WeeklyBasis 03/31/08: Housing “By Far” Greatest Economic Risk

Fixed and ARM rates are down about .125% this week following last Friday’s Personal Income & Spending report which includes the Fed’s favorite measure of inflation—Personal Consumption Expenditures. The PCE number showed that year-over-year inflation was 2%, within the Fed’s 1-2% target range. Tomorrow and Thursday the Institute for Supply Management releases monthly reports on manufacturing and services sectors, and both usually move markets, especially Thursday’s ISM Services Index because approximately 84% of the nation’s jobs are in services related jobs. This will lead into Friday’s Jobs Report from the Labor Department, which is our broadest monthly indicator of employment and wage health.

This morning Treasury Secretary Henry Paulson announced a plan for modernizing financial market regulation with three main tiers: (1) Increased Federal Reserve power to promote market stability, (2) Consolidating all federal bank charters and insurance companies under one regulator, probably the Treasury, in order to promote safety and soundness of institutions with federal guarantees, and (3) Combining the Commodities Futures Trading Commission and the Securities and Exchange Commission to ensure business conduct is in the best interest of consumers.

HOUSING MARKET SOLUTIONS
In speaking about the current financial market troubles, Paulson said that “we know that a housing correction has precipitated this turmoil, and housing remains by far the biggest downside risk to our economy. As we work through this period, our highest priority is limiting its impact on the real economy.” Ostensibly, Paulson announced his regulatory modernization plan—which he said they would take slow and implement over 2-8 years—to preempt any rush to regulation from the legislative branch that may prevent orderly market correction as we work through the housing problems.

Today, he didn’t address FHA modernization, but one thing that’s coming is a way for the FHA to work together with banks to unwind the foreclosure problem. It would involve banks eating losses on homes with negative equity in exchange for being able to unload the remainder of those loans to the FHA, which would take them on and offer more favorable rates and terms to borrowers who might otherwise “walk away” leaving the bank with the losses AND the property. Keeping people in their homes is obviously the better solution.

IMPACT ON MORTGAGE INDUSTRY
Paulson also announced the formation of a Mortgage Origination Commission that would impose Federal level licensing and codes of conduct for the mortgage industry, in addition to existing state licensing and conduct requirements. I see this as a positive because it will prevent unscrupulous and unqualified people from being mortgage professionals.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 5.875% (6.025% APR)
15 Year: 5.5% (5.64% APR)
5/1 ARM: 6.0% (6.14% APR)

Jumbo ($417,001 – $1,000,000) – NO POINTS
30 Year: 7.25% (7.39% APR)
7/1 ARM: 6.25% (6.38% APR)
5/1 ARM: 6.0% (6.13% APR)