Why do mortgages interest rates change?

Mar

Why do mortgages interest rates change?

Archived in the category: 3rd mortgages

I am confused. I know there are ARM’s, and that lending companies sell their mortgages to others to collect payments and so that their books look good at the end of the year. I just don’t understand a few things:

1 – if the Fed has cut interest rates, wouldn’t that rate cut trickle down to the mortgage industry? If so, why would mortgage interest rates increase?
2 – Were people informed of the "ballooning" that was going to happen?
3 – Why did lending institutions issue mortgages at adujustable rates knowing that they were going to increase out of peoples budgets?

Any explanation of what is happening would be appreciated. Thank you!

1 – if the Fed has cut interest rates, wouldn’t that rate cut trickle down to the mortgage

A: US interest rates are determined by the US Bond market.
Many banks are charging a premium because they are concerned about default risk.

Look at 10 year Treasury prices (benchmark for most consumer rates).

Compare that to the LIBOR rate (many mortgages tied to LIBOR).

LIBOR = London Interbank Offer Rate. Complicated. Basically it’s an agreement with all U.S. charter banks under UK law.

2 – Were people informed of the "ballooning" that was going to happen?
Yes, I have been saying this since summer 2005. Most people, and lenders weren’t paying attention.

3 – Why did lending institutions issue mortgages at adjustable rates knowing that they were going to increase out of peoples budgets?
Greed. Easy money. Lenders resold loans to Wall Street and to banks and governments world wide to reduce their loan risk.

How did we get in this mess?

1. Former HUD director, Henry Cisneros under the previous administration strongly advocated that we should have home loans to more people, including people who could not afford them by current standards.

2. The FED kept rates at historical lows which made this job easy.

3. Real estate prices soared with these low rates and money that moved out of the stock market in 2000-2002.

4. By 2004, the FED began raising rates due to their nutty idea on inflation fears. Their inflation ideas was and is wrong. The FED mistakenly saw inflation but failed to attribute the cause was driven by higher commodity prices (oil, corn, wheat, steel, milk, etc). The big drive in oil prices was and is due to demand for oil by China and India’s explosive growth. These FED rate hikes continued until 2006.

5. The FED Funds rates went from 1.00% to 5.25% in two years – a 425% increase in rates. This killed the subprime market and hit everyone with an adjustable rate mortgage, no money down mortgage, and interest only mortgage.

6. Greedy banks and other lenders were lax on their credit standards and gave out loans to anyone without any qualifications. This was a mistake.

7. The higher rates triggered loans to go into default as many people could no longer afford their house payment. They should not have got the loan in the first place.

8. Some alleged "predatory lending" may be a slight factor. It is ridicules to think that someone could buy a $500k home who makes $18k a year, and never expect rates to rise and never expect home prices to fall.

9. Creditors made their own problem worse by tightening credit standard in spring/summer 2007. The tighter standards increased defaults. As defaults increase the problem perpetuates on itself. Mortgage insurers are partially stuck with huge losses as they guaranteed payment on these higher risk loans. These companies are 1 step from bankruptcy right now (ABK, MBI, PMI,. MTG, RDN).

10. Banks and other lenders began taking huge losses as they write off part of their bad loans. This problem is huge. Banks and lenders will not admit how bad their portfolio really is. The result is the wave of selling in the stock market.

Future issue?

Bad credit card portfolios. if people can’t pay their mortgage, what makes anyone think they can pay their credit card?

Proof Note: Amer Express (AXP), Capital One (COF) reported large Q4 (2007) losses due to credit card defaults. Were just getting started with this issue.

Posted by: admin - 3 Comments

3 comments for “Why do mortgages interest rates change?”

engineer50

1. Sometimes fed rate cuts will lower market mortgage rates, but they are not directly linked. Other factors affect mortgage interest rates.
2. Yes, they were informed but some ignored it.
3. Lenders offered them and people took them assuming housing prices would keep spiraling up and they could re-finance their way out of the ARMs.
References :

March 5th, 2010 at 12:30 am

Lisa L

1. Depends on where people decide to put their money. The Fed rate cut is for short term money, not mortgages.

2. People were informed. They don’t care about what is going to happen in 5 or 7 years. Disclosures are signed at application & at closing.

3. ARMs are good for some people. There are benefits but you need to understand how they work. There are disclosures & a good loan officer will explain it. People want what they want & they want it right now. They do not want to think of the consequences down the road. They had to have that house that was too expensive right now.
References :

March 5th, 2010 at 12:58 am

NetAdvisor

1 – if the Fed has cut interest rates, wouldn’t that rate cut trickle down to the mortgage