WeeklyBasis 3/24/08: Credit Markets Optimistic, Loan Guidelines Tighter

Fixed and ARM rates are about even following last week’s Fed meeting. Rates dropped about .25% for the two trading sessions ahead of the Fed meeting then rose right back up after the Fed cut the bank-to-bank Fed Funds Rate and the Fed-to-bank Discount Rate by 75 basis points each. These rates are to encourage commercial lending to loosen up the credit markets, they are not directly correlated to any consumer mortgage rates except for HELOC 2nd mortgages. Those rates will drop .75%, but all other mortgage rates are tied to the yield on mortgage backed securities.

MBS yields (and thus mortgage rates) are up since the Fed meeting as investors have dumped bonds and bought higher yielding stocks on new confidence that the markets may start functioning normally again soon. That remains to be seen, but for now stock markets have rallied on the relief that the Fed extended their credit facilities (the Discount Window and Term Auction Facility) beyond primary dealers to investment banks. Even JP Morgan Chase acknowledged that their original $2 per share bid for Bear Stearns was low and they quintupled the bid to $10 per share. This further helped credit market confidence, and sentiment is suggesting the worst is over.

That makes great headlines, but lender guidelines are certainly now showing signs of loosening. Guidelines are tighter, and underwriting turn times are slower as lenders do all they can to scrutinize files and ensure new mortgages make for strong securitization pools. It’s natural that all the volume quickly migrates to the best price, and that is another reason approval turn times are under strain.

This may loosen up in the next two months as FNMA starts buying 15yr and 30yr super-conforming fixed rate loans April 1 and 5yr ARMs May 1. That also may help super-conforming pricing loosen up. Right now that pricing is on par with Jumbo rates because lenders are in uncharted territory until they get some confidence when FNMA and the other agencies actually start purchasing this paper.

Existing Home Sales today were weak but stronger than expected. I don’t predict the same from New Home Sales Wednesday because I think there’s still too much new construction nationwide. The biggest market moving news of the week is the Personal Consumption Expenditures report which is the Fed’s favorite measure of inflation. If it comes in higher than expected, mortgage rates will rise on inflation fears.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.0% (6.15% APR)
15 Year: 5.5% (5.64% APR)
5/1 ARM: 5.75% (5.88% 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)