Mortgage Rates Continue at Near-Record Lows, but for How Long?

The 30-year fixed mortgage rate has held fairly steady, maintaining near record lows since December and sending most credit union originations straight to Fannie Mae and Freddie Mac.Fannie Mae Affinity Relationship Manager Tammy Trefny said the GSE’s program with NAFCU Services Corp. saw a whopping 242% increase in total credit union delivery volume in first-quarter 2009 compared to the same period last year. In addition, the total number of loans delivered was up 227% during that period.The low rates in 2009 are unusual because the 10-year Treasury note yield has risen from a low of 2.05% in December to 3.12% as of May 14. Traditionally, the spread between the 10-year T-bill and the 30-year Fannie Mae commitment rate rarely fluctuates from between 120 to 150 basis points.Last November, before the Treasury rolled out its first mortgage-backed securities repurchase program, the spread had grown to 280 basis points. However, it’s compressed with each new government purchase program announcement, down to only 109 basis points as of May 14.Why the fluctuations?Two chief industry economists, NAFCU’s Tun Wai and Western Corporate FCU’s Dwight Johnston, both agree with most Wall Street observers that government entities have helped keep mortgage rates low by purchasing mortgage-backed securities when rates threaten to rise. Low rates help strapped homeowners refinance and buyers chip away at a glut of homes on the market, both goals of the Obama administration.Regulators aren’t complaining about institutions selling mortgages to the secondary market either, Wai said, because it allows them to keep originating mortgages while keeping assets low, which helps bolster sinking net worth.However, both men agree the government can’t keep rates abnormally low for long.“What a lot of people are expecting is as the recovery occurs is that the Fed will probably raise its rate, and it will probably increase rather quickly,” Wai said. “As far as the mortgage rate, on the long side, it has more to do with inflation expectations, and as far as the market is concerned, whether or not the Fed can control the inflation that will be building up with all the liquidity going into the system right now.”Fixed-income investors flocked to the safety of agency mortgage-backed securities, Johnston said, but added that those same portfolio managers will stop buying if spreads are too low. Eventually, investors will step away from MBS, and even though the Fed will buy up securities in an attempt to keep rates low, they’ll eventually follow Treasury rates upward.Johnston also said he thinks the bond markets are vulnerable to rate spikes.“For credit unions that make mortgages, they need to be extremely cautious in hedging what’s in the pipeline and pricing mortgages, because they could get burned by a quick upturn in rates.”–[email protected]