Why are mortgage rates higher now than in 2004 and the FED rate is near ZERO?

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Is this all about the banks getting bailed out? Ya, people will say “Oh but the FED rate really isn’t about mortgage rates”. HOWEVER, actually it is – but seemingly only when it’s convenient for the banks. Back in the bubble, it was desirable for the banks to have low rates so they cut them. Now, it doesn’t matter WHAT the FED and LIBOR rates do – the banks have the mortgage rates magically stuck at over 5%. What gives?

Also, why are the banks allowed to “pull back” all lending now including and most importantly refinancing. They are simply denying all stated income loans including refinancing. People are trying for “loan modification” which are but a desperate chance to get relief on their mortgages. Certainly bailing out the banks has only made this problem worse.

  1. Reply
    May 1, 2011 at 5:40 am

    I agree with you. The reason why rates are not lower right now is because banks and the secondary investors have less competition and they are trying to recoup some of billions in write downs of the last year or so. These banks have taken billions from the fed to increase lending but instead they are still tightening up the requirements.

  2. Reply
    May 1, 2011 at 6:16 am

    Wow! First off, mortgage rate are loooooooooow! Right around 5.25%! What do you want them to just give you money for free? Seriously, name me one other type of loan that has a lower rate. Also, look at the historic rates, not just 04, and you will see that right now mortgage rates are as low as they have ever been. You need to gain some perspective!

    As for stated income loan (a.k.a. liar loans) are a major part of the problem – these are the loans that got the banks in so much trouble. Why would the continue with these risky loans?

  3. Reply
    May 1, 2011 at 6:31 am

    1. Rates are historically low now. Think about it: you can get a 30-Year fixed rate loan for under 5.25%. Now, think about how much risk there is inherent in holding debt at a fixed rate for 30 years. What if home prices and the economy continue to decline so that you have even more mortgage defaults and the liquidated collateral (houses) aren’t worth enought to pay you back? What if inflation sky rockets and interest rates go through the roof and you’re still getting only 5.25% so that you’re actually losing purchasing power on an annual basis? All of these risks have to be taken into account. So, 5.25% is pretty good.
    2. Also, Fed. Funds is the overnight rate available to certain banks with certain types of collateral to pledge. The Prime rate is actually completely arbitrary and represents both the bank’s risk premium and profit margin on loans so mortgage rates (long-term) which are tied to, among other things, the 10yr T-Bill and Fed. Funds (very short-term) are only vaguely related. After all, most banks don’t hold the debt for 30 years; they sell the debt to investors so they have to take into consideration what return those investors are willing to accept. This is especially true with the current market conditions and liquidity preference of investors.

  4. Reply
    John D
    May 1, 2011 at 6:46 am

    5.25-5.5% is historically rock bottom low for mortgage rates (what they are now). We’re at a 30 year low right now iirc. So much so that refinancing applications are exploding in number, at a rate nobody could have predicted, and I mean seriously exploding (people recognize that its a great deal right now).

    As to the ‘math’ you’re putting forth. Yes, bank rates are higher than fed rates. The RISK in giving out a loan right now is higher than it normally is, a LOT higher (if you’ve read the paper in the last year you’ll see there’s a teeny tiny foreclosure issue right now) and so banks are trying to offset that RISK (that’s what a rate does) by increasing the disparity between what the FED rate is vs their own offered rates (IE larger percentage gap between what they would normally charge vs normal FED rate).

    Are banks part of the problem? Sure, but not on this particular issue.

  5. Reply
    Real Estate Guy
    May 1, 2011 at 7:03 am

    bill, i have been in the real estate business for 18 years AND I have a degree in Economics.

    I can say that you are full of it. Your arguments are totally wrong.

    Banks don’t determine the rate, the market does.

    Rates are at a all time low. In 2004, rates were in the upper 6% range.

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