Refinance rates under pressure from agency lender struggles
Mortgage refinance rates are being pressured to stay above six percent despite the recent drop in oil prices and the rapid sell off of the stock market. The ten year bond has dropped from 4.26 to 3.82%, yet fixed mortgage rates remain relatively unchanged.
The major reason mortgage rates remain at their current levels is a lack of demand in the secondary marketplace. Mortgage rates are priced similar to other commodities and are greatly influenced by the supply and demand of investors in mortgage backed bonds. The current marketplace is void of investors who are looking for mortgage bonds as the housing market has resulted in billions of losses for mortgage lenders and investors.
The two largest agency lenders Fannie Mae and Freddie Mac are under severe financial pressure as their balance sheets continue to grow and their capital ratios shrink. The long term concern that these lenders may fail has also been a great influence on the marketplace for mortgage bonds. The lenders have also continued to increase their rate adjustments for credit scores, loan to value and property types. Home owners who have procrastinated with refinancing their mortgages are going to be left with more limited options and a market that is becoming more challenging to negotiate price breaks with the current mortgage lenders. Home buyers may be missing a golden opportunity to purchase homes at historical lows and secure financing under seven percent.
Mortgage giants lose billions
The countries two largest agency lenders disappointed wall street this week. Both companies have announced a drastic reduction of their dividends as they fight to preserve working capital in the difficult housing markets. Fannie Mae and Freddie Mac are essentially the only agancy lenders that are purchasing mortgage backed loan securities.
The secondary marketplace for mortgage loans has been a disaster for the entire year. As home prices continue to move lower, investors are growing increasingly weary of purchasing anything that is tied into the housing or credit markets. The spread on mortgage securities is continuing to climb, putting pressure on mortgage rates to move up despite the drop in recent oil prices and reduction of inflationary challenges in the market.
Fannie Mae and Freddie Mac are now looked at to be the secondary market, along with FHA that will help to guide the country out of the housing mess. The major concern is that both lenders operate a business model that is highly leveraged and requires adequate levels of capital to balance their debts. The companies will likely need to raise billions of additional capital to help navigate the next few quarters until the housing market shows signs of bottoming out. The companies will have the benefit of borrowing money from the government if necessary and gaining working capital if they can not find this in the open markets.