WeeklyBasis 2/4/08: Conforming Limits, Fed vs. Mortgage Rates

Fixed and ARM rates are about .125% higher since last Monday, but volatility continues, and rates have swung up and down as much as .375% on individual trading days. Last week, the Fed continued its commitment to “reduce tensions in bank lending” (as opposed to being a slave to markets as some claim) by cutting the bank-to-bank Fed Funds Rate and the Fed-to-bank Discount rate each by .5%. Fed Funds is now 3% and the Discount Rate is now 3.5%. The Fed Funds Rate cut means Home Equity Line of Credit 2nd mortgages are now .5% lower, but all other mortgages are affected by mortgage bond yields, NOT the Fed Funds Rate. The last week’s .125% to .375% rate swings noted above are due to mortgage bond trading, and all my references to mortgage rates always refer to this.

In a time where Fed action is front page news, I can’t emphasize this point enough. HELOCs are directly correlated to Fed Funds because they’re tied to the Prime Rate, which is Fed Funds Rate plus 3%. All other basic ARMs and fixed rate mortgages are tied to mortgage bond trading. Mortgage bond yields take some cues from Fed Funds and Discount rates, but they are NOT directly correlated. Mortgage rates DO NOT drop .5% when the Fed Funds Rate or the Discount Rate are cut by .5%. Lender rate sheets are priced several times daily using mortgage bond yields, not periodic changes in Fed rates. Mortgage rates have actually risen after the last 4 scheduled Fed cuts, since mortgages trade on anticipated Fed actions then correct when actual decisions are announced.

This week is light on economic news, and mortgage bonds which affect rates will be trading relative to stock market activity. There are a lot of media company earnings this week, and this is important since advertising is often the first thing to be cut when companies are scaling back if the economy is slowing. Investors and traders will be looking for any signs of this when reacting to media earnings.

As for conforming loan limits, preliminary reports out of Washington, DC show that San Francisco (and maybe Marin County) will end up with conforming loans of $729,750. The higher conforming and FHA loan limits, which would only last for one year, are part of the economic stimulus package that also includes $150 billion in tax incentives to households and businesses. It passed in the House of Representatives last week, and currently Senate Democrats are trying to add a few provisions to the bill. Senator Chuck Schumer said Thursday that the goal is to have something on the President’s desk by February 15.

If that happens, we could be able to lock higher-limit conforming loans March 1 or sooner. For existing clients that will have opportunity to refinance, I am collecting documentation and working on files now to be ahead of the rush. For buyers who are either in contract or writing offers that will close before the changes, I am working out low or no-cost refis when conforming loan limits change.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 5.75% (5.89% APR)
15 Year: 5.25% (5.39% APR)
5/1 ARM: 5.25% (5.40% APR)

Jumbo ($417,001 – $1,000,000) – NO POINTS
30 Year: 6.875% (7.03% APR)
5/1 ARM: 6.375% (6.56% APR)
7/1 ARM: 6.375% (6.56% APR)