Whats happening in the mortgage market

Posted by Leslie Bauer on Wednesday, March 18th, 2009 at 11:46pm.

RATE UPDATE

Rates on conforming loans up to $417k and super-conforming loans up to $625k have been about even for the past four weeks, but it looks like they’ll break downward thanks to new Fed action. Super-conforming loan limits to $729k will be phased in by most lenders in the coming weeks. Rates on Jumbos from $729k to $3.5m are steady. All rates below will likely be outdated by the time you read this.

Following the FOMC meeting today, the Fed announced that they’d expand their commitment to buying mortgage bonds to keep rates low. Between the original program announcement on November 24 and the time bond buying actually started January 5, rates dropped about 1.25%. Rates have held this line since then and the Fed has purchased almost $250 billion of mortgage bonds over the past 11 weeks.

The original commitment was to buy $500b by June. Today’s commitment was to buy $1.25 trillion in mortgage bonds by December. This 150% increase in Fed rate stimulus should ensure rates hold onto current levels and the immediate reaction is that rates are breaking lower—when mortgage bond prices rise on strong buying, yields (or rates) drop. This is all in reference to loans up to $729k. Jumbo loans are currently priced based on borrower and market risk, not directly on mortgage bond pricing because Jumbos aren’t being securitized right now. But this Fed assistance helps build confidence back into broader mortgage markets and helps overall recovery.

BANKING UPDATE

Amidst all of the financial sector hysteria coming from every mainstream media outlet from CNN to CNBC to Comedy Central, it’s no wonder consumers have trouble figuring out what is actually going on. Last week Citigroup, Bank of America and JP Morgan Chase all grabbed headlines about their first quarter profitability. This has helped stocks rally for the past six sessions. This sentiment is positive but the underreported component of those profit statements is that these companies are profitable before provisions for writedowns. Globally, financial firm writedowns are now about $1.2 trillion and the IMF and Goldman Sachs have projected another $1 trillion in writedowns still to come while more bearish analysts like NYU economics guru Nouriel Roubini estimate $2.4 trillion more writedowns to come.

For consumers evaluating their home buying options this means two things: First, banks need to rebuild by taking on good credit quality, so borrowers with stable profiles will continue to see favorable terms. Second, it means the banking sector will continue to evolve weekly as some big firms struggle and some smaller firms rise up—creditworthy borrowers benefit as the winning institutions vie for the business.

ECONOMY & HOME PRICES

The third factor consumers need to continue to watch is the broader economic situation and what that might mean for home prices. The latest GDP figure shows economic output shrank -6.2% for 4Q2008 and the latest jobs report shows 8.1% unemployment. This sustained weakness has helped to contribute to home prices dropping to 2003 levels according to S&P Case Shiller data (next report March 31). This data is a decent indicator of home prices, but macro home price data cannot be used to make specific property investment decisions. Street-to-street home price analysis should be conducted with a real estate advisor. Macroeconomic analysis to determine how much weakness is ahead should be conducted with a finance advisor. As the media noise grows louder all the time, consumers need to understand that a headline isn’t going to help them make financial planning decisions. An expert is. 

Conforming ($200,000 – $417,000) – 1 POINT

30 Year: 4.875%   (5.09% APR)

FHA 30 Year: 5.0% (5.21% APR)

15 Year: 4.625%   (4.75% APR)

5/1 ARM: 4.875%   (5.09% APR)

Super-Conforming ($417,001 to $625,500 cap by county) – 1 POINT

30 Year: 5.25% (5.32% APR)

FHA 30 Year: 5.5% (5.68% APR)

Jumbo ($625,500 – $3,500,000) – 1 POINT

30 Year: 6.625 %   (6.83% APR)

10/1 ARM: 6.25%   (6.39% APR)

5/1 ARM: 5.375 %   (5.52% APR)

Scenarios assume full doc pricing on purchase or rate/term refi (but not cash-out refi) loans for borrower with 720 FICO score or greater, at least 20% equity (unless FHA), and 6-12 months reserves left over after close (retirement assets counted at 70% of value for reserves). Better or worse rates apply to specific client profiles. Better rates are available using tax deductible points. ARM rates adjust the first month after initial fixed period shown, and once per year thereafter until year 30. Adjusted rate calculated by adding 2.25% margin to 1yr LIBOR index at time of adjustment. At first adjustment LIBOR+margin cannot exceed start rate+5%, subsequent yearly adjustments can never be greater than 2% per year, total of all adjustments for 30yr life of loan can never exceed start rate+5%. This is not a loan commitment nor a loan guarantee, rates based on loan amount ranges shown and rates available at the time of production. Rates subject to change without notice. California Department of Real Estate license #01376428. Equal Housing Lender.

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