WeeklyBasis 10/14/08: Rates Up on Gov’t Rescue, Conforming Loans Expiring, Property Tax Notes

Fixed and ARM rates for loans up to $729k are up roughly .5% in the past two weeks, erasing the .5% rate drop during September when Fannie & Freddie were taken over and the investment banking industry melted down. Rates on loans above $729k are consistent because they continue to be priced more on lenders’ willingness to lend than on market forces.

Since the fourth quarter started, stocks and bonds (including mortgage bonds) have generally sold off. The Dow is down about 34% from its record high of 14,164 set October 9, 2007, and mortgage bond prices are at lows for the year—when bond prices drop in a selloff, yields (or rates) rise. Bonds are way oversold right now and a rally is imminent which will help rates ease up a bit.

Be advised that super-conforming loans up to $729k will be gone as of December 31. Those loans have to fund, clear all lenders’ books, and be in the hands of Fannie or Freddie by December 31, so many lenders are not accepting these loans past the end of October, but there are some players that will go a bit longer. Anyone looking for these loan amounts needs to consider their timing.

On January 1, all conforming loans will be capped at $625,500 based on median price of an area (core Bay Area counties will be at this limit). It’s possible regulators have learned this year that loan-amounts-by-median-price is a good model, so higher priced areas may soon see higher limits. But for now the cap is $625,500.

The credit market problems and regulatory solutions are fluid. The Treasury, along with the FDIC and Federal Reserve, has moved forward with phase one of the financial system rescue by investing $250b directly into banks, insuring senior debt of banks, and making the market for the commercial paper market which is how business fund day-to-day operations.

Treasury secretary Henry Paulson has strongly encouraged banks to lend the money they’ve injected into the banks to business and consumers. Some experts say Treasury may have to mandate the lending of these funds because banks are so reluctant to lend—especially unsecured loans, which comprise much of what they do.

There are some encouraging signs with 1-day, 30-day and 90-day LIBOR rates coming down slightly off big spikes (LIBOR rates are used to price short-term business-to-business loans, and also serve as benchmarks for many ARM mortgages), but no meaningful downward trend has developed.

We’re definitely in the early phases of regulatory and government intervention on this, so I will continue to cover the topic going forward. For now, homebuyers and homeowners need to know that lenders make mortgage lending a priority because it’s a loan secured by a real asset. The borrower income/asset requirements and especially down payment requirements are higher because lenders need to account for projected property price declines.

The big economic releases this week are on inflation with the Producer Price Index Wednesday and the Consumer Price Index Thursday. With oil hitting $78 today versus $145 in early-summer, inflation is likely to show signs of moderating. Not to mention that daily machinations of credit crisis are far outweighing weekly data releases in terms of market impact.

The economic outlook is generally weak. Unemployment is at 6.1% and economists’ projections for the next year range from 7% to 9%. For the last three quarters, final GDP has been as follows: 4Q2007: -0.2%, 1Q2008: +0.9%, 2Q2008: +2.8%. We need two consecutive quarters of negative GDP for an official recession, but if unemployment rises 16-50% percent from present levels, that feels pretty official. Generally, weak economic news will help mortgage rates.

By now, most people in California should have their tax bills. For those who pay twice per year, this is the time to consider what to pay and when. If you have money now but aren’t sure if you will have enough in April, you can consider paying both installments in 2008. This means you’ll have more tax deductions when you file your 2008 taxes next year, and you’ll also be in the clear on tax payments until this time next year. Consult a tax professional regarding any tax issues.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.625% (6.7353% APR)
15 Year: 6.5% (6.61% APR)
5/1 ARM: 6.875% (6.98% APR)—See Jumbos for Lower Rates

Super-Conforming ($417,001 to $729,750 cap by county) – NO POINTS
30 Year: 6.875% (6.985%)

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 % (6.11% APR)