Why Do Mortgage Rates Seem High?, 2009 Conforming Loan Limits, Demise of Non-Traditional Loan Products

Why Do Rates Seem High?
Why do mortgage rates seem kind of high? One answer is that in order to fund the rescue and the new government guarantees, our Treasury must sell more new Treasury securities to raise money. And the Treasury has to offer higher interest rates to sell them. On top of that, mortgage related bonds always trade at a slightly higher yield due to the prepayment and delinquency risk. Lastly, the cost of financing mortgages has increased for Freddie and Fannie due to the plan for the FDIC to back the newly issued, unsecured debt of some banks. Obviously by guaranteeing bank debt, the government is making that debt more attractive for investors, and consequently creating more competition for Fannie and Freddie when they look to sell their own securities. To compete for buyers, the mortgage giants will have to raise their own yields – and to pay for that they’ll have to charge borrowers higher interest.

Scotland’s Mortgage Solution
Ah, leave it to those Scots! The Edinburgh City Council announced that they will “offer mortgages and buy up homes which developers are unable to sell in a bid to ensure Scotland’s capital survives a global financial meltdown. The local authority is hoping to rent out its new properties at market or social rate in an attempt to attract more key workers to the area.”

Update on Conforming Loan Limits for 2009
The Federal Housing Finance Agency (FHFA) expects to announce 2009 conforming loan limits for Fannie Mae and Freddie Mac by November 7. The limits define the maximum loan size of mortgages that can be purchased by the Enterprises. You may recall that under the Housing and Economic Recovery Act of 2008, FHFA was directed to set conforming loan limits each year for the nation as a whole as well as for high-cost areas. The rules governing how the loan limits are established differ from the rules set forth in the Economic Stimulus Act of 2008 (ESA), which applies to loans originated in 2008. For example, under ESA, loan limits for high-cost areas were set at 125% of local house price medians and the maximum high-cost limit was 175% of the national conforming limit ($729,750 in the continental U.S.) Under HERA, the high-cost area loan limits are 115% of local price medians up to a maximum of 150% of the national limit. In 2009, if the national limit remains at $417,000 for one-unit properties, the maximum limit in high-cost areas would be $625,500 for the continental U.S. To determine high-cost area limits under HERA for 2009, FHFA will use median home values estimated by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development (HUD). The FHA median prices will be calculated in the coming weeks by FHA for the purpose of determining its 2009 loan limits. Information concerning its process and calculations can be found in the attached addendum.

Non-Traditional Mortgage Products Disappearing
Firms offering non-traditional mortgage products are facing some difficulties. Lately, for example, the press has been filled with warnings about reverse mortgages. Namely, although for homeowners 62 years and older a reverse mortgage may seem like an excellent way to tap into home equity, generating much-needed retirement income since the loan typically doesn’t have to be repaid as long as the last surviving borrower lives in the home or until the home is sold. But closing costs and fees can be steep, the borrower must meet with a counselor, and if your client is thinking about leaving their home in 2-3 years a home equity loan, if even possible, is likely a cheaper option. (Federally insured home equity conversion mortgages, or HECMs, which are backed by HUD, account for 90 percent of all reverse mortgages.)

In a similar vein Rex & Co., a San Francisco firm that offered homeowners a way to convert their equity into cash without taking on debt, has stopped signing new agreements. Its backers include subsidiaries of AIG, now owned by taxpayers, and the Royal Bank of Scotland, which is being partially nationalized by the British government. Rex, as you might know, signed agreements with homeowners that let them cash in a portion of the equity in the homes, and instead of taking on debt, homeowners agreed to share part of the future appreciation or deprecation in their homes with Rex. Of course, if there is no appreciation… Grander Financial, another company that had been offering a private-label version of Rex agreements, is no longer doing so, and EquityKey (who offers a similar agreement except it requires homeowners to be at least 65 and pass a medical exam to get a required life insurance policy) is still taking applications but is not funding deals.

Market Update
Rates have crept up a little this morning, with the 10-yr sitting around 3.95%. This isn’t really attributed to economic news, as there is none until Leading Economic Indicators at 7AM PST, but instead the bond market is watching the rally in the stock markets. Many mortgage folks are attending the conference here in San Francisco, and are looking forward to being greeted by protesters claiming that housing is a “right” that we have, and trying to ban foreclosures. Later in the week we’ll have a FOMC meeting, where economists expect another 25 basis point cut. Later in the week we’ll have Consumer Confidence, Jobless Claims, and Existing Home Sales – a pretty light week.

Daily Humor
Saturday morning I got up early, dressed quietly, made my lunch, grabbed the dog, slipped quietly into the garage to hook the boat up to the truck, and proceeded to back out into a torrential downpour.

The wind was blowing 50 mph. I pulled back into the garage, turned on the radio, and discovered that the weather would be bad throughout the day.

I went back into the house, quietly undressed, and slipped back into bed. There I cuddled up to my wife’s back, now with a different anticipation, and whispered, “The weather out there is terrible.”

My loving wife of 20 years replied, “Can you believe my stupid husband is out fishing in that?”

I still don’t know if she was joking, but I’ve given up fishing.