As Peter mentioned, most people are more interested in mortgage rates than Treasury yields. (I don’t have a mortgage but millions do.)
When the Fed raised the fed funds rate in 2004-2006 (to 5%), they caused the 2007 recession and 2008 financial crisis. Millions of subprime “NINJA” (No income, no job, no assets) home buyers were given teaser-rate ARMs (adjustable-rate mortgages) that were then packaged into MBS (mortgage backed securities) and were sold all over the world. When the Fed jacked up interest rates, the ARMs were no longer affordable. Millions of homeowners couldn’t afford their mortgages and defaulted.
In response to the crisis, many rules were changed. NINJA mortgages were nixed. The Fed’s last tepid attempt to raise the fed funds rate (to 2.5% in 2019) caused the stock market to have a hissy fit but didn’t cause a rise in mortgage defaults.
What can the mortgage market expect now that the Fed is raising rates again?
**Adjustable-Rate Mortgages Are Back, But They’re Not Like You Remember**
**Gone are the ultralow teaser rates and lax lending requirements. Today’s ARMs are safer and so are borrowers.**
**By Orla McCaffrey, The Wall Street Journal, May 28, 2022**
**Applications for ARMs, a kind of mortgage that carries a lower rate in the loan’s early years, more than doubled in April from a year earlier, according to the Mortgage Bankers Association. More than 9% of mortgage applications submitted last week were for adjustable-rate mortgages, up from 4% a year ago....ARMs still make up a tiny fraction of the mortgage market — 2.1% in March, according to the Urban Institute, up from 0.6% a year earlier. They accounted for half of all mortgages at their precrisis peak....**
**Hamilton customers approved for variable-rate loans have an average credit score of about 750, compared with an average of 730 for applicants approved for 30-year mortgages, Mr. Sheehy said....About 2% of mortgages issued in the first quarter of 2022 went to borrowers with credit scores below 620, according to the Federal Reserve Bank of New York, down from about 13% in the first three months of 2005. These days, banks tend to keep ARMs on their books. In the years before the financial crisis, they were often packaged up and sold to investors....** [end quote]
That is really good news. If the markets are hit by a “black swan” problem, it won’t come from the mortgage market.
If I was getting a mortgage today I would seriously consider an ARM. Even though the Fed has announced that it is raising rates and reducing its book of long-term mortgage bonds, the bond market believes that long-term rates won’t go higher. At least, that’s what the market is saying today. That would make today’s fixed rate mortgage a maximum. Not a great time to lock it in.
It’s likely that the Fed’s actions will cause a recession. Then they will cut rates. That would be the time to switch from an ARM to a fixed rate mortgage.
What do you think, mortgage experts? (Calling on aj485.)