- The Washington Times - Friday, March 21, 2008

In more than 20 years in the mortgage business, I could rely on one thing to tell my clients. If anyone wanted an easy way to monitor the direction of mortgage rates, I suggested they track the yield on the 10-year U.S. Treasury bond.

Long-term mortgage rates have always followed this federal debt instrument fairly closely.

It makes sense. Treasury bonds are considered to be among the safest investments in the world, thanks to the world’s confidence in the stability of the U.S. government and financial system.

“A” credit mortgage-backed securities have enjoyed the same status. I’m not talking about subprime mortgages, which are offered to folks with impaired credit histories. I’m also not talking about the so-called no-documentation or “stated income” liar loans. I’m talking about fixed-rate mortgage loans secured by real estate that’s worth far more than the loan balance, to be repaid by borrowers with excellent credit and solid, verifiable income.

Here’s a typical example of a well-qualified home buyer: A couple apply for a $200,000 mortgage to purchase a new house. They both have solid jobs with a steady employment history. Their combined annual income is $75,000. They have saved $60,000 to cover a 20 percent down payment and closing costs. Their credit history is excellent.

Luckily, despite all the bad mortgage news in the media, the couple described is similar to the vast majority of homeowners. Although first-time home buyers may have less than a 20 percent down payment, the majority have good income and credit.

Homeowners wishing to refinance have a better profile. While the media has reported a decrease in home prices during the past year or so, these decreases don’t come close to the appreciation real estate has enjoyed over the past 10 or 15 years.

Here’s my point: Investing in “A” credit, 30-year fixed-rate mortgage-backed securities can and should be considered a safe move — almost as safe as investing in U.S. Treasury bonds. This is why long-term rates follow the direction of Treasuries.

Since the subprime mortgage meltdown and subsequent spillover into the conventional mortgage market, investors have lost their appetite for mortgage-backed securities, including triple-A-rated securities made up of mortgage loans carried by squeaky-clean folks like the couple described in this column.

In fact, while the yield on the 10-year Treasury bond recently had fallen to 3.50 percent, rates on 30-year fixed-rate mortgages were rising to the 6.50 percent range. The last time the yield on the 10-year Treasury fell to 3.50 percent was in 2003. Back then, I was quoting 5.25 percent for a 30-year fixed-rate mortgage.

Are mortgage investors overreacting? I think so, but it’s likely to take some time before this mess gets cleaned up.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by

e-mail (henrysavage@pmcmortgage.com).

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