Concerns about creditworthiness in the U.S. mortgage market have helped to push up rates on so called jumbo mortgages, and rates on adjustable-rate mortgages saw a record rise this week.
The Mortgage Bankers Association (MBA) said on Wednesday borrowing costs on 30-year fixed-rate mortgages dropped to the lowest level in weeks, but rates on one-year adjustable-rate mortgages (ARMs) rates surged to 6.51 percent from 5.84 percent in the week ended August 24.
The divergence in interest rates on fixed- and floating-rate mortgages is the latest example of how problems are percolating in the primary mortgage market.
Jay Brinkman, the MBA's vice president of research and economics, said the jumbo mortgage market, where mortgages are bigger than $417,000, is more to blame for the sharp disparity on the two loan types than the conforming loans that are guaranteed by Fannie Mae and Freddie Mac.
The data reflects conforming loans as well as jumbo loans, but the rate increases on jumbo loans were enough to pull the one-year ARM rate up, he said, adding that higher jumbo rates were the main reason as a high concentration of ARMs exist in the jumbo loan market.
The rates for jumbo mortgages have been increasing as investors command a bigger mark-up for loans that come without any guarantees against default.
Interest rates on jumbo mortgages have jumped significantly higher than loans guaranteed by housing finance giants, Fannie Mae and Freddie Mac.
The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.41 percent, down 0.08 percentage point from the previous week. Interest rates were above year-ago levels of 6.39 percent. Fixed 15-year mortgage rates averaged 6.10 percent, down from 6.20 percent the previous week.
The data includes both conforming and jumbo loans, with interest rates on 30-year fixed-rate mortgages up only 0.9 percentage point from three months ago.
The average jumbo 30-year fixed rate, however, has soared in recent months, reaching 7.4 percent last week, up from 6.64 percent at the end of May, according to Bankrate.com.
We have seen significant dislocations in the primary mortgage market over the past couple of weeks, Alec Crawford, head of MBS strategy at RBS Greenwich Capital in Greenwich, Connecticut, said in commentary published Wednesday.
The primary mortgage market, where loans get originated, has changed significantly over the past few months. A sharp rise in defaults in the subprime mortgage market, which caters to borrowers with poor credit histories, has caused lenders to tighten requirements, making it difficult for those with weak credit to get a home loan.
Some market observers say even borrowers with an unblemished credit history are having a more difficult time getting a loan.
Over 30 mortgage lenders have gone out of business as a result of rising defaults rates in the subprime mortgage market.
The MBA said the ARM share of activity decreased to 15.0 percent last week, down from 18.6 percent the previous week, its lowest level since July 2003, and in contrast from where levels seen during the U.S. housing market's heyday of above 30 percent.
While this is not a very popular mortgage product, it demonstrates the issues in the primary mortgage market, said Crawford.
Steve Habetz, President of Threshold Mortgage in Westport, Connecticut, said a relatively flat U.S. Treasury yield curve, which happens when the yield between short- and long-term securities narrow, has dampened a lot of the rate incentive to take on an adjustable-rate mortgage.
Second, some lenders are now qualifying borrowers on the fully indexed rate instead of the start rate, making adjustable rates more difficult to qualify for than a fixed rate on the same size loan, he said. In fact, Minnesota has passed a law requiring lenders to qualify borrowers in this manner.
The direction of interest rates is dependent on expectations for U.S. Federal Reserve monetary policy which have been changing regularly with the latest economic data and credit market concerns.
With sentiment surrounding Fed policy gyrating on almost a daily basis, fixed-rate mortgages appear to be the best option at this point of time, a lender at one of the nation's largest home loan originators said. People are less willing to take on an ARM at this point due to risk as well as higher rates.
This comes at a time when conforming fixed mortgage rates have fallen, while borrowers in high-cost areas are seeing much higher rates.