DROdio Real Estate

Daniel R. Odio spoke to Patrick Collins today about mortgage rates going up in the past couple of days, and what that might mean for the industry and rates moving forward:

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Here's a transcription of Daniels' conversation with Patrick:

DROdio:  Hi this is Daniel Odio with DROdio Real Estate.  I’m on the phone with Patrick Collins of First Savings.  Patrick are you there?

Patrick Collins:  I am here.

DROdio:  Alright.  So we’re in about the middle of April 2008 and interest rates took a big jump and you were just explaining to me why that was.  I wanted to get this recorded, because I think a lot of people would enjoy hearing about this.  So if you could just kind of backtrack a little and start from the beginning.

Patrick Collins:  Sure.  We’ve been holding pretty steady, which has been nice.  We’ve seen some stability in the interest rate market and the bonds market over the past few weeks and we’ve been holding around 5.75 at zero points for a standard or traditional 30 year fixed.  And in the past  three days we’ve seen a lot of volatility in the bonds markets and rates have really, really jumped significantly and they are going to do so again today.  And the reason for that is all of a sudden, it’s actually a positive reason, long term, but all of a sudden we have some liquidity in the market.  And by that I mean in the secondary mortgage market where big money center banks, big banks sell securitize bundles of mortgages, which is how most loans are originated.  They are usually bundled and sold.  We not are getting liquidity in that market.  A couple of very large hedge funds sold really, really, really big bundles of mortgages on the open market.  They were bought quickly and they were bought for a good price and that really shocked everybody on Wall Street as they stood back and said wow, this is really the first time that we’re seeing anybody step out and actually have faith in a pool of mortgages.  What that’s going to do is that’s going to cause long term rates to go up a little bit and short term rates, adjustable rate mortgages to come down.  What we’re going to have is a steepining of what we call the yield curve, the difference between long term and short term rates.  That yield curve has been flat for a very long time and now that there’s some liquidity investment banks, hedge funds and different investors, now they’ve been fleeing to fixed rate loans for a long time and only buying those, because the perception that the federal government is backing them, because the of Fannie Mae and Freddie Mac Loans. Now that there’s liquidity they don’t have to be buying these securitized Fannie Mae, Freddy Mac Loans, they are going to start buying ARM’s again and that, again the yield curve will start to look a lot better.

DROdio:  So let’s break this down for people into some understandable level of detail, because many people, you know, to part of the audience it’s going to make perfect sense, but part of the audience is going to be (audio fades) what you just said. So in terms of how it effects somebody who is looking to buy a home right now, if I understand what you’re saying, you’re saying that getting a 30 year fixed rate loan has been a really great deal period and as compared to the adjustable rate mortgage products, because the yield curve or the difference in the rates hasn’t been very different.  But now that’s changing, now the adjustable rate mortgages are going to be better deals again?

Patrick Collins:  That is almost exactly what I am saying.  Right now the flat yield curve means that three year, five year, seven year ARM’s have been priced at the same level as 30 year fixed rate loans or even higher in many cases.  So the 30 year fixed has just far and away been the best product out there.

DROdio:  When you can get a fixed mortgage at the same rate…

Patrick Collins:  Exactly.  And that still remains true right now and that will probably be true for, you know, maybe a few more weeks, months, maybe even a quarter.  But what we’re seeing is that start to change, literally just over the past 72 business or 72 hours we’re seeing that start to change.  So right now it’s probably still going to  make sense for people to get a 30 year fixed, but if this trend continues next week, the week after, you know, those ARM’s are going to start coming down and you’re going to see those come back into the market place.

DROdio:  And so for people that are considering purchasing a home right now at this very moment what would you recommend to them, should they wait, should they lock in as quickly as possible, what’s the best thing to do?

Patrick Collins:  To be honest, if they’re looking at a 30 days or less closing, which is the standard contract in our area, I would lock in.  I think that this trend is going to continue here for a little bit.  We’re nearing the highest rates we’ve had in about, unfortunately for buyers right now, two hundred days.  So what we’re hitting and a lot of Wall Street analyst look at this, is we’re starting to test what’s call the two hundred day moving average. A lot of times if you break that level that trend is going to continue.  So I think that we’re going to see long term rates go up, you know, for the next probably week or so and then we’ll see them come back a little bit.  Wall Street always goes higher than it should and interest rates do too and then they come back.  So there will be a price correction at some point, but it’s a matter of when that happens.  If you’re buying a home in the next 30 days I would probably lock in.  If you’re 60 to 90 days out I would definitely wait a little bit and see what happens.

DROdio:  So if you’re closing, I mean this is the middle of April right now.  If your closing is towards the end of May or after maybe wait before locking in, but if it’s towards the middle May better lock in now before rates increasing.

Patrick Collins:  That’s exactly right.

DROdio:   And can you just to the bond market a little bit and how that affects interest rates?  I know we covered that in a previous post a bit.  But it confuses many, many people.

Patrick Collins:  Sure.  So a lot of people look at the stock market and try to translate that to how rates are doing or even the ten year note, the ten year T bill and that’s, the phrase goes that’s old school thinking.  That used to be the case, you could track the ten year T bill and watch how that was performing and really, you know, a few percentage points above that would be where the 30 year fixed rate was.  What really is the case right now is the mortgage market has its own entire almost section of the bond market.  Where mortgages are pooled and they’re sold as securities.  It’s very similar to bonds. And those securities are traded day to day and it’s tracked day to day.  And how those securities are trading is what effects long term 30 year fixed and 15 year fixed mortgages.  And the reason is if literally a big group of hundreds of mortgages being sold and traded everyday and you can see what buyers are willing to pay for a group of loans, so banks sit back and they look at that and they say well the market today will sustain a price of X.  So we are going to price our 30 year fixed right around that price.  So they know what they can get on a day to day basis for their loan.  So that’s really, it’s a alive, it happens everyday, that’s why rates change day to day.  It’s because the way that bonds and securities are being traded.  Banks look at that and then subsequently price their loans accordingly to that market.

DROdio: The bank builds a little bit of margin into what they think they can sell the loans for?

Patrick Collins:  Absolutely.  They certainly do.  Your average bank, your average institution really across the country is looking for anywhere on a  margin of a traditional 30 year fixed and this is an actual money lending institution not obviously a broker shop.  But they are looking for anywhere between 1.25 to about 2 points as a margin.

DROdio:  And so if somebody is going to try t o predict what long term rates are going to do, look at the bond market?

Patrick Collins: It’s better to look at the bond market.  It’s better to look at trends in the bond market and the securities market, but I will say in this environment, in this physical environment that we have right now it’s very difficult to predict.  There’s so much, still, fear built into this market that anything that, you know, any economic data that comes out from any big blue chip, you know, Google or anybody announcing any news is going to move the market drastically.

DROdio:  Well thanks for the info Patrick.   Can you give everybody your contact info?  And also what states do you do loans in, because people can listen to this from anywhere in the world, really U.S.

Patrick Collins:  Sure.  We’re right here in McClain, Virginia.  I’m with First Savings Mortgage Corporation and we lend in Virginia, D.C., Maryland, right here in our Tri-state region and then from the outlining areas, Delaware, Florida, both the Carolinas and West Virginia.  I can be reached on my cell phone any time at 703-282-5982 and my email address is pcollins@firstsavings.com and first is spelt out.

DROdio:  Great. Well Patrick thanks for the info.  I appreciate it.

Patrick Collins:  Absolutely. Thanks Daniel. Bye.

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This entry was posted on Friday, April 18th, 2008 at 11:35 am and was filed under All About Home Financing & Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.