All well in mortgageland, at least on rates

24 May 2010 | By Paul Muolo

Mortgage bankers in the US are bracing themselves for what could be a protracted period of low interest rates. And usually, that’s a good thing I think. Then again, as I’ve pointed out in previous columns, predicting where rates are headed is a fool’s game.

Most mortgage professionals in the US already realise, without quite admitting it, that rates aren’t going anywhere.

Of course, the industry - myself included - was expecting some type of spike in mortgage rates when in late March the Federal Reserve and Treasury Department stopped buying Fannie Mae and Freddie Mac mortgage-backed securities.

The reigning estimate was a spike upward of 25 to 50 basis points.

But the mortgage witching hour here came and went, and as I write this the yield on the 10-year treasury is at 3.35% and looking quite friendly. The lesson learnt here is simple - maybe we all overreacted.

The fear that private sector investors wouldn’t buy Fannie/Freddie bonds without a major bump up in rates was overblown. So far, the buyers are banks that like the 5% yield, especially when their cost of funds is a scant 150 basis points.

At the time of going to press a 30-year fixed rate loan could be had for 4.75% with less than a point upfront - for consumers with good credit.

The yield on the 10-year treasury has traditionally been the barometer for where rates are headed. It appears that all is well in mortgageland, at least when it comes to rates.

Investors are more willing than ever to snatch up US treasuries. The more they snatch, the lower rates go

And we can thank Greece’s debt crisis and the fear of a European debt contagion for the good news. As investors charge more for the risk of the PIIGS - Portugal, Ireland, Italy, Greece and Spain - they realise that Uncle Sam’s problems don’t look so bad in comparison.

So investors are more willing than ever to snatch up US treasuries. The more they snatch, the lower rates will go. Wall Street analysts like to call this phenomena a flight to quality.

Of course, some bears might look at the PIIGS and surmise that Uncle Sam has plenty to worry about as well. Our debt loads are massive and our elected officials have no inclination to throw politics aside and come up with a workable plan to control spending and raise taxes.

For residential servicers - firms that process mortgages on a monthly basis and receive fee income - low rates have always been a mixed blessing. Refinancing booms wreak havoc on residential servicing portfolios as run-off throws a monkey wrench into all those fancy cashflow projections made by the geeky mathematics majors working in the basement accounting office.

Hedging loan run-off can only go so far. The best way to block and tackle against a refinance boom is for a servicer to hit the airwaves and local business section with advertisements about the wonders of refinancing. Direct mail and phone calls work nicely too.

And let’s face it - some residential servicers are good at refinancing their own portfolios and stealing business from others. The old Countrywide franchise under Angelo Mozilo comes to mind as a firm that was quite good at the refi game, while others are not.

Mozilo, despite his shortcomings in the last two years of his career, was a feared competitor who spent a ton of money advertising to win the refinance game in almost any market Countrywide originated loans in.

It should be noted that today’s refinance market is vastly different from those of the past. With home values down 25% to 50% in once red-hot markets and the national delinquency rate at 10% and headed higher, refinances are no longer an easy way to make money. It’s all about home equity, isn’t it? A consumer either has it or not.

Complicating the whole value equation is the issue of a regulation called Home Valuation Code of Conduct, which has thrown the appraisal industry into disarray with lenders and realtors complaining about the poor quality of work being done under the regulation.

The regulation has supposedly created an appraisal system where the appraiser charging the cheapest amount of money for his work wins the bid, despite the quality of his work. But that’s a column for a different day.

Also complicating the refi picture is the poor jobs market. Consumers - no matter how much equity they have - cannot refinance without employment. The good news is that the economy is finally creating jobs, especially manufacturing positions, at a healthy clip.

But the newly employed aren’t running out and buying homes, and that’s a problem. Their credit has been damaged, they have little in the way of funds for a downpayment and they’re scared to buy now, thinking that home values aren’t finished correcting.

Also, some workers probably realise that manufacturing and the export of goods will be hurt if the PIIGS get sicker. Crazy world, isn’t it? For now, mortgage professionals in the US are sleeping well, knowing that low rates are their friend. At least, I think they are.

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