JohnsBlog (articles, news, thoughts, advice)

I've spoken before about rates and how they fluctuate, generally based on 2 major factors.  1)What mortgage backed securities are selling for on the market and 2)What rate the banks are borrowing their money from the Fed.

Well, the rate at which banks borrow money is 5% lower than it was a year and a half ago, and mortgage backed securities are trading pretty darn high compared to historical levels.  However, rates are only reflecting a slight change, and are actually slightly higher right now than they were at their low in 2008.  Why could this be?  Several factors are at work here.

First and foremost, a lot of it has to do with greed.  The banking industry and their poor decision making over the past several years have caused billions in losses.  Rather than making necessary changes and building business back up, they're in a mentality where accruing capital is their primary concern, no matter what the cost to others.  That means where every 5.5% mortgage is written, last year there was about a .5-2% profit margin for the banks.  Now, there's a 5.25-5.5% profit margin, and the change in their profits are not being passed along to the consumer.  Just looking at market indicators, rates should technically be in the mid-high 3's. 

Another reason rates are so high are the inefficiencies within the banks employment ranks.  With unemployment mounting and hiring freezes being seen everywhere, banks are surely hesitant to take on new staff.  With rates being so low, loan applications soared in mid December, and we're still seeing the effects.  As underwriting turntimes increased, we saw a symmetrical increase on the rate sheets.  They're keeping rates artificially high to stem any new applications, rather than having their turntimes continue to increase, and rather than hiring new employees to handle the increased volume.  Why hire new employees if rates could potentially rise, causing loan applications to fall drastically, which would just result in more layoffs. 

A third factor deals with investor appetite.  Why would an investor want to hold onto paper with a 3.5% fixed return?  They could make more money elsewhere, so rates have to stay somewhat higher to increase investor appetite.  Currently, rates are in the low-mid 5's, but we're likely to see a drop into the high 4's. 

Anyone holding off on that government-cited dream of 4.5% fixed might be waiting their whole life, because with the state of the industry as a whole, it's going to surprise me and everyone else to see them get there even if only for a short while.

Well the second major economic stimulus plan has been written, declined, rewritten, renegotiated, and finally passed in final form as a nearly $800 billion package.

Most of the items included in the package are supposed to be geared towards job creation and from keeping the unemployment rate from rising much higher. 

Unfortunately, there weren't many tools in the package that will directly stimulate the housing market, which is surprising due to the fact that this sector is what caused all of the mess we're in, and what will (in my opinion) ultimately pull us out of the mess as well (when peoples homes grow equity, they feel safer, spend more money, buy more homes, etc, and it's the same ripple effect as we saw when the housing market collapsed, only in reverse).

2 major pieces of the package that are directly geared towards housing are an $8000 tax credit ("credit" is the word the governments using, it's really an interest free loan to be paid back through taxes over 15 years) and legislation to assist struggling homeowners before they are delinquent.  Not sure how exactly they can do that without people fully taking advantage of the idea, but we shall see.

On a personal note, anyone who is tired of the political games being played in Washington, please speak out against House Speaker Nancy Pelosi who pathetically enough tried to put a ton of stuff in this bill that had nothing to do with our economy or building jobs....items concerning sex ed and contraception in the hundreds of millions of dollars?  at a time like this?  Absolutely pathetic, she should be removed from office and politics altogether.  How could a supposed "Leader" take advantage of a bill designed to help struggling Americans?