Mortgage Rates: Can They Go Lower?

Can mortgage rates go lower?Can mortgage rates go lower? Not an 8th of a percent here and there, but really lower, say in the 2 percent range or lower still?

The Wall Street Journal argues that banks are doing everything possible to stave off reduced rates and that mortgage costs should actually be lower.

“Banks,” says the paper, “have previously held the line on profits in the face of rising borrower demand to try and counter low rates. Back in 2012, falling bond yields led to a mortgage-refinancing wave. Amid strong loan demand, banks didn’t pass on the savings in lockstep to borrowers. The same looks to be happening today.”

Translation: On one hand mortgage rates should be lower but on the other the interest paid to depositors should be higher. By keeping the spread between the two as wide as possible banks are trying to maximize profits.

If the Journal is correct banks will see nothing more than a short-term and marginal victory because mortgage rates are headed lower. Here’s why:

Mortgages are increasingly originated by nonbanks, financing sources which do not have depositors. For nonbanks profits come from volume, more originations equal more revenue.

Nonbanks get some of their funds from banks, but they can also get money elsewhere. For instance, there is plenty of money abroad, including more than $10 trillion now invested with negative interest, meaning investors are knowingly getting less than zero. Dire Straits is finally right, you can now get “money for nothing.”

There is little chance that rates overseas will soon rise. The three great capital centers outside North America — Europe, Asia and the Middle East — are all in the midst of economic woes. Think about it: Europe is debating how to break apart after the Brexit vote, Asian economies have slowed and the Middle East is largely at war.

US banks cannot lobby the laws of economics, rates will go down. But — not unreasonably — they might want to look at the way mortgages are formatted as a hedge against inflation and rate risk.

Lower Mortgage Rates

If you’re a borrower and get a 30-year fixed-rate mortgage you have a magical hedge against inflation for as much as the next three decades. Lenders would like to have that advantage, the reason they gleefully offer adjustable-rate mortgages.

But, truthfully, borrowers really don’t need 30-year financing.  The National Association of Realtors says real estate tenure — the amount of time homes are typically owned — is nine years and according to Freddie Mac the usual mortgage is now outstanding just 6.7 years.

So, a modest proposal: How about marketing 10/1 ARMs? The first 10 years are fixed and then the rate adjusts annually. Borrowers will have the comfort of 30-year financing — something they likely don’t need — while lenders will have protection in the event rates rise.

Five-year ARMs are already down to 2.5 percent this morning and the way markets are now moving that also seems like a fair price for a 10/1 ARM — at least until rates fall further.


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