My New Blog

February 20, 2008

Interest Rates are, unfortunately, going higher and not lower.

Not at all going the direction we (Real Estate professionals, borrowers, AE's) all want and frustrating for those on the fence (who will likely stay on the fence longer) as hopes for lower rates fade and realty sets in...

We had at least two intra-day rate changes Tuesday for the worse and one already today. So where do we go from here? A week ago we were in low to middle 5's and now we're back over 6 at par pricing on a 30 yr fixed conforming.....

In light of recent significant interest rate reductions by the Fed, and general consumer and media sentiment that rates should be heading lower, how do you respond, as a knowledgeable "insider" in the loan industry, when you have to tell your borrower the new REALTY of our business and that interest rates are actually headed higher, not lower?

A few items to consider and possible responses to your potential buyers question

Why are rates going higher?

#1. Inflation concerns by the Fed; recent economic data (but not all) shows the economy may be heating up in some areas....higher interest rates slow inflationary pressures on food, gas, energy costs, consumer goods, etc.,

#2. Profits of lenders; lenders need to recoup (million and billion dollar) recent losses and post profits soon. Margins are already razor thin in the financial industry and higher interest rates increase profit margins. Bankers are for-profit workers.

#3. Loan demand is very high now at current (historically low) rates and lenders can't service and fund all loan requests fast enough in light of reduced staffs. Easiest way to slow excess demand is raise rates, eliminate programs, and tighten guidelines.

#4. Limited funding sources; secondary market is limited and also demanding safer and larger returns for buying loans, thus higher rates.

#5. Rising default rates; higher interest rates needed to offset prior losses and mitigate risk of future losses. More defaults=more losses=higher rates.

The new realties of our business are here to stay;

Sorry about the somewhat depressing, albeit real, blog, but I am getting about a dozen calls daily asking why rates are rising....

Hope this helps explain this to some of you and your Buyers....

We're all looking for our next quality deal, so...

Please call or e-mail me if I may assist.