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If Interest Rates Rise...What Happens to Refinance Reality?

[Nov 17, 2009.]


Much to the pleasure of property owners who could benefit from a refinance at today's low mortgage interest rates, several major players in the global finance system seem very, very intent on keeping mortgage interest rates as low as possible for the foreseeable future.

However, this begs the question: what would happen if mortgage rates did rise significantly?

Three Major Reasons Why Mortgage Rates Remain Low

First, Ben Bernanke, Chairman of the Federal Reserve, continues to never, ever speak a word about raising interest rates anytime soon. Mr. Bernanke talks about a lot of stuff, but not that.

Secondly, foreign demand for long-term U.S. assets, including U.S. Treasury bonds, remains strong. China and Japan, in other words, continue to pump gargantuan sums of money into the U.S. financial system. Some of this money eventually finds its way into banks, which then make mortgage loans.

Thirdly, Freddie, Fannie, and FHA are quite prepared to go absolutely broke before giving up on the dream of any American who can own a home owning a home. These three government agencies, always important to the mortgage market, have become completely essential--and everyone knows it.

Future Mortgage Rate Rises and Refinancing

While the three factors above are certainly combining at the moment to keep mortage rates low, one cannot assume that this happy dynamic will continue forever. At some point, even the most optimistic analysts are predicting a mortgage rate rise of some significance.

When this happens, though, is very critical. What seems to be occurring is that everyone who needs to refinance and can qualify, or can almost qualify and then get some government assistance to get the rest of the way there, will be refinanced by the banks within the next year or so.

At the end of this 12 month period, the Federal Reserve may raise interest rates, which would in turn raise mortgage interest rates.

The theory behind this strategy, it seems, is to get all the really bad loans off the books before any significant mortgage rate increases take place. For example, consider the vast quantities of adjustable rate mortgages due to reset in the next couple years; if they reset too high, more foreclosures result.

More foreclosures, of course, drive down home prices further.

Further reducing the possibility that borrowers who do not have a large amount of equity in their properties will be able to refinance. And possibly shaking confidence in the U.S. housing market as a whole.

The Fed, foreign buyers of U.S. debt, and Freddie, Fannie, and FHA are therefore walking a tightrope to keep mortgage rates low for at least another 6-12 months.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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