Eddie Reed, MRMS, CRMS

Over the past two years the face of the mortgage industry has changed much like the Picture of Dorian Gray. A swarm of regulation proposals that is still buzzing today has affected lenders, appraisers, real estate agents and customers. With more regulations to come it will only be harder for customers to get a mortgage. More verification, more paperwork, more compliance can only equal one thing to the consumer: Higher Cost. I heard a good summation of what the government and regulatory agencies are telling the banks-

One one hand you have Washington saying, "Lend More Money!" then on the other hand you have the regulatory agencies saying, "Don't make that loan!" Now, in mid sentence, the guys from Washington sign legislation to create another regulatory agency that will only further hamper bank lending. This is a perfect example of how actions are louder than words.

Let's take the residential lending market into consideration. During the Clinton administration Barney Frank and Andrew Cuomo were at the forefront of LOOSENING the lending standards which enabled lesser qualified individuals obtain home loans. Many of those same individuals have contributed to the rising foreclosure crisis. Now both Frank and Cuomo are on the forefront of TIGHTENING regulation to restrict lending but take none of the blame for contributing to the mortgage meltdown.

To me it seems like a tug of war where each entity has one hand on each side of the rope. The rope is made up of all the real estate professionals and the consumer and we are being stretched thin. Which side will win or will it just be pulled apart?

I know that economic and financial talk can turn most of our brains to mush in a matter of seconds. Most of the time mine feels like creamy potato soup so I'll try to make this short and sweet.

On February 2^nd I sent out this as part of my Market Pro-Spective:

"Given the current economic status and all the other twenty something odd number of things that affect mortgage rates we should be at a true all time low. The reason we are not is because of the increase in bonds being issued by the U.S. Government to finance the stimulus package.

So, now the question to all refinance candidates is this: What has to happen for rates to drop? Demand for bonds has to increase or supply has to decrease? You are absolutely right! You get an A.

They key piece of information to look for is this : The Federal Reserve has said the government will buy a large soum of bonds before the summer (they did back in December and rates dropped). If those intentions are confirmed or they actually do buy a large chunk of bonds then we will see rates return to near historic lows yet again. If not then who knows."

Yesterday the Fed announced it would follow through on its plans to buy $300 Billion in treasuries and pledge to buy another $750 Billion by the end of the year.

This is what I was talking about. Read the headlines over the next few days and you will possibly see announcements of rates at an all time low. Just remember you heard it here first and by all means now is the time to purchase or refinance a home.

I didn't particularly like macroeconomics when I was in college. It could have been the fact that my elderly college professor was one year from retiring and taught from his wheel chair in between naps. Yes, I said in between naps. At any given time after finishing a thought or assigning a pop quiz he might doze off. I remember one class where he slept for a good twenty minutes, woke up and immediately started talking about his days as a peanut farmer. His main competition in those days was former president and peanut farmer extraordinaire, Jimmy Carter. The class, much like a pack of wolves, soon found the weakness of our professor and used it to their advantage. If our teacher was talking about something particularly mundane one of my classmates would pose a question such as, "So you're saying the yield curve corresponds directly to demand? How would that work in the real world with you and Jimmy Carter?" The rest of the class would be spent with the prof going on and on with tales about peanut farming which usually involved three or four of the same stories he told during the last class. Honestly, I didn't learn much. It wasn't until much later did any of it make sense. Supply, demand, stocks go up, bonds go down - it was all a jumble. So here's my quick and dirty version of why and what is going on right now. I promise not to talk about peanut farming.

Let's start with investors. When the stock market is doing good most of them put their money into stocks. When the stock market is doing poorly most of them put their money into bonds. It's that simple.

It doesn't matter if you know what a stock or bond is to understand the next principal. Supply and demand.

When stocks are doing good demand goes up. When stock are performing poorly demand for bonds goes up.

So what is the stock market doing right now? Bad.

So that means demand for bonds is up right? Right.

High demand for bonds usually makes mortgage rates drop. That's pretty simple, yes?

Here's the kicker. The supply of bonds is overwhelming due to the $885 Billion dollar government stimulus package.

The governments issues bonds when it needs money.

Moral of the story: Given the current economic status and all the other twenty something odd number of things that affect mortgage rates we should be at a true all time low. The reason we are not is because of the increase in bonds being issued by the U.S. Government to finance the stimulus package.

So, now the question to all refinance candidates is this: What has to happen for rates to drop? Demand for bonds has to increase or supply has to decrease? You are absolutely right! You get an A.

They key piece of information to look for is this : The Federal Reserve has said the government will buy a large soum of bonds before the summer (they did back in December and rates dropped). If those intentions are confirmed or they actually do buy a large chunk of bonds then we will see rates return to near historic lows yet again. If not then who knows.

Late last year Fannie Mae and Freddie Mac went to a risk based pricing model which means factors such as credit score and loan-to-value affect the final rate. I had an interesting discussion with David Morgan, president of the Batesville branch of Guaranty Bank and Trust, about risk based and competition driven pricing. David pointed out that recently we have seen large retail bank competition for deposits drive up CD and Money Market rates but that this practice cannot last due to the high cost of that type of capital. Eventually the large banks will have to reign in their special rates and go back to basics or possibly risk losing money caused by increased interest expense. This theory runs parallel to what we've seen in the mortgage market. The competition to lend to the masses when liquidity was plentiful drove down the lending standards as we saw a tremendous loosening of underwriting standards from 2003 to 2007. This change caused massive losses in the mortgage industry. The GSE's (Fannie and Freddie) had to go back to the basics which is price better for the people who pose less risk and charge more for those who pose a slightly higher risk. For the customer this means that the advertised rate is often lower than the final rate.

Other factors that affect rate pricing include loan amount, occupancy type, rate lock period, and loan program.

Just this morning I sent out the following email:

Would you believe that September saw a rise in new home sales? It was actually expected to show a decline but posted a 2.7% increase. Conversely we're seeing a drop in gas prices and I'm sure everyone is happy about that. Treasuries are bringing in strong demands for guaranteed returns as investors shy away from the stock market which is why we've recovered from the spike in mortgage rates early last week.

Many people including realtors and clients ask me what factors play a role in mortgage rates. We all see the advertisements that say, "Fed cut rates! Refinance now!" In some instances where inflation fears creep in due to extremely low overnight rates this causes mortgage rates to rise. In actuality there are a lot of factors that affect how mortgage backed securities are priced such as the trend of existing home sales. Some others include:

Stock Market

Unemployment Numbers

Consumer Confidence Index

Durable Goods Orders

Gross Domestic Production

Index of Consumer Sentiment

Inflation and/or fear of inflation

Federal Open Market Committee comments

We generally follow the 10 year treasury bond as the best indicator of what mortgage rates are doing on a daily and weekly basis. While it is by no means a "spot on" indicator it serves as a general index of the MBS market. Currently the yield is 3.67% for the 10 year treasury bond and showing strength this morning.

It didn't take long for the last sentence to change. The market has deteriorated and pricing has worsened slightly for mortgage rates. This type of change may occur two or three times in a day which is important for mortgage shoppers and realtors to keep in mind when comparison shopping. What is true one minute may change in the next. That's why it is most important to find a reliable professional who not only offers a competitive rate but tracks the market and rate trends daily.