June 26th, 2013 9:30 AM by Mel Samick
“The Sky is falling! The Sky is falling!” You probably didn’t need Chicken Little to sound this warning if you were watching the financial markets last week - you could feel the sky falling. The Dow Jones finished the week down 2.85 percent. The 10 year Treasury was up 36 basis points, reaching a high of 2.51 percent on Friday. That was the highest it has been since August of 2011. Mortgage rates started the week at 4.17 percent and ended the week above 4.375 percent. Most of this happened after the Federal Reserve Open Market Committee and Fed Chairman, Ben Bernanke, speculated that continued growth in the United States would be strong enough such that the Federal Reserve would be able to stop purchasing bonds (and mortgage backed securities); subsequently ending the four year program of quantitative easing. This will almost certainly put the brakes on many would-be refinances and switch the mortgage business mostly into a purchase market. However, if there is a big enough reason, the Federal Reserve could certainly change direction and taper off at a slower pace.
The Dodd-Frank legislation is worrying many that in trying to protect borrowers, they are going to limit access to credit. The House Financial Services Subcommittee on Financial Institutions and Consumer Credit heard testimony this week from industry experts on how the Dodd-Frank legislation could keep certain borrowers from being able to access a mortgage. This is a tricky balancing act that the Consumer Financial Protection Bureau is charged with. They need to create a rule that allows for lenders to have a ‘safe harbor’ and that isn’t so narrow that it encourages lenders to lend to only the most creditworthy borrowers. The funny part is that the mortgage meltdown was created in part because lenders provided credit to borrowers that were not financially or fiscally responsible or qualified. So, the only way to keep that from happening again is to stop lending to borrowers that are below a certain minimum threshold; which lawmakers are trying to avoid from happening.
With Conforming rates increasing, they are getting closer and closer to Jumbo rates. Part of the reason for this is that fees keep increasing on agency loans. Jumbo investors are starting to come back into the market with a bigger appetite. Historically, Jumbo loans have been 25 – 50 bps higher in rate than conforming loans. According to HSH.com, for the week ending June 14, the average conforming fixed loan rate was 4.09 percent and the average jumbo rate was 4.23 percent. This only makes the case that private investors now need to step in take a slice of the Fannie Mae and Freddie Mac pie.
There has been much speculation that Bernanke will step down as Fed Chairmen when his term expires next year. The President added to that speculation last week when he said that Bernanke has stayed longer than he wanted.