As Mortgage Rates Plunge, 30 Year Fixed Rate of 3.5% Seems Likely

Fed Goes All In

The Federal Reserve announced that it intends to purchase massive amounts of mortgaged backed securities and long term treasury debt. Yields on the 10 year treasury, from which mortgage rates are based, saw the biggest drop in yield since 1962.

Since mid December of last year the yield on the 10 year treasury had risen from a low of 2.07% to a high of almost 3% yesterday. Almost half of that 50% increase in yield was erased today as the ten year closed at 2.53%.

Given the Fed’s open ended determination to lower mortgage rates, it is very likely that we may see the 30 year fixed rate mortgage at 3.5% or lower. The Fed’s plan to purchase a massive amount of mortgage backed securities is certain to cause a large drop in mortgage rates.

U.S. central bankers decided yesterday to buy as much as $300 billion of long-term Treasuries and more than double mortgage-debt purchases to $1.45 trillion, aiming to lower home-loan and other interest rates.

Yesterday’s decisions will add $750 billion in purchases this year of mortgage-backed securities issued by government- sponsored enterprises Fannie Mae, Freddie Mac and Ginnie Mae, for a total of $1.25 trillion. The Fed has already announced $217.1 billion in net purchases out of $500 billion planned through June, under a program unveiled in November.

The central bank will also double to as much as $200 billion this year its planned purchases of debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks. The Fed bought $44.4 billion of the so-called agency debt

The rationale for seeing generational lows in rates is the same as I proposed on January 12, 2009.

30 Year Mortgage Rates - Is 3.5% Possible?

The Federal Reserve’s direct purchases of mortgage backed securities initiated late last year was successful in its goal of lowering mortgage rates. The Fed’s direct purchases of MBS has stabilized the mortgage market and lowered rates. There are arguments being put forth that due to the Fed’s intervention, mortgage rates have artificial price support. Nonetheless, if the historical yield spread between the bond and the 30 year mortgage is re-established, we may see a 30 year fixed rate in the 3.5% range. Something to think about for those contemplating a mortgage refinance.

Last week, a borrower with excellent credit, necessary income and home equity was able to obtain a par rate of 4.5%. The question of whether the Fed is manipulating mortgage pricing at this point or how long such price support can last is somewhat irrelevant. The major fact to keep in mind is that the Fed appears to be relentless in its campaign to drive down mortgage rates. If the Fed can stabilize the MBS market we may be looking at mortgages rates in a range we never thought possible a short time ago.

30 year fixed rate mortgages in the mid 3% range would cause a huge refinance surge. Keep in mind that over the past five years, homeowners had multiple opportunities to refinance in the low 5% range. Unless the borrower is taking cash out, it usually does not pay to refinance for less than a one percentage point reduction. At 3.5% rates, it would make sense for almost every homeowner with a mortgage to refinance again.

Comments

[Respirate:]

Thanks for the excellent article.

I like your comment, "The question of whether the Fed is manipulating mortgage pricing at this point or how long such price support can last is somewhat irrelevant. If the Fed can stabilize the MBS market we may be looking at mortgages rates in a range we never thought possible a short time ago."

The Federal Reserve's bold move yesterday, buying Treasuries on the open market, will reduce all rates and maturities to some degree. I agree that how and why it's being done is irrelevant -- it's an opportunity for current home owners and prospective buyers to lock in once in a lifetime rates.

The Fed's action will also help to stabilize home prices, but the degree to which this happens depends on factors such as the overall economy and employment.

Mar 19 09:10 AM

[scotty1560:]

good article..
my only questions is at least in my area of South Florida there is no
equity thanks to 60+% corrections. Few people who purchased in the last 8-10 years have equity. And older owners I would think can see the risk in a re-fi, you also are on the back end of a mortgage which is rapidly building principal.

So for boom areas, I don't see re-fi as a big option. Might help
new loans if someone is walking around with perfect credit and
not going after a jumbo loan.

Mar 19 09:32 AM

[Lea:]

A 3 1/2% mortgage rate sounds inconceivable to me. The first home my husband and I purchased in the early 60's was $8900. and we still had to make a downpayment. The rate was 7 1/2% which was the norm then. We have a generation of people who seem to think they have an "entitlement" to have a home. Some people just shouldn't own houses, either because they can't afford them or because they don't know how to maintain the property. The Government should stay out of this mess. The large majority of people are paying their mortgage on time.

Mar 19 10:06 AM

[DougM:]

What happens to banks that make 3.5% loans for 30 when, inevitably, sometime during the next 30 years (heck, the next 5 years) rates on deposits go north of that?

Mar 19 10:33 AM

[evergreen16:]

DougM - it doesn't matter where rates go in five years or even tomorrow. The bank borrows the money for less then 1% and gives it to you for the 3.5% at the same time.

Mar 19 12:32 PM

[Mad Hedge F...:]

Soon they will pay you to take a house. Way to go Ben! If pouring gasoline on the fire doesn’t work, try nitroglycerine! Some $1.2 trillion in new agency and bond purchases, including previously untoucheable long term treasury bonds. Goodbye dollar, hello 4% home mortgage rates. Just tack on another 3% to the 2010 inflation rate. The bond market had its biggest up day in history, gold soared $50, the euro gapped up 4%, and commodity prices roared. Citigroup (C) has quadrupled from $1 to $4 since last week, while General Electric (GE) has doubled from $5 to $10! Just when you think this guy has thrown in the kitchen sink, he shows up another truckload of kitchen sinks. I guess this is what a 1590 SAT score gets you.

Mar 19 02:19 PM

[User 122313:]

mike shea----Nashville, Tn
Spent my last 26 years in the business (1974-2000) underwriting and trading taxable bonds with the emphasis on mortgage product. During that time, I had transactions with thousands of customers and let me venture a guess as to how many would buy a mortgage security with a 3 1/2% coupon @ par----------NOT A ONE!!!!!

Mar 19 06:24 PM

[Teutonic Kn...:]

Mr. Zielinski,

I concur with your take of a 3 1/2% 30-year first mortgage on the horizon. Frankly speaking, we are just entering a depression so a 3 1/2% rate would fit the description of coming era.

Personally I am worried or even apprehensive of the coming mid- and longer-term future (i.e., 5 to15 years horizon). What is the end result of the government's intervention and manipulation of the rates? Even at my age of over 60, I am scared.

Nothing to brag about of course, but if you look over my comment stream record since last fall, almost (in italics) everything I had predicted had come to past.

Yes I am pessimistic. I see a lot of hardship and stunning surprises ahead of us.

Mar 19 10:06 PM

[vaughn:]

I do not think 3.5% mortgage rate for 30 years is likely, make that 4.5%. The reason is simple: 30 year treasury bond is already yielding 3.5% which was considered low.

What happened was that the banks made the 4.5% (if you are lucky enough to get one) loan and simultaneously sold the loan to Fannie Mae which issued a 30 year bond to hedge the interest rate risk. And in all probabilites it is the Fed who purchased the 30 year bond from the Fannie Mae. So, in the end, it is the taxpayers who subsidy your mortgage rate. Therefore, it is your BAILOUT. Go get it.


On Mar 19 10:33 AM DougM wrote:

> What happens to banks that make 3.5% loans for 30 when, inevitably,
> sometime during the next 30 years (heck, the next 5 years) rates
> on deposits go north of that?

Mar 20 12:02 AM

[yellowhoard:]

Better pick the home that you want to be in for the rest of your life. These rates will not be available 3 years from now. Who is going to buy your home down the road when interest rates are 20%?

Mar 20 06:09 PM

[SoCalsurfbum:]

3.5%?

Who cares when your equity is dropping at 10% a year. Home prices are still readjusting... you are still losing money. And when interest rates go up down the road as 'yellowhoard' mentions, you will have to drop the price of your house even more to compensate.

Mar 20 07:54 PM

[EGGBEATER:]

CURRENTLY I HAVE A 30-YR 7% FIXED MORTGAGE SINCE JUNE 2008. THE LENDER (GMAC) IS NOT WILLING TO REFI AT A LOWER RATE UNTIL THE LOAN HAS RUN FOR 2 YEARS. I GUESS I'LL HAVE TO FIND ANOTHER LENDER WHO IS MORE COMPETETIVE.
ANY SUGGESTIONS?

Mar 24 12:48 AM