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Variable Mortgage Premiums Shrink

There’s been a noticeable industry-wide reduction in variable rates the past few weeks.  Whereas prime + 0.80% was the norm for a closed variable four weeks ago, today’s variables are available for prime + 0.40%.  If you look hard, or have a good mortgage planner, you might find some even lower.

Interestingly, bankers acceptance (BA) yields have not gone down in that timeframe.  Nor has prime rate.

BA-Yields-20090530Instead, it appears that liquidity spreads above BA yields are improving.  (Liquidity spreads represent the extra premium that lenders pay for variable mortgage money.)

There are at least two factors at work here.  Short-term borrowing costs, in general, have improved significantly.  (See this story on the TED spread.)

In addition, lenders with alternative funding sources (like deposits) are currently flush with cash as investors park money in safe accounts.

Each factor is helping lenders generate short-term capital at better rates, which lenders are then passing along to borrowers (some lenders faster than others).

Going forward, unless we get another market shock, variable rates may continue to drift lower.  No one knows if we’ll get back to “prime minus” this year, but variable rates may indeed get closer to prime.