Could negative mortgage rates really happen?

Here's what you need to know about what's happening to rates right now
  • Negative rates could happen only to adjustable-rate loans.
  • Here the structure of our ARMs makes negative payments impossible because of a near-hit experience back in 2004.
  • Every mortgage contract began to identify a rate “floor.” In mortgages the typical language has been “... in no case lower than the margin amount.” You’ll find all new HELOC documents in the last dozen years have explicit rate floors.

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Don’t get your hopes up. But, you’ve got clients asking, and the national news media is hopelessly lost on the subject, including the financial press. Can there be such a thing as a negative interest rate? First things first. Negative rates could happen only to adjustable-rate loans. Fixed-rate loans are...fixed rate. At the rate you got on the first day, permanently. The first ARMs appeared in 1980 to protect banks and investors from rising rates -- Paul Volcker had taken the bank cost of money over 14 percent by then. Lending at adjustable rates is as old as banking, but 1980 brought the first U.S. adjustable home loans since about 1930 (the prior episode did not end well). ARMs always involve the same components: First, an index which would be independent of banks (no rigging) but would reflect changes in their cost of money. The most common were the 11th District Cost of Funds, “COFI” (the average cost of deposits among California and Arizona savings and loans),...