The 4.5% mortgage myth?

Flickr photo by Moe.

The Fed's cut to "zero to 0.25 percent" cost of money and non-response in the mortgage markets combined to produce consternation among a refinance-hungry public.

Excepting a frantic hour at no-fee 4.75 percent on Wednesday morning, mortgage rates remain as they have been for 10 days, roughly 5 percent with an inescapable origination fee. And that deal is available only for the best FICOs and loan-to-values.

These rates are not going lower any time soon, not on a sustained basis, not without extraordinary intervention by the "Obamanauts." Miracles are rare.

The average client simply does not believe the paragraphs above. If I were not a lifer in the mortgage trade, I wouldn't believe them either.

In the last month, irresponsible media reports, wishful expectation by housing industry survivors, and trial balloons by non-market theorists have made "four-and-a-half" (percent interest rates) a national imaginary fact.

Why are rates stuck? The main roadblock is the $10 trillion in outstanding first mortgages, rates scattered from mid-sixes to 5.25 percent. Toss out the ones that can't refi (jumbos, underwater vs. appraisal, clogged by piggyback second, stated-income or no-doc underwriting ...) and the adjustable-rate mortgages that no longer need to hurry -- $6 trillion, anyway. The first $1 trillion, above 6 percent, everybody who bought from 2004-08, is in the money right now, eligible to refi with quick recapture of costs. That volume is equivalent to the total production capacity of the mortgage industry in 2008, severely diminished since the September financial cardiac arrest.

"But refis are just rollovers, not new money ...?" The current owner of a 6 percent mortgage-backed security may have little interest in 5 percent or 4.5 percent. The last people who bought those, in 2003, lost money every day since. Worse, the financial system is still "deleveraging" -- trying to sell IOUs, not buy.

"But if money doesn't cost anything ...?" The Fed is acting in an emergency. It will not last forever. When it ends, rates will rise, explosively from time to time. The zero-cost money is overnight money, and it's a bad idea to finance a 30-year loan with overnight money. Long-term Treasury rates are also approaching zero, the spread versus mortgages unbelievable. The Treasury market is the most liquid in the world; when the economy bottoms, today's Treasury investors-for-safety will be able to dump at little loss. Even top-quality MBS are not very liquid... buyers at this level and below will get killed in the turn, and cannot hedge that risk in a Treasury market priced for a new Great Depression.

"Why is 4 (percent) so hard?" The one and only time that U.S. mortgages reached 4 percent: at the GI Bill rollout of VA loans on July 25, 1944: it went to 4.5 percent on May 5, 1953, 4.75 percent on April 4, 1958, and to 5.25 percent 15 months later. That's it, the cumulative history of "four-something," all in a very different world. Also, those rates were set so low that the seller to a veteran had to pay two to four points for the veteran's loan.

"Why doesn't the government buy, or just make 4 percent loans?" See $10 trillion, above. The total U.S. national debt traded on markets is only $6.5 trillion. One of the awful aspects of our predicament: having borrowed our way into trouble, there are limits to borrowing our way out.

"But my brother-in-law said he got 'X' percent!" Bernie Madoff's clients got into trouble believing one-upmanship fables told by their neighbors. The fibs told in a locker room full of teenage boys about their sex escapades don't hold a candle to your friends' tales of their mortgage conquests.

Call me when we hit bottom, will you? Or at 4 percent, whichever. The law of refis: Do any deal that works, recapturing costs in a year or so. Can't know the future. Lock your rate, then don't watch TV for three weeks or talk with your brother-in-law.

"But you said rates could crawl lower ...?" Yup. It took a year for rates to move from 6.25 percent to the 45-year low of 5.25 percent in June 2003, working off masses of refis at each intermediate stage. Lasted one month.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

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