Interest Rates Decline to Record Levels

Incredibly, mortgage interest rates went down again about a quarter of a percentage point over the last week, primarily due to the Federal Reserves announcment of a new program called “Operation Twist” . The following are some excerpts from this week’s newsletter on interest rates from HSH Associates :
“The market seemed to settle a little bit on Friday after a truly wicked day on Thursday. Mortgage rates moved to new record lows again this week, and we seem likely to be in that territory again next week. A larger bit of economic data is due out but there doesn’t seem to be anything on the horizon which would come in so strong as to convince the market that the recovery is gaining speed which would move rates upward.The Fed made their moves this week because it is their duty to try to promote economic growth, maintain stable prices and foster lower unemployment. Manipulating interest rates in a variety of usual and even unusual ways is really all they can do to try to nudge the economy forward, and some of these programs produce better results than others.

“The Fed’s message was twofold: First, they are changing their investment holdings by selling up to $400 billion of holdings with maturities of less than three years, and will use those proceeds to purchase US Treasury debt with maturities of six years or longer. This will lower interest rates for everything from Treasuries to corporate bonds, with mortgages among them. The problem is that, in the present environment, mortgages are low yielding investments which have a fairly high risk profile, and investors are unlikely to want to snap up new MBS with even lower yields. In fact, over the past few weeks, the often-tenuous relationship between treasury yields and mortgage rates has grown more distant, with spreads widening appreciably as new Fed action became more likely. Underlying interest rates have gone down considerably more than their mortgage counterparts, muting some of the beneficial effects that low rates can provide to some borrowers.

Thus, the second component of the Fed’s plan: The Fed announced that they will now start to use money coming in from their still-massive holdings of mortgages — prepayments from refinancing, maturing loans and regular principal payments — to purchase MBS coming into the market. Essentially, the Fed has stated that they will be lowering rates, that mortgages are directly targeted, and if the investor market doesn’t want to buy them for whatever reason, the Fed will be there to pick up the slack. A ready buyer in the market means that mortgage rates will decline, since the investor who is buying them cares more about beneficial economic consequence than yield or threat of loss.

Driving down interest rates is one way the Fed hopes to crowd out investors from parking their money in the safe-haven of Treasuries. If 100% guaranteed yields for Treasury offerings get low enough, investors will have strong incentive to look elsewhere for productive places to put their cash to work, and that would ultimately benefit the economy as a whole. One of the successes (if short-lived) of QE2 was the reflation of equity prices; one of the drawbacks was the ballooning of commodity prices, including metals and oil and the inflationary kick those increases left. Unlike QE2, the twist doesn’t push more money into the economy and so doesn’t carry an explicit inflation threat along with it.

Although these Fed plans will be in effect until next June, mortgage borrowers who might consider procrastinating for a while should keep this in mind: The Fed is making these changes in hopes of spurring the economy, which is pretty rough shape. It won’t happen overnight – some would say “if at all” — but should it start to work, interest rates will begin to rise as a natural course of events. That would slow refinancing down, which in turn would slow down the speed at which the Fed would be buying MBS. In our view, this suggests the largest impact on rates is most likely to come earlier in the program than later. This is not to suggest that rates are likely to rise significantly anytime soon, but that they will stop posting record lows and turn around at some point, and successful efforts to help the economy will move that date closer.”

The following are interest rate quotes from Al Hermann of American/California Financial Services ,

30 Yr Fixed FHA

Rate 3.750

APR 4.437

Conforming 30 Yr Fixed up to $417000

Rate 3.875

APR 4.021

Conforming Jumbo 30 Yr Fixed $417001 – $729750

Rate 3.990

APR 4.130
Jumbo 30 Yr. to $1.5 Mil

Rate 4.500
APR 4.635
Jumbo 7/1 ARM $1.5 Mil (higher loan amt available)

Rate 3.490

APR 3.314

 

For more information about Palos Verdes and South Bay Real Estate and buying and selling a home on the Palos Verdes Peninsula, visit my website at http://www.maureenmegowan.com . I try to make this the best real estate web blog in the South Bay Los Angeles and the Palos Verdes Peninsula. I would love to hear your comments or suggestions.

About mmegowan

I am a realtor with Remax Estate Properties in Palos Verdes Estates. Visit my website at http://www.maureenmegowan.com
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