What drives interest rates and an update of the current mortgage market

The mortgage market has an interesting dichotomy. The reason rates go up and down is not simple to explain but here is a good tip from HSH Associates Financial Publishers.

The answer is that rates are moved by a number of related factors, and believe it or not, you -- Joe or Jane Consumer -- are one of those factors.

Mortgage money can come from many sources, including deposits at banks and brokerages, but most comes from investors through what is collectively known as the "capital markets." This is where investors interested in purchasing certain kinds of debt instruments -- bonds, in this case -- come to buy these items.

In order to attract investors, sellers of bonds must compete with one another to get their money. They do this by offering a variety of " instruments" (also called "product") with differing structures of risk and return over given periods of time. These offerings compete with other investments which are reasonably similar in performance, such as US Treasuries, corporate bonds, foreign bonds, and others.

Mortgage market makers serve not one client, but two: investors, who want the highest possible return on their investments, and the homeowner or homebuyer, who wants the lowest possible interest rate. Simultaneously, rates need to be high enough to attract investors but low enough to attract borrowers. (http://library.hsh.com/read_article-hsh.asp?row_id=85)

This information was extracted from an email from Tom Rhea from Pacific Guarantee Mortgage, our in house mortgage brokerage. Great information in regards to the mortgage market and its recent behavior.

The last two days have been a wild ride for mortgage rates. We had big time improvement on Wednesday afternoon and the 4.5% coupon moved into territory not seen since December and overall rates improved to the range of 4.75% - 4.625%. At the start of the day yesterday that lasted for just part of the morning as lenders were flooded with locks and we started to see price changes around 10:30am that continued into the afternoon and here we are today with rates back in the same range as they were early in the week. The conforming 30 year fixed base rate is at 4.875% and the FHA 30 year fixed rate is at 5.00%. This is again another example of why it is so important to have your clients approved and in position to be able to take advantage of the short term movement, the people that either could not contact their loan officers or we not aware of the change missed the boat.

I wanted to give you some information on Condominium financing as some of you may not be aware of changes that have gone into place recently that are making financing more of a challenge for consumers. Fannie Mae has added restrictions making it more difficult for developers to sell their units and making it more expensive for everyone to purchase. Fannie Mae has stopped guaranteeing mortgages in condo buildings where fewer than 70% of the units have been sold, up from 51% which was the previous guideline. In addition, the company won’t back loans for sales in buildings where 15% current owners are delinquent on association fees or where more than 10% of units are owned by a single entity. The new policy became effective March 1st, 2009 and most lenders have started to implement these guidelines. The new rules protect borrowers from buying units in buildings that have a high risk of failure while also preventing the companies and taxpayers from throwing good money into troubled developments. Developers have been petitioning for exemption from the occupancy rule but so far no exceptions have been made. In addition fees for condo loans are scheduled to increase next month. Buyers without at least a 25% down payment will have to pay closing – cost fees equal to .75% of their loan amount regardless of the borrowers credit score. And Fannie Mae says these fees are necessary to protect against higher default rates. So when you are working with potential buyers who are looking for a condo please make sure that you take these changes into consideration and share with your clients.

Hopefully this information will be helpful to you and I will continue to try and provide some of these guideline changes in my updates. Here is the rest of the market report:

Yesterday there was talk about how even the chatter of inflation can spook Bonds and yesterday's sell off was sparked by inflationary talk and that theme is continuing again this morning. Once again, if you have clients on the fence, you must explain to them that should inflation talk continue, it will be hard to see mortgage rates move much lower.

At 12:00pm ET, Fed Chairman Ben Bernanke will be speaking about the economy with the topic being "The Financial Crisis and Community Banking." This talk could have an impact on the markets later today.

The New York Fed is continuing its Mortgage Backed Securities purchase plan as it bought $19.67B from March 12 through March 18. The Fed increased its purchase plan by $750B to $1.25T on Wednesday and will run through 2009. The Fed has purchased almost $235B since the program began. (Tom Rhea PGM)

The NASDAQ and S&P 500 both fell today. The question of where is the best investment for my retirement and where should I put my money is still being tossed around. The stock market is at record lows as is the Real Estate market. I believe both of these markets will gain strength together in the near future. Keep an eye on both markets, consumer spending and job growth. All four will be the keys to building a stronger economy on all levels (city, state, and national).