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Mortgage firms boosted by market conditions
A confluence of factors are contributing to some of the lowest mortgage rates in decades, and local companies are reaping the benefits.
Were probably 100 percent over what we were doing last year, easily," said Brett Green, a senior mortgage banker at Bay Mortgage, 9230 Bayshore Drive in Old Town.
In late October and early November, rates dipped to 6.25 percent, lower than Roger Nance of Eagle Home Mortgage ever has seen. He estimated business is up 40 percent.
Firms were reluctant to quote precise mortgage rates because they vary according to market conditions, credit ratings, income-to-debt ratio and equity or down payment. But managers estimated the rate is hovering between 6.5 percent and 7 percent this week.
The lower rate means people who couldnt previously afford to buy homes are now priced into the market. Other homeowners can trade up.
"What were seeing is people taking advantage of low interest rates to step up and sell their homes and build dream homes," Green said.
He added that many customers have been surprised by the houses they can afford.
While the bulk of Bay Mortgages business comes from home purchases, refinancing jumped from 20 to 30 percent of its business share this year, Green said.
In previous years rates have been as high as 8 or 9 percent, Nance explained, which are not attractive conditions for refinancing.
Recently, several television commercials have aimed to lure individuals to refinance, but Green warned customers against viewing refinancing as a panacea for consumer debt.
"You have to sit down with each customer to address consumer debt and make sure theyre not putting themselves behind the eight ball," Green said.
A number of factors are contributing to the rock-bottom mortgage rates.
"The reason rates are so low is the government has suspended the (30-year) long bond," said Stephen Coup, the chief executive officer of Puget Sound Financial Center. "Its supply and demand. The prices then jumped on the long bonds."
While the Federal Reserve Boards decision to lower the prime rate is significant, Bay Mortgage branch manager Randy Gelhaus was quick to point out there is no direct cause-and-effect relationship.
"Its a common misconception that the prime rate drop affects mortgages. We are affected by bond yields ... The lower prime rate is trying to stimulate corporations to borrow. It creates economic stimulus," Gelhaus said.
The bond market is the source from which investors ultimately get money to lend to homeowners.
But Nance argued that the impact of the Federal Reserves actions should not be discounted.
"There is no direct effect, nor is it proportionate, but there is a relationship. The economy starts to pick up with the lower prime rate because consumers are spending more," Nance said.
There are other economic and political factors which have made bond investment attractive, boosting the mortgage market.
"People who have invested in the stock market in the last three years have not had a fun ride," Coup said, and government-backed secure bonds become more appealing to investors who have been burned. The aftermath of the Sept. 11 attacks further damaged confidence in the stock market, prompting a shift to bonds.
From there, supply and demand dictated the falling mortgage rates.
"When demand is highest for (treasury) bonds, the yield is less. Then the return investors get on their money goes down because more people want bonds," Nance said.
In other words, i0f the yield on the bond goes up, then the mortgage rates go up, Nance said.
If the yield goes down, rates go down.
But there are aspects of the business which continue to mystify even the experts.
"If it really made sense I wouldnt have all this gray hair," Gelhaus said.
As for the future of the mortgage rates?
"If I knew where they were going to go, Id be sitting on a beach. That is the question of the day," Nance said.