WeeklyBasis 3/17/08: Fed Plays Final Cards In Bear Stearns Collapse

Fixed and ARM rates continue to rise and fall by .375% to .5% every few trading days, and we can expect more of the same this week as markets digest JP Morgan Chase buying Bear Stearns for $240 million on Sunday. This compared to Bear Stearns’ $6.73 billion value a week ago and $18.7 billion value a year ago. Their New York headquarters building alone is worth $1.2 billion! Yes Bear Stearns was certainly having liquidity problems like many prominent firms, but this staggeringly low valuation speaks to the ongoing crisis of confidence in credit markets.

Even before their normally schedule FOMC policy meeting Tuesday, the Fed has pulled out all stops to stop a global market meltdown Monday in the wake of the Bear Stearns news. They’ve lowered the Fed-to-bank Discount Rate from 3.5% to 3.25%, extended Discount Window terms from 28 days to 6 months, and now allow investment banks to use the Discount Window and Term Auction Facility (TAF) in addition to global money center banks. The Discount Window makes the Fed a lender of last resort for banks in times of crisis, and make no mistake: financial markets are in crisis. The TAF is where banks can trade AAA mortgage-backed and other securities (that nobody else will purchase in open markets) for Treasuries for a period of 28 days as a way to shore up liquidity.

So far the Fed moves have stopped a meltdown, and U.S. stock markets are only down 1% as opposed to many overseas markets that were down 3-5%. The Fed is expected to lower the Fed-to-bank Discount rate and the bank-to-bank Fed Funds Rate even more Tuesday, after they see how markets play Monday. But Fed Funds Rate cuts have proven largely irrelevant (not to mention damaging to the dollar and ultimately inflationary) since banks don’t seem to want to lend to each other. So the Discount Window and the TAF are the most important monetary tools they have right now. Let’s all hope these efforts work, since even the Fed’s balance sheet is getting a bit light.

Major lenders like Chase, Wells, WAMU, and Countrywide have announced pricing on super conforming 30yr fixed loans above $417k this morning, and so far rates are very close to jumbo loans. The higher pricing is probably to keep pipelines from getting jammed up in case FNMA runs into trouble purchasing these loans. FNMA guidelines for super conforming are tight, similar or tighter in some cases than existing jumbo guidelines, and far tighter than FNMA guidelines for conforming loans up to $417k. This also so FNMA doesn’t get barraged with more loans than they can purchase in this uncertain credit environment. They will start purchasing super conforming Fixed loans in April and ARMs in May, as indicated by the excerpt below from their March 7 memo to banks:

“To help provide liquidity to this market segment, we will accept whole loans and MBS deliveries of Jumbo-Conforming Mortgages starting April 1, 2008 for 15- and 30-year FRMs, and starting May 1, 2008 for 5/1 ARMs. A 5/1 ARM with a 10-year interest-only period will be available in addition to fully amortizing options.”

I will not start publishing super-conforming rates until pricing methodology becomes more clear, which will take a few weeks when FNMA actually starts buying the paper from mortgage originators. Also there’s really no consistency to traditional conforming and jumbo pricing right now, so rates below are a barometer, but market levels are less relevant to pricing right now than lender risk control—as always, all pricing is custom per client profile. Also please be aware that all lenders are experiencing pricing and underwriting disruptions as they evaluate the credit markets in the wake of the Bear Stearns deal.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.0% (6.15% APR)
15 Year: 5.375% (5.53% APR)
5/1 ARM: 6.0% (6.14% APR)

Jumbo ($417,001 – $1,000,000) – NO POINTS
30 Year: 7.25% (7.39% APR)
5/1 ARM: 6.25% (6.39% APR)
7/1 ARM: 6.25% (6.38% APR)