WeeklyBasis 09/10/07: Credit Crunch Continues to Affect Loan Programs

Friday’s dismal jobs report was the first post credit crunch data we’ve seen. When markets saw that a net negative 4000 jobs were created for August, rates on Conforming loans up to $417k dropped about .25%, bringing average 30yr fixed rates to 6.25%. Market average rates on Jumbo loans above $417k are at 7.375% since they’re still being priced based on risk rather than market movement. However, I should point out that I’ve been placing 700+ credit, full-doc borrowers with at least 10% down (plus 6-12 months reserves, which can include up to 70% of retirement assets) in 6.375% 5yr ARMs and 6.5% 7yr ARMS. From what I’ve been seeing, these Jumbo rates are significantly below market average.

During this storm, over 100 lenders have closed their doors, and layoffs in the mortgage field are approaching 100,000 – banks, brokers and trading desks are all affected. There are decently-priced portfolio lenders who surviving brokers can access, and the mortgage banks that have survived did so because of solid ratings from their warehouse banks (who provide money to fund loans) and from their investors (who purchase funded loans).

RPM Mortgage was fortunate that our conservative mortgage banking model has been to sell loans individually to investors as they fund. It’s less profitable than holding loans until we can sell to investors in bulk, but it was a key reason we have made it through this very rough period while many banking competitors got stuck with loan blocks they couldn’t sell nor service the warehouse debt on when credit markets froze. The end result for us is great rates for Jumbo full-doc borrowers. It’s important to note: the majority of stated-income rates still have big risk premiums, but there are still favorable stated-income rates for high-credit self-employed borrowers with strong assets.

After the jobs report, the market is pricing in a rate cut for the Tuesday, September 18 FOMC meeting. But the market chatter lacks specifics on whether the Fed will cut the Fed Funds Rate or the Discount Rate. A Fed Funds Rate cut would have a more direct impact on HELOCs, credit cards, car loans, and other consumer credit. A Discount Rate cut would enable large warehouse banks to borrow cheaper money from the Fed than they could from each other.

The Fed did an emergency Discount Rate cut on August 17 but this hasn’t had enough time to play out yet. Also, at 5.75%, the Discount Rate still isn’t low enough to be a viable source for big-bank liquidity. I think the Fed should keep focused on this rate before they lower Fed Funds, so they can see if another cut actually helps big banks then helps smaller banks in turn. Perhaps more weak post-crunch data will prove the economy needs rate cut stimulus at the consumer (Fed Funds) level, but we’re not there just yet.

Just five weeks ago, the biggest concern was inflation due to a strong economy. So until the Fed sees otherwise, inflation will still be on their watch list. Interestingly, this month’s critical inflation data comes next Tuesday and Wednesday, just as the “data dependent” FOMC decision is being made. It will be a critical and defining week for Fed Chairman Ben Bernanke, and should help us chart where the Jumbo market is going.

The biggest decision for buyers right now is when the best deal will be available. This decision involves some quantitative market analysis with a mortgage/financial advisor and some neighborhood-level pricing analysis with a Realtor. Contact me if you need my article on home prices versus rates that can help with the market analysis.

The biggest decision for imminent sellers right now is what list price to choose. This happens at the neighborhood level so the Realtor is the best advisor for this. For sellers that don’t have to sell right now, the biggest decision is your time horizon. Do you have to sell 6 months from now, or do you have as much time as you need? Again, your Realtor is the best advisor here, but I can also provide input on the 12-24 month economic projections.