Market Insights

Many people ask Landmark Advisors how mortgage interest rates are determined. Rates have climbed dramatically through May and into June, despite the feeling they should not have been increasing. The quick answer is that supply and demand set prices: the higher the prices, the lower the rates. But what determines supply and demand?

The supply side of the equation is determined by the volume of mortgage originations there are from companies such as Landmark. Demand is determined by investors' expectations of what will happen in the economy in the future. If investors think there will be inflation they will require a higher rate of return, demand will shrink and rates will go up. The more detailed answer is the value of the investment is determined by the rate of return. Lenders usually do not keep their mortgages but rather bundle them into huge pools and sell them to Fannie/Freddie/Ginnie. By selling the mortgages the lender reloads on cash, which they then use to fund more mortgages.

In general, the demand for any fixed-income security will be based on future inflation expectations. In addition, risk matters: the riskier the asset, the higher rate they'll have to pay. Is a particular borrower a better credit risk than IBM, or Coca Cola? If they are, then they'd pay a lower rate. Investors are willing to forego some profit for the stability of the investment, but they put their money in depending on their best guess as to what will happen in the future and how they can maximize their return.

For the past several years the Federal Reserve has been impacting the demand side of supply and demand by purchasing billions of dollars of mortgages from Landmark and other lenders. The current QE policy intends to drive interest rates low and assist the housing market in recovering from the collapse. The recent increase in rates is mostly based on speculation that the Fed will begin to slow, termed unwinding, its mortgage purchases. This will alter the demand for mortgages; less demand with constant supply will drop prices. To summarize, investors speculating on supply and demand and the future economic conditions determines interest rates.

Our Landmark Advisors know that anyone with a loan in process, or waiting to refinance, has seen rates move higher recently. A while back we wrote about the reasons interest rates might feel upward pressure this year. Granted, we have no crystal ball, but it is not hard to see why rates have been creeping up.

Remember that mortgage rates, and interest rates in general, are determined by supply and demand. If investors think that the economy is starting to heat up, already has, or may in the near future, that might lead to inflation, and they will require a higher rate of return, and thus rates head higher. It is also important to remember that we may not be seeing it now – but markets are moved by the expectations of what might happen.

Our Advisors have been telling their clients that rates have been very low for quite some time. They have moved higher from very low levels reached at the end of last year, and into this year, when the economy was slower than it is now and the budget crisis threatened to shut down the government completely. Secondly, the economy seemed to be bouncing back from the pause of late last year. Third, the Federal Reserve Board has been making statements to the effect of ending their purchases of Mortgage Backed Securities, and an ending date for stimulus activity known as Quantitative Easing (QE).

What parts of the economy are causing this? Basically, jobs and housing - the employment reports are being watched closely and we had another report which was released on Friday. There are many way to read statistics, but after the slicing and dicing, the general feeling is that the jobs picture is gradually improving. And we continue to hear good news about the housing markets – prices are improving in many areas, sales are brisk creating some bidding wars, and builders are at work again – and we're seeing this in several communities here in Northern California.

While we can't tell you where rates will go from here, all along we have indicated that record low rates would end and when they do, we will get no warning. Don't focus where rates will go, but focus on where rates are. They are still historically low and if you want to borrow money to finance a house, car or business, now is the time to get it done.

Yes, rates have crept up from where they've been for many months. The job market is doing well, at least according to nationwide statistics. The housing market is doing well in most markets, not only generally nationwide but in many areas such as the 580/680 region. And many of the problems that European countries are having are somehow being temporarily ignored by the financial markets. And for the most part residential lending is purely government-backed programs. But with the move up in rates, and the prudent use of portfolio money, comes an occasional new program. In this specific case, Landmark Mortgage has rolled out a very good program that is attracting attention in the region among home buyers. Landmark has rolled out a bridge loan program that will help our clients make an offer on their new home before selling their current home! It provides our clients a way to bridge the gap between selling and buying in that Landmark's bridge loans allow borrowers to access up to 80% of the equity in their existing residence to help fund the down payment on their new home. There are important criteria that borrowers should know about. The mortgage loan is secured by Landmark's clients' current/departing residence. The interest rate is stable: it is a fixed rate set at the Prime Rate +3.50%. (Be sure to check with your Advisor for the current rate.) The term is a maximum of six months for the close of escrow or sale of the departing residence. Landmark's clients are happy to learn that the loan is interest only (IO), with no monthly payment, and with no prepayment penalty! The maximum loan amount is $350,000 with a maximum and a LTV/CLTV of 80%, which will cover the majority of down payments on a new house. There are other restrictions and benefits – check with your Landmark Advisor for the full details!

In the mortgage industry, companies focus on product, price, and service. Landmark's clients know that our service is very good, and that our prices are very good. But over the last few years the mortgage industry has had little in the way of products that might differentiate one company from another – until now.

Landmark has rolled out a bridge loan program that will help our clients make an offer on their new home before selling their current home! It is rare that a home owner, in the market, will commence scouting for a new place to live only after they sell their current home. And the odds are good that the home owner may find their dream home before they've sold their current place, in which case funds may be tight to close on the new house.

And that is why we rolled out our new program. It will provide our clients a way to bridge the gap between selling and buying. Our bridge loans allow borrowers to access up to 80% of the equity in their existing residence to help fund the down payment on their new home.

And in a seller's market where only the most attractive offers get accepted, our bridge loans can help clients make an offer that is not contingent on the sale of their current home, making the offer far more appealing to any seller.

This is a program which makes a tremendous amount of sense to any borrower who is moving. Landmark is able to do this through our focus on customer service, the fact that the majority of house purchases are from existing home owners, and our realization that the markets along the 580/680 corridors are heating up. There are restrictions, but check with your Landmark Advisor for current rates, program parameters, and underwriting guidelines!