Mortgage-backed bond investors push for higher interest rates

Investors buying bonds backed by Fannie Mae and Freddie Mac mortgages are demanding higher interest rates, Bloomberg News reported today.

Why should anyone but bond buyers care? Well, if the buyers won't accept lower yields, the bond issuers will have to get loans with higher interest rates to bundle up and sell. And since the vast majority of all U.S. mortgages are now winding up in Fannie and Freddie securities, that could mean more costly loans for anyone buying or refinancing a house.

In a bid to keep rates down, the Federal Reserve has been aggressively buying Fannie and Freddie bonds. But the Bloomberg report suggests that the efforts may not be working as well as the Fed hoped.

From the article:

The Fed, seeking to use lower home-loan rates to stem the housing slump and bolster consumers, said March 18 it would increase its planned purchases of so-called agency mortgage bonds by $750 billion, to as much as $1.25 trillion, and start buying government notes. Rising mortgage-bond yields, driven higher in part by climbing Treasury rates, means the Fed now “faces a challenge to its ability to sustain low mortgage rates,” according to Jeffrey Rosenberg at Bank of America Corp. 

The report notes that the yields on 10-year Treasury bonds, a traditional indicator of fixed-rate mortgage trends, are at six-month highs.

The average rate on a typical 30-year mortgage for the week ending May 21 was 4.82%, Freddie Mac said last week. When Freddie issues its new rate report Thursday, will the average have crept closer to 5% again?

It sure looks like the answer is yes.

-- E. Scott Reckard

Comments

[Cal]

Lots of purchase deals in the pipeline will blow up if rates adjust upwards .75%.. locks aren't nearly as sacred as they once were

Lots of refinances won't happen if rates go that "high" at this critical time.

Loan mods are also made based on prevailaing rates...

RE People better hope the bond market snaps back quick..

[fezco]

Will this give an additional advantage to cash-ladened specuvestors? Me thinks so.... So much for the middle class and first time buyers buying homes. As PeteH mentioned in this article:
http://www.latimes.com/business/la-fi-homes28-2009may28,0,2766174.story
First time buyers aren't buying. Now that interest rates are going up, there is even less incentive.

[Ace]

These low interest rates really scare me. I hope they increase soon. Rates this low are not healthy in the long term. Just as real estate will start to recover, the rates will go back up and push the real estate prices lower. We have been used to interest rates below 6 for too many years.

On a side note, I saw a full page ad in the LA Times today for some townhouse looking things in Hollywood. They advertised the 2 bedroom units for only $2822 per month. I thought that seemed reasonable until you check out the fine print. The purchase price is $749,000 and the payment is based on 10 percent down and a 5 year interest only ARM. First, why would anyone get an ARM when rates are at a historical low? Second, this purchase on a 30 year fixed would be an additional $800 a month. Good luck when that mortgage adjusts.

[firesale]

Some postings are far more visionary than most.
A couple of days back, we had a good glimpse
into the Westside's RE crystal ball. It's worth mentioning,
again, so it has a chance to find more readers
who are struggling to accept the true value of LA
real estate.

Loanowner wrote:

"I'm a happy owner. Unfortunately I heloc'd on my beautiful Venice 3/1, which I thought would get me to about 1.5 (I paid 1.1). Unfortunately, I have it on the market for 1.05
but so far only tire kickers come around offering me 750-850K even with the extra bath I added. "

Only thing loanowner forgot to mention is the year
he paid 1.1M for his Venice 3/1. Perhaps he'll reread
his posting here and add that detail.

[Laker]

Cal, Not necessary purchase deals will blow out.
I was looking at a $550,000 loan and a 1/4% in rate contributed $80 per month. I've seen rate spike about 0.5% higher than 2 weeks ago, so that will increase the monthly by $160.
If you can afford to pay $2800 a month and not able to afford $2960, you should not buy and rather stay renting in the meantime.
Sure it is better to pay $160 less every month....but that should not be the difference between buying or renting.
I call the difference of $300-500 or more to be a factor.
I do however agree that refi deals will be dead if rates go up that much.

[Cal]

Laker,

40% of loans are FHA, these are low down , lower income people. Extremely price sensitive and therefore interest rate sensitive. Everything else being equal if interest rates go up .75% a lot of deals will blow up. On a FHA deal for 350k it would increase payment around 7% (interest rate increase form 4.75 to 5.5, 15% increase in rate, 7% increase in total payment).. That is more than enough to blow up deals. I think people don't understand just how razor thin some of the borrowers are today.. FHA is really pushing it.

There is a massive backlog of deals at the banks for underwriting.. if people were floating the rate or their lock didnt get hedged right... It is going to hurt that backlog a lot.

[Nelcisco]

Laker,

what you're saying is true, whats $2960 when you're already paying $2800? not much difference in a borrowers ability to pay, but 160 bucks can be a deal breaker if an underwriter sees that it exceeds the DTI requirement.

[MyLessThanPrimeBeef]

When the rates go to 5 or 5.5%, that will be the end of this 'dead cat bounce' in transaction volume, a bear market trap designed to lure in as many victims as possible, as flippers find out that they can't close the second and final leg of their flips.

[speaker-to-animals]

That rates can go up a mere 0.5% and cause the whole thing the blow up really illustrates how vastly overpriced RE in LA still is. If you are looking to buy or re-fi and do not have locked-in rate now you are hosed. Besides keeping the interest rates artificially low was bound blow up sooner than later (I always thought sooner), Remember, back in the 80's people were still happily buying homes at at 14%.