Are You Confused Yet?

If you are not in the mortgage industry or pay particular attention to this topic in the media, you may be confused by the talk of impending changes by the Federal Reserve and how that will affect the housing market.  So let’s break this down so your mom can understand this.

When you secure a home loan, more often than not, the lender who provided you the mortgage loan is not the one you end of sending your monthly payments to.  Shortly after you close on your loan you can receive a letter stating you now have a new mortgage lender to work with.  Understand this does not change the parameters of your loan, it only changes who collects your monthly payments and (if you have an escrow account) who sends the payments out to your insurance provider, and local municipalities for property taxes, etc.  Behind the scenes some investor now holds the loan so that the original lender can in turn lend out more money.

When the housing market started getting soft and interest rates dropping, investors started slowing down on purchasing these investments.  Look at this from their perspective, they make less return on their investment and a much higher percentage of those loans were going into foreclosure.  So they stopped buying as many as they had in the past.  The trickle affect of this was that the original lenders had less money of their own to lend out to consumers like you and me.  The Federal Reserve stepped in and starting buying many of these loans to keep the market going; and it worked.

The reason for recent hubbub is that this particular program from the Federal Reserve is set to end on March 31 of this year.  Uncle Sam will then stop this support, that to date has purchased $1.3 trillion worth of mortgage loans.  (Just for fun, 1 trillion is a 1 followed by 12 zeroes; and 1.3 trillion is very close to the size of our federal deficit.  But what are a few bucks between friends?  Whoa.)

This is where the “what happens next?” question comes into play.  The big item of speculation now is the impact this will have on the housing market and the overall economy.  Industry forecasters are predicting anything from modest bumps in interest rates (less than a 1% increase) to a noticeable climb (a 2% increase or more) and everywhere in between.  Now, unless you have a crystal ball, no one knows exactly what will happen.  But let’s put some things in perspective.

Historically speaking, rates at 7% are still low compared to what they have been.  Anyone hear of a rate at 11%?  Any takers for relatives who once had a mortgage at 13%?  Also keep in mind the rule of supply and demand.  If interest rates suddenly or drastically increase, the amount of buyers will decrease – it now costs more to secure a home loan.  So if there are fewer buyers, there will be proportionately more homes on the market available to purchase.  As the quantity of for sale homes increases, the price will decrease due to an increase in supply for the available market.  So while the cost of securing a loan may increase, the size of your loan may decrease.  Again, it’s all relative.

My point in all this?  The marketplace is always moving and adjusting to outside forces.  If you don’t like the way the pendulum is swinging right now, hang on.  Like the weather in Michigan – it will change.

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