Magazine article American Banker

A 10%-Fixed Won't Put Industry in a Fix

Magazine article American Banker

A 10%-Fixed Won't Put Industry in a Fix

Article excerpt

Joe K. Pickett, president of the Mortgage Bankers Association, said in a televison interview from its senior executives' conference in New York last month that he expects the 30-year fixed-rate mortgage to break the 10% threshold later this year.

Specifically, he said he expected the 30-year rate to top 10% by the end of the third quarter but then move back down.

If we should see fixed-rate mortgages over 10%, does that mean that we will see mortgage activity, already slow for many lenders, come to a screeching halt?

Probably not, for two reasons: It should only be a temporary condition, and the economy is strong and consumer confidence is high.

But two positive, if short-lived. things could happen if rates do breach the double-digit threshold.

The first is that borrowers may rush out to buy, trying to lock in a 10% rate before it goes to 11%.

The second is that with fixed-mortgage rates over 10%, borrowers appetite for adjustables could increase significantly, maybe pushing the ARM share of the market to 60% or more.

That assumes that the yield curve remains fairly close to where it is now and does not invert - with short-term rates higher than long-term - since that might preclude the one-year Treasury adjustable from being more attractive than a fixed-rate loan.

However, even with a narrow spread between the one-year adjustable rate and the fixed rate, emphasis might shift toward the 11th district COFI adjustable because of its tendency to lag behind other indexes as rates change.

This might mean a windfall of new loans for portfolio lenders that specialize in COFI adjustables, or for anyone else offering an ARM tied to the index of cost of funds in California and Nevada, the 11th Home Loan bank district.

Most likely, though, any originations done at 10% or above for 30-year fixed-rate loans should be limited and short-lived because of the forth-coming economic slowdown, which should put downward pressure on rates. …

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