Why Aren't Rates Going Down?

People have been asking why fixed mortgage rates aren't going down, even though bond rates have dropped over 1/2% since their June high.

MyNext Mortgage's VP of Capital Markets and Treasurer, Boris Kogut, offers this explanation:

“…..all the credit spreads have widened, while the Government of Canada (GOC) bond yields have fallen.  This has resulted in a disconnect of the historical relationship between mortgage rates and GOC rates.  The impact of widening credit spreads is that all mortgage lenders are now paying a higher spread over the GOC rates to borrow funds (and lend these funds to mortgagors.) 

The credit spreads have widened most for non-conforming mortgages, but have only impacted conforming mortgage rates by 20 – 30bp’s (i.e. if credit spreads had not widened, current conforming mortgage rates would have been 20-30bp’s lower.)   This is not just a Canadian phenomenon – it is also taking place in the US and Europe and the expectation is that this will go on for months to come….”

How long will this situation take to resolve itself?  Our industry sources predict from 3 to 12 months. 

In the meantime, 5-year bond rates keep going down, settling Friday near a 4-month low.

Comments

[Jim]

Melanie,

The recent credit crunch is certainly a hot topic, and it is having an effect on all credit spreads even for the highest rated debt. All rating agencies are in the spot-light as a lot of asset-backed debt with previously high ratings (ABCP with R1 & R2, or bonds with AA & AAA) is unable to find buyers, sometimes at any price.

On the mortgage side, I appreciate any stories and information from the "front-lines" about how lending in Canada is being affected. Any comments from brokers, lenders about credit conditions and changes in product offerings in really helpful.

Thanks

Jim

[Online Mortgage Broker]

Hi Jim,

Great points.

Fortunately, we have seen no tightening in liquidity for "A" credit borrowers thus far. As you know however, "B" lending is drying up. That has me a bit worried about the ability of marginal borrowers to buy homes.

On the other hand, once the panic subsides (probably next year) we should hopefully be back to "normal," albeit with higher risk premiums built into mortgage money.

I'll pass along any broker/lender opinions I can get on the topic.

Thanks for the note and take care,
Melanie