Mortgage Rates Skyrocket on Tax Cut Compromise

December 10, 2010


Oh The Humanity!

Oh The Humanity!

This week was bad for rates, really bad. If you are not in the industry, it is impossible to describe what happens when you see rate increases like we saw this week, so I will once again defer to history to illustrate what occurred.

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“It’s fire and it’s crashing! It’s crashing terrible! Oh, my! Get out of the way, please! It’s burning, bursting into flames and is falling on the mooring mast, and all the folks agree that this is terrible. This is the worst of the worst catastrophes in the world! Oh, it’s crashing…oh, four or five hundred feet into the sky, and it’s a terrific crash, ladies and gentlemen. There’s smoke, and there’s flames, now, and the frame is crashing to the ground, not quite to the mooring mast…Oh, the humanity” (See the actual event.)

Yes, that was the Hindenburg and, as you might guess, rates jumped. Currently Fannie Mae and Freddie Mac conforming 30 Year Mortgages are averaging anywhere between 4.75% and 4.875% for optimal borrowers. While these are still amazing rates from a historical perspective, it is hard to reconcile this with the 4.25% available just a few months ago.

We were definitely expecting some degree of increase. Europe is beginning to stabilize with many countries, including the beleaguered Ireland, undertaking continued austerity measures. In the US, Congress has all but approved the extension of the Bush era tax cuts, as well as an extension of unemployment benefits for over 2 million Americans. Since this favors investment in equities, a negative impact on bonds would follow. The degree of the impact in the face of near 10% unemployment and continued weak economic indicators in the housing market, however, should have tempered movement.

A good number of economists have put forth that moves such as the recent Congressional plan add a monstrous amount to the deficit, which erodes confidence in Treasuries. Since Treasury pricing affects mortgage backed securities, mortgage pricing would follow suit. In short, we will have to pay the piper at some time and that time will not be pretty.

I will close by saying that this is a time for a very defensive strategy. In addition to significant increases, we are not seeing recovery from data that should provide respite. The abysmal jobs report from last week, for example, should have predicated a massive flight to safety bolstering bonds, but the bounce that we saw was almost non-existent.

I am recommending that my clients closing in 7 days or less LOCK. If closing in 7 to 30 days or less, there may be time to take advantage of a correction. LOCKING would be a very conservative way to go, but if your risk tolerance permits, you could FLOAT with a LOCK on ANY price improvements. For those closing in more than 30 days, I would suggest FLOATING with extreme caution.

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About Doug Katz

As the Senior Mortgage Banker and Sales Manager for Chicago Bancorp, Doug not only originates loans for his personal business, but also oversees affiliations with banks and other financial institutions that depend on Chicago Bancorp to meet their client’s lending needs. In this role, Doug directs the day-to-day mortgage sales operations of over 25 branches in a multitude of Chicagoland’s diverse communities. He brings to these relationships a wealth of industry experience and a dedication to an exceptional client experience that has established Chicago Bancorp as Chicago’s pre-eminent mortgage solution providers. Prior to joining Chicago Bancorp, Doug attended and graduated from West Point. Upon graduation, he was commissioned as an officer in the United States Army Artillery, where served 5 years in numerous roles and in various deployments include service in Kuwait. In addition to his Bachelor’s Degree from West Point, Doug holds an M.B.A. from Loyola University Chicago, where he was also inducted into the Beta Gamma Sigma Honor Society. He also served as President for the West Point Society of Chicago from 2003 to 2005 and still serves on the Board of Directors. When not working, he spends his time with his wife and three children in their hometown of Oak Park, as well as pursuing his passions for fitness, cooking and the banjo. Doug can be reached by phone at 312.738.6079, by email at, on his own blogs, and Vet Money Matters. He's also on LinkedIn.

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