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US Mortgage Rates Sink to Lowest on Record


It seems mortgage rates in the US have fallen to the lowest on record, at 4.69 percent:

Mortgage company Freddie Mac said Thursday that the average rate for 30-year fixed loans sank to 4.69 percent, from 4.75 percent last week.

That’s the lowest since Freddie Mac began tracking rates in 1971. The previous record of 4.71 percent was set in December. Rates for 15-year and five-year mortgages also hit low

Bloomberg has an explanation:

The average price of $5.2 trillion of bonds guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae climbed to 106.3 cents on the dollar yesterday, according to Bank of America Merrill Lynch’s Mortgage Master Index. That’s up from 104.2 cents on March 31, when the Federal Reserve ended its program purchasing $1.25 trillion of the debt.

“It’s gotten insane,” said Scott Simon, the head of mortgage-backed securities at Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund. “This is rarefied air.”

U.S. existing home sales unexpectedly fell last month and purchases of new houses tumbled to a record low, underscoring how borrowers’ ability to qualify for financing is limited even as rates drop. Bond prices show investors aren’t concerned homeowners will pay back the mortgages underlying the securities early, forcing them to reinvest in new debt at lower yields.

Applications for mortgage refinancings are off almost 57 percent from last year’s peak reached in January, according to the Mortgage Bankers Association.

In essence, mortgage rates are ultra low, but people just can’t qualify for refinancing their loans. If people refinance, the current owners of the mortgage will lose because they pay 106.3 cents and get back just 100 – because a refi is paying back your current loan for a new one. When prices go too high, yields – or rates – become low enough for people to refinance, and yet, people can’t refinance because of qualification issues (like income, down payment, loan-to-value and so on).

This is weird. Because if people have qualification issues, surely they are candidates for default? Not just the kind where they can’t make enough, but the kind where they decide it’s not worth it anymore (“strategic” default)? These options make the market useless for people – no matter how “low” the market seems to price yields, they will never get the advantage. More importantly, it means the market isn’t quite thinking of default risk?

Calculated Risk says the fall is because the US 10 year treasury yield has dropped even more. Makes sense – traders will use one to hedge against the other; and if that’s so, there’s a slight pricing of default risk in the increased spread between 10 years and mortgages. And Fannie Mae is cracking down on “strategic defaults”, which probably means there is enough of it happening to warrant attention. This is not going to be a good rest of the year for US Housing.


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