WeeklyBasis 3/27/09: Record Low Rates & A Credit Crunch Recovery Plan

RATE UPDATE
Rates on conforming loans up to $417k and super-conforming loans up to $625k are down about .25% since the big Fed announcement last Wednesday—they were down further but have since retraced. Increases of super-conforming loan limits to $729k have still not been announced by Fannie and Freddie—it’s expected very soon. Rates on Jumbos from $729k to $3.5m are steady.

Last week, the Fed said they’d increase their mortgage bond buying program from $500 billion by June to $1.25 trillion by December. This will help keep rates low because mortgage rates drop when bond prices rise on buying rallies. But consumers shouldn’t assume rates will drop significantly from current levels. Here’s why:

Rates on loans up to $729k change all day everyday based on mortgage bond trading (whereas rates on loans above $729k are set by lenders because jumbos are currently not being packaged into bonds). The Fed’s mortgage bond buying goal has always been to elevate bond prices to certain levels to keep rates nice and low. But they are only one participant in the mortgage bond market. Private investors have been saying since last year their goal is to buy mortgage bonds before the Fed and sell at a profit after the Fed drives up the prices. Private investors will sell more and more as the Fed uses up its $1.25 trillion budget (they’ve used up 22% so far), which means Fed buying and private selling work to even each other out over the course of this year.

Also Mortgage Bankers Association forecasts call for $2.8 trillion in mortgage originations this year, the fourth highest amount on record, which is putting massive strain on understaffed lenders of all sizes who then hike pricing to control volume.

So rates could trade up and down about .25% to .375% in phases over the coming months—providing nice dips if timing works out just right—but we are likely to remain in the current already-record-low range.

BANKING UPDATE
Good news on the banking front. Treasury Secretary Tim Geithner rolled out the eagerly anticipated plan to remedy the global financial crisis that started in August 2007. The plan enables private investors to raise money with FDIC backing so they can buy currently illiquid mortgage loans and securitized loans from banks in partnership with Treasury. This provides strong incentive for long-term investors, of which there are plenty.

Markets have reacted favorably so far and it will take some time to implement, but it’s a well-designed plan that shares risk among taxpayers and private investors instead of putting all risk on the taxpayer. The plan also enables markets to price these assets rather than previously-failed efforts for the government to price them. With the FASB’s plan on revising and/or limiting mark-to-market accounting rules coming early-April, we will also see increased freedom for markets to sort through the pricing issues that have been preventing any solution to getting these illiquid assets off bank balance sheets so they can extend new credit to businesses and consumers.

Like I said last week, the banking sector still has quite a slog ahead of it but consumers are the ultimate beneficiary because banks need to rebuild by taking on good borrowers and will offer these people good terms, and because the banking sector will continue to evolve as some big firms struggle and some smaller firms rise up—creditworthy borrowers benefit as the winning institutions vie for the business.

Conforming ($200,000 – $417,000) – 1 POINT
30 Year: 4.625% (5.09% APR)
FHA 30 Year: 5.0% (5.21% APR)
15 Year: 4.625% (4.75% APR)
5/1 ARM: 4.875% (5.09% APR)

Super-Conforming ($417,001 to $625,500 cap by county) – 1 POINT
30 Year: 5.125% (5.2% APR)
FHA 30 Year: 5.0% (5.21% APR)

Jumbo ($625,500 – $3,500,000) – 1 POINT
30 Year: 6.625 % (6.83% APR)
10/1 ARM: 6.25% (6.39% APR)
5/1 ARM: 5.375 % (5.52% APR)