Lower mortgage rates a silver lining of stock market drops
If there’s an upside to a plunging stock market, it’s that mortgage rates are falling too.
Investors bailing out on stocks have piled into ultra-safe U.S. Treasury bonds, pushing down the government’s long-term borrowing costs on Wednesday to the lowest level since June 2013 — about 2.1% annual interest on the 10-year Treasury note. That yield was more than 2.5% at the end of September.
That means fixed mortgage rates, which tend to track the long-term Treasury yield, also are trending down. And that could perk up the lethargic real-estate industry.
First-time homebuyers and those with less than perfect credit histories still struggle to qualify for loans, a byproduct of the mortgage meltdown. But the lowest-risk buyers and refinancers have been enjoying loans at 4% — or even less — in recent months. That’s a surprise during a period when the Federal Reserve has been winding down its program aimed at lowering long-term rates.
Mortgage broker Roger Kumar delivered good news this week to a refinancer with plenty of home equity: a 30-year loan at a fixed rate of 3.875% with almost no fees.
“The only cost was a $480 appraisal fee,” said Kumar, president of Trident Mortgage Group in Solana Beach.
The latest market movements may mean that low rates could become the norm again, according to Barclays Research analysts who track the market.
“If [Treasury] rates stay where they are currently, we believe it is only a matter of time before primary mortgage rates drop sharply, too,” the analysts wrote in a note Wednesday to investors who buy mortgage bonds.
They projected the average rate for a 30-year home loan could drop to 4%. The rate, they said, has averaged 4.3% since the middle of last year — the point at which mortgage costs shot up on word that the Fed would pull back on its economic stimulus program, which involves massive monthly bond purchases.
Barclays analysts said buyers of 30-year mortgage bonds backed by Fannie Mae were getting a stream of payments equivalent to a 2.75% annual return as of Wednesday morning — the lowest level since May 2013.
Lower rates for home loans boost new construction as well as purchases, said Mark Zandi, chief economist at Moody’s Analytics. A decline of half a percentage point in mortgage rates ultimately lifts home sales by close to 250,000 a year, Zandi said, and a half-point cut also increases housing starts by 110,000 units per year.
“This is roughly the decline in fixed mortgage rates from the start of the year, from 4.5% to 4%,” Zandi said.
To be sure, other factors can keep mortgage rates from immediately following trends in Treasury yields. For example, lenders sometimes resist cutting rates to boost profit when they sell their loans. Mortgages at higher rates command higher prices, assuming all else is equal.
The nation’s leading home lender, Wells Fargo & Co., said in its earnings report Tuesday that its third-quarter profit on mortgage sales rose by $266 million, or 38%, compared with the second quarter, even though it wrote only 2% more home loans, largely because it maintained higher rates.
The biggest question, though, is whether lenders will loosen their mortgage standards, enabling more borrowers to take advantage of the low rates.
First-time and marginal borrowers continue to be rebuffed by lenders that set standards higher than those required by Fannie Mae, Freddie Mac and the Federal Housing Administration, which buy or guarantee nearly all non-jumbo mortgages.
The reason, Wells Fargo Chief Executive John G. Stumpf said in a call with analysts Tuesday, is that these government-backed operations have made unreasonably high demands that bankers buy back soured loans. Banks can be required to take back bad loans even in the absence of serious underwriting mistakes, he said, and even on loans that borrowers had paid for years.
In an interview, Wells Fargo Chief Financial Officer John R. Shrewsberry said stricter regulation has in effect created two mortgage markets, only one of which — the one for affluent borrowers with well-established credit — serves borrowers well.
“Every bank wants that customer,” Shrewsberry said. “But the first-time buyer, or someone with recovering credit, may have enough income to repay a loan but have a hard time getting one.”
Twitter: @ScottReckard
