Today, once again the Federal Reserve reduced short term interest rates by .25%. This is a reduction in the fed funds rate, the rate that banks charge when lending to each other. This action is taken in times of economic downturns to stimulate banks in lending money and encourage consumers to borrow money and spend it, all of which will breathe life into the economy. When the Federal Reserve takes this action, it has an immediate effect on prime rate as well as rates on other types of loans such as car loans and credit card rates. Unfortunately, it does not have a direct effect on Hilton Head mortgage rates.   

Source: Bankrate.com

Hilton Head Mortgage Rates and the 10-year Treasury Note

Short-term vs. Long-term Mortgage Rates 

In fact, many times we see mortgage rates on Hilton Head rise after a reduction in short term rates by the Federal  Reserve. Why, you ask?  Well, the biggest fear of the treasury market is inflation, as that erodes the value of the note. One would normally find rising inflation in times of economic upturns. When the Federal Reserve reduces the short term rates, the treasury market reads that as a stimulus to the economy which could lead to a possible rise in inflation.   So to guard against this, the treasuries sell off forcing a rise in the yield.   Having said all of this, most of the time a reduction is so anticipated that the rise in the yield has already been priced into the value of the note, so when the rate cut is finally announced it is pretty much a non-event. For example, three weeks ago, the yield on the 10 year note was 3.46%. As we drew closer to today’s fed meeting, most economists were predicting a .25% cut in the short term rate. So, over the past three weeks we have seen the yield on the 10 year note rise to today’s 3.82%. After the announcement, the yield did not move at all. 

Rate Cuts are Probably Over

Where do Hilton Head borrowers and lenders go from here? Most analysts feel that the Federal Reserve will not cut rates again in 2008. This means that the monthly economic data will determine the direction of the treasury yield.  Bad news will lower the yield while positive news will cause it to rise.  Even the experts don’t  know if rates will be higher or lower later this year.  Remember that historically rates are still very, very low.  There are many properties in the Hilton Head area that are value priced.  If you find one that you like, buy it now.  Don’t wait for lower interest rates.   

 Patrick S. Child, Vice President

Hilton Head and Bluffton real estate borrowers often request loans of more than $417,000.  These loans are called jumbos.  Jumbo rates are higher than the rates of lower, conforming mortgages.  I want to explain just what has happened to jumbos recently and offer our best guess of what will happen for the near term.

Source: Bankrate.com

First of all, all mortgage lenders ideally prefer to sell the mortgage loans they make to others rather than hold them on their own balance sheet.  In a “normal” mortgage environment, loans can be bundled into mortgage backed securities and sold to investors.  However, with the current state of affairs in the mortgage industry, investors for jumbo loans have become scarce to totally non-existent.  When the lender makes a conforming loan, a loan in the amount of $417,000 or below, it can still be sold to either Fannie Mae or Freddie Mac.  Both of these agencies are backed by the federal government.  Because these loans can be sold, the rates on the conforming loan products have remained fairly low.  However, when a loan amount exceeds the conforming loan limit and without investor to buy the loan, the lender must hold the loan in their portfolio.  When a lender makes a residential real estate loan that they cannot sell, they are required by law to set aside three times the loan amount in reserve.  That is money that cannot be touched until the corresponding loan has been paid in full.  For example, if we at Wachovia make a loan of $1 million to a buyer of a Hilton Head villa, we have to set aside $3 million in reserve.   Because of this reserve requirement, the lender is forced to require a higher rate of return on the loan, thus the jumbo rates continue to climb.

Source: Bankrate.com

Recently Congress passed and the White House approved a new economic stimulus bill, a portion of which provided an increase of the conforming loan limit to $729,750.  As it turns out, the increase was only for designated “high cost” areas of the country, the majority of which are in Florida, California, New York, and Washington. DC - not Beaufort County.  As it appears at the present time, Beaufort County, SC will not see a direct benefit from this package with regard to the loan limit increase.  However, the stimulus bill should allow some owners in New York who want to move to Hilton Head or Bluffton sell their homes and relocate here.    

Going forward we do not look for any major change in the jumbo mortgage market for the near term.  Until all of the uncertainty has been worked out of the housing markets, investors for jumbo loans will continue to sit on the sidelines, leaving rates higher than all of us would like to see them.  It is important to remember, however, that if you are considering the purchase of a property that would require you to take out a jumbo loan, the current rate environment should not hold you back.  Based on where rates are at the present time, the monthly payment difference between a conforming and jumbo 30 year fixed rate loan is only $40 per $100,000 loan amount.  Also, it is very important to remember that this mortgage and housing environment will improve at some point in the future.  Nobody can tell you when it will occur, but when it does you will be able to refinance your loan to a better rate.  You won’t be able to go back and buy property at these low prices.  So, do not let today’s jumbo rates prevent you from taking advantage of a great deal on a home, villa, or lot. 

Should you have questions about jumbo loans or any other types of mortgage loans, please feel free to contact me via e-mail at pat.child@wachovia.com.

 Patrick S. Child

Vice President

Sperry Kaler is a local lenderof  with Ameris Bank.   Here are his comments about what buyers can expect today: 

 If you would like to discuss loan products and prequalify at no obligation withAmeris Bank, contact Sperry Kaler at sperry.kaler@amerisbank.com or call him at 843-301-1325. 

Richard Kadesch, Owner and Broker-in-Charge The Gated Community Specialist ® Go Gated Realty ® Hilton Head Island, South Carolina Rich@rkrealty.com www.GoGated.com 1-800-333-5025 Read Some of My Clients’ Success Stories