Forecasting Interest Rates

Forecasting Interest Rates

The argument for rising interest rates is:

1. Bankruptcy code changes:  Legislation is being introduced that will allow the courts (read judge), to alter the terms of a borrower's mortgage.  This will impact the integrity of the MBS market and reduce demand for Agency MBS. China and other major investors will move away from MBS in favor of treasuries.  Reduced demand for MBS increases the rate to the consumer. What is an MBS? "Mortgage Backed Securities" are sold in the bond market to provide funds for purchase of closed mortgage loans.  They compete with all other bond types for investor attention.  Lack of attention translates into higher rate for more attention.

2. Agency Add On's:  Across the board, FNMA/FHMC have implemented risk based add on's for loan purpose(Purchase, Refi, Cashout Refi) /LTV (97%, 95%, 90%, 80%, 79% or less) /FICOS(Borrower Credit Scores).  Average BP add on for a 660 FICO score/refinance is 200 BP's greater than a year ago.  These new add on's (this week the cash out refi add on's increased again) have resulted in 200 BP's worse execution to the end consumer.  Translation your credit scores will hammer your interest rate.

3. Government Influences:  Only the government is buying MBS (Mortgage Backed Securities).  Rather than periodically jumping into the market as aggressive bidder, the treasury is buying at scheduled intervals.  On Dec 17th we saw the positive impact on price with the 600B announcement. The rates quickly deteriorated when the treasury provided details / regular Thursday announcements and regular purchase schedules. The Federal Reserve Fed Funds Rate already at .25 has little room to move lower.  Banks receiving Tarp Funds are using the money to improve their balance sheet rather than expand their lending.

4. World Wide investment community is worried that flooding world economies with government stimulus money will lead to inflation.  Higher inflation concerns require higher interest rates to convince the investing public to purchase a long term security at a fixed interest rate. 

Draw your own conclusions but, given these factors, mortgage rates should continue to trend upwards.  As a realtor, you should be educating your buyers that rates have bottomed, housing values are very attractive, and, if they are a first time home buyer, the $8,000 tax credit will expire in November.  If you are a buyer, it's decision time.  Take advantage of a housing market and rate combination that may never come around again. 

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