WeeklyBasis 5/11/09: Spring In The Market’s Step?

Rates on conforming loans up to $417k are holding around record lows even in the wake of improving economic data which can push rates up. This is largely because of continued Fed mortgage bond buying which drives bond prices up and yields (or rates) down. Rates on high-limit conforming loans up to $729k are still not as efficient as they could be because not all players have entered the market yet, but rates should continue to sharpen in the coming weeks. Rates on Jumbos from $729k to $3.5m are competitive for borrowers with strong down payments, income and credit profiles.

Four recent economic updates show signs of improvement: (1) On April 28, S&P reported that 9 of 20 U.S. metro areas showed a slower pace of home price decline in February than in January—the first time declines have slowed in 16 months. (2) On April 30, the Economic Cycle Research Institute, an organization that accurately predicted the past three recessions in advance, said that the U.S. recession will likely be over by the end of summer. (3) On May 5, Ben Bernanke said if the financial sector can recover, the Fed expects economic activity to bottom out then turn up later this year. He also said the housing market is beginning to stabilize. (4) On May 8, U.S. job losses slowed for the first time in six months.

There must be a few consistent months of data to create any meaningful trend, but after consistently tough conditions since August 2007, a positive trend could be forming.

Results of the government stress tests on the nation’s 19 largest revealed that that 10 banks need $74.6 billion to weather a more severe economic downturn in the next two years and 9 banks were deemed adequately capitalized. The resulting market mood is optimistic but remember that just before the financial crisis blew wide open, Ben Bernanke told Congress on July 18, 2007 that bank losses could total be in the range of “$50 to $100 billion.”

Granted, a few weeks later he said it could be several multiples of that, but it’s just an example of the tightrope the government walks when they’re also a market participant rather than just regulator. They can’t spook markets so we can’t be fully sure of how things will evolve until we have a couple more quarters of earnings—that’s the only way to remove any post mark-to-market creative bank accounting and see if banks are regaining their health.

Treasury Secretary Tim Geithner said that the results will be reassuring. There are $110b left in TARP funds but the “reassuring” message is based on a theory that banks won’t have to tap this. Instead they can raise private money and/or use the government’s PPIP program to sell assets and raise money.

Conforming ($200,000 – $417,000) – 1 POINT
30 Year: 4.75% (4.96% 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 $729,750 cap by county) – 1 POINT
30 Year: 5.125% (5.2% APR)
FHA 30 Year: 5.125% (5.3% APR)

Jumbo ($625,500 – $3,500,000) – 1 POINT
30 Year: 6.25 % (6.36% APR)
10/1 ARM: 6.25% (6.39% APR)
5/1 ARM: 5.125 % (5.24% APR)

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