Mortgage Rates Left Behind

Americans seeking mortgages aren’t getting the full benefit of record low yields on Treasuries and government-supported mortgage bonds, blunting U.S. efforts to curb the housing crisis.

While the average rate on a fixed 30-year mortgage fell to 5.18 percent last week from 6.47 percent in October, according to Mortgage Bankers Association data, the historical relationship between home loans and mortgage bonds shows rates should be at least half a percentage point lower. Though the U.S. is paying nothing to borrow in some cases, homebuyers are paying about $730 more a year then they would otherwise on a $200,000 mortgage.

The demise of lenders including Countrywide Financial Corp. of Calabasas, California, and Seattle-based Washington Mutual Inc. reduced competition as refinancings soar. At the same time, surviving mortgage banks face a credit crunch that limits their lending ability, industry officials say.

“Lenders have raised their prices over the last few weeks because of capacity concerns amid all this additional business,” said Brian Simon, chief operating officer at Freedom Mortgage Corp. The Mount Laurel, New Jersey-based firm is among the five biggest independent mortgage companies.

Even though mortgage rates have fallen, the decline hasn’t kept pace with the slide in yields on bonds backed by the loans. Yields on Fannie Mae’s 30-year current-coupon mortgage securities fell to about 3.80 percent today as of 8:30 a.m. in New York, from 6.04 percent on Oct. 31. Mortgage bond yields help determine what lenders must charge to make a profit when selling the debt, which in turn provides cash for new lending.

Widening Spreads

difference between the average rate on a typical fixed-rate loan and Fannie-guaranteed securities widened to more thanone percentage point last month for the first time in at least a decade, rising to more than 1.4 percentage points yesterday, data compiled by Bankrate.com and Bloomberg show. The average over the past five years is 0.14 percentage point.

Almost $6.7 trillion of U.S. home-mortgage bonds were outstanding on Sept. 30, and about 70 percent of those were guaranteed by government-chartered Fannie and Freddie Mac or federal agency Ginnie Mae, according to Federal Reserve data.

The Treasury market is about $5.7 trillion. Investors charged the U.S. zero percent interest when the government sold $30 billion of four-week bills on Dec. 9. The yield on the benchmark 10-year Treasury note has fallen to 2.19 percent from 4.08 percent in October.

About $1.1 trillion of so-called agency mortgage securities have been created this year, about the same as in 2007 and up 25 percent from 2006, as banks and bond buyers shun other types of home-loan debt. The U.S. seized Washington-based Fannie and Freddie of McLean, Virginia, in September and began buying home-loan securities to lower financing rates and stem the worst housing slump since the Great Depression.

Lowering Rates

Additional moves, such as a plan being considered by the Treasury Department and backed by the National Association of Realtors to create loans with rates of 4.5 percent, may be coming because borrowing costs haven’t fallen further, said David Lykken, a consultant at Mortgage Banking Solutions in Austin, Texas, which sells advice to lenders.

The Fed said two days ago that it may expand a program that it announced last month to buy $500 billion of mortgage bonds. The spread between rates and yields partly reflects greater uncertainty about how many applications will turn into loans as rates fluctuate and approvals drop, Lykken said. Home lenders hedge against changes in bond yields with instruments such as forward-sales contracts, which can cause losses if loan-completion rates don’t match their forecasts.

Refinancing Surge

After the Fed’s Nov. 25 announcement boosted mortgage-bond prices and Treasury yields tumbled, the average rate on a 30-year fixed-rate loan fell to the lowest since June 2003, according to Mortgage Bankers Association surveys, which cover borrowers with good credit and 20 percent down-payments.

The drop spurred a flood of loan applications from homeowners to refinance their loans, causing the mortgage trade group’s index measuring such activity to rise to 4,156 in the week ended Dec. 12 from 1,254 for the period ended Nov. 21.

The increase taxed lenders who fired employees earlier this year, making them reluctant to bring in business with more competitive rates on concern they couldn’t keep up. “Our mortgage volume has quadrupled from a month ago,” said Bob Walters, chief economist at Quicken Loans Inc. in Livonia, Michigan. “I have no doubt other people’s numbers have done the same thing.”

Failed Companies

A larger gap between rates and yields usually implies bigger profits for lenders, though a need to hire temporary workers and pay overtime rates can boost expenses during origination booms. “The issues include space, people and computers,” said Steve Jacobson, chief executive officer of Fairway Independent Mortgage Corp., a Madison, Wisconsin-based lender. “A few weeks ago we were concerned about things being slow in December and January, and now it’s like, how are we going to get through December and January?”

More than 100 mortgage companies have failed since the start of last year because of a record jump in U.S. foreclosures and a collapse in demand for loans outside Fannie, Freddie or federal-insurance guidelines. Since June, Countrywide, Washington Mutual and Charlotte, North Carolina-based Wachovia Corp., three of the top eight lenders, were acquired by rivals.

‘Disappointed’

The credit crunch for remaining non-bank lenders such as Taylor, Bean & Whitaker Mortgage Corp., the largest independent mortgage company, is also limiting options for home buyers. The firms rely on increasingly scarce credit lines to make new loans, and then hold the mortgages until they’re sold. Taylor Bean Chairman Lee Farkas said in October that he was “disappointed” banks weren’t using U.S. capital injections to expand credit lines, after his capacity contracted to $3 billion from $7 billion in July 2007. That left the company able to hold 57 percent fewer loans.
 
“Even the big money center banks” that provide credit lines and make mortgages are restraining loans meant for quick sales as they cut risk-taking and seek to maintain ratios between capital and assets, Freedom’s Simon said. “Lenders are coming in and out of the market much more rapidly on price than they have in the past.”