Why haven't mortgage rates declined? |
|
|
Greenspan speculated that the odd rate behavior arose from a savings glut in Asia: China and Japan, flush with
dollars, sent the money back to the United States so Americans would have cash to keep buying imports. Instead of buying skyscrapers
and movie studios, the Chinese and Japanese bought Treasury bonds and mortgage-backed securities. They bid up the prices of IOUs --
and when IOU prices go up, interest rates go down.
"Fast forward to today," says Kenneth Thomas, a lecturer in finance at the Wharton School of Business at the University
of Pennsylvania. He points out that investors around the world continue to buy Treasury debt, keeping yields low. But their reluctance
to buy mortgage debt keeps mortgage rates higher.
"Mortgages are now considered riskier than they used to be," Thomas says. "That's one of the biggest factors in this
credit crunch."
He cites the Fed's quarterly bank survey, in which 75 percent of lenders said they tightened mortgage lending standards
in the second quarter of this year. "The tightening comes in many ways, including higher rates," Thomas says.
Stricter and more expensive
So Beijing has had a hand in raising mortgage rates with its reluctance to buy American mortgage debt, and Seattle and Charlotte, N.C., play
their part as major banks raise mortgage rates to compensate for a perceived higher risk. The global financial system ties these
decisions together.
This might seem strange if you applied for a mortgage five years ago and again recently. Lenders have
become more strict -- demanding better documentation
of income and assets and requiring bigger down payments. Today's new mortgage almost certainly has a smaller chance of going bad than
a typical mortgage underwritten three years ago. If they carry less risk, why don't rates fall?
"To me, it says the banks are holding more of the profits on these mortgages to make up for the losses that they've
experienced over the last several years," says Moulton, of Americana Mortgage.
Maybe he should blame Freddie Mac and Fannie Mae. The government-sponsored companies guarantee and securitize mortgages,
and this year they have added fees (such as "loan level price adjustments" and "adverse market charges") that lenders pass along to
borrowers, usually in the form of higher rates. The fees supply Fannie and Freddie with cash to fend off a government takeover. They
probably wouldn't have such pricing power if they had more competition.
Banks, on the other hand, have plenty of competition, says Bob Walters, chief economist for Quicken Loans. "It's still a very, very competitive market, and
that keeps rates, from our perspective, low," he says. "You don't see anybody gouging out there. If they do, they'll lose -- because
the customer will go somewhere else."
|
