Dalrymple: Ask A Banker Q & A
March 29, 2016
The Federal Reserve raised rates, but a recent article said that rates for new mortgages are at last summer's low levels. Is this really true?
Yes, as a matter of fact, it is.
It doesn't make a lot of sense, until you realize that liquidity, i.e. cash, is earning investors virtually nothing. If you've got money in a CD, or cash in your IRA, what kind of return are you getting? Not much, unfortunately.
On the other hand, Residential Mortgage Backed Securities are a viewed as a stable investment, with a yield much higher than any comparable instrument. At first glance, this seems kind of oxymoronic, given that toxic MBS were what triggered the Great Meltdown.
But you have to look at history. From their creation through the Government National Mortgage Association (Ginny Mae), which packages government insured and guaranteed loans, the securities were top of the line. Beyond being guaranteed by the U.S., they were meticulously and stringently underwritten.
When non government insured loans, so-called conventional mortgages were packaged into securities through Freddie Mac beginning in the 1970's, the quality carried over. The loans that backed the securities had a very low delinquency rate, and an even lower default rate.
In fact, this perceived quality of U.S. mortgages is what lit the fuse to the financial crisis. At the turn of this century, the world was awash in liquidity: China was booming, OPEC was rolling in excess cash. There was an insatiable demand for RMBS, and everybody in this country busted their chops to satiate it. Now, the underwriting standards, and resulting quality, are back to what they were in the last century.
How long will this paradox continue? It's virtually impossible to say. Seldom, if ever, has the short term picture been more uncertain. Maybe it is time to buy or refinance.
Alan Greenspan has been somewhat discredited since he admitted, referring to the Great Recession, "I didn't see it coming." But one of his most famous statements still resonates: "You can predict the weather and interest rates, and be right about half the time".
Pat Dalrymple is a former bank president who has been making mortgage loans in western Colorado since 1967. He's currently an advisor to Grand Mountain Bank's Mortgage Lending Outreach Initiative. He welcomes your questions on lending and banking, and can be reached at firstname.lastname@example.org.