As 2012 comes to an end, we are closing out the year with mortgage rates at or near the lowest levels on record.
But as good as the rates are; they could be lower. How much lower? That’s a matter of debate. But there is reason to believe that mortgage levels could fall further.
How is this possible?
Two reasons may drive mortgage interest rates lower.
First, since September the Federal Reserve has been buying additional mortgage-backed securities at the rate of $40 billion a month, purchases which have lowered mortgage rates by about .20 percent according to Federal Reserve Governor Jeremy C. Stein. Such purchases are expected to hold rates down and perhaps even drive them a touch lower.
Second, mortgage lending has become very profitable. Part of the reason is that the “spread” between the cost of money and the rates extracted by lenders are much larger than in the past, a difference that can be measured with basis points. A “basis point” is 1/100th of a percent, so 100 basis points equal a 1 percent change in mortgage rates.
“The spread was relatively stable from 1995 to 2000 at about 30 basis points,” says a new study presented at a Federal Reserve conference in New York earlier this month. “It subsequently widened to about 50 basis points through early 2008, but then reached more than 100 basis points in early 2009 and over the past year. Following the September 2012 Federal Open Market Committee (FOMC) announcement, the spread temporarily rose to more than 150 basis points — a historical high that has attracted much attention from policy makers and commentators.”
Who Gets The Benefit?
In other words, larger mortgage spreads — and profits — are a by-product of federal actions. When the Fed announced it was buying additional mortgage-backed securities the spread grew and the benefit from such purchases was largely retained by lenders.
It’s not an inherently bad thing for lenders to make profits, after all a lending system without them was a big by-product of the mortgage meltdown and nearly bankrupted the country. And the Federal Reserve is a banking regulator which is supposed to keep the financial system secure.
But we also have an economy which remains rickety. Perhaps if the spread was more in line with historic norms additional households would be able to finance and refinance at rates that are even lower than today’s interest levels. Such lower borrowing costs would spur more home sales, pushing prices upward, speeding short sales and perhaps reducing foreclosures as employment rises with a stronger housing sector.
The study presented in New York talks about the possibility of “attention” from policymakers and commentators. That’s a polite way of saying politicians and regulators are bound to look into the issue of bloated lender profits created by Federal Reserve actions and ask if the government is effectively picking marketplace winners. Such congressional and agency interest would no doubt be contentious and well publicized — and that’s a lot of incentive to take a lengthy look at recent mortgage trends.