Mortgage Rates Drop! It Does Not Mean What it Used to

Posted on November 26th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

First off, Happy Thanksgiving everyone! I really wish you all the best.

Ok, now down to business – I have heard enough of the rampant speculation about how a 50bps drop in conforming mortgage rates are going to save the housing market – I wish it were that simple.  There is not a lack of liquidity in the mortgage market.  Rather, a lack of qualified borrowers given current lending guidelines; lack of aggressive Jumbo money; major asset devaluation; and terminal negative-equity.  These factors make this excitement over a 50bps drop in rates a red herring.


For an in-depth look at today’s mortgage rate environment, check out my most recent story Mr Mortgage: An In-Depth Look at Mortgage Rates: 5.5% is Nowhere Near Reality For Most

Remember folks, the rates at 5.5% you are hearing quoted are for the best AAA, high-FICO, low loan-to-value, owner-occupied purchase or rate & term refi. This loan scenario makes up the small minority of all borrowers. The rates for most of us are still well over 6%. The rates for Jumbos are much worse and did not respond anywhere close to conforming.

We can’t even be certain yet these levels will hold. Remember folks, we have seen this happen a few times this year. Each time, rates went right back up after the initial knee jerk lower. It is happening again this time as well. Ever since the initial betterment on Tuesday morning, rates have been increased higher multiple times in just two business days.  As of Wednesday afternoon rates have climbed back up to a level that has wiped out half of their initial gains. For example, last week a zero to half point 30-yr fixed was around 6%. On Tuesday is jerked down to 5.25% and is back to about 5.625% now. I am still not convinced that the low rates will last – I talk about in HERE. I bet we see a 6-handle on base-rates again by year-end.

But, for the purpose of this analysis, let’s pretend that conforming base-rates stay at 5.5% (NOTE – Jumbo Agency money is still well above 6%.  Jumbos over the Agency Jumbo limit can be as high as 7-10% because these are bank portfolio loans).


In the good-old days, when rates dropped 50bps in a short period of time, the entire country would refinance for a lower rate, for cash out, to combine a first and second into new first mortgage and then add a new HELOC, etc.

Back then when values went up every month and there were hundreds of lenders with thousands of programs and interest rate structures it was very easy to pump the mortgage money.  Back then the refi waves came every 6-8 months and within a few months after a wave began it was noticeable how this injection rejuvenated the consumer.

This can’t happen any longer. Who do you think is out there to take advantage of these low rates? Much fewer than you would think and a lot less than in the past.


-Negative Equity – Within the states that need to most help, the vast majority can’t refi due to negative-equity see chart in this LINK. In CA for example, some 60% of all mortgagees are either underwater or ‘near’ underwater and and will not be able to take advantage of the rates. NV, FL and AZ are even worse. The top 10 trouble states in the nation are mostly stuck underwater in their homes, unable to move or refinance.

-Rates are really not that low – The rates you are hearing about at 5.25% were there for a brief period yesterday morning but by the end of the day every lender had re-priced rate higher multiple times.  Rates jumped back to the 5.5% level where they sit now.

***Rates are lower than last week for sure, but these ‘low rates’ that are being heralded are ONLY for the best AAA Prime gold borrowers with 80% CLTV’s and 720 scores. This represents a small fraction of borrowers. THE REST STILL GET RATES WELL ABOVE 6%. As a matter of fact, most borrowers with this profile did not participate in the past several years of serial refinancing and many already have low 30-year fixed rates at 5% attained in 2003-2004. These rates are not for anyone less than perfect.

-Steep rate adjustments – Now days, the GSE’s have steep adjustments to the interest rate for less than perfect credit scores, higher loan-to-values, cash-out etc. These steep adjusters carry rates for most well above 6% even at today’s lower rate levels.

-Folks don’t qualify – ‘Back then’ nearly everyone could benefit from a drop in rates because values always went up and because stated income and interest only loans made it so everyone could qualify.  Until mid 2007, lenders actually funded 75-80% of all loan applications! Now, lenders are funding 40-50% of applications. That is serious fall out. Now, you must have two years tax returns, a current pay stub, great credit and sizable equity to take advantage of the best rates. This profile represents a small minority of borrowers.


With respect to purchasing, since over half the market is distressed sales of foreclosure related properties, rate does not matter as much – home price does. 6% or 5.5% will not change things – its about how cheaply they can buy. Everyone wants a ‘deal’ on a foreclosure.

Many ‘investors’ buying distressed properties pay cash. Those that don’t have much tighter qualifying rules and a much higher rate structure anyway because rental properties carry more risk. The GSE’s are now pricing in that risk.

Renters and first time home buyers are a different story and should see some benefit to lower rates if they hold. They will either save money or qualify for slightly more house.  But remember, first time home buyers and renters are the weakest portion of the market and have always been. What is missing is the all-important move-up buyer, which lower rates will not help to any great degree.  This is because of the gross amount of negative equity already discussed here and because without all of the exotic loan programs and easy qualifying many can’t even afford to re-buy the home they live in now.


I emailed a good friend at a national mortgage bank yesterday and asked…

Mark: Of all your loan locks today, how many were re-locks of loans already in process with other lenders.  If it was heavy, it would show that yesterday’s massive mortgage action was not a bunch of new loans but just an aggregation of that past 30-days of production at higher rates that all moved to other lenders on the same day (today) for lower rates?  I am trying to validate that on days where rates drop through the floor in a single day, very few new loans are originated.  Rather all bank lose their present portfolio as borrowers and brokers go elsewhere to capture the new pricing.

David: Most were re-locks from other lenders on loans already in process. Some were refi-churns from the past 6 months originations including some of the re-locks. Another problem on days like today is that brokers lock everything in their systems without checking with their clients first because their computer tells them that John Smith can benefit from a refi if rates fall to a certain level. They lock up the loan to protect the rate and then call John Smith to find out he is delinquent, unemployed or the home value has dropped to a level at which he can’t refinance using new guidelines. Days like today feel great when they are happening but end up being costly.


This brings me back to a research note I wrote in Jan 2008 about IndyMac that explains the flurry of mortgage activity yesterday, as rates dropped.

1/24/08 IndyMac locks $1 billion in loans in a single day – The Lies Never Stop

Michael Perry is the biggest information fabricator in the industry. Look back through all of your 2007 press releases and you will see how many times he has said such things only to disappoint the shareholders.

The facts are IndyMac sits on Billions of unsalable subprime, Pay Option and second mortgage loans. These three loan types make up 80% of their portfolio and most of it cannot be sold for any price.

All mortgage companies had record locks yesterday. But this is not ‘new’ business necessarily. When rates crash down like they did yesterday, everyone forward locks loans with whoever has the lowest rates. They may have already had these loans locked at a different lender but relocked somewhere else to get the better rate.

IndyMac took a lot of business from other lenders yesterday. But, they lost a lot too. When this happens, portfolios just tend to shift from one lender to another, as borrowers and brokers want to take advantage of the lower rates and the lender at which they are presently locked typically will not roll down rates to market. If you lock it, that is your rate.

So, yes Indy may have locked $1 Billion (3000 loans) but they likely lost 3000 loans at their shop locked previously in the month because the loan officer locked those with a different lender for a better rate. Of the 3000 loans Indy locked yesterday, 2500 likely were already locked and in process at another lender like Countrywide.

Now for the bad news…all of those loans IndyMac already had in their pipeline previously locked at higher rates that were pulled, will cause massive losses. Not, only paper and hedging losses but real operational losses from having staff work loans that will never fund. These loans  are the exact ones that they wanted to fund because they carry a  higher rate than market rate in most cases.

The new $1 billion (3000 loans) that they locked yesterday at the one-day lowest rates in 5-years are locked at such low rates, funding these could created massive losses since rates shot up so much in the past 24-hours. Rates are up almost 50bps since yesterday morning.

To add insult to injury, chances are IndyMac was not able to hedge these appropriately and/or do not have the forward commitments necessary to handle that much production. In essence, their entire pipeline of loans they worked so hard on over the past month churned elsewhere for lower rates at a COST to Indymac.

This whole deal could ruin them. Sounds counterintuitive, but it is absolutely the facts.

67 Responses to “Mortgage Rates Drop! It Does Not Mean What it Used to”

  1. Dick, you’ve said “Do you feel exhausted from all this housing stuff? Are sites like Mr. M making you sick? Are you sick of hearing about it? If you said yes, we have reached the very bottom. Exhaustion. ”

    No, I’m not sick of those sites, I welcome MM’s input and others, and happy to have the service.. even thought I don’t fully agree, I respect their service. I wished I read more before I bought a home in 2006!

    So, we agree then.. that we’re not at a bottom.

    You sold before the crash..hmm, r u into investment banking? Did u have inside information?

  2. Dick, glad you sold when you did. Don’t give it back. It’s hard to believe you need the money now. We might be soon getting a Bear Market rally. Don’t get sucked in too deep.

  3. You don’t get it.

    First of all, I welcome Mr. M’s site. I use it more as a guage then for its content. What I mean by that is the more pesism I read, especially all the FUTURE pessism that he posts, the more I sense it is the bottom. As I posted 5x now, we are at that point. EXHAUSTON.

    Ex-owner, go back an re-read my posts. It clearly says why I think we are at a bottom.

    I have the same info you guys have. If naything, I have less of an advantage becuase I have to work for clients and be distracted 12 hours per day.

    Maybe someone will pull up this post in Aug. 2009 when the is full well into a strong recovery. But, I don’t know.

    This is the end of my replies. Good luck

  4. […] Not a Reality for Most on Fed Buying Agency MBS – Still No ‘Explicit’ GuarantyDick on Mortgage Rates Drop! It Does Not Mean What it Used toBrant Gaede on Mortgage Rates Drop! It Does Not Mean What it Used toex_owner_now_renter on Mortgage […]

  5. Dick, some home owners still don’t admit their value has gone down, especially high end markets. Does the velocity of speed going down, and desperation of government to do something tells you something?

    oh yeah..we’ve hit bottom.. personally I’m looking for your comments in Aug 2009!!

  6. Dick,

    Are you saying if I don’t get into the housing market now I will be locked out forever?
    Are you implying that housing is like stocks, you need to jump before they blast off?

    In a healthy housing market there is no rush WHAT SO EVER. In a bubble there is a Rush.

    It is possible the Fed revives the housing bubble temporarily but as soon as interest rates sky rocket form all this monetary inflation the rest of the correction will occur.

    That said, I will admit there are certain areas of certain markets that are probably safe to buy in.

  7. Buying real estate is a highly leveraged purchase. Why would anyone risk trying to buy at the bottom when real estate moves so slowly that you could wait until there are more clear signs of a recovery and still get in to the market and realize very nice price growth. It’s not like the stock market. The average real estate transaction at least 30 days. Now if you were looking to flip on propeery that was purchased very low from REO, that’s a different story. But buying and holding now is extremely risky and not needed.

  8. Dick, as far as a bottom goes, we will have one when everyone is convinced that “You cannot make money in real estate anymore”, which is the far extreme. Looking at California, the unemployment rate is just starting a climb which I expect to be even more significant in the first quarter.

    Seeing that the Fed has amassed trillions in assets, one has to assume that in these times that those trillions are yet to be defaulted mortgage paper. Now I am not going to claim what the default rate is going to be on that paper but I will claim that the Fed Holding is the equivalent of a giant seller in the market.

    Back to your 20 years Wall Street experience, what did you do when you knew that their was a large entity divesting themselves of a holding? My guess is that you just stood back out of the way until the seller was done.

    With the banks giving bad assets to the Fed in exchange for treasuries, we might see banks holding off on filing notices of defaults but that only extends inventory out to some point in the future.

    I see a Fed inventory chart performing two functions. One is when they start to run out of inventory and two and more importantly, when banks will ease up on lending standards again.

  9. Dick,
    Your exhaustion does not signal a bottom. Your reasoning? Remember, an alpine climber who is exhausted does not magically get beamed back to base camp…he probably dies.

    Anyhoo…in Tucson: median asking price still 7-8x median income, massive layoffs imminent, and I rent for 1/3 the cost of owning same home, even after a 20% drop. Bottom??? heheheheheheh…no.

  10. I have cash and credit. Im not paying these prices. Seller, ya gotta come off, your house ain’t worth that anymore. Sorry bout your bad luck..

  11. Dick,
    Lets make a bet . I say the housing market does not recover. If you just made a million this year a 25k bet should be nothing for you . The housing market is not going to recover for years.

  12. >> Maybe someone will pull up this post in Aug. 2009 when the is full well into a strong recovery.


  13. Not sure what Mr M’s point is. Are low rates not a good thing? Perhaps not as many people qualify for them as before but for those who do it is a good thing, right??!! Mr M does this constantly,, and tells us why the “good news” isn’t as good as it needs to be. Rates going down are good..sales up, no matter the reason, is a good thing..Dick is right…things are going to get better but in the meantime I am sure we will get another blog by Mr M why the increase in spending on Black Friday doesn’t mean anything and we should go back to building our bomb shelters.

  14. […] Full Analysis Here […]

  15. No, low rates are not a good thing. They serve to delay the inevitable repricing of housing in relation to the all-important wage levels that must ultimately support house prices before stability can be achieved, and they ignore the real risk premium, which entails transfer of a sizeable amount of expensive risk to someone else…in this case, the taxpayer.

    Low rates might be a good thing for a starving realtor, but as MM points out, these lower rates are not a direct input to the supply-demand relationship, since demand is now being stringently filtered on the basis of qualification. The population of willing and qualified potential buyers is likely to prove quite underwhelming.

    And Dick, you just don’t think big enough. Don’t think Enron. Don’t think 9/11. Think 1933. And not 1933 America. 1933 Germany.


  16. So cd, how do they delay “re-pricing”? Obviously, major re-pricing is occuring as we speak even with these “low” rates and will continue to. Also, as it relates to wages, say home prices keep going down but the rates go up, isn’t that six of one, half dozen of the other as it relates to the mortgage payment itself and the wages needed to afford the payment? In terms of risk to the taxpayer, no matter what happens,that ship has sailed. Either way that is going to occur but not sure how offering low rates to extremely qualified is going to hurt the taxpayers. In fact, if that had been happening all this time, much of this could have been avoided.

    1933 Germany or the 1870 America situation that was posted in another link, all ignore today’s enviroment, the fact that we are already along this curve as Dick points out and that the world, not just the USA, is taking unprecedented action in these areas.

  17. michaelphelps

    Here is the problem. In typical recessionary times they would lower interest rates to spur the economy. This would result in refi activity and consumers had a way to utilize this interest rate reduction to lower a house payment and achieve a higher monthly disposable income. Or they could do a cash out or whatever.

    In the current environment even if they do lower interest rates it is not much help since in most cases the existing mortgage underwater. Credit card rates are already jacked up and consumers are reluctant to increase balances due to uncertainty and CC interest rates.

    As Susan points out, we need to save more, however that would come at a price against economic activity. In essence saving more on a national level is putting yourself or your neighbor out of work in a consumer based economy during a recession. In addition, if we are to save, banks need to pay an interest rate to make it worth while. We cannot have both high rates to savers and low rates on mortgages. The Japanese model says savers will lose.

    “During Japan’s long years of economic darkness, one member of the board of the Bank of Japan—the only woman—complained bitterly about the nation’s zero-interest rate policy. “You are taking money from my people—the elderly savers—to support those bad bankers whose greed and mismanagement drove the nation into this recession. Families have to be very rich to survive on interest rates of less than one-half per cent.”

    Other than dropping money out of helicopters, there does not appear to be a way to put money in the hands of the consumer. The result will likely be taxpayer funded government jobs and projects.

    Sadly, our government has passed laws favoring unions and making it more expensive for a non union company to bid on government work than a union contractor. Since union rates are significantly higher than real world pricing, it forces our government to pay the highest price possible for construction work. But hey, what does billions matter when you are spending trillions of money you don’t have.

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