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Mortgage rates skyrocketed this week as Wall Street tried to discern the ever-shifting contours of the Great Bailout.
The benchmark 30-year fixed-rate mortgage rose 54 basis points to 6.74 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.42 discount and origination points. One year ago, the mortgage index was 6.16 percent; four weeks ago, it was 6.49 percent.
The benchmark 15-year fixed-rate mortgage rose 45 basis points
to 6.4 percent. The benchmark 5/1 adjustable-rate mortgage rose
40 basis points to 6.61 percent.
It was the biggest weekly rise in the Bankrate.com
index in more than 21 years. In April 1987, the benchmark mortgage
rate jumped 86 basis points in one week, from 9.44 percent to 10.3
percent. Between then and now, the biggest one-week increase happened
exactly 10 years ago this week, when the 30-year jumped 44 basis
points, to 6.9 percent.
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| Weekly
national mortgage survey |
|
| This week's rate: |
6.74% |
6.4%
|
6.61%
|
| Change from last week: |
+0.54 |
+0.45
|
+0.40
|
| Monthly payment: |
$1,069.09 |
$1,387.91
|
$1,011.64
|
| Change from last week: |
+$58.52 |
+$40.36
|
+$43.24
|
Two weeks ago, there was doubt about whether the $700 billion bailout would even happen. It eventually passed, and then investors wondered whether the federal government would pay top dollar for distressed mortgage-backed securities, or drive a hard bargain for them.
This week, the bailout morphed into a partial nationalization of the banking industry, as the Treasury and Federal Reserve told executives of the country's biggest financial companies that they would accept federal investments, whether they liked it or not. It was an offer they couldn't refuse, and unlike Moe Green in "The Godfather," they wisely accepted the unsolicited investments.
All of this happened before a backdrop of discouraging economic news. The stock market took wild up-and-down swings. So did bond yields, which affect mortgage rates. One analyst says he thought that investors were more willing to buy and sell mortgage-backed securities as they moved out and into the stock market, leading to big down-and-up movements in rates. "I think you just saw waves and waves of selling of mortgage-backed securities in the last couple of weeks," he says.
Mark-to-market effects
Barry Habib, publisher of Mortgage Market Guide, laid this week's
volatility and higher rates at the feet of mark-to-market accounting,
which has the effect of forcing banks to raise capital as the values
of their loan portfolios suffer paper losses. It's as if you had
to come up with cash just because the value of your house fell --
even if you had no intention of selling it.
For banks, one solution to the problem is to sell their loans -- but that has the effect of lowering the values of other banks' loans, triggering another round of selling. Habib says the government's impending purchases of distressed mortgage-backed securities "absolutely will help. It will create some stability."
Cameron Findlay, chief economist for LendingTree.com,
says the roots (sorry) of the increase in mortgage rates lie in
technical matters. The money in a mortgage-backed security goes
in three directions: the investor, Fannie Mae or Freddie Mac, and
the servicer who handles billing and collections. Lately, as prices
for mortgage-backed securities have plummeted, investors and servicers
have been squeezed -- so they demand higher coupon yields and therefore
higher mortgage rates.
See? Technical.
It comes down to unpredictability. When mortgage rates
are so volatile, no one can predict how long borrowers will keep
their loans before they refinance them. "Those expectations are
being totally blown out the window," Findlay says. "There are no
models out there that are coming even close to predicting" how mortgages
will perform.
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This week: July 30 - Aug. 5
