Mortgage rates reached new lows this week after the Federal Reserve started its bond-buying program. But they could have dropped lower if Fannie Mae and Freddie Mac had not raised mortgage fees.
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The benchmark 30-year fixed-rate mortgage fell to 3.7% from 3.81%, according to the Bankrate.com national survey of large lenders. The mortgages in this week's survey had an average total of 0.43 discount and origination points. One year ago, the mortgage index stood at 4.29%; four weeks ago, it was 3.91%.
The benchmark 15-year fixed-rate mortgage fell to 2.95% from 3.04%. The benchmark 5/1 adjustable-rate mortgage fell to 2.69% from 2.75%.
All rates reached record lows this week, including the rate on jumbo mortgages. The 30-year fixed jumbo rate fell to 4.32% from 4.36%.
The decline in rates was expected after the Fed said last week that it would spend $40 billion per month to buy mortgage bonds. But the move didn't push rates as low as it could have.
"QE3 did have an effect -- but not as much as many thought it would," says Brett Sinnott, director of secondary marketing for the CMG Mortgage Group.
Why Rates are Not Lower
One reason rates have not tumbled is that the Fed's move coincided with the implementation of higher mortgage fees. On Nov. 1, Fannie Mae and Freddie Mac will increase the fees they charge lenders to guarantee loans. Lenders have already started to price their loans based on the higher fees because it can take several weeks before they close and sell the loans to Fannie and Freddie.
The fee hike is being passed on to consumers and translates into about a quarter of a percentage point increase in the rate borrowers get, Sinnott says.
"I personally find it a bit ironic that Fannie Mae and Freddie raised their fees, and then the Fed announced QE3 would involve directly buying (mortgage-backed securities), which dropped rates by roughly the same amount," he says.
But if it weren't for QE3, rates could have increased this week, says Rob Nunziata, president of FBC Mortgage in Orlando, Fla.
"I think QE3 definitely helped the market," he says. "It gave the market some certainty that the Fed will do whatever they can to keep rates low."
The 30-year fixed should have been closer to 3.5%, based on how much the yields on mortgage bonds have dropped since QE3 was announced.
The required net yield on Freddie mortgage bonds for 30-year loans tumbled to 2.33% as of Wednesday afternoon. Prior to the Fed's announcement last week, the yield was 2.67. In an ideal world, mortgage rates would have experienced a similar decline.
If the yields on mortgage bonds continue to fall as the Fed purchases more mortgage bonds, rates may reach new record lows in coming weeks.
Low Rates Not Enough for Housing Recovery
The low rates are crucial to keep the momentum of the housing recovery, but the tight lending standards limit the impact of the low rates on the market and the economy as a whole, the National Association of Realtors says.
Sales of existing homes increased 7.8% to a seasonally adjusted annual rate of 4.82 million in August compared to a month earlier, according to a report released by the NAR on Wednesday.
"The strengthening housing market is occurring even with difficult mortgage qualifying conditions, which is testament to the sizable stored-up housing demand that accumulated in the past five years," says Lawrence Yun, NAR's chief economist.