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Suspense and Increased Costs Plague Mortgage Industry

Stock broker sitting on curb
Today marks the tenth day of the government shutdown, and although it has not caused any large changes on reported mortgage interest rates, the actual rates that borrowers are able to access are significantly higher.

Political leaders have not agreed on a tangible plan of action for re-opening government programs, so the entire industry remains in limbo about the future of certain economic divisions. The housing industry is no different, according to Jim Angleton, president and CEO of AEGIS FinServ Corporation.

He said that lenders and brokers are in a “mode of suspense” and not sure exactly what will occur on the long term.

“What is going on in Washington is going to have massive negative effects in the next six months,” he said.

All three rates reports provided by loans.org showed very little movement for the week ending Oct. 10, 2013.

The 30-year fixed-rate mortgage (FRM) averaged 4.12 percent, a small increase from 4.08 percent reported one week prior.

The 15-year FRM also made a small jump. The rate grew from 3.12 percent to 3.17 percent.

The 5/1 adjustable-rate mortgage (ARM) interest rate barely changed, decreasing from 2.91 percent last week to 2.9 percent this week.

Although very few lenders are approving new mortgage loans due to the government shutdown and the limited background and credit checks, Angleton said that borrowers will likely face rates significantly higher than those reported here and elsewhere.

“Banks and wholesale lenders are going to add 50 basis points to the risk because they are so unsure of where the market will stabilize,” he said.

For example, an average 30-year mortgage loan that is reported at 4.12 percent would likely cost the borrower 4.62 percent or higher. Angleton said the higher prices are because treasury buyers are not trading and because lenders simply “can’t afford to make a bad deal anymore.”

Even the length of a mortgage interest rate offer has severely changed. Just three years ago, a potential borrower could lock in an interest rate quote for four months. Now, they are lucky to have that rate for 10 days.

“That’s how fast the market and policies have changed,” Angleton said.

Uncertainty with the Fed has caused some borrowers to turn to alternative lending methods. These lenders offer mortgages based off of LIBOR rates instead of mortgage interest rates that work off of the Fed’s 10-year Treasury.

Lenders who use the London Interbank Offered Rate (LIBOR) only offer adjustable rates. One option allows for a fixed rate for three years, but then changes to an adjustable rate afterwards.

Angleton said that although the LIBOR rates are quite depressed right now and slightly favorable over the Treasury rates, inflation will occur in the near future and could cause serious issues.

“That is probably the most volatile loan you are going to create,” he said.