Rates Are Staying Low - Don't Miss Out

At the end of March, the Federal Reserve followed
through on its promise to stop buying mortgage-
backed securities.

At the time, I was of the opinion that rates would
go up. My reasoning was that when private
investors - institutional investors, pension funds -
were asked to fill the gap from the Fed leaving
the market that they would insist on higher
rates of return that what the government was
willing to accept.

Prior to the end of March, the Fed was creating
and controlling a closed system:

They were keeping rates low to allow for as much
recovery as possible.

So that lenders who created these low interest
rate loans did not have to deal with the risk
that these loans would become money losers in
the future, they enabled FNMA and FHLMC to
purchase these loans. FHA and VA have also
expanded their programs,, and those loans are
generally sold to GNMA (Government National
Mortgage Association). FNMA, FHLMC, & GNMA
are all government-related and sponsored entities.

FNMA, FHLMC, and GNMA all bundle pools of
mortgages into mortgage-backed-securities (MBS)
and sell them. The Federal Reserve was the primary
purchaser of these MBS issues earlier in the year.

Once they pulled out of the market, I thought that
the private investors would insist on higher yields
to be interested in buying these MBS issues. If that
were true, interest rates would go up.

But that has not happened. Rates are at historical
lows right now.

What has developed is that the Fed has continued
to keep rates low, as evidenced by Treasury issues:
T-bills, Treasury Notes and Treasury bonds. These
investments are desirable because they carry low
risk since they are backed by the U. S. Government.

Even though MBS issues are higher risk than Treasury
issues, they are not significantly more risky in this
environment. Because loan underwriting has tightened
so stringently, the new loans created over the last 1 1/2
to 2 years are nowhere near as risky as the ones that
were created in the "anything goes" era.

So the choices for an investor to keep their risk low
is to either invest in Treasury issues where the rates
are really low, or to accept a higher rate of return
by investing in MBS issues that are better quality
than they were a few years ago.

It works out well for borrowers and for the mortgage
business that rates are staying low. I'm glad that
things have not worked out as I predicted.

The reality is that instead of investors dictating the
interest rates under which they would purchase
MBS issues - driving up rates - the government is
dictating the rates at which mortgages are offered
and telling the investors to make a choice: buy
really low, really safe Treasury issues or obtain a
higher rate of return with MBS issues where the
risk has been minimized with tighter underwriting
guidelines.

We never know how long these dynamics will continue.
Make sure that you take advantage of these rates
while they are low. Converting adjustable rates to
fixed rates would probably be a good long-term move
right now. Contact me and we can work through the
details.