The extension to the temporary payroll tax reduction Congress passed in late December was the talk of the mortgage world this past week.
Wait, you thought all the debate late last year was about Social Security withholding? While employees will feel a bit of relief in their paychecks for two months, borrowers will probably experience the exact opposite emotion for years to come.
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Yes, this will affect borrowers. A provision in the deal increases the guaranteed fees charged on Fannie Mae and Freddie Mac loans, which, along with Federal Housing Authority loans, make up 95 percent of all mortages. "The average guarantee fees charged in 2012 need to be at least 10 basis points greater than the average guarantee fees charged in 2011." What does that mean to us?
Plain and simple, this fee results in higher rates for borrowers, and mortgage rates for loans not expected to close within the next month or so have begun to reflect this coming increase in guarantee fees. These fees equate to 30-40 basis points to lenders (.30-.40 in fees based on loan amounts) or .125 percent difference in rate – that's 1/8th percent – that will be passed down to the borrowers. While I readily acknowledge rates have been historically low, I have to ask, do we need this to stimulate the economy?
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You may be thinking that .125 percent difference in rates is not that much, but it really is when you consider that borrowers have to pay this difference for the lifetime of the loan.
Take a 30-year, $417,000 loan. The change adds up to an extra $29.70 a month, an extra $356.40 a year and $10,692 over the lifetime of the loan.
Otherwise this has been a good week for rates as increased concerns about Europe helped mortgage rates improve this week. As usual, trouble in the rest of the world means good news to mortgage rates. This week investors again shifted funds to safer investments, including U.S. mortgage-backed securities (MBS), which helped mortgage rates move lower.
To give you a little more detail, S&P is downgrading the debt of several European countries, including France. The economic growth in Germany was slower than expected. Negotiations on restructuring Greek debt did not progress as planned, increasing the risk of default. Finally, the European Central Bank (ECB) provided no relief, as it gave no indication that it would increase the level of aid available to troubled countries.
These issues are not going to be resolved any time soon, so we can probably expect rates to remain stable... except, of course, for the bump this week caused by the payroll tax-cut extension.
Today's BEST-EXECUTION Posted Rates
- 30-YEAR FIXED CONFORMING – 3.875%, glimpses of 3.75% diminishing due to the tax-cut-extension
- FHA/VA – 3.75%
- 15-YEAR FIXED – 3.375%
- 5-YEAR ARMS – 2.625-3.25% depending on the lender
