millions of homeowners underwater on their
, not everyone has been able to take advantage of the rock-bottom
rates on home loans. But for those who
been able to refinance, low rates have proven to be extremely
useful, slashing monthly mortgage payments and freeing up
valuable cash to spend on other needs.
Yet as much as some homeowners have been able to save on their
mortgages, some believe that they should be paying even
than they are currently. The reason has to do with an obscure
relationship between home-loan rates and the mortgage-backed
securities market, but the result is that homeowners may be
missing out -- while lenders book better profits than they
Why mortgage-backed bonds matter
It's hard to complain about where mortgage rates are right now.
Currently, 30-year rates are below 4% after having come close to
the 7% mark as recently as mid-2007. Enterprising homeowners have
had many opportunities to lock in lower rates, and some have
actually refinanced on multiple occasions in recent years.
But with the
Federal Reserve doing everything it can to keep
, some believe that not all of the Fed's efforts are making it
through to homeowners. A recent
Wall Street Journal
article explained how the mortgage-backed bond market has seen
even sharper drops than retail mortgage rates.
Here's how it works: Most banks that offer mortgage loans end
up selling them to entities like
, which then package them with similar loans to create
mortgage-backed securities. Lately, demand for those securities
has been red-hot, as investors snap up shares of
American Capital Agency
(Nasdaq: AGNC) , which in turn buy those bonds. That has pushed
the interest rates investors are willing to accept on those bonds
way down -- further down, in fact, than the rates homeowners pay
The spread between what borrowers pay and what investors
accept represents profit for banks and other intermediaries. With
that spread at roughly twice its normal level, money that would
otherwise go to homeowners -- or to the mortgage REITs -- is
getting siphoned off by those intermediaries. And even though the
amounts involved aren't huge -- half a percentage point amounts
to less than $100 per month on a $350,000 mortgage -- they
significant in the aggregate.
Banks and mortgage lenders can certainly argue that anything
extra they're getting from mortgage refinancings now is fair
compensation for the losses they've suffered in the recent past.
Bank of America
) , and
) among the participants in the recent
$26 billion settlement of questionable
, they're clearly interested in whatever ways they can find to
recoup lost profits and boost their financial health.
But in my view, this is simply another example of how the
housing-related markets aren't functioning the way they should.
Just as government refinancing programs took away the focus from
the true problem of underwater mortgages forcing people to stay
put when they'd prefer to sell out and start over, so too are
divergent trends in the primary mortgage industry versus the
mortgage-securities market creating some undesirable results.
What to do
From your perspective as a homeowner, what this means is that
it's more important than ever to shop around to try to find the
best deals. One criticism has been that large institutions have
priced smaller banks and mortgage lenders out of the market,
using economies of scale to build market share. But even as
lending standards have gotten tighter, you need to remember that
refinancing still represents a very profitable opportunity for
your lender -- one in which you should share the benefits.
Getting your housing budget under control is just one way in
which you need to plan for your long-term financial goals.
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