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What's going on with interest rates?

By Rob Tierney

The question I most often hear these days is, "What's going on with interest rates?" In general, mortgage rates have come down about 1 percent or so since November of 2008, when the Federal Reserve began a policy of purchasing MBSA (mortgage-backed securities). Specifically, the final rate a borrower obtains is based on FICO score, loan to value, and loan purpose.

When I originate a loan, my client closes with MBS funds. We, in turn, sell the servicing contract to the loan to a national investor such as Chase, TBW, GMAC, etc. They bundle the mortgage securities and sell them to Fannie and Freddie. This is how lenders such as MSA and investors such as Chase, TBW, GMAC, etc., get more money to lend to more borrowers.

In March of 2008 Fannie/Freddie instituted risk-based pricing on the loans they purchase. All the national investors followed suit by risk-layering the price of money. This is the same principal that insurance companies use to rate insurance premiums. There is no longer the same rate for all borrowers.

For example: A borrower wishing to do a rate and term refinance of a single-family primary residence with a 760 FICO score and 30 percent equity may get a 4.875 percent/0 point rate. A borrower wishing to do a cash-out refinance to 80 percent of value on a single-family with a 709 FICO score would get a 5.625 percent. A borrower wishing to purchase a second home condo with 80 percent financing and a 735 FICO would get 5.25 percent. Money is priced on a matrix using the combined factors.

The Federal Reserve policy of purchasing MBS that began in November is committed to continue until June of 2009. This policy preceded the current administrations most recent endeavor to increase this dedicated MBS purchase by billions more. This is an effort to allow qualified borrowers to refinance to historically low rates and qualified new home purchasers to obtain affordable financing. There are also several government subsidy programs through current loan servicers to modify existing loans due to lack of equity from declining values or hardship.

Rates have gone from a summer 2008 high in the 6 to 6.5 percent range, to a fall range of 5.75 to 6 percent, to 4.75 to 5.25 percent range now. Money is a commodity and the price can fluctuate daily. The answer to the question of "What are rates doing?" is that they are going down and up. Right now they are on the low side.

Rob Tierney owns MSA Mortgage in Waitsfield and lives in Fayston.

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