Many people have asked me why mortgage rates have gone up so much so quickly, even on “good loans”. Sue Baker Dirickson quoted rates at our office meeting yesterday, with Jumbo(non-conforming)rates now in the 7%-plus range.
Here's the scoop.
Even though the Feds kept things the same yesterday, default and foreclosure has been on the rise, so now institutions are demanding a much higher "risk premium" for taking on pools of loans.
But because these institutions are purchasing these loans sometimes months after the borrower has actually closed at a given rate, this increase to the risk premium means that instead of paying $101K for a $100K loan that will bear interest, they may only be willing to pay $95K for that $100K mortgage to account for the risk. Multiply that times thousands upon thousands of loans...and you have millions upon millions of dollars in loss for the company trying to sell the pool at a much lower price than they were expecting.
This is called a "liquidity crisis", and is exactly what happened to American Home Mortgage - there was no mismanagement, but they simply got caught holding too many "hot potato" loans, forced to sell them at massive losses...and eventually they had to make the decision to close the doors and stop the bleeding.
In response to seeing this situation play out in the demise of American Home Mortgage, lenders of other non-conforming loan products increased their interest rates dramatically almost overnight to be better prepared - and likely over-prepared - for increased risk premiums down the road. Even though loans above $417K are not presently suffering from increased delinquencies like the Subprime loans are, these rates are now higher as well, because they are being purchased by smaller private entities that can't afford to take on any margin of risk.
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