Risk and Refinance Rates

Today, Freddie Mac reported a $821 million loss in 2nd-quarter as more people with risky loans default. It was more than three-times larger than Wall Street expected as a huge number of borrowers with good credit fell behind on their exotic and risky mortgages. These so-called Alt-A loans make up about 10 percent of Freddie's portfolio, but accounted for more than half of the company's credit losses in the quarter.

About the only good news to take from today's Freddie Mac earnings report is the fact that most of the loss is derived from a relative few high risk areas - California, Nevada, Florida, and Arizona.

What does this mean for refinance rates?

Higher than expected losses from either Freddie or Fannie translates to a higher risk to investors in the mortgage backed securities market. This means that they expect a higher rate of return for buying mortgages.

We continue to experience this in the mortgage market on a daily basis. Depending on the refinance program, the mortgage spread is as high as 2.5%, which is a full point above it's average historical level of 1.5%.

This results in refinance rates that are up to 1 percent higher than normal. Thankfully, the 10 Year Treasury Yield remains at a low level, which offsets the higher mortgage spread premium.

Look at it another way. All things being equal, a par 30 year fixed refinance rate would be in the 5.375% to 5.5% range today using the historical spread premium!

The real deal for refinance rates and the economy as a whole comes down to the housing market. Rising risk and rising mortgage premiums will not decline until home prices stabilize. Most feel that we still have a way to go before this will occur.

If you are sitting on the fence want to refinance soon, now would be a good time to lock a refinance rate. It doesn't appear as if rates will drop much from here in the near future, but the risk of further refinance rate increases looms larger by the day.

May the Mortgage Rates be with You!

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