Interest rates have hit a new high, but Houston is outpacing the national average slightly over 5 percent for the 30 year mortgage rate this week. According to Freddie Mac’s latest Primary Mortgage Market Survey rates are still much higher than last year’s rate of 3.88%. Although it’s a 7 year high, mortgage rates should rise modestly from here.
There are several sources for home loans and understanding how each lender obtains the funds to lend can help understand how the rates are determined. Houston Private Investors use their own funds to lend whereas Banks fund their loans with depositor’s money.
If you borrow money from a mortgage company they typically sell their loans to Fannie Mae or Freddie Mac and which either hold these mortgages in their portfolio or package the loans into mortgage backed securities (MBS) that may be sold. By packaging mortgages into MBS and guaranteeing their timely payments of principal and interest of the underlying mortgages; Freddie and Fannie attract to the secondary market investors who might not otherwise invest in mortgages, thereby expanding the pool of funds available for housing. This makes the secondary market more liquid which helps lower rates paid by homeowners and other mortgage applicants.
Let’s understand the Federal Prime Rate.
Who controls the economy? The Federal Reserve, but they don’t have a direct role in setting the prime rate. In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis.
The Federal Reserve sets the target federal funds rate as the basis for the prime rate. When the Fed anticipates future inflation, it raises interest rates slightly to slow it down.
The Fed rate is a benchmark that banks, credit unions and other financial institutions use to set price for their loans. When a bank approves a loan, it will typically add a margin (based on the loans risk level) to the fed prime rate to make a profit.
The earliest mortgages were not offered by banks, but by insurance companies and they differed greatly from the mortgage loans we know today. Earlier mortgages were short with a balloon payment at the end of the term, or were interest-only loans which pay zero towards the principal of the loan. People were either perpetually in debt in a continuous cycle or they lost their home through foreclosure when they were unable to make the balloon payment at the end of the term.
The US Congress passed the Federal Home Loan Bank Act in 1932, during the Great Depression. It established the Federal Home Loan Bank and associated Federal Home Loan Bank Board to assist other banks in providing funding to offer long term, amortized loans for home purchases. The idea was to get banks involved in lending, not insurance companies, and to provide realistic loans which people could repay and gain full ownership of their homes.
The Savings and Loan association (S&L) became strong force in the early 20th century until the Savings and Loan Crisis from 1986 to 1995 in which the number of federally insured savings and loans in the United States declined from 3,234 to 1645. Analysts attribute this to unsound real estate lending, where the market share of S&L’s for single family mortgages went from 53% in 1975 to 30% in 1990.
As a result, the government passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) that dramatically changed the savings and loan industry and its federal regulation. The legislation was signed into law on August 9, 1989 which abolished the Federal Home Loan Bank Board (FHLBB) and the Federal Savings and Loan Insurance Corporation (FSLIC). The Office of Thrift Supervision (OTS) was created to charter, regulate, examine and supervise savings institutions.
FIRREA gave both Freddie Mac and Fannie Mae additional responsibility to support mortgages for low-and moderate-income families.
For the average American, recent signs of rising inflation, which pushed the central bank into increasing rates, aren’t necessarily bad. We are seeing some deceleration in the rate of home price growth, but we believe this is healthy for the market as it allows the income growth to catch up to the recent increase in home values. With unemployment rate at a 50 year low it has resulted in faster wage growth and more confident homebuyers.
Houston’s premiere Hard Money lender, AMI Lenders, takes pride in providing alternate sources of financing for all types of properties in Residential and Commercial fields. Our licensed loan originators have over sixty years combined experience providing better service and better Hard Money lending rates in Houston and surrounding cities. We are a private lender who funds most of our loans and responds quickly to hard money loan requests.