Mortgage rates have jumped in the last two days even as rates on Treasurys have fallen, disappointing homeowners and potential home buyers.Rates on 30-year fixed-rate conforming mortgages currently average 6.11%, according to HSH Associates, a financial publisher in Pompton Plains, N.J., after dropping below 6% last week. Rates slid a bit more on Monday before jumping by roughly one-eighth to one-quarter of a percentage point in the past two days, mortgage lenders and mortgage brokers say. Rates currently average 7.42% for 30-year fixed-rate jumbo mortgages, which are loans too large to be eligible for purchase by government-sponsored mortgage investors Fannie Mae or Freddie Mac.
Mortgages are still well below their recent highs of 6.7% in July. But the latest increase is notable because rates on 10-year Treasurys have fallen by roughly 0.32 percentage point since Friday, to 3.41%.
Rates on 30-year fixed-rate loans have tended to move in line with rates on 10-year Treasurys. But the relationship has weakened in the past year or so. "When people look at the 10-year Treasury and mortgage rates don't follow, that's a surprise," says Wells Fargo & Co. Executive Vice President Joe Rogers. "But the two rates do not move in tandem." Even with the latest increase, mortgage rates are still "quite attractive," he says.
In the past week, the spread between 10-year Treasurys and 30-year fixed-rate mortgages has risen by roughly 0.35 percentage point, says Mahesh Swaminathan, a mortgage strategist at Credit Suisse Group. The wider gap reflects a variety of factors, he says, including reduced demand for mortgages because of the bankruptcy filing by Lehman Brothers Holdings Inc. and the planned sale of Merrill Lynch & Co. to Bank of America Corp. Both Merrill and Lehman have in the past been buyers of mortgages. At the same time, investors are fleeing from all but the very safest assets in the wake of financial troubles at Lehman and insurer AIG Corp.
"There's a credit panic going on, and people are afraid of buying anything but U.S. Treasurys," says Thomas Zimmerman, a managing director at Credit Suisse.
The result has been confusion for borrowers seeking to lock in a good rate. "It's been a roller coaster," says Melissa Cohn, president of the Manhattan Mortgage Co. in New York. "The whole market seemed to unravel" on Tuesday.
Rising rates aren't the only issue for borrowers. Many who would like to refinance can't because of tighter standards and falling home prices. "You have people who can't fully document their income, but are still making their payments, still have good incomes and good reserves, but under the new rules can't qualify for a new loan," says Jon Eisen, a mortgage broker in San Diego.
One big problem for borrowers is that over the past year, Fannie and Freddie -- the two main providers of funds for U.S. home mortgages -- have raised the fees they charge to lenders, and those fees get passed on to consumers.
Fannie and Freddie recently raised their "delivery" charge for loans that will be bought or guaranteed by the companies to 0.5% of the loan amount from 0.25%. That 0.5% fee translates into an interest rate about 0.125 percentage point higher than it would have been before such fees were imposed last year.
In addition, Fannie and Freddie charge another set of fees to all but the most solid borrowers including many people who own Charlotte condos. These fees are highest for borrowers with weaker credit scores or smaller down payments. For instance, effective for loans purchased on or after Nov. 1, Fannie will impose a fee of 1.25% on a borrower with a credit score of 660 to 679 who is making a hefty down payment of 25%. On a $400,000 loan, that means $5,000 in extra fees, some or all of which might be paid in the form of a higher interest rate.
The median credit score for Americans is about 720, according to Fair Isaac Corp.
If the goal is to revive demand for housing, "it isn't going to work this way," says Lou Barnes, a mortgage banker in Boulder, Colo.
The regulator of Fannie and Freddie, the Federal Housing Finance Agency, or FHFA, took over management control of the companies early this month, partly because of worries that they no longer had the financial strength to provide enough support to the housing market. Mortgage bankers hope the companies, backed by promises of financial support from the Treasury, will now be able to reduce some of the fees. A spokeswoman for the FHFA said Fannie and Freddie are reviewing their fees, but she declined to discuss when they might adjust them.
A Fannie spokesman declined to comment on the fees. A spokesman for Freddie said: "We are always looking at the market and making appropriate adjustments."
By: Ruth Simon and James Hagerty
Wall Street Journal; September 18, 2008
