Regular readers of my blog know I’ve been pounding the table for sustained low mortgage interest rates since 2011. Back then, I saw there was enough global and local headwinds to the economy to tie the Federal Reserve’s hands for years and for a disconnect between the Fed’s funds rate and mortgage interest rates. Earlier this year, I posted a blog to explain my rationale.
Meanwhile, fellow Realtors and some lenders continued to threaten home buyers with higher impending mortgage interest rates, much to the detriment of home buyers. This fear-based message pressures buyers to purchase homes sooner and at higher prices. This also leads fearful buyers to lock themselves into expensive 30-year fixed rate loans where a lower rate 5/1 or 7/1 adjustable rate mortgage (ARM) would be more advantageous.
Today (7-14-15), the biggest mortgage originator in the country, Wells Fargo, concedes they have been wrong about anticipating higher interest rates for years. Wells Fargo finally believes that the Federal Reserve Chair, Janet Yellen, has been crying wolf about higher interest rates (but given the macro-economic conditions, how can you blame her). They now don’t believe there’s a realistic chance of Fed funds rate increases in the near future, and if there were to be increases, they would be gradual and delayed for years. Wells Fargo is betting hundreds of millions to back that belief, buying credit swaps to convert their floating ARM loans to fixed rate loans. In effect, Wells Fargo agrees with my assessment that there’s little likelihood of the ARM loans floating up to the same rates as the fixed rate loans. And, with typical herd mentality, other banks are very likely to follow.
Of course, there’s a certain satisfaction and vindication when the biggest mortgage originator agrees with me and puts real money on the line. This will only be compounded when other banks eventually follow suit. Still, when dealing with the behavior of slow moving institutions, we need to also understand what their behavior actually signals. Just as with media reports on the status of the housing market and mortgage interest rates, we have to separate out their view from the 40,000-foot perspective from what is actually happening on the ground. While I haven’t changed my assessment of the direction of mortgage interest rates yet, I certainly won’t be waiting until Wells Fargo reverses course and repositions themselves for a higher mortgage interest rate environment.