Debunking the myth that rising rates are good for you


A writer on a large personal finance page recently asked the following question regarding mortgage rates:

“Are rising mortgage rates good for banks – and you?”

Are you freakin’ kidding me?

The higher rates she refers to are the result of rates being held too low (qualitative easing) by the Federal Reserve, the central bank.  Of course, this low, low rate environment was the result of previous tinkering with the money supply.  And all this in what is supposedly a free market economy…

Let me remind you here that central banks were despised by previous US statesmen and presidents such as Thomas Jefferson and Andrew Jackson.  Jefferson’s birthday was April 13th.

Average mortgage rates have risen from the lows of last year.  That happens naturally as economic activity picks up.  Even though rates have increased, they are still remarkably low.

Let’s take each of the bloggers points one by one and see if the her assumptions can be reasoned as valid.

Credit standards are loosening

Yes, thankfully, they are.  “These are people with good, but not great, credit — people who would have been considered quality borrowers a decade ago but were squeezed out of the marketplace after the housing crash,” she says.  While mortgage underwriting criteria may be getting a little easier, being a quality borrower in 2005-2007 meant being able to sign the loan application.  Not a great feat nor a valuable comparison.

The market got whacked after the housing crash.  It would get better on its own.  Is it getting better because of rising interest rates or is that just an incidental result.   High school economics tells us that as the market improves there is a greater demand for capitol and therefore the cost of that capitol should rise.  Loosening credit standards are not the result of higher rates.

You might not need as big a down payment

I have been doing this long enough to recall when conventional mortgages regularly required 20% down.  If you didn’t have that saved up, you were doing a government loan: FHA or VA.

The Fannie Mae 5% down loan never left us.  Yes, it came with high costs to price in the risks associated with the low down payment but, that is to be expected.   In the article there really isn’t any relationship suggested why rising rates may be causing lower down payments.  We don’t buy it.

It takes less time to close a mortgage

Finally, a silver lining that may actually be the result of rising rates.  With the slowdown in refinancing that has taken place more of the mortgage pipeline process is dedicated to purchase mortgages and they are getting done quickly.  Mortgage purchasers were always given preference over refinances.  The slowdown in refinancing volume has allowed what was a 60 to 75 days adventure to become 30 days once again.  Now, the timing challenge is for the buyer to find a home that is acceptable.

This, too, should become easier as the forsythia have bloomed and so are the number of for sale signs popping up.

You’ll get better service

If we could have snuck several more hours in our days we would have delivered what now is described as better service.  When the low rates hit last year we were working what seemed to be night and day to accommodate the your desires to get the lowest rate possible.  Lender’s  staffs were working 6 or 7 days a week.  I was getting conditional approvals emailed to me at 9 pm on Saturdays.  That gave my clients and I a chance to satisfy those requirements by Monday morning.

Technology has improved and volumes have calmed down.  The one thing that was not mentioned is that the compliance issues that we have all suffered and endured still remain although we have grown accustomed to many of the changes.  Many of the new compliance practices put in place to protect the consumer do nothing of the like.  They really only protect the banks.

Rising rates may be good if you already own a bunch of real estate or assets.  Generally, rising rates are the result of the perspective that the economy is improving and that prices will rise as demand picks up.  Last year’s rise was based on a decision of the Federal Reserve to stop buying bonds which kept rates artificially low.

Will mortgage interest rates continue to drift upward and hit 5% by the end of the year as the Mortgage Bankers Association latest prediction suggests?  Only time will tell…

 

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