Mortgage rate cut quantum will vary depending on clients, cities
Bank exec: rate cut conducive for easing prepayment pressure
Chinese banks will also cut some deposit rates by 10-25 bps
$5.3 trillion mortgage book accounts for 17% of banks’ loan
BEIJING, Aug 29 (Reuters) – Some Chinese state-owned banks will soon lower interest rates on existing mortgages, three sources familiar with the matter said on Tuesday, as Beijing ramps up efforts to revive the debt crisis-hit property sector and bolster a sputtering economy.
The quantum of the cut on existing mortgages, which, if implemented, will be the first such move in China since the global financial crisis, would be different for different types of clients and in different cities, said the sources.
The reduction could be as much as 20 basis points in some cases, said the sources, who declined to be named as they were not authorized to speak to the media.
The country’s central bank, the People’s Bank of China (PBOC), did not immediately respond to Reuters’ request for comment after business hours.
The reduction in existing mortgage rates will come amid several other property, economic and market support measures Beijing has announced over the past few weeks, as concerns mount about the health of the world’s second-largest economy.
The property sector, which accounts for roughly a quarter of the economy, has lurched from one crisis to another since 2021, and contagion fears deepened this month after liquidity stress in leading developer Country Garden (2007.HK) became public.
Chinese lenders were widely expected to cut interest rates on existing mortgages after the PBOC earlier this month said that it would guide commercial banks to do so.
The central bank’s proposal to cut rates, which came after a wave of early repayments of mortgage debt, aims to reduce the interest rate costs for homebuyers and to boost consumption in a slowing economy.
China has been cutting new mortgage rates since last year to boost sales in its moribund property market, but the main result so far has simply been a rush by households paying off existing mortgages early, squeezing banks’ profits.
Lowering existing mortgage rates is expected to further weigh on the banking sector’s net interest margin (NIM) – a key gauge of profitability – which fell to a record low at the end of the second quarter, official data showed.
Chinese banks have been battling headwinds such as lower lending rates and pressure from the government to prop up the economy, as well as bad debt related to property developers and local government financing vehicles (LGFV).
China’s mortgage loans totalled 38.6 trillion yuan ($5.29 trillion) at the end of June, representing 17% of banks’ total loan books.
Zhu Qibing, chief macro analyst at BOC International China, estimates the weighted average rate of new mortgages is 4.11%, while the average rate on all existing mortgages is at least 100 basis points higher.
Citigroup in a note this month said that the repricing of existing high-yielding mortgages would further add to Chinese banks’ NIM pressure and dampen their profitability and lending capability.
Adjusting existing mortgage rates is conducive to easing pressure on banks from mortgage prepayment, Lin Li, vice president of Agricultural Bank of China Ltd (601288.SS), the country’s No.3 lender by assets, said earlier on Tuesday.
The bank would draft detailed implementation rules on rate cuts after policies on this become clear, he said. The lender reported a drop in its NIM to 1.66% at the end of June from 1.7% at the end of March.
Chinese banks’ net interest margin would face downward risks in the second half of this year, Fu Wanjun, Agricultural Bank of China’s president, said.
To soften the hit on the margins, the three sources said that major state banks would also lower interest rates on some fixed-term deposits, and the quantum of cuts would range from 10 basis points to 25 basis points.
Cutting deposit rates could help banks to maintain a proper level of NIM, one of the sources said.
Analysts have said China last week did not opt for a broad rate cut that would further depress banks’ narrow net interest margins, instead deferring to banks to cut their deposit rates and give themselves room to cheapen mortgages.
($1 = 7.2916 Chinese yuan renminbi)
Reporting by Xiangming Hou, Rong Ma, Ziyi Tang and Ryan Woo in Beijing, Selena Li in Hong Kong; Editing by Sumeet Chatterjee, Alex Richardson and Sharon Singleton
Our Standards: The Thomson Reuters Trust Principles.
The rate of mortgage delinquency increased more than nine percent from the first to second quarter, rising to a national average high of 3.53 percent, according to credit bureau TransUnion.
The delinquency rate, which includes borrowers with mortgage payments 60 days or more past due, is up from the previous quarter’s 3.23 percent average and about 51 percent higher than a year earlier.
Nevada led the nation with a delinquency rate of 6.63 percent, followed by Florida at 6.47 percent, while the lowest delinquency rates were found in South and North Dakota, at 1.5 percent and 1.54 percent, respectively.
Over the last quarter, Wyoming (28.3 percent), Oregon (23.5 percent), and Florida (20.2 percent) saw their delinquency rates surge, while six other states, Missouri, Kansas, Nebraska, North Dakota, New Hampshire, and Montana, saw improvement.
Average national mortgage debt per borrower increased 0.4 percent to $192,681, up 3.35 percent from the year-ago average of $186,432.
California’s average mortgage debt of $361,988 was the highest in the nation, followed by the District of Columbia with $355,875 and Hawaii with $304,096.
“The national 60-day mortgage delinquency rate among mortgage borrowers is expected to continue to rise throughout 2008 from a value of 3.53 percent in the second quarter of 2008 to just over 4 percent by year end,” said Keith Carson, a senior consultant in TransUnion’s financial services group.
“However, TransUnion forecasts that later in 2009 the rise in mortgage delinquency rates will taper off as economic conditions improve and home prices begin to stabilize.”
This echoes similar sentiment expressed last quarter after delinquenices climbed eight percent from the fourth quarter.
The mortgage loan delinquency rate has now risen for six consectutive quarters.
The second way diversifying a portfolio through real estate helps is because it is in its own class when it comes to types of investments. Including real estate in an investment portfolio can provide massive benefits because of this separation. Real estate has a low correlation with other asset classes, such as stocks and bonds … [Read more…]
Financial markets rallied worldwide today as a massive plan to remove bad mortgage debt from the balance sheets of troubled institutions was introduced by Treasury Secretary Henry Paulson.
Last night, Paulson held discussions with Fed Chairman Ben Bernanke and SEC Chairman Chris Cox about taking a “comprehensive approach” to solve the ongoing credit crisis.
After addressing problems on a case-by-case basis over the past few weeks, such as the bailout of Fannie and Freddie and AIG, it became clear that a more systematic plan would be necessary to maintain market stability.
“The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded,” said Paulson in prepared remarks posted on the Treasury website. “These illiquid assets are choking off the flow of credit that is so vitally important to our economy.”
“When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.”
The so-called troubled asset relief program currently being mulled over aims to be the “ultimate taxpayer protection,” though it will involve a “significant investment” from taxpayer dollars.
“I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion,” said Paulson.
While the new plan is being worked on over the weekend, Treasury is taking immediate steps to provide relief to the mortgage market.
First, Fannie and Freddie will boost their purchases of mortgage-backed securities, and second, Treasury will expand its MBS purchase program to increase available capital for new home loans.
Additionally, a temporary guaranty program for the U.S. money market mutual fund industry has been established and a ban on short selling is in place on 799 financial companies until October 2.
As for the millions of delinquent borrowers, banks receiving assistance may need to endorse judicial loan modifications and allow bankruptcy judges to facilitate refinances on primary residences in return.
The Federal Deposit Insurance Corporation is suing over a dozen mortgage firms in federal courts to recoup funds over loans they brokered over 14 years ago for Washington Mutual.
The agency in its complaints points to a combined 373 home loans it claims were defective for a variety of reasons, according to a National Mortgage News review of federal court records. While dollar amounts sought aren’t disclosed, some alleged bad underwriting for the loans in question includes five-figure kickbacks and six-figure borrower debts.
The FDIC’s pursuit stems from the fallout of its takeover of WaMu in 2008 during the Great Financial Crisis. Deutsche Bank, a trustee for mortgage-backed securities including the defective WaMu loans, sued the agency in 2009 for indemnification for its securities.
The sides reached a $3 billion settlement agreement in 2017, in which the FDIC issued a receivership certificate, which grants payments to Deutsche Bank as the FDIC recoups WaMu funds. The federal agency began requesting indemnification from mortgage companies in 2021 and none, according to court records, have acquiesced.
“I’m really quite concerned about them taking this stance when they stand in the shoes of those banks who were really at fault, lenders at fault, not the brokers who are just giving them information they asked for,” said Mukesh Advani, a Bay Area attorney representing defendant Cal Coast Financial.
The FDIC sued East Bay-based Cal Coast in August over 21 mortgages the company brokered for WaMu and its subsidiary, Long Beach Mortgage Co.
The FDIC declined to comment last week, while its counsel and other companies either declined to comment or didn’t respond to questions. Two lenders facing such lawsuits, Guild Mortgage and Supreme Lending, have responded to the FDIC’s complaints in brewing court battles.
The 14 firms named in lawsuits in the past 12 months range from small operations to major players, such as Freedom Mortgage. Mortgage companies are being sued for indemnification for as few as 14 loans, in Guild’s case, to as many as 72 loans from Benchmark Mortgage. The Plano, Texas-based Benchmark is scheduled to take the FDIC to trial next June, court records show.
Other businesses the FDIC is suing include American Nationwide Mortgage Co.; Lennar Mortgage; The Mortgage Link; Mortgage Management Consultants; New Jersey Lenders; PNC Bank as successor to smaller firms; Primary Residential Mortgage Inc.; Pulte Mortgage and RealFi Home Funding Corp.
The lawsuits are nearly uniform in length and language, describing the FDIC-WaMu receivership’s losses as arising from inaccurate and/or incomplete loan applications and documentation produced by the brokers.
Each company signed broker agreements with WaMu and its subsidiaries, such as Long Beach Mortgage, in 2004 and 2005, according to exhibits attached to each claim. The FDIC in each case includes an exhibit describing in brief the defects of each loan, the majority appearing to be misrepresented credit or income and debt.
In the FDIC’s lawsuit against Lennar, it alleges one borrower suggested a $60,000 monthly income, six times their actual earnings, while another homebuyer failed to disclose over $660,000 in mortgage debt from a previous property. Lennar last week declined to comment on pending litigation.
Each lawsuit also cites a six-year limitation to file claims following the 2017 Deutsche Bank agreement, and attorneys for lenders said they anticipate more FDIC complaints against lenders.
James Brody, an attorney with Irvine-based Garris Horn LLP, represents Guild and was recently retained by The Mortgage Link in its own FDIC litigation. In regards to the Guild lawsuit, Brody shared a statement this week calling the FDIC’s case “extremely weak” and noted the complaint’s lack of specifics around losses attributable to Guild’s brokered loans.
“We certainly anticipate that there will be a number of motions for summary judgment that will be filed with the Court by most if not all parties that don’t decide to settle out because of their own cost/benefit considerations,” he wrote.
Guild anticipates filing a motion for summary judgment to dismiss the lawsuit, Brody said.
FDIC Chairman Sheila Bair, apparently unmoved by the recent Streamlined Modification Plan announced by the FHFA, has launched her own sweeping loan modification program.
In prepared remarks, she noted that the pace of modifications continues to be unsatisfactory, with just four percent of seriously delinquent loans tackled each month.
As a result, she has proposed a streamlined loan modification program similar to the one implemented at Indymac Federal, which aims to rework 2.2 million troubled loans through 2009.
The program, geared towards borrowers 60+ and 90+ days in arrears on owner occupied properties, would rely on standard interest rate reductions, extended amortization, and deferred principal reductions, but the big difference would be government guarantees for loans that re-default.
The government would assume up to 50 percent of losses incurred if a modified loan were to subsequently re-default.
If that’s not enough of an incentive, servicers who agree to take part will be paid $1,000 to cover expenses for each loan modified, a premium to the $800 offered in the FHFA’s SMP.
Bair expects the program to use roughly $24.4 billion of the $700 billion bailout fund, though it’s unclear if the Treasury is yet to be onboard, especially after Paulson recently decided it was best they didn’t use the funds for bad mortgage debt.
The program would also provide support for underwater borrowers, though the government loss share would progressively fall from 50 percent to 20 percent.
If the loan-to-value for the first-lien rises above 150 percent, it would receive no loss sharing benefit from the government.
A standard net present value (NPV) test would be implemented to determine if modifying a given loan made more sense than foreclosing, based on a debt-to-income ratio of 31 percent for the first-lien mortgage payment.
Additionally, a de minimus test would also be carried out to exclude from loss sharing any modifications that did not lower monthly mortgage payments by at least 10 percent.
The loss sharing guarantee would terminate eight years into the loan modification, and would only be applied once the borrower had made six payments on the modified mortgage.
Bair believes the program could prevent 1.5 million foreclosures, factoring in a re-default rate of 33 percent.
Mortgage rates eased back down this week, but remain above 7%, which is prohibitively high for many homebuyers.
The average rate on the 30-year fixed mortgage declined to 7.18% this week from 7.23% the week before, according to Freddie Mac. This marks the third straight week rates have been above 7%, the first time that’s happened since April 2002.
Elevated rates are colliding with the end of the traditional homebuying season, but the environment remains a major headwind for those buyers left in the market and further cements many homeowners’ decisions to not sell now.
“The impact of mortgage rates on activity right now might not be all that big because activity is expected to slow down,” Zillow senior economist Orphe Divounguy told Yahoo Finance. “The housing market is very seasonal so it’s expected to slow down right now and pick back up in the spring.”
Buyer demand still low
Buyers still in the market took advantage of the somewhat softer rate.
Mortgage application volume for purchases picked up 2% last week on a seasonally adjusted basis, compared with the previous week, the Mortgage Bankers Association (MBA) survey for the week ending Aug. 25 found.
“Treasury yields peaked early in the week and did move lower by the end, which may have spurred some activity,” MBA deputy chief economist Joel Kan said in a statement. Fixed mortgage rates tend to follow the direction of the 10-year Treasury yield.
Still, demand remains low, Kan said, with volumes off 27% from the same time last year.
Adding to the affordability concerns are home prices, which have been pushed up by solid demand and sparse inventory.
In June, home prices rose for the fifth consecutive month, according to the S&P Case-Shiller US National Composite home price index, which is off just 0.02% from its all-time peak a year ago.
Mortgage rates are also to blame for the shortage in homes for sale.
Most homeowners have a mortgage rate far below the prevailing rate. According to the Bureau of Economic Analysis, the average rate on all outstanding mortgage debt was 3.59% in the second quarter, nearly half the 7.18% rate recorded this week.
“For the bulk of those who already have a mortgage, a new mortgage at current rates would incur significantly higher costs,” Jake Gordon, research analyst at Bespoke Investment Group, wrote in a note following the BEA’s revised data release on Wednesday.
“That gives them little reason to enter the housing market, and thus, is part of the reason for the dearth in housing inventories,” the analyst added.
New homes to the rescue
With little on the resale market, some buyers have turned to new homes.
New construction now made up nearly 31% of the for-sale inventory pie in July, up from around 20% in the years from 2000 until the pandemic, according to analysis from Odeta Kushi, First American’s deputy chief economist.
As a result, builders have ramped up construction and incentives. A prevalent perk is paying for mortgage rate buydowns for prospective buyers.
For instance, some new buyers are getting mortgage rates below 6% as builders allocate 4%-6% of the home sale proceeds toward buying down the mortgage rate, data from John Burns Research & Consulting shows.
“As mortgage rates swing between the low- and mid-7% range, we could see this uncertainty around rates have more of a cooling effect on sales,” Eric Finnigan, vice president of research and demographics at John Burns Research and Consulting, told Yahoo Finance.
Mortgage rate forecast
Where mortgage rates go from here remains to be seen.
“Recent volatility makes it difficult to forecast where rates will go next, but we should have a better gauge in September as the Federal Reserve determines their next steps regarding interest rate hikes,” Sam Khater, Freddie Mac’s chief economist, said in a statement.
The increase in rates is largely because the yield on the 10-year Treasury has skyrocketed over the past 18 months as the Federal Reserve tries to tamp down inflation to its 2% goal.
Read more: What the latest Fed rate hike plan means for mortgage rates and loans
The Fed’s preferred inflation reading slightly ticked up on annual basis in July, according to a government release on Thursday, overturning some of the prior month’s drop as the battle to bring down inflation could be slower.
Last week, Federal Reserve Chairman Jerome Powell warned in his Jackson Hole speech that inflation still remains too high, suggesting that the central bank isn’t done.
“Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy,” Powell said, also noting that home prices are still going up, even after 11 rate hikes.
“In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up.”
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
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Banks serve two main purposes. They provide loans to consumers who need a helping hand, and they provide a place to store cash, also known as a deposit.
The two actions aren’t independent of each other, and are actually very much interconnected.
For example, banks lend money out a certain rate and pay customers a certain return if they keep their money at the bank.
The two rates rely on one another to ensure the bank makes money. The short version of the story is that the bank must pay depositors less than what it charges to lend.
That’s why we see mortgage rates on the 30-year fixed around 4%, and savings accounts paying closer to 1% APY. This spread allows banks to make money and continue lending to consumers.
Low Mortgage Rates Are Bad News for Those Who Don’t Have a Mortgage
While everyone has been banging on about low mortgage rates for years now, many fail to mention that savers (and really anyone without a mortgage) are getting the short end of the stick.
As noted, when interest rates on loans move lower, as they have over the past several years, savings rates must drop as well, seeing that the two tend to move in tandem.
Before the financial crisis, it was actually quite common to see savings rates in the 3-4% APY range, which certainly wasn’t bad from a saver’s point of view.
Banks were offering great savings rates because they needed more money in the coffers to lend out to consumers, who were especially hungry for loans.
Remember, banks were going haywire making new loans during the housing boom, so they also had to attract depositors to ensure they had collateral.
Interestingly, the gap between savings and mortgage rates wasn’t all that wide back then, with the 30-year fixed ranging between 5-6%, compared to around 4% today.
Meanwhile, savings accounts were commonly in the 3% or higher range if you went with a bank that offered a more aggressive return.
Today, the gap between one-month CD rates (0.06%) and the 30-year fixed (4.5%ish) is the highest it has been since mid-2011, according to MoneyRates.com, which releases the so-called “Consumer’s Lost Interest Percentage (CLIP) Index.”
The company noted that the gap widened to 4.43% in September, up three basis points from August. It has increased by a staggering 1.15% so far this year thanks to rising mortgage rates and savings rates that “haven’t budged.”
The average gap between CD rates and 30-year fixed mortgage rates since 1971 has been 2.83%, meaning today’s gap is 1.6% above the norm.
So What Do You Do with Your Money?
With the gap so wide, it’s clear that those with the bulk of their assets in low-paying savings accounts are losing out.
At the same time, mortgage rates are at near-record lows, so one has to scratch their head a little.
Do you pay down the mortgage early, which has an ultra-low rate that will probably never be lower? Or do you throw your money into a savings account that is paying next to nothing?
Or, do you say to heck with savings accounts and try your luck in the stock market, which also happens to be sky-high currently?
It’s certainly not an easy decision, and it’s clearly not good news for renters and those who have already paid off their mortgages.
But perhaps the best option is to tackle other high-APR debt, such as credit cards, which tend to have interest rates in the teens and higher.
If the only debt you have is mortgage debt, there are plenty of ways to pay down your mortgage a little quicker, including going with a shorter-term mortgage, such as the 15-year fixed. That will reduce the gap as well, seeing that rates on 15-year loans are lower than those on 30-year mortgages.
But you might regret locking that money up a few years down the line if both savings and mortgage rates go up, especially if inflation rears its ugly head.
The big plan to buy up all the so-called toxic mortgage debt gumming up the financial system seems to be a thing of the past.
In prepared remarks this morning, Secretary Henry Paulson said the original strategy to purchase troubled assets “would take time to implement and would not be sufficient given the severity of the problem.”
“Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets,” he said on the Treasury website.
“Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.”
Instead, he determined, with consultation with the Federal Reserve, that strengthening bank balance sheets via direct purchase of equity in banks was the way forward.
On October 14, the Treasury announced a plan to purchase up to $250 million in preferred stock in federally regulated banks and thrifts, and within two weeks, $115 billion had gone out to eight of the largest financial institutions.
The remaining TARP funds will be deployed with three main priorities in mind, including keeping both banks and non-banks well capitalized so they can continue to lend, buoying the auto loan, student loan, and credit card markets, and exploring more effective ways to reduce foreclosures.
Ideas currently floating around include maximizing the reach of the TARP program by attracting private capital via matching investments and developing a liquidity facility for “highly-rated AAA asset-backed securities.”
The Treasury is also looking at a number of proposals to increase loan modifications, though each would require “substantial government subsidies.”
“We are designing further strategies for building capital in financial institutions. Stronger capital positions will enable financial institutions to better manage the illiquid assets on their books and better ensure that they remain healthy,” he added.
Way to spread the confidence…see where the TARP money went so far.
PHOENIX (3TV/CBS 5) – According to Freddie Mac, mortgage rates have hit a 22-year high this week at 7.23%. The higher interest rates could be pricing out new homebuyers in the Valley.
Alexz Jones with Bison Ventures said if you can afford it, you should buy now and not wait until the rates go back down. “My advice is get into the door now; it’s not the forever home. We know rates will drop, we don’t know when, we don’t know how much,” he explained.
There is still some demand since the inventory is so low in Arizona, but it is not the same feeding frenzy sellers experienced when the rates were much lower. Jones advises buyers who can afford it to get back into the game and build equity, then refinance when rates get lower. “For people putting minimum down, or payment assistance program, this is still your time to shine because of the other people are scared of their interest rates,” he explained.
In the Phoenix metro area, the average non-mortgage debt is slightly higher, at $40,484.
He says the lower inventory could partly be attributed to sellers not wanting to return to buying a home with these higher rates.
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