December 2, 2008

It Finally Happened

Our readers were probably getting tired of us harping about rates on mortgages. We kept explaining why mortgages did not go down despite the fact that market rates had dropped significantly. We also kept explaining how important rates are with regard to the housing and ultimately the economic recovery. Obviously, the Federal Reserve Board agreed with this assessment as they forced rates down significantly throughout this year. But lowering short-term rates was not enough.

This week, the government’s decision to support the credit markets by spending hundreds of billions of dollars to purchase mortgage-backed securities and support Fannie Mae and Freddie Mac did the trick (see news section for more information). Rates on mortgages instantly moved down significantly, narrowing the spread between mortgages and Treasuries. Where they will settle is anyone’s guess, but for now we have a situation that could boost the housing markets instantly. Lower rates help housing by making ownership more affordable. As a matter of fact, coupled with lower housing prices, housing should be more affordable now than at any time in the past several years. This will attract more investors and first-time buyers into the markets. And it could start a cycle in which the markets gain even more confidence in purchasing mortgages because housing prices stop falling and the rate of defaults slow down. Perhaps we are getting ahead of ourselves, but for now, these lower rates are very good news and anyone who has been thinking about buying or obtaining a lower rate on their loan should act accordingly.

The Markets. Rates fell again this week and these numbers may not reflect the full extent of the drop the markets experienced. Freddie Mac announced that for the week ending November 26, 30-year fixed rates averaged 5.97%, down from 6.04% the week before. The average for 15-year fixed rose slightly to 5.74%. Adjustables fell as well with the average for one-year adjustables decreasing to 5.18% and five-year adjustables falling slightly to 5.86%. A year ago 30-year fixed rates were at 6.10%. "Rates fell for the fourth consecutive week as signs the overall economy is flagging lowered most rates market-wide," said Frank Nothaft, Freddie Mac vice president and chief economist. "And economic growth in the third quarter was revised downward this week, led by the first decline in consumer spending since the fourth quarter of 1991 and the largest drop since the second quarter of 1980. However, declining house prices and low rates have raised housing affordability in September to the highest level since February of this year, according to the National Association of Realtors® (NAR)."

Current Indices For Adjustable Rate Mortgages
Updated November 28, 2008

  Rates on mortgages fell sharply last week after the administration announced that it will pump another $800 billion into credit markets to free up frozen consumer and mortgage lending. That number dwarfed previous government actions aimed at bolstering the mortgage lending market. "The feds agreed to spend a half a trillion dollars to buy up mortgage backed securities and another $100 billion to fund lending for Fannie and Freddie; we’re not talking chump change anymore," said Keith Gumbinger of HSH Associates, a publisher of mortgage information. Rates averaged 5.77% for the day on a 30-year, fixed rate loan, down from 6.06% Monday of last week, according to Gumbinger. They fell as far as 0.75 percentage points during the day, according to Orawin Velz, Associate Vice President for Economic Forecasting at the Mortgage Bankers Association. That could save a typical homebuyer more than $90 a month on a $200,000 mortgage. "The government action was geared to bringing rates down," said Velz, "and it did." Most mortgages are sold to investors in so-called secondary markets but with foreclosure rates so high and expensive write downs of mortgage-backed securities so common over the past several months, investors had fled the mortgage market. Instead of buying mortgage bonds, they’ve been snapping up Treasury’s which have a lower risk. That showed up in the falling yields of Treasury bonds and the greater difference between Treasury yields and mortgages. Normally, rates on 30-year fixed rate mortgages are only slightly higher than yields on 10-year Treasury bonds, about 1.5 percentage points. That difference compensates mortgage investors for taking on extra risk. Lately, however, because investors have perceived, quite reasonably, that risks of mortgage-backed securities were far greater than previously supposed, they demanded greater reward for investing in them. Source: CNN/Money

The Federal Emergency Management Agency has released digitized flood insurance rate maps of more areas of the country. The maps were initially rolled out in some areas in 2003. This fall, they have been distributed in 100 communities in Alabama, Georgia, Illinois, Kansas, Mississippi, North Carolina, South Carolina, Tennessee and Wisconsin. By 2010, about 92 percent of the U.S. population and 65 percent of the land will be covered by the maps, FEMA says. Home owners in affected areas should check the new maps, which revise flood zones significantly. Some home owners who never needed flood insurance will need to buy it. Other homes will no longer be in flood zones, relieving their owners of the obligation to buy the insurance. "In the past, we did not have as precise information and so, with the digital products, in some areas the special flood-hazard area has gotten smaller. In other areas it has grown," says Roy Wright, deputy director of the risk analysis division for FEMA. Source: USA Today

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November 4, 2008

Happy Election Day

This has not been a good election season. It is not fun to watch candidates point fingers at each other claiming that their opponent and their party helped cause the mess we are in. It would have been better to have candidates claiming that they were the cause of how well things are going. It is hard to say we are on the right road with so many people hurting in this financial crisis. On the other hand, let’s not lose sight of the fact that the political process in this country, though not perfect, is a privilege for all of us to participate.

Right now the government is doing plenty to put us in better position. The Federal Reserve Board lowered short-term rates to their lowest level in history. The Treasury is buying banks, commercial paper and even is considering a plan that would modify mortgages for millions. But the markets are not reacting well. Long-term rates have moved up despite the Fed’s action. The stock market had one of its worst months in history. Economic growth was negative for the past quarter and this puts us in recession territory.

History has shown that significant fiscal stimulus will turn the ship around. And we have never had as much stimulus as we have right now. Elections can boost the economy as well. Not just through dollars spent, but because of confidence. Above all, this crisis is a crisis of confidence. No matter which candidate wins, there is a possibility that the markets will react positively. If people envision the end of the crisis–more will step up and be part of the recovery.

The Markets. Rates reversed their drop of the previous week . Freddie Mac announced that for the week ending October 30, 30-year fixed rates averaged 6.46%, up sharply from 6.04% the week before. The average for 15-year fixed rose significantly as well to 6.19%. Adjustables were also higher with the average for one-year adjustables increasing slightly to 5.38% and five-year adjustables rising to 6.36%. A year ago 30-year fixed rates were at 6.26%. "Long-term rates followed long-term Treasury bond yields higher this week, pushing fixed-rates up to levels of two weeks ago," said Frank Nothaft, Freddie Mac vice president and chief economist. "The Federal Reserve’s 0.50 percentage point cut in the discount rate and federal funds target rate on Wednesday was widely anticipated in the financial markets and is likely to keep short-term interest rates low; consequently, initial interest rates on ARMs, which tend to be set relative to other short-term rates, may remain near current levels. In other news, house-price declines in many markets have improved housing affordability and stimulated home sales. In September, sales of existing homes rose 5.5 percent while sales of new homes were up 2.7 percent, at a seasonally-adjusted annual rate."

  Bargain hunters and home owners who pulled their properties off the market hoping for better days down the road helped shrink the inventory of available homes in September, according to a Wall Street Journal survey. The largest year-over-year declines in inventory were 32.1 percent in Sacramento, 27.1 percent in Orange County, Calif., 21.6 percent in Los Angeles, 21.5 percent in Boston, 21.1 percent in Denver, and 20.6 percent in San Diego. Demand for housing has slowed even as the population has increased, according to Census Bureau figures. Mortgage Bankers Association chief economist Jay Brinkmann blames lack of jobs, noting that young people don’t go out on their own nearly as frequently during tough times. Source: The Wall Street Journal

House and Senate leaders are considering enacting another economic stimulus package after the Nov. 4 election, and realtors and home builders say the measure should provide assistance for home buyers and the housing market. Realtors say first-time home buyers should not be required to repay the new $7,500 tax credit for purchasing a home, and they add that Congress should extend the break to all buyers of a primary residence. "Housing has always lifted the economy out of downturns, and it is imperative to get the housing market moving as quickly as possible," says Richard Gaylord, president of the National Association of Realtors. The building community, meanwhile, says municipalities should waive impact fees on new projects, streamline the development review process and allow higher density for affordable housing, among other measures. "By encouraging new development rather than penalizing it, local governments will be helping to create a new business environment that will generate jobs, stabilize property values and get the housing market back on track." Source: National Mortgage News