According to a recent article in the Wall Street Journal, lenders might be artificially keeping interest rates higher than they should be. Mortgage rates are averaging as low as 3.37, over 3 percentage points lower than they were four years ago when the Fed began taking drastic steps to lower the interest rate. While these rates are the lowest they have been in generations, some economist argue they should be lower – as low as 2.8% – based on the historic relationship between mortgage rates and the yields on mortgage-backed securities.
The economists suggest that lenders are keeping rates artificially high by not passing along the savings they receive from the Fed to borrowers, thereby boosting their own profits. Lenders traditionally profit on the difference between their cost of obtaining money to lend and the interest rate they charge when lending it out to borrowers. Before the financial crisis in 2008, that difference averaged about .5% and grew to 1% in the years following. When the Fed began taking steps to lower the interest rate, that difference grew to 1.8% and now hovers around 1.3%.
Lenders claim that the higher difference between the cost of money and the interest rate is needed to cover increased lending costs and has not necessarily produced increased profits. Lenders are processing less loans versus the pre-2008 levels which means costs are not spread out over as many transactions. Also, underwriters are spending time and resources more closely scrutinizing loan applications and other documents in the borrowing process, raising their costs per transaction.
While lender costs have increased, they have not increased enough to support the higher rates they are charging. Unfortunately, with rates as low as they are right now, no one is complaining about getting a mortgage for around 3.5%. Unpredictable costs, heaping regulations and relatively content consumers means banks will likely keep the rates where they are for the foreseeable future.
For information on how interest rates impact your purchasing power and options when buying a home, drop me a note or give me a call at 512-636-9707.