Congratulations to anyone who refinanced last month. That may have been the bottom in mortgage rates.

15 and 30-year fixed mortgage rates have climbed by about a quarter of a point from a month ago, and rates will climb another quarter of a point for many borrowers. In addition, Freddie Mac will now require 25% down for borrowers to avoid Private Mortgage Insurance (PMI).


The above sentence was based on statements in a Reuters article confusing the need for mortgage insurance with other changes in Freddie Mac fees. The statement is inaccurate and has been stricken.

Please see my post Clarification on Freddie Mac Mortgage Fees; A Look at Why Your Credit Score is Important for details.

Expect Fannie Mae to follow. If so, the wave of refinancings we saw this year, may be about over.

Please consider Freddie Mac says to hike fees on some mortgages

Freddie Mac, the second-largest provider of funding for U.S. home mortgages, will raise some fees on loans it finances, a sign it sees greater risks even for borrowers making regular payments.

Among changes, Freddie Mac will generally raise fees by 0.25 of a percentage point to 0.75 percentage point on mortgages with a combination of high loan-to-value ratios and/or lower credit scores.

However, even the most creditworthy borrowers would be affected unless they put 25 percent down, up from the 20 percent that has long been the minimum equity needed to escape the need for mortgage insurance.

If a lender applies a 0.25 point fee to an interest rate, it would add less than $10 to the monthly payment on a 5 percent, 30-year loan of $200,000, it estimated.


The paragraph in italics above is incorrect as are other paragraphs in the article itself. Once again, please see my post Clarification on Freddie Mac Mortgage Fees; A Look at Why Your Credit Score is Important for details.

Mortgage Rates

Mortgage rate table courtesy of Bloomberg.

Mortgage Bond Spreads Relative to Treasuries Climb

Please consider Low-Coupon Mortgage Bond Yield Spreads Climb to Highest in Year

Yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates rose to the highest in more than a year relative to 10-year Treasuries.

Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds climbed about 0.01 percentage point to about 0.95 percentage point more than 10-year U.S. government debt as of 5 p.m. in New York, the widest spread since October 2009, according to data compiled by Bloomberg. The gap was 0.76 percentage point on Oct. 29.

Prices for the securities tumbled this month relative to Treasuries even as those of so-called agency mortgage bonds backed by higher-rate loans soared. Rising borrowing costs may cause the lowest-coupon debt to prepay more slowly than investors expected by reducing consumer refinancing and home sales. That would delay the time it takes for bondholders to recoup their principal.

“That is a big concern,” said Karlis Ulmanis, an investment manager at Wilmington, Delaware-based DuPont Capital Management, which oversees about $20 billion of assets. “If rates move higher, the lower-coupons are going to extend considerably.”

Mortgage Borrowers Deleverage

The Cleveland Fed reports Mortgage Borrowers Deleverage

The housing bubble that preceded the last recession left many borrowers overleveraged once the recession struck. According to the Board of Governors, from March of 2000 to September of 2007, the homeowner mortgage obligation ratio, which measures the outstanding value of mortgage payments as a percentage of disposable income, grew from 8.6 percent to 11.3 percent. However, since the peak of the last business cycle in 2007, consumers have begun to deleverage their balance sheets. This trend is evident in the housing market where consumers have been reducing their exposure to mortgage debt by financing more home purchases with cash and reducing both the loan-to-value ratios and the term to maturity of their mortgage debt.

For the month of September, cash was the number one source of financing for home purchases. According to the November 9 edition of Inside Mortgage Finance, which includes the most recent Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions, 30.5 percent of home purchases were financed with cash, up from 24.4 percent in January.

Consumers have been able to deleverage by reducing both the amount of debt and the term to maturity of their mortgage debt. Loan-to-value ratios have steadily declined since they peaked, falling 680 basis points for existing homes and 520 basis points for new homes. Moreover, consumers have reduced their exposure to mortgage debt by reducing the debt’s term to maturity. In June, 2007, the term to maturity of all loans closed was 29.5 years; however, as of September of the term to maturity of all loans closed was 27.6 years.

Borrowers have responded to the recent recession by reducing their exposure to mortgage debt. Since the recession began in 2007, the mortgage financial obligation ratio has declined 97 basis points, from 11.3 percent to 10.3 percent. While mortgages remain a much larger proportion of homeowners’ debt today than in 2000, if borrowers continue to deleverage, they will be able to obtain more manageable levels of debt in the future.

Deleveraging attitudes are making Bernanke’s life miserable. Debt payback is not what Bernanke wants even though it is the best thing for the economy long-term.

Mike “Mish” Shedlock
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