Mortgage rates to rise, but not because of tapering

Although interest rates have increased slightly, they likely won't see a dramatic jump, even after Fed announcement on Wednesday.

By MSN Real Estate partner Dec 19, 2013 9:12AM

 © Image Source, SuperStockBy Diana Olick, CNBC


The Federal Reserve's announcement Wednesday that it would reduce its bond-buying by $10 billion a month was seen generally as a moderate start to the highly anticipated taper. As such, mortgage rates, which follow bond yields, did not rise dramatically, as some had predicted.


"I was relieved by how the market has reacted so far and that we didn't see a sharp rise in interest rates as a result of the Fed telling us that they were going to start tapering," said Craig Strent, CEO of Apex Home Loans in Rockville, Md. "That certainly could have happened."


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The average rate on the conforming, 30-year fixed mortgage has been at 4.57 percent since last week, according to Mortgage News Daily. (Editor's note: Freddie Mac reported on Thursday that the average interest rate on a 30-year, fixed-rate loan was 4.47 percent for the week ending Dec. 19.) But concern about the Fed's potential move may have been behind a sharp drop in weekly mortgage applications, down 5.5 percent week over week, to the lowest level in 12 years.

"Mortgage interest rates generally hate the idea of uncertainty, so this definitely brings some certainty in terms of the Fed showing their cards as far as the direction of rates," Strent said.

But that is not the end of the rate story by a long shot.

The Fed's move comes as Fannie Mae and Freddie Mac, which control two-thirds of the mortgage market, are practicing their own form of tapering. The government-owned entities announced late Monday that they are raising overall guarantee fees to lenders, as well as raising loan-level guarantee fees to lenders on loans where borrowers have good but not the best credit scores. These fees are passed on to borrowers.

"The new pricing continues the gradual progression toward more market-based prices, closer to the pricing one might expect to see if mortgage credit risk was borne solely by private capital," wrote Edward DeMarco, acting director of the Federal Housing Finance Agency, in a release earlier this month. "These changes should encourage further return of private capital to the mortgage market."

It is also an attempt to reduce Fannie and Freddie's own market share. The private mortgage market is still on life support, as few lenders have returned since the credit crisis.

"Of the two announcements in the last 24 hours, by far the bigger ... was by Fannie Mae," said Christopher Meyer, a professor of real estate at Columbia Business School. "Particularly if you're a first-time homebuyer who's looking to put less than 20 percent down — you could see mortgage rates rise by as much as four-tenths of a percent.


Matthew Graham at Mortgage News Daily said that even though rates will surely rise as the Federal Reserve continues to curtail its monthly asset-buying, things will follow a certain trajectory in any event.


"A borrower with a 750 credit score and 15 percent down would likely get a rate of 4.625 percent now but will get closer to a 4.875 percent rate when the new loan pricing goes into effect in March," he said. "When the changes actually take place is a bit of a moving target, because different lenders will adjust their pricing at different times. Still, we can expect to see rates move up as early as January."


The housing market is finally finding its feet again. While sales have dipped in the fourth quarter, optimism — especially among homebuilders — is rising. Pent-up demand has some claiming that housing will rebound even more strongly in 2014, while others argue higher rates could change that.

"At a time when the market is fragile, this is going to discourage certain borrowers, who are now going to be paying higher rates as a result of these new adjustments," said Eric Egenhoefer, CEO of Wisconsin-based Waterstone Mortgage. "There will be unintended consequences here, and we are concerned about the effect on affordability for homebuyers."


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Tags: loans
Jan 5, 2014 8:12AM
Four tenths of one percent will definitely price many at the lower end of the economic scale out of the market.  This does not bode well. And if you need an FHA loan, you're hit with a double whammy because they require mortgage insurance too no matter how much money you put down, and it lasts the entire life of  the loan.  That's a real kick in the gut for low income Americans.
Jan 5, 2014 7:08AM
Higher taxes, a bloated, overbearing and evermore intrusive government... this is considered progress? While the Republicans have been responsible for a large portion of the massive increase in government regulation, it's nothing compared to what the Democrats under FDR and LBJ did to us in creating our ever-increasing welfare (read "nanny") state.  Socialism works pretty well until you run out of other people's money.  What ever happened to the ethic of being RESPONSIBLE for your OWN welfare?
Jan 5, 2014 5:06AM
Republicans stand for nothing, Except in the way of progress!
Dec 19, 2013 2:21PM
God bless president Obama for turning around the economy that GW Bush Tanked. The republicans are nothing more than Anarchists, cry babies!
Dec 19, 2013 12:30PM
"The government is going to make it very expensive and very hard to get a mortgage.  Only the rich will be able to get a mortgage, starting in 2014."

Wow... that's dumber than owning bank stock! Rates go UP, values stabilize. Stable values increase the amount of homes available for sale and purchase. Harder criteria means fewer new bad loans and foreclosures. Don't mistake correction for some sort of government plot, pea brain... We need YIELD to offset having to make it up in taxes. We need wealthy people to lose money, even if it's just paying interest. Hoarding kills, you aren't supposed to be rich, you're supposed to find happiness. It never comes as currency. 
Dec 19, 2013 12:26PM
It doesn't matter. Every bank that wrote low rate mortgages has to service them. It requires about 3% to do that. If you wrote a 4 or 5% mortgage, you use up the additional rate when the balance is high. You lose interest income every month BUT servicing costs remain constant. All the big banks did it, so every single one of them will hit a negative cost wall in a couple of years. In a couple more, they'll be begging us for bail-outs. Congress set the Volcker Rule in play. It requires banks to set aside 20% of their assets as loss reserves. I'd estimate that garbage institutions like JPM, BofA, Goldman Sacks, Citi and Wells all have higher measures of toxic assets. So 20% won't cut it. 
Are you invested in bank stock? Did your broker tell you they are good investments? That's not going to be true and in a year or so, you may not be able to sell your stock and may even be victimized by a "bail-in" where banks confiscate YOUR assets to cover their losses. Use your brain for once... do the rich EVER take a hit for their mistakes? Doesn't the little guy ALWAYS pay? WHY DO YOU OWN ANY BANK STOCKS? JUST THAT STUPID OR WHAT? 
Dec 19, 2013 11:11AM
The government is going to make it very expensive and very hard to get a mortgage.  Only the rich will be able to get a mortgage, starting in 2014.
Dec 19, 2013 9:55AM
Rates were between 6.25% and 7.50% during the housing boom.  While any increase in rates will eliminate a few buyers, today's rates are still phenomenal when looking at the big picture.   Those business owners would like rates to continue dropping...forever.  That's not going to happen and it's going to continue to thin the mortgage business, as the refi boom of the last few years has come to an end.   
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