How Low Will It Go? That is the Mortgage Rate Question

These are the questions I field every day from clients waiting to buy or refinance.  Before I answer that question, let’s look at some information to gain perspective.  We need to know where we have been to appreciate today’s rates.  

CNN Money reported recently that “The 30-year, fixed rate fell to an average of 3.87% and the 15-year fixed dropped to 3.14% for the week ending February 2, both the lowest rates ever recorded in the 40-year history of the Freddie Mac Primary Mortgage Market Survey”. What about the popular FHA loan?  The San Francisco Chronicle reports that “For the first 5 months of 2010, HUD reported FHA rates at between 5.21 and 5.26 percent, which are the lowest rates through that point in history”.  At the time of this article, the 30 year FHA rate was 3.75%.* (see rate box).  Conforming loans (Fannie Mae and Freddie Mac) and FHA (Federally Housing Administration) are the two most popular loans available.  Let’s take a look at these two different loan types from a historical perspective and see if we are really getting a “good deal”.

In 1934, Franklin D. Roosevelt came up with a “New Deal” which really was a great opportunity for consumers.  Roosevelt wanted to stimulate the economy by making it easier for people to buy.  His government introduced laws and institutions designed to make this happen. Under these new laws, the securities and banking industries were kept under tight supervision, which in turn revolutionized the way mortgage loans were structured and made available to average Americans.  As a result of FDR’s idea, the Federal Housing Administration (FHA) was created to insure mortgage lenders against losses from default. Now that the risk had been taken away from them, lenders were more willing to give people mortgages. The FHA also developed the 30-year fixed-rate loan program, providing homeowners lower payments and more stability.  Soon it became apparent that lenders didn’t always have enough money to lend and rates and terms were set according to the local economy which varied around the country.  As an answer to this problem, the Federal National Mortgage Association (better known as FNMA, or Fannie Mae) came along to save the day in 1938.  FNMA bought FHA insured loans and sold them as securities on the financial markets.  By doing this it also produced the introduction of more fair and efficient lending practices and similar underwriting guidelines. Fannie Mae grew so large over the years that in 1968, with the pressures of the Vietnam War straining the national budget, President Lyndon Johnson took Fannie Mae's debt portfolio off the government balance sheet; Fannie Mae was converted into a publicly traded company owned by investors. Two years later, Freddie Mac was launched, primarily to keep Fannie Mae from functioning as a monopoly. It went public in 1989.

Now that we understand a bit about how our current day mortgages came to be; let’s look at the rates over time.  

^{Year                FHA 30 yr fixed             Fannie Mae/Freddie Mac 30 yr fixed}           

1990            10.22%                       9.9%   

1995             9.06%                        9.15%

2000             8.08%                        8.21%

2005             5.09%                        5.71%

2010             5.03%                        5.10%

2012             3.73%                       3.87%

A bit of interesting information; the highest mortgage rates for both loan types was in 1985, when the average 30 year fixed Fannie Mae/Freddie Mac and FHA rates were around 13%.  When I check rates every morning, I still pinch myself to see rates available in the 3 percent range!

Last year, many of us wondered how low mortgage rates would go.  This year, my question is this: how long will rates stay this low?  There are a number of unknowns that could push rates in either direction. The quicker our economy finds its footing, the faster the rates will inch upward.  An increase in the guarantee fees from Fannie Mae and Freddie Mac, used to fund the payroll tax cut extension, may be followed by additional fees later this year and raise rates more.  On the flip side, it's unclear what effect the 2012 presidential election, and possible efforts to shore up the economy beforehand, will have on the mortgage market.

But Keith Gumbinger, vice president at market researcher HSH, suggests that people should be careful what they wish for, "To wish for continued record lows for rates is to wish for continued economic malaise," he said. "I can't imagine anyone would want to wish another year of economic malaise upon themselves or others."

To answer the original questions: Should you wait to buy? Nope.  Will rates go any lower?  I doubt it.  Now is the time to take advantage of the lowest rates in 40 years.  To see if you qualify for either loan type in this article, call a licensed mortgage loan officer today.

_{Ginenne Rife is a Licensed Mortgage Loan Officer in both North and South Carolina.  803-403-2336 grife@americanequity.com}