Everyone knows our economy right now is unstable. The big question on everybody’s mind is can mortgage rates get any lower? My answer is no. I don’t see how interest rates can get any lower because of the simple fact that banks are not making money right now and they have not been making money for the last couple of years. Let’s say for a moment that mortgage-backed securities get a huge pool of capital over the next couple of months. That will drive yields up and mortgage rates down right? Wrong! The banks that offer mortgage loans know they have to earn some kind of a premium on the origination of that loan, even if it is small.

This means bank will put a “floor” on how low mortgage rates will actually be. Put another way, we might have bonds that generate 3.0%, 30 year fixed-rate mortgages, but banks will put floors on those mortgages of say 4% and they’ll add discount points to it. So in essence they are protecting themselves so they can still earn a very thin premium. So if you are waiting for mortgage rates to get lower before buying a house or refinancing the house who already live in, you are going to be waiting a very long time.

Why will bank mortgage rates not get any lower?

The first reason as explained above is the simple fact that banks are not making any money right now. The second reason is much deeper than that. U.S. Banks presently employ over 2 million people, down from the 2.21 million people from early 2008, according to the FDIC. Moreover, many banks are experiencing rapid layoffs because they don’t have enough revenue to pay all of their employees. There is a ripple effect in place when banks do not make money and they need to make money in every possible outlet they can in order to survive. For example just last week Bank of America announced they are cutting 3,500 jobs because the banking industry is becoming less and less profitable. All areas of banking are being heavily scrutinized right now to determine if those outlets are worth keeping. There is, however, one area of banking that is profitable. Special Assets, otherwise known as bad mortgages is the department in almost every bank that is growing. This represents only additional costs for banks, with no additional revenue.

Okay, so big picture, what does this mean for loan rates and the banking industry?

It means we are not out of the woods by a long shot. Now does this financial turmoil mean that consumers will stop getting mortgage loans? No, absolutely not, people will still be taking out mortgage loans and refinancing and purchasing real estate despite the fact that banks are overall not very profitable. Banks know low interest rates drives consumer demand.

Let’s say for a second that it’s your money: you can choose a 3% return or a 4% return. Which would you choose? You’d probably choose a 4% rate because that means you’re getting 1% more on your money right? That’s exactly what banks will be doing if they are not already. This is the exact reason why I don’t see how 30 year fixed, or 15 year fixed or even 10 year fixed rate mortgage loans are ever going to get cheaper than they are presently.

If you would like to learn more about current mortgage rates available shoot me an e-mail at Scott.Sheldon@nafinc.com. I can give you an accurate pricing quote for your unique loan scenario or you can go to my handy rate quote feature in the right-hand column. Home mortgage banks are financially strapped so rates will not likely get any lower than they are today.