The Manipulation of Mortgages has Begun

Introduction: First, let me give a quick course to all layman as to how mortgage professionals get paid. Banks pay mortgage brokers to take loans off their hands so to speak. Everything else being equal, the higher the rate the more the bank wants it and will pay for it for obvious reasons. In other words, for the same borrower the bank will want and pay more for a 6% rate than a 5.75% rate. There is a certain and very simple logic to this process. Keep this in mind as you chew on the big financial news of the day.

Financial industry lobbyists are urging the Treasury Department to take steps to lower mortgage rates and help stabilize the battered U.S. housing market.

Under one proposal, Treasury would seek to lower the rate on a 30-year mortgage to 4.5 percent by purchasing mortgage-backed securities from Fannie Mae and Freddie Mac, Scott Talbott, chief lobbyist at the Financial Services Roundtable, said Wednesday.

If enacted, such a plan would be an unprecedented opportunity for anyone with good credit and a solid income who could qualify for a mortgage at the lowest rates on records dating to the early 1960s, said Keith Gumbinger, senior vice president at financial publisher HSH Associates.

Yesterday, I pointed out that the Treasury's plan is another form of a price ceiling and it will eventually lead to all sorts of problems for both Fannie and Freddie which will be forced to implement it.

This brings me to developments I have seen today. The link is difficult to read but it is the rates on the standard 30 year mortgage from a bank that shall remain nameless. If you can decipher the numbers what you will see is that the bank continues to pay more for higher rates until it gets to 5.875%, then, as the rates go up it starts to pay less. Another words, some entity is giving mortgage brokers less incentive to charge anything more than 5.875%. Of course, in any real market environment this would never happen. Any bank would always want a higher rate and so every bank would continue to pay more for higher rates.

As such, the rates are being manipulated. I have looked around and most banks have some form of this phenomenon. It appears that someone doesn't want any mortgage broker to give anyone anymore than 6%. The payouts for rates are being manipulated so that there is financial disincentive to charge any higher rate than 5.875%.

Now, the rates I am talking about are those that are backed by Fannie Mae/Freddie Mac. Both entities are currently under the direction of the U.S. government. I have never until now seen this phenomenon when they were strictly private (only using government funds). As such, while I have no smoking gun proof, I would be willing to bet anything that some bureaucrat somewhere has made an executive decision and directed Fannie/Freddie to do this.

Such market manipulation is not without unintended consequences. For instance, I have been looking to do two loans each below $150,000. I was looking to lower the borrower's rates and pay for their closing costs. Rates have been manipulated so much that right now nothing pays me enough to do this. As such, these borrowers are stuck. What this sort of manipulation does is force mortgage brokers to spend even more time with borrowers with sizeable mortgages. Banks pay as a percentage of the loan amount. As such, the higher the loan amount the more the mortgage broker gets paid, everything else being equal. As such, there is already a natural bias against smaller loans. This sort of manipulation, which cuts off the natural progression of payout, creates an even larger incentive for brokers to go after larger loans. As such, whoever is doing this is essentially pricing out many folks who's mortgages are below $150,000 right out of the market.

Furthermore, this sort of manipulation will make it difficult for all those that have adjustments to their mortgage rates. Adjustments happen when something in the loan makes the loan more risky. For instance, a two unit is more risky than a house or condo and so there will be an adjustment. What banks do is take away some of what they pay the broker for this adjustments. There are adjustments for loan to value, credit score, and property disposition (primary residence or investment property). As such, any borrower with far to high an adjustment will also be aced out because no rate will pay enough to get done. For instance, let's suppose you are attempting to buy a three unit property as an investment property. The adjustments could equal three percentage points if not more. Well, what this market manipulation has done is put a ceiling as far as what the bank will pay of 1.625%. As such, someone would then have to pay about a percent and a half (and that someone would of course be the borrower) in order to get this artificially low rate. Normally, the broker would simply raise the rate to account for the adjustments but now that rates have been manipulated that won't be possible.

There is another even larger risk. It's clear that the government is going to do everything possible, manipulation included, to force rates lower artificially in an attempt to stimulate borrowing. That's all good and well for now, but what will happen to all of these banks holding onto mortgages below 6% when rates go back up? By forcing down rates and then creating a financial disincentive to go any higher than 5.875%, the government will create a much bigger demand for mortgage rates below 6% than any natural event would. Once rates go back up, and they will, then banks will have a much larger supply of low rate mortgages than they ever intended. These mortgages will be difficult to sell since they will be well below market at the time.

Furthermore, by creating this artificial ceiling, they will also force down the rates on all Fannie/Freddie bonds created by these mortgages. As such, any sucker that buys them now is buying something that is being artificially manipulated downward. Once the shackles are released, it will no doubt raise the rate on these same bonds and mean that those buying the current bonds will have been scammed. If everyone buying Fannie/Freddie bonds knew what I am seeing, they wouldn't buy them today. It's likely most of them are unaware that someone is manipulating the mortgage rates currently, and so they are buying something that is being manipulated without knowing it. This may not technically be fraud, but it has the exact same effect. How will these folks feel when they realize that the fraud perpetrated on them was created by the government? What will that do to the confidence in our investment markets?

It's truly remarkable that folks that are supposed to be experts in economics, finance, and business are doing all of this hair brain manipulation. Government manipulation of markets is what folks do in Socialist states. If we are going to be run as a Socialist state, the least the government can do is be honest about what they are doing. These sort of government manipulations like the one I see, done behind closed doors where only detailed professionals can see, is exactly the kind perverse and dishonest government behavior that I loathe. Whoever is creating this phenomenon should be made to answer. They should explain why they are doing this. The folks should know that this is happening, and instead it is being done in the worst sort of a smoke filled room type deal imaginable.