What is happening to Variable Rate Premiums
I spoke in my last post that fixed rate spreads were shrinking due to continued increases in bond yields. We predicted many months ago that if/when spreads started to contract banks would hold off increasing their fixed rates and that has proven to be an accurate prediction.
Now what about variable rates. Given the time of the market and that this is traditionally the busiest time of year banks are very hesitant these days to be uncompetitive for any period for risk of losing market share. That explains in part why we have seen variable rate premiums fall from prime + .80% that we saw a month ago to Prime +.40% that can be found today.
The other explanation has to to do with banks cost of funds. Short term money costs have dropped significantly. watch the TED Spread that has more or less returned to normal, in addition many of the large lenders have significant deposit bases of cheap money as people continue to reach for safety of their cash in bank accounts or money-market instruments.
Unless we get an unforeseen market disruption I think variable rate premiums will continue to slide. We are not that far off of “Prime” loans. As for “Prime Minus” loans the jury is still out. If the real estate market continues to stabilize, arrears rates stabilize, and the banks continue to get short term money cheaply, you may see these mortgages return.
