The Federal Reserve is going to extraordinary lengths to push down long-term interest rates, including home-mortgage rates. But those hoping mortgage rates will fall sharply from current levels, already historically low, may be disappointed.

Mortgage firms Thursday were quoting rates averaging 4.875% on 30-year fixed-rate mortgages, according to Zillow.com, a real-estate information service. That is down from more than 5% two days ago and about 6% in mid-November. But further big declines will be hard to achieve, partly because the mortgage-lending market has grown less competitive in the past year as hundreds of small banks and independent mortgage lenders have collapsed. The big banks that dominate the market are eager to boost their profits margins, not give deeper bargains to consumers.

Many analysts believe rates for borrowers with the strongest credit are likely to be in a range of roughly 4.75% to 5.0% for the rest of this year.  Others say that is too optimistic. Assuming no big change in government policy, Walter Schmidt, an analyst at FTN Financial Capital Markets, sees a range of 4.75% to 5.5% for most of this year.  The Fed began driving mortgage rates down in late November when it announced plans to buy as much as $500 billion of mortgage securities this year. The Fed expanded that program, saying it will spend as much as $1.25 trillion on such securities in 2009. That is enough to provide funding for more than half of all home-mortgage loans likely to be made in the U.S. this year.  The Fed also is buying long-term Treasury bonds to drive down rates on those securities, whose pricing affects mortgage rates.

By historical standards, rates look incredibly low. Until recently, 30-year fixed-rate mortgages hadn’t been below 5% since the 1950s. For the past couple of months, rates have been bobbing between about 5% and 5.25%.

One reason mortgage rates often tick back up after a decline is that a rush of people seeking to refinance quickly causes backlogs at lenders, which frequently don’t have enough employees to process all of the applications. 

The situation highlights a conundrum for the government. It wants low rates to spur the housing market, but also wants the banks to make profits on loans so they can return to financial health.

Many of the small mortgage banks that remain are struggling. Mortgage banks, often small, family-owned companies, aren’t licensed to take deposits and so lack that source of money for their loans. Instead, they typically borrow money for short periods from so-called warehouse lenders. They use this short-term credit to make loans to their customers and then pay back the warehouse lenders after selling the loans to bigger banks or to government-backed mortgage investors Fannie Mae and Freddie Mac.  But this warehouse credit is much harder to obtain than it was a year or two ago because many of the big banks and Wall Street firms that used to provide it have exited that business.

Despite these constraints, the Fed’s action is “going to be a plus” for the housing market, says Thomas Lawler, an economist in Leesburg, Va. Lower rates make it more likely that home prices will hit bottom in many parts of the country later this year, Mr. Lawler says. The recovery, though, is likely to be gradual, partly because rising unemployment reduces housing demand.

Here at PHH Home Loans it continues to be business as usual.  Perhaps, because that statement is so ordinary it gets overlooked.  I would like to give you the facts so that you can better know our capability and commitment.

First, frankly we have access to more funds to lend than we can actually use!  Our warehouse facility has a $350 Million capacity.  I would say we have access to plenty of credit.

Second, mortgage product is widely available.  So far this year we have sold loans to 21 different state and national investors.  Within our investor group we still have more than 450 products to offer.  Furthermore, we constantly seek out new investors and, just as importantly, they seek us out to sell their product!  It is important to remember that we have the best mortgage customers around, the purchase money borrowers who come through our doors every day.  Our investors recognize this fact and want to do business with us.

Third, borrowers can still qualify for a loan.  It is absolutely true that today’s underwriting standards are now stricter than those of the recent past.  However, that is a good thing for our industry.  Borrowers should be able to document their income, their assets and prove that they are credit worthy.  Old fashioned?  Perhaps, but it is certainly prudent.  Furthermore, PHH Home Loans was never a major player in the sub-prime market.  In 2005 when things were getting rather wild and crazy PHH Home Loans did just 3.5% of our closed loan volume in this category.  It was never our stock in trade and this has served us, and our parent company, quite well.  The marketplace is littered with the wreckage of companies who choose the sub-prime path.

Housing affordability is at record highs.   It will certainly do the consumer little good to hold out for that last $5,000.00 on the sales price and then have to pay a half percent or more on their interest rate for the next 30 years. 

Right now may well be the best time to buy!

If you or your clients have questions about the state of home financing, please call me.  I will be happy to answer your questions.

Betsy E. Hanrahan
VP Residential Lending
PHH Home Loans
552 Lincoln Ave.
Winnetka, IL 60093
direct   847-897-1021
fax       847-897-1021
betsy.hanrahan@phhonline.com

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