Marketweek 08/19/08: Rates Down As Markets Mull Fannie/Freddie Bailout

Time Jan 1981 Cover Will Be Same as Jan 2009 CoverFixed and ARM rates are down about .25% in the two weeks since I suggested rates could be in a +/–.25% trading range until Fall. July’s inflation reports released in the past few trading days showed the highest consumer price spike since 1991, when California’s current governor hit his prime with Terminator 2; and the highest business price spike since 1981, when another actor became U.S. president and the year kicked off with this Time magazine cover.

Rates would normally spike on this kind of inflation news, but markets believe for now that since oil has settled from $140+ highs in early summer to around $115 per barrel, that July’s inflation levels may not hold going forward. Because of this and a new wave of credit crunch worry, and rates are holding onto a favorable trading range.

Stock markets are still reeling from a weekend Barron’s story outlining why a Treasury takeover over Fannie Mae and Freddie Mac seems inevitable. Bond king Bill Gross said the same in an interview last week, predicting that Treasury would need to invest about $15 billion each “at a minimum” into Fannie and Freddie to shore up their balance sheets and bolster investor confidence in their core functions (of purchasing and securitizing high-quality mortgages).

What does this mean? Mortgage rates are tied to the mortgage bonds Fannie and Freddie issue, and if an explicit government guarantee gave buyers confidence to continue taking up these bonds, it would keep yields (or rates) down.

This isn’t the endgame for fixing mortgage securitization and the credit crunch overall, but it’s looking more and more like a next step. And if experts like Bill Gross and Henry Paulson think it will help keep rates affordable until January 2009 when Time magazine edits a new president’s name into that old cover headline, that could be the best solution for now.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.5% (6.59% APR)
15 Year: 6.0% (6.11% APR)
5/1 ARM: 6.0% (6.11% APR)

Super-Conforming ($417,001 to $729,750 cap by county) – NO POINTS
30 Year: 6.625% (6.71%)

Jumbo ($729,751 – $1,500,000) – NO POINTS
30 Year: 7.0% (7.025% APR)
7/1 ARM: 6.25% (6.21% APR)
5/1 ARM: 6.0 % (6.12% APR)