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Lenders worry about rising delinquencies, foreclosures
By Susan Chandler
Chicago Tribune
Published on Tuesday, Jun 10, 2008
The Federal Reserve has aggressively cut interest rates. Houses are sitting around unsold. The stage appears to be set for mortgage rates to fall as lenders compete to attract that scarce quarry: the well-qualified home buyer.
You wish.
Rates on 30-year fixed-rate mortgages have remained stubbornly above 6 percent for months. Interest rates on those loans are averaging 6.09 percent, mortgage investor Freddie Mac reported June 5, an increase from the 6.08 percent the previous week. Rates on five-year adjustable-rate mortgages declined slightly to 5.51 percent.
Rates on jumbo loans, those larger than $417,000, were considerably higher, averaging 7.47 percent nationally on June 4, according to Bankrate.com.
Several forces are conspiring to keep rates up, economists and mortgage experts say, and they aren't going away soon.
When the subprime-lending bubble burst last summer, many large mortgage brokers went out of business because they could no longer find investors to buy their loans and fund their operations. That means the pool of mortgage lenders is much smaller than it has been in recent years, and billions of dollars in liquidity have disappeared.
Also, surviving lenders are still gun-shy about rising delinquencies and foreclosures, which have forced many to take large write-offs.
''Time heals all wounds, and we haven't had enough time yet to heal this wound,'' said Diane Swonk, chief economist with Mesirow Financial in Chicago. ''Banks and other lenders are being more conservative. They're saying, 'I need to be compensated for this risk.' ''
But there's even a bigger-picture reason behind the buoyancy in mortgage rates — the expectation that rising inflation is the biggest challenge the economy faces.
Many people think that the U.S. economy has narrowly avoided a recession and that the worst might be over. If that's true, the Federal Reserve is unlikely to lower interest rates further and, in fact, could start raising them again as soon as October.
With commodity prices rising, especially for oil and food, the Fed might have little choice but to tighten credit to slow inflation, which eats away at the value of wages as well as financial assets, economists say.
When inflation goes on a tear, investors want higher premiums for lending money, which translates into higher long-term interest rates.
''If people are concerned about inflation, they don't want to hold Treasury bonds,'' said Orawin Velz, senior director of research at the Mortgage Bankers Association in Washington, D.C. ''If there's a decline in demand for bonds, the price will go down, and the yield will go up.''
That's been happening recently with 10-year Treasury notes, the benchmark for mortgage interest rates. But investors are fickle and skittish, Velz said, and their expectations can change with the latest economic report.
For the downtrodden housing sector, the question is whether 6.5 percent interest rates will keep home buyers on the sidelines, slowing an already painful recovery.
Buyers spoiled by years of rates in the 5s need to remember that 6 percent is a very attractive rate, observers say. Plus, with housing prices declining, a buyer's monthly payment might be the same in spite of that slightly higher rate.
Mike Sante, managing editor of personal finance Web site Interest.com, agrees. ''Rates are pretty doggone good,'' he said. ''Historically, anytime you can get a rate below 6.5 percent, you're doing very well. We're not at the double-digit rates of the '80s or even the 7 or 8 percents of the 1990s.''
The Federal Reserve has aggressively cut interest rates. Houses are sitting around unsold. The stage appears to be set for mortgage rates to fall as lenders compete to attract that scarce quarry: the well-qualified home buyer.
Get the full article here.
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