Vail Daily column: Mortgage markets return to normal — for now
October 21, 2013
As pretty much everyone has heard, Congress kicked the can down the road again and reopened the Government and temporarily extended the debt limit to avoid the default on not only U.S. T-Bills but salaries, benefits and other government expenditures. Included in this legislation was an appropriation for a favorite project of the author (Mitch McConnell) that costs $1.2 billion for some lock and dam project on the Ohio River in his home state of Kentucky. Pork barrel spending is alive and well!
The mortgage markets had been bracing for the worst, and rates for a 30-year fixed were inching towards 5 percent in anticipation of investors fleeing the fallout from a default. This was as much as a 0.5 percent gain and at least as of today, the markets have reclaimed half that ground. After the announcement on Wednesday afternoon, there was a huge sigh of relief and 30-year fixed mortgage rates retreated back to the mid-4 percent range.
The "fix" that Congress passed will fund the government through Jan. 15 and the Treasury through probably about Feb. 7, leaving the nation and the economy vulnerable again to Congressional ego battles and partisan bickering. My money would go towards seeing another self-invented (by Congress) crisis in January.
But the good news is that this has re-opened a window of opportunity for homebuyers and homeowners to again take advantage of low rates, and low-cost to no-cost mortgages are still available, for now at least. If Congress resumes its childish behavior again, then we know that rates will become volatile, and investors who determine what is an acceptable rate of return will err on the high side of caution. This means mortgage rates could swing upwards again.
Adjustable Rate Mortgages
Right now one of the most vulnerable segments of homeowners are those with adjustable rate mortgages. Many of these are performing spectacularly right now, giving borrowers a rate generally in the low to mid-3 percent range. The reason for this is that the rates are often tied to the one-year LIBOR rate, which is currently is at .62 percent plus a margin (or markup) of 2.5 to 3 percent. This means many adjustable rate loans are carrying interest rates in the mid 3 percent range, which is pretty sexy! Adjustable rates loans also come with caps as to how much they can adjust, and most likely if you are through your first adjustment period it will be capped at 2 percent per year, or 5 percent for the life of the loan.
The LIBOR rate is the London Interbank Offering Rate, and is the rate that bankers lend each other money for. This rate can fluctuate quickly in the event of a banking or financial crisis, and who knows when the next banking crisis will hit. If Congress had not extended the ability of the U.S. Government to borrow money, then there would have most likely been a huge crisis unfolding today and some experts had speculated that the LIBOR could well have soared to 2 or 3 percent (tripling) overnight.
Traditional mortgage rates would probably have been impacted hugely as well if the government had defaulted, with many predicting they could have easily doubled.
If you have an adjustable rate loan, perhaps now is the "eye of the storm" to lock something down for the future. If you are thinking of purchasing a place, perhaps there is no time like the present to act.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers.