From the desk of:
Rich Storey
Mortgage Advisor
615.260.8028
Credited to: www.WashingtonPost.com
30-Year Loan Rates at 37-Year Low
By Alan ZibelAssociated Press Saturday, December 20, 2008; Page F04
Rates on 30-year, fixed mortgages dropped this week to their lowest levels in at least 37 years as the Federal Reserve pledged to pour money into the mortgage market to spur the moribund U.S. housing sector.
Freddie Mac reported Thursday that average rates on 30-year, fixed-rate mortgages dropped to 5.19 percent from the year's previous low of 5.47 percent, set last week.
The rate is the lowest since Freddie Mac's weekly mortgage rate survey began, in April 1971.
Mortgage rates started falling after the Federal Reserve launched a sweeping effort in late November to aid the U.S. housing market by buying up to $600 billion of mortgage-related securities and other debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Other gauges of rates also showed them falling through the week.
It was the best news in months for anyone looking to lock in a 30-year, fixed-rate mortgage. But it was not expected to be a cure-all, and borrowers already in danger of foreclosure probably won't be able to take advantage because only borrowers with stellar credit can qualify.
"It's a call to action for homeowners looking to get out of adjustable-rate mortgages," said Greg McBride, senior financial analyst at Bankrate.com. "Unfortunately, it's not an equal-opportunity party."
Faced with a surge in defaults, Freddie Mac and its sibling company, Fannie Mae, are stepping up efforts to prevent foreclosures.
The federal agency that regulates the two companies anticipates that they will modify about 75,000 troubled loans next year, up from about 60,000 this year. The program applies only to borrowers who have missed three months of payments, have not filed for bankruptcy and still live in their homes.
Most of the increase is expected to result from a mass loan-modification program for loans owned by Fannie Mae or Freddie Mac that was launched this week. Loan servicing companies, which collect mortgage payments for Fannie and Freddie, are expected to send out thousands of letters to eligible borrowers in the coming weeks.
Borrowers who are current on their mortgages can take advantage of lower interest rates and refinance to save money.
The average rate on 15-year, fixed-rate mortgages dropped to 4.92 percent from 5.2 percent last week, Freddie Mac said.
Rates on five-year, adjustable-rate mortgages fell to 5.6 percent from 5.82 percent. Rates on one-year, adjustable-rate mortgages dropped to 4.94 percent from 5.09 percent.
The rates do not include add-on fees known as points. The nationwide average fee for 30-year and 15-year mortgages was 0.7 point last week. Fees on five-year, adjustable-rate mortgages averaged 0.6 point, while fees on one-year adjustable-rate mortgages averaged 0.5 point.
The Federal Reserve, aiming to free up lending and jolt the economy, on Tuesday cut the federal funds rate from 1 percent to a target range of zero to 0.25 percent and pledged to keep funneling money into the market for mortgage investments.
Monday, December 22, 2008
Wednesday, December 17, 2008
Can Mortgage Rates Fall Further???
From the desk of:
Rich Storey
Mortgage Advisor
615-260-8028
Credited to: The Tennessean
Mortgage rates are down, but can they fall further?
Mortgage rates have been on the decline, but speculation is rife that rates are headed still lower. I spoke Friday with Scott Ractliffe, president of the Tennessee Mortgage Bankers Association, about whether now is the right time to refinance or consider a home loan.
Where are rates now?
The 30-year fixed rate is in the low 5s, probably in the 5.25 range. … Two weeks ago, it was 6 to 61/8.
What's bringing them down?
The primary cause was when (the federal government) decided to buy mortgage-backed securities directly. The more buyers there are for mortgage-backed securities, that drives prices up and inversely drives the yield down. Anytime a lot of people are buying mortgage-backed securities and bonds, mortgage rates go down. … If they're not buying stocks and they're going to invest in something, and if investment dollars are flowing towards bonds, then they're also flowing towards mortgages.
We've been hearing a lot about rates perhaps dropping to 4.5 percent. Why?
One reason would be partly political. In order for the overall economy to start to rebound, home prices have got to stabilize, foreclosures have to get under control in terms of numbers, and a very low mortgage rate would help with both of those things. There's a lot of talk on Capitol Hill of what can they do. There's really no target level … but they all realize — we all realize — that rates in the mid-4s would create a lot of activity.
There are no specifics of what that might look like. It could be only for purchase money. It could be only certain income brackets. Which is why I warn people, if they're thinking about refinancing, not necessarily to wait.
Another reason is if you're looking at mortgages historically, rates average a 1½ percent spread over Treasury yields. … Today it's about 2½, so you should have a rate of 4½. Mortgage rates are still artificially high on that basis.
That would be a reason to wait, wouldn't it?
That's true, but that spread has been 2 to 2½ percent for months. I guess the question is when will those spreads come back to normal, and when they come back to normal, whether yields will go up or rates will come down. It's kind of a gamble either way.
What's your prediction?
It looks like we do have a little farther to fall, but I guess how far is anybody's guess. So much of it depends on the economy overall. As long as the economy, like retail sales, corporate profits and so forth, are staying really, really low, we're looking at the possibility of mortgage rates continuing to drop.
Once we see some signs of strengthening, money will start to be pulled out of the safe havens they're in now. … They (rates) could rise quickly when they come back up.
Rich Storey
Mortgage Advisor
615-260-8028
Credited to: The Tennessean
Mortgage rates are down, but can they fall further?
Mortgage rates have been on the decline, but speculation is rife that rates are headed still lower. I spoke Friday with Scott Ractliffe, president of the Tennessee Mortgage Bankers Association, about whether now is the right time to refinance or consider a home loan.
Where are rates now?
The 30-year fixed rate is in the low 5s, probably in the 5.25 range. … Two weeks ago, it was 6 to 61/8.
What's bringing them down?
The primary cause was when (the federal government) decided to buy mortgage-backed securities directly. The more buyers there are for mortgage-backed securities, that drives prices up and inversely drives the yield down. Anytime a lot of people are buying mortgage-backed securities and bonds, mortgage rates go down. … If they're not buying stocks and they're going to invest in something, and if investment dollars are flowing towards bonds, then they're also flowing towards mortgages.
We've been hearing a lot about rates perhaps dropping to 4.5 percent. Why?
One reason would be partly political. In order for the overall economy to start to rebound, home prices have got to stabilize, foreclosures have to get under control in terms of numbers, and a very low mortgage rate would help with both of those things. There's a lot of talk on Capitol Hill of what can they do. There's really no target level … but they all realize — we all realize — that rates in the mid-4s would create a lot of activity.
There are no specifics of what that might look like. It could be only for purchase money. It could be only certain income brackets. Which is why I warn people, if they're thinking about refinancing, not necessarily to wait.
Another reason is if you're looking at mortgages historically, rates average a 1½ percent spread over Treasury yields. … Today it's about 2½, so you should have a rate of 4½. Mortgage rates are still artificially high on that basis.
That would be a reason to wait, wouldn't it?
That's true, but that spread has been 2 to 2½ percent for months. I guess the question is when will those spreads come back to normal, and when they come back to normal, whether yields will go up or rates will come down. It's kind of a gamble either way.
What's your prediction?
It looks like we do have a little farther to fall, but I guess how far is anybody's guess. So much of it depends on the economy overall. As long as the economy, like retail sales, corporate profits and so forth, are staying really, really low, we're looking at the possibility of mortgage rates continuing to drop.
Once we see some signs of strengthening, money will start to be pulled out of the safe havens they're in now. … They (rates) could rise quickly when they come back up.
Monday, December 8, 2008
Time to refi??
From the desk of:
Rich Storey
Mortgage Advisor
615-260.8028
Credited to: www.CNNMoney.com
Mortgage applications more than double
Bankers' group cites Fed's bailout of Fannie and Freddie for plummeting rates, with refinancing leading the way.
NEW YORK (CNNMoney.com) -- Mortgage applications more than doubled last week, a mortgage bankers' group said Wednesday, as government bailouts led to sinking interest rates that made refinancing especially more attractive.
In the weekly report, the Market Composite Index - the association's measure of mortgage loan application volume - surged 112.1% on a seasonally adjusted basis from the week earlier.
On an unadjusted basis, the index increased 51.4% from the previous week; it was down 21.9% from a year earlier, the report said. Results included an adjustment to account for the Thanksgiving holiday.
Rates plummeted following the Fed's announcement that it would buy debt and mortgage-backed securities from mortgage finance companies Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), according to Orawin Velz, associate vice president of economic forecasting, in a statement.
"Many of those on the sidelines decided to quickly jump in and take advantage of lower rates before they began to rebound," Velz said.
The Mortgage Bankers Association said 30-year fixed-rate mortgages fell to 5.47% this week. That's was down from 5.99% last week.
Rates on 15-year fixed-rate mortgages fell to 5.13% from 5.78%, the report said. The rate on a one-year adjustable-rate mortgage declined to 6.61% from 6.87%.
Refinancing
While the application statistics were high, "this is more a refinance story than a purchase story," said Mike Larson, real estate and interest rate analyst at Weiss Research.
The report's Refinance Index increased 203.3% to 3802.8 from the previous week, and the seasonally adjusted Purchase Index increased 37.4%.
"While purchasing a home is a big commitment, refinancing is often a no-brainer," Larson said. "You may be less inclined to go buy a house in this weak economy. Refinancing will go forward if the gains can hold."
In the short-term, the Fed "did manage to get quite a bit of bang for their buck," Larson said. "Most things they've done so far have improved some credit spreads slightly, but you didn't see the effect on Main Street. Now, these are big numbers - the biggest we've ever seen."
Today's rates are lower because lenders' standards are tighter, Larson said, so many buyers applying may not have the equity they need for approval. As a result, more applications "might end up in the circular file rather than the closing tables," he said.
Still, Larson expected the Fed's actions will result in more staying power and success, giving stressed homeowners a bit of breathing room.
"The Fed gave us an early Christmas gift," he said.
Rich Storey
Mortgage Advisor
615-260.8028
Credited to: www.CNNMoney.com
Mortgage applications more than double
Bankers' group cites Fed's bailout of Fannie and Freddie for plummeting rates, with refinancing leading the way.
NEW YORK (CNNMoney.com) -- Mortgage applications more than doubled last week, a mortgage bankers' group said Wednesday, as government bailouts led to sinking interest rates that made refinancing especially more attractive.
In the weekly report, the Market Composite Index - the association's measure of mortgage loan application volume - surged 112.1% on a seasonally adjusted basis from the week earlier.
On an unadjusted basis, the index increased 51.4% from the previous week; it was down 21.9% from a year earlier, the report said. Results included an adjustment to account for the Thanksgiving holiday.
Rates plummeted following the Fed's announcement that it would buy debt and mortgage-backed securities from mortgage finance companies Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), according to Orawin Velz, associate vice president of economic forecasting, in a statement.
"Many of those on the sidelines decided to quickly jump in and take advantage of lower rates before they began to rebound," Velz said.
The Mortgage Bankers Association said 30-year fixed-rate mortgages fell to 5.47% this week. That's was down from 5.99% last week.
Rates on 15-year fixed-rate mortgages fell to 5.13% from 5.78%, the report said. The rate on a one-year adjustable-rate mortgage declined to 6.61% from 6.87%.
Refinancing
While the application statistics were high, "this is more a refinance story than a purchase story," said Mike Larson, real estate and interest rate analyst at Weiss Research.
The report's Refinance Index increased 203.3% to 3802.8 from the previous week, and the seasonally adjusted Purchase Index increased 37.4%.
"While purchasing a home is a big commitment, refinancing is often a no-brainer," Larson said. "You may be less inclined to go buy a house in this weak economy. Refinancing will go forward if the gains can hold."
In the short-term, the Fed "did manage to get quite a bit of bang for their buck," Larson said. "Most things they've done so far have improved some credit spreads slightly, but you didn't see the effect on Main Street. Now, these are big numbers - the biggest we've ever seen."
Today's rates are lower because lenders' standards are tighter, Larson said, so many buyers applying may not have the equity they need for approval. As a result, more applications "might end up in the circular file rather than the closing tables," he said.
Still, Larson expected the Fed's actions will result in more staying power and success, giving stressed homeowners a bit of breathing room.
"The Fed gave us an early Christmas gift," he said.
Thursday, December 4, 2008
Treasury Considers Dropping Rates to 4.5%
From the desk of:
Rich Storey
Mortgage Advisor
615-260.8028
Credited to: www:WashingtonPost.com
Treasury Considers Plan to Stem Home-Price Decline
Rates Could Be as Low as 4.5% for Newly Issued Loans
WASHINGTON -- The Treasury Department is considering a plan to revitalize the U.S. housing market by reducing mortgage rates for new loans, according to people familiar with the matter.
The plan, which is in the development stages, would use mortgage giants Fannie Mae and Freddie Mac to bring loan rates down as low as 4.5%, a full percentage point lower than the prevailing rates for 30-year fixed mortgages.
Government officials are under pressure to stem foreclosures, which underpin much of the current financial crisis. Treasury has struggled for months to come up with a plan that would ease the market without appearing to bail out homeowners and lenders.
Under the plan, Treasury would buy securities underpinning loans guaranteed by the two mortgage giants, which are temporarily under the control of the government, as well as those guaranteed by the Federal Housing Administration. Fannie and Freddie guarantee a large proportion of all new home loans made in the U.S.
Rich Storey
Mortgage Advisor
615-260.8028
Credited to: www:WashingtonPost.com
Treasury Considers Plan to Stem Home-Price Decline
Rates Could Be as Low as 4.5% for Newly Issued Loans
WASHINGTON -- The Treasury Department is considering a plan to revitalize the U.S. housing market by reducing mortgage rates for new loans, according to people familiar with the matter.
The plan, which is in the development stages, would use mortgage giants Fannie Mae and Freddie Mac to bring loan rates down as low as 4.5%, a full percentage point lower than the prevailing rates for 30-year fixed mortgages.
Government officials are under pressure to stem foreclosures, which underpin much of the current financial crisis. Treasury has struggled for months to come up with a plan that would ease the market without appearing to bail out homeowners and lenders.
Under the plan, Treasury would buy securities underpinning loans guaranteed by the two mortgage giants, which are temporarily under the control of the government, as well as those guaranteed by the Federal Housing Administration. Fannie and Freddie guarantee a large proportion of all new home loans made in the U.S.
Tuesday, December 2, 2008
FED HINTS AT ANOTHER RATE CUT
From the desk of:
Rich Storey
Mortgage Advisor
615.260.8028
Credited to: www.CNNMoney.com
Fed hints at rate cut, lowers forecast
The Fed reduces its GDP projection, signals additional interest rate cuts and sees unemployment over 7% next year.
WASHINGTON (AP) -- The Federal Reserve on Wednesday sharply lowered its projections for economic activity this year and next, and signaled that additional interest rate reductions may be needed to help combat the worst financial crisis to jolt the country in more than a half-century.
With the economy forecast to lose traction, or even jolt into reverse, unemployment will move higher, the Fed predicted.
Facing the likelihood of "significant weakness" in the economy, some Fed officials suggested "additional policy easing could well be appropriate at future meetings," according to documents from the Fed's most recent closed-door deliberations on interest rate policy at the end of October.
At that Oct. 29 session, the Fed ratcheted down rates to 1%, a level seen only once before in the last half-century. Many economists predict the Fed will lower rates again at its last meeting of the year on Dec. 16, to help brace the sinking economy.
Even while hinting that another rate reduction could be forthcoming, Fed officials worried that the effectiveness of previous rate cuts "may have been diminished by the financial dislocations, suggesting that further policy action might have limited efficacy in promoting a recovery in economic growth," the documents said.
Unprecedented steps
To help ease financial turmoil and spur banks to lend money more freely again to customers, the Fed has taken a series of other unprecedented steps, including offering short-term cash loans and buying up mounds of short-term debt that companies rely on to pay day-to-day expenses like payrolls and supplies.
Under its new economic forecast, the Fed now believes gross domestic product could be flat or grow by just 0.3% this year. GDP could actually shrink by 0.2% or expand by 1.1% next year. Both sets of projections are lower than the Fed's forecasts delivered to Congress in July.
GDP is the value of all goods and services produced within the U.S. and is the best measure of the country's economic health.
The forecasts are based on what the Fed calls its "central tendencies," which exclude the three highest and three lowest forecasts made by Fed officials. The Fed also gives a range of all forecasts that showed some Fed officials projecting a 0.3% dip this year, followed by a deeper 1% contraction next year.
The economy "would remain very weak next year" and "the subsequent pace of recovery would be quite slow," according to the Fed documents.
The prospects for weaker economic activity will push up unemployment. The Fed projected that the national unemployment rate will rise to between 6.3% and 6.5% this year. The rate in October was 6.5%, and last year the rate averaged 4.6%.
Next year, the Fed expects the jobless rate to climb to between 7.1% and 7.6% - also higher than its summer forecast.
Inflation, deflation
Inflation, meanwhile, is expected to be lower this year and next compared with the Fed's previous forecast. A global economic slowdown is sapping demand for energy, food and other commodities, driving down prices. That - along with a stronger U.S. dollar - has reduced inflation risks, the Fed said.
The Fed now expects inflation to be between 2.8% and 3.1% this year. And, inflation should moderate further to between 1.3% and 2% next year. Both forecasts are lower than the projections made in the summer.
In minutes of the October meeting, the Fed said "more aggressive easing" in interest rates "should reduce the odds of a deflationary outcome."
Deflation is a prolonged and widespread decline in prices, something the U.S. hasn't seriously suffered through since the 1930s. Once established, it is hard for Fed policymakers to break. That's partly because the Fed can lower its key rate only so far - to zero - to combat it.
Earlier Wednesday, the government reported that consumer prices dropped 1%in October, the biggest monthly decline on records dating back to 1947. The sharp drop spurred concerns about the possibility - however remote right now - of deflation.
Rich Storey
Mortgage Advisor
615.260.8028
Credited to: www.CNNMoney.com
Fed hints at rate cut, lowers forecast
The Fed reduces its GDP projection, signals additional interest rate cuts and sees unemployment over 7% next year.
WASHINGTON (AP) -- The Federal Reserve on Wednesday sharply lowered its projections for economic activity this year and next, and signaled that additional interest rate reductions may be needed to help combat the worst financial crisis to jolt the country in more than a half-century.
With the economy forecast to lose traction, or even jolt into reverse, unemployment will move higher, the Fed predicted.
Facing the likelihood of "significant weakness" in the economy, some Fed officials suggested "additional policy easing could well be appropriate at future meetings," according to documents from the Fed's most recent closed-door deliberations on interest rate policy at the end of October.
At that Oct. 29 session, the Fed ratcheted down rates to 1%, a level seen only once before in the last half-century. Many economists predict the Fed will lower rates again at its last meeting of the year on Dec. 16, to help brace the sinking economy.
Even while hinting that another rate reduction could be forthcoming, Fed officials worried that the effectiveness of previous rate cuts "may have been diminished by the financial dislocations, suggesting that further policy action might have limited efficacy in promoting a recovery in economic growth," the documents said.
Unprecedented steps
To help ease financial turmoil and spur banks to lend money more freely again to customers, the Fed has taken a series of other unprecedented steps, including offering short-term cash loans and buying up mounds of short-term debt that companies rely on to pay day-to-day expenses like payrolls and supplies.
Under its new economic forecast, the Fed now believes gross domestic product could be flat or grow by just 0.3% this year. GDP could actually shrink by 0.2% or expand by 1.1% next year. Both sets of projections are lower than the Fed's forecasts delivered to Congress in July.
GDP is the value of all goods and services produced within the U.S. and is the best measure of the country's economic health.
The forecasts are based on what the Fed calls its "central tendencies," which exclude the three highest and three lowest forecasts made by Fed officials. The Fed also gives a range of all forecasts that showed some Fed officials projecting a 0.3% dip this year, followed by a deeper 1% contraction next year.
The economy "would remain very weak next year" and "the subsequent pace of recovery would be quite slow," according to the Fed documents.
The prospects for weaker economic activity will push up unemployment. The Fed projected that the national unemployment rate will rise to between 6.3% and 6.5% this year. The rate in October was 6.5%, and last year the rate averaged 4.6%.
Next year, the Fed expects the jobless rate to climb to between 7.1% and 7.6% - also higher than its summer forecast.
Inflation, deflation
Inflation, meanwhile, is expected to be lower this year and next compared with the Fed's previous forecast. A global economic slowdown is sapping demand for energy, food and other commodities, driving down prices. That - along with a stronger U.S. dollar - has reduced inflation risks, the Fed said.
The Fed now expects inflation to be between 2.8% and 3.1% this year. And, inflation should moderate further to between 1.3% and 2% next year. Both forecasts are lower than the projections made in the summer.
In minutes of the October meeting, the Fed said "more aggressive easing" in interest rates "should reduce the odds of a deflationary outcome."
Deflation is a prolonged and widespread decline in prices, something the U.S. hasn't seriously suffered through since the 1930s. Once established, it is hard for Fed policymakers to break. That's partly because the Fed can lower its key rate only so far - to zero - to combat it.
Earlier Wednesday, the government reported that consumer prices dropped 1%in October, the biggest monthly decline on records dating back to 1947. The sharp drop spurred concerns about the possibility - however remote right now - of deflation.
Wednesday, November 26, 2008
Mortgage Market Revival
From the desk of:
Rich Storey
Mortgage Advisor
615.260.8028
Credited to: http://www.cnnmoney.com/
Mortgage-market revival: Try, try again
The feds are trying to stimulate housing activity, but two earlier efforts show success won't come easy.
By Colin Barr, senior writer
Last Updated: November 25, 2008: 3:40 PM ET
NEW YORK (Fortune) -- The feds are trying once more to resuscitate the mortgage market. But history shows reviving this patient won't be easy.
The Federal Reserve said Tuesday morning it would spend $600 billion in coming quarters to buy the bonds and mortgage-backed securities issued or guaranteed by Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500). The move, the Fed said, aims "to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally."
The market reacted positively to the announcement, with the spreads between the yields on agency bonds and similar-duration Treasury securities narrowing. Lower spreads translate to lower mortgage rates, which bring down the cost of buying houses. That generally leads to more house sales - a top priority for officials who want to slow the decline in house prices that is soaking financial-sector balance sheets with losses.
The decision to buy agency debt and mortgage-backed securities shows policymakers are "looking to drive mortgage rates down," says Bill Larkin, a fixed-income portfolio manager at investment adviser Cabot Money Management in Salem, Mass. "They need to get them close to 5% if they want to get the housing markets going again."
That will take some doing, though. The rate on a 30-year fixed mortgage was around 6% Monday, before rates fell Tuesday on word of the Fed plan. The lowest rate on record since the St. Louis Fed started tracking conventional 30-year mortgage rates was the 5.23% reached in June 2003, in the midst of the housing bubble that inflated earlier this decade.
Larkin says the government will need to bring the rate down into that range to create demand for mortgage refinancing, and to get current homeowners who'd like more room or a better location to think about making a change. Larkin notes that homeowners who took advantage of the last refinancing opportunity in January, when rates on a 30-year fixed mortgage dropped briefly to around 5.5%, won't be tempted to refinance again - thereby incurring additional fees and in many cases having their houses assessed at lower values - till rates go substantially lower.
If at first you don't succeed...
Still, government officials clearly view reducing mortgage rates and bolstering house sales and refinancing activity as one of their few good options in the midst of financial sector meltdown. Treasury Secretary Henry Paulson has tried at least twice this year to bring down mortgage rates, by seeking to ease market fears about the health of the main conduits for U.S. mortgage financing, Fannie Mae and Freddie Mac.
In July, as mortgage rates soared, Paulson announced a plan for the government to provide backup financing for the companies, whose publicly traded shares had come under attack amid questions about the adequacy of their capital. That move initially brought mortgage rates down and narrowed the spread between agency bonds and Treasurys, but the 30-year mortgage rate remained stubbornly above 6%.
In September, Paulson put the companies into conservatorship, citing a need to clarify the companies' role in the economy and their relationship to the government. "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system," he said Sept. 7, "that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."
That move - which was accompanied by the announcement of a federal plan to buy mortgage-backed securities similar to today's announcement - led to a deeper decline in mortgage rates than had July's move. The 30-year fixed rate tracked by the St. Louis Fed fell to 5.78% on Sept. 18 from 6.35% the week before the nationalization.
But the collapse of Lehman Brothers, the near implosion of AIG and the plunge of world stock markets this fall resulted in a new flight to the liquidity of Treasury bonds that widened agency spreads and pushed mortgage rates back up over 6%, where they have largely been since then.
That's partly because the government hasn't been able to devote much firepower to buying mortgages, what with the crisis-a-day schedule of recent months. And it's partly because the investors who once were avid buyers of agency bonds have fled for the greater safety and liquidity of Treasury bonds.
Brad Setser, an economist at the Council of Foreign Relations, says that in the third quarter, China bought $81 billion of Treasurys and sold $16 billion of agencies. Just a quarter earlier, China was buying more agencies than Treasurys, Setser writes at his blog. Larkin says questions about the liquidity in the markets for agency bonds continue to push investors toward Treasurys, which give holders the security of knowing they can sell without a hitch at any moment.
New mark of quality for bond market
One other question mark comes from this week's debut of the Federal Deposit Insurance Corp. corporate-bond loan-guarantee program. Goldman Sachs (GS, Fortune 500) issued $5 billion worth of bonds Tuesday under the plan. Larkin calls those bonds "interesting," and says he believes the FDIC label could emerge as the new mark of quality in the bond market, what with the ratings issued by agencies like S&P and Moody's largely discredited.
But if the FDIC plan works and issuers like Goldman and Morgan Stanley (MS, Fortune 500) come quickly to market with billions of dollars in new issues, it could draw some investor demand away from the agencies, counteracting some of the gains from federal purchases of Fannie and Freddie securities.
And Edward Gainor, a lawyer at McKee Nelson in Washington, notes that the Fed approach to the mortgage-backed securities market neglects the most troubled part of that market - the one for bonds not backed by Fannie and Freddie, some of which continue to weigh on financial institutions' balance sheets.
"The non-agency MBS market is not functioning," he says, "and no program has yet been announced that will stimulate that market."
Rich Storey
Mortgage Advisor
615.260.8028
Credited to: http://www.cnnmoney.com/
Mortgage-market revival: Try, try again
The feds are trying to stimulate housing activity, but two earlier efforts show success won't come easy.
By Colin Barr, senior writer
Last Updated: November 25, 2008: 3:40 PM ET
NEW YORK (Fortune) -- The feds are trying once more to resuscitate the mortgage market. But history shows reviving this patient won't be easy.
The Federal Reserve said Tuesday morning it would spend $600 billion in coming quarters to buy the bonds and mortgage-backed securities issued or guaranteed by Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500). The move, the Fed said, aims "to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally."
The market reacted positively to the announcement, with the spreads between the yields on agency bonds and similar-duration Treasury securities narrowing. Lower spreads translate to lower mortgage rates, which bring down the cost of buying houses. That generally leads to more house sales - a top priority for officials who want to slow the decline in house prices that is soaking financial-sector balance sheets with losses.
The decision to buy agency debt and mortgage-backed securities shows policymakers are "looking to drive mortgage rates down," says Bill Larkin, a fixed-income portfolio manager at investment adviser Cabot Money Management in Salem, Mass. "They need to get them close to 5% if they want to get the housing markets going again."
That will take some doing, though. The rate on a 30-year fixed mortgage was around 6% Monday, before rates fell Tuesday on word of the Fed plan. The lowest rate on record since the St. Louis Fed started tracking conventional 30-year mortgage rates was the 5.23% reached in June 2003, in the midst of the housing bubble that inflated earlier this decade.
Larkin says the government will need to bring the rate down into that range to create demand for mortgage refinancing, and to get current homeowners who'd like more room or a better location to think about making a change. Larkin notes that homeowners who took advantage of the last refinancing opportunity in January, when rates on a 30-year fixed mortgage dropped briefly to around 5.5%, won't be tempted to refinance again - thereby incurring additional fees and in many cases having their houses assessed at lower values - till rates go substantially lower.
If at first you don't succeed...
Still, government officials clearly view reducing mortgage rates and bolstering house sales and refinancing activity as one of their few good options in the midst of financial sector meltdown. Treasury Secretary Henry Paulson has tried at least twice this year to bring down mortgage rates, by seeking to ease market fears about the health of the main conduits for U.S. mortgage financing, Fannie Mae and Freddie Mac.
In July, as mortgage rates soared, Paulson announced a plan for the government to provide backup financing for the companies, whose publicly traded shares had come under attack amid questions about the adequacy of their capital. That move initially brought mortgage rates down and narrowed the spread between agency bonds and Treasurys, but the 30-year mortgage rate remained stubbornly above 6%.
In September, Paulson put the companies into conservatorship, citing a need to clarify the companies' role in the economy and their relationship to the government. "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system," he said Sept. 7, "that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."
That move - which was accompanied by the announcement of a federal plan to buy mortgage-backed securities similar to today's announcement - led to a deeper decline in mortgage rates than had July's move. The 30-year fixed rate tracked by the St. Louis Fed fell to 5.78% on Sept. 18 from 6.35% the week before the nationalization.
But the collapse of Lehman Brothers, the near implosion of AIG and the plunge of world stock markets this fall resulted in a new flight to the liquidity of Treasury bonds that widened agency spreads and pushed mortgage rates back up over 6%, where they have largely been since then.
That's partly because the government hasn't been able to devote much firepower to buying mortgages, what with the crisis-a-day schedule of recent months. And it's partly because the investors who once were avid buyers of agency bonds have fled for the greater safety and liquidity of Treasury bonds.
Brad Setser, an economist at the Council of Foreign Relations, says that in the third quarter, China bought $81 billion of Treasurys and sold $16 billion of agencies. Just a quarter earlier, China was buying more agencies than Treasurys, Setser writes at his blog. Larkin says questions about the liquidity in the markets for agency bonds continue to push investors toward Treasurys, which give holders the security of knowing they can sell without a hitch at any moment.
New mark of quality for bond market
One other question mark comes from this week's debut of the Federal Deposit Insurance Corp. corporate-bond loan-guarantee program. Goldman Sachs (GS, Fortune 500) issued $5 billion worth of bonds Tuesday under the plan. Larkin calls those bonds "interesting," and says he believes the FDIC label could emerge as the new mark of quality in the bond market, what with the ratings issued by agencies like S&P and Moody's largely discredited.
But if the FDIC plan works and issuers like Goldman and Morgan Stanley (MS, Fortune 500) come quickly to market with billions of dollars in new issues, it could draw some investor demand away from the agencies, counteracting some of the gains from federal purchases of Fannie and Freddie securities.
And Edward Gainor, a lawyer at McKee Nelson in Washington, notes that the Fed approach to the mortgage-backed securities market neglects the most troubled part of that market - the one for bonds not backed by Fannie and Freddie, some of which continue to weigh on financial institutions' balance sheets.
"The non-agency MBS market is not functioning," he says, "and no program has yet been announced that will stimulate that market."
Tuesday, November 25, 2008
FED to Jumpstart Lending
Fed bets $800 billion on consumers
Central bank and Treasury announce a massive plan to jumpstart lending.
NEW YORK (CNNMoney.com) -- The Federal Reserve and Treasury Department on Tuesday unveiled a plan to pump $800 billion into the struggling U.S. economy in an attempt to jumpstart lending by banks to consumers and small businesses.
The government hopes that these initiatives will enable more money to flow to consumers in the form of loans than has occurred so far in previous bailout plans.
One program will make $200 billion available from the Federal Reserve Bank of New York to holders of securities backed by consumer debt, such as credit cards, car loans and student loans.
The Treasury Department will allocate $20 billion to back that lending in order to cover any losses that the New York Fed might suffer.
In addition, the Federal Reserve, announced it will purchase up to $500 billion in mortgage backed securities that have been backed by Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote home ownership. It will also buy another $100 billion in direct debt issued by those firms.
Together, the programs from the Federal Reserve and the New York Fed are more than Congress approved in October for a bailout of the nation's banks and Wall Street firms. The Fed said the money will come from an increase in its reserves -- in essence, it is creating new money.
The idea is that by making money available for investors who are interested in buying loans bundled together into securities, it will be easier and more profitable for banks to loan money to consumers and small businesses.
Before the current credit crisis, lenders got the money they needed to extend credit by selling the loans they had already made. But the Treasury Department said the issuance of those securities essentially came to a halt in October.
"This lack of affordable consumer credit undermines consumer spending and, as a result, weakens our economy," said Treasury Secretary Henry Paulson at a press conference.
Still, previous efforts to pump money directly into financial institutions have done relatively little to expand credit available for consumers, and some economists said it was not immediately clear if this money would flow through to households as planned.
"It's certainly not directly going to go through to the consumers. I don't know if anyone can say how much will get through," said Keith Hembre, chief economist at First American Funds. "It certainly shouldn't hurt. We'll have to see how much it does help."
To that end, government officials said that they would not set up the $200 billion consumer lending program until February. So officials couldn't say if the mere announcement of the program would cause lenders to make more credit available to consumers in time for the holiday shopping season.
Paulson described the $200 billion consumer lending program as a first step, one that could be expanded later to include different kinds of debt, including assets backed by commercial real estate mortgages and business debt.
He said the fact that the Fed and Treasury had to work together to get an additional $800 billion into the system is not a sign that the $700 billion bailout of banks and Wall Street firms passed by Congress last month has been a failure. He said that, without that program, it is likely that the financial markets would be in even worse shape than they are today.
"I wish, and I know everybody wishes, that one piece of legislation, and then magically the credit markets would unfreeze," he said. "That's not the type of situation we're dealing with."
The fact that the New York Fed is taking the lead on the consumer lending program means that the man nominated by President-elect Obama to succeed Paulson, New York Fed President Timothy Geithner, played a central role in this new effort.
But Paulson said this is not a sign that the Bush administration is letting the new administration call the shots on further efforts to revive the economy.
How it may affect mortgages
The larger part of the new program is geared toward ending the mortgage crisis, which was the original intent of the bank bailout plan proposed in September and signed into law in October.
That plan, known as the Troubled Asset Relief Program, or TARP, was quickly dropped for one in which Treasury instead made direct capital investments in banks in return for the government receiving preferred shares in the institutions getting funds.
This new program is much closer to the planned bailout. But government officials stressed that this new plan is different from TARP in that only mortgage securities backed by Fannie, Freddie and Ginnie Mae will be in the new program.
The loans being backed by the new program, for the most part, are of better quality than many of the troubled assets that would have been purchased under the original TARP plan.
"This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," the Fed said in a statement.
There is also limited additional risk for the federal government from the Fed buying that $600 billion in debt from the three firms, since the government is already on the hook for losses those firms suffer on the loans they back.
Despite that implicit government guarantee behind Fannie and Freddie's debt, there gap between rates for U.S. Treasurys and the rates for mortgage assets continues to widen.
But with the Fed buying such a large amount of mortgage assets directly, the hope is that this will narrow that gap and drive down mortgage rates.
The Treasury, which oversees the $700 billion in the TARP program, has been reluctant to expand the use of those funds beyond direct capital investments in banks, despite request to use the funds to help out insurance companies and even the nation's automakers.
The moves came as the Commerce Department announced that gross domestic product, the broadest measure of economic activity, fell at an annual rate of 0.5% in the third quarter.
That was the biggest drop in seven years and economists believe that the economy will decline further in the current quarter and into early next year.
Central bank and Treasury announce a massive plan to jumpstart lending.
NEW YORK (CNNMoney.com) -- The Federal Reserve and Treasury Department on Tuesday unveiled a plan to pump $800 billion into the struggling U.S. economy in an attempt to jumpstart lending by banks to consumers and small businesses.
The government hopes that these initiatives will enable more money to flow to consumers in the form of loans than has occurred so far in previous bailout plans.
One program will make $200 billion available from the Federal Reserve Bank of New York to holders of securities backed by consumer debt, such as credit cards, car loans and student loans.
The Treasury Department will allocate $20 billion to back that lending in order to cover any losses that the New York Fed might suffer.
In addition, the Federal Reserve, announced it will purchase up to $500 billion in mortgage backed securities that have been backed by Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote home ownership. It will also buy another $100 billion in direct debt issued by those firms.
Together, the programs from the Federal Reserve and the New York Fed are more than Congress approved in October for a bailout of the nation's banks and Wall Street firms. The Fed said the money will come from an increase in its reserves -- in essence, it is creating new money.
The idea is that by making money available for investors who are interested in buying loans bundled together into securities, it will be easier and more profitable for banks to loan money to consumers and small businesses.
Before the current credit crisis, lenders got the money they needed to extend credit by selling the loans they had already made. But the Treasury Department said the issuance of those securities essentially came to a halt in October.
"This lack of affordable consumer credit undermines consumer spending and, as a result, weakens our economy," said Treasury Secretary Henry Paulson at a press conference.
Still, previous efforts to pump money directly into financial institutions have done relatively little to expand credit available for consumers, and some economists said it was not immediately clear if this money would flow through to households as planned.
"It's certainly not directly going to go through to the consumers. I don't know if anyone can say how much will get through," said Keith Hembre, chief economist at First American Funds. "It certainly shouldn't hurt. We'll have to see how much it does help."
To that end, government officials said that they would not set up the $200 billion consumer lending program until February. So officials couldn't say if the mere announcement of the program would cause lenders to make more credit available to consumers in time for the holiday shopping season.
Paulson described the $200 billion consumer lending program as a first step, one that could be expanded later to include different kinds of debt, including assets backed by commercial real estate mortgages and business debt.
He said the fact that the Fed and Treasury had to work together to get an additional $800 billion into the system is not a sign that the $700 billion bailout of banks and Wall Street firms passed by Congress last month has been a failure. He said that, without that program, it is likely that the financial markets would be in even worse shape than they are today.
"I wish, and I know everybody wishes, that one piece of legislation, and then magically the credit markets would unfreeze," he said. "That's not the type of situation we're dealing with."
The fact that the New York Fed is taking the lead on the consumer lending program means that the man nominated by President-elect Obama to succeed Paulson, New York Fed President Timothy Geithner, played a central role in this new effort.
But Paulson said this is not a sign that the Bush administration is letting the new administration call the shots on further efforts to revive the economy.
How it may affect mortgages
The larger part of the new program is geared toward ending the mortgage crisis, which was the original intent of the bank bailout plan proposed in September and signed into law in October.
That plan, known as the Troubled Asset Relief Program, or TARP, was quickly dropped for one in which Treasury instead made direct capital investments in banks in return for the government receiving preferred shares in the institutions getting funds.
This new program is much closer to the planned bailout. But government officials stressed that this new plan is different from TARP in that only mortgage securities backed by Fannie, Freddie and Ginnie Mae will be in the new program.
The loans being backed by the new program, for the most part, are of better quality than many of the troubled assets that would have been purchased under the original TARP plan.
"This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," the Fed said in a statement.
There is also limited additional risk for the federal government from the Fed buying that $600 billion in debt from the three firms, since the government is already on the hook for losses those firms suffer on the loans they back.
Despite that implicit government guarantee behind Fannie and Freddie's debt, there gap between rates for U.S. Treasurys and the rates for mortgage assets continues to widen.
But with the Fed buying such a large amount of mortgage assets directly, the hope is that this will narrow that gap and drive down mortgage rates.
The Treasury, which oversees the $700 billion in the TARP program, has been reluctant to expand the use of those funds beyond direct capital investments in banks, despite request to use the funds to help out insurance companies and even the nation's automakers.
The moves came as the Commerce Department announced that gross domestic product, the broadest measure of economic activity, fell at an annual rate of 0.5% in the third quarter.
That was the biggest drop in seven years and economists believe that the economy will decline further in the current quarter and into early next year.
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