WeeklyBasis 8/14/10: Full Tilt Credit Boom

Normally this report is measured, but it’s hard to temper the current situation: we’re in an unprecedented government credit explosion. Low rate bonanza. Full tilt refi boom. Best time for homebuyers who select the right deal.

The ironic reason for this boom is that is that global developed economies are so unstable because of the last credit boom. But the late-1990s to 2007 credit boom wasn’t just loose monetary and fiscal policies, it was also loose credit standards born out of sweeping financial deregulation. We all know the story: Home loans made to unqualified (mostly U.S.) borrowers underpinned bond funds around the globe and countless derivatives were created from those bonds—and it all crashed when home prices plummeted.

At least this time credit guidelines are more strict, as any homebuyer or refinancer knows all too well. Getting a mortgage funded involves painstaking scrutiny of borrower and property profiles. The rewards, of course, are the rates. You can view current rates below and see this rate chart from 1971-Present.

But back to the irony. While it’s painstaking for a borrower to procure new debt, the government issues billions in new Treasury debt every other week, and global markets readily absorb it. Here are three reasons why Treasury and mortgage debt (which is, in essence, government debt too since Fannie and Freddie were taken over 2 years ago) has rallied so much recently:

(1) From January 2009 to March 2010, the Fed bought $1.25t in mortgage bonds to bid prices up and rates down.

(2) Then a European debt crisis from April to July caused bond investors to sell European bonds and buy U.S. Treasury and mortgage bonds.

(3) And the U.S. economy has posted two months of weaker jobs, GDP, home prices, retail sales, and consumer sentiment, causing money to move from stocks to Treasuries and mortgage bonds.

The result is record high mortgage bonds and record low rates.

This simply can’t last. Look at Europe. Right now we’re the beneficiary of their (many would say) profligate government debt issuance, but our gross federal debt is 75% of nominal GDP, according to Kansas City Fed President Thomas Hoenig. In a worst case, we’d eventually have a debt crisis of our own which would cause huge mortgage and Treasury selloffs, resulting in a very sharp rate spike.

Even in a moderate scenario where mortgages and Treasuries simply experience a market correction off current record highs, it would push mortgage rates up .25% to .5%.

But for now, it’s full tilt credit boom, and qualified mortgage borrowers are beneficiaries.

CONFORMING RATES ($200,000 – $417,000) – 0 POINT
30 Year: 4.375% (4.49% APR)
FHA 30 Year: 4.375% (4.50% APR)
5/1 ARM: 3.25% (3.37% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 0 POINT
30 Year: 4.625% (4.74% APR)
FHA 30 Year: 4.5% (4.62% APR)
5/1 ARM: 3.5% (3.62% APR)

JUMBO RATES ($729,751 – $2,00,000) – 1 POINT
30 Year: 5.25% (5.37% APR)
5/1 ARM: 4.125% (4.24% APR)