The Fed Acts to Push Mortgage Rates Lower

In it's first action to directly influence mortgage rates and the housing market, the Federal Reserve has announced that they "will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae."

There's more:

This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.

This action is aimed directly at, and intended to narrow, the interest rate "spreads" between Mortgage related securities and treasury securities, which have been leaking wider ever since the Fed stopped short of affirming a "full faith and credit guarantee" for Fannie and Freddie's obligations.

If you read our post last week on why mortgage rates are higher than they should be, you'll have some great context as to why the Fed had to do this.

Prices of mortgage backed securities are sharply higher on this news.  Expect mortgage rates to see .25 in improvement immediately, (putting them in the sub 5.5% range for 30 year fixed paper) with further gains possible as the market sorts out the impact of this action.

11/25/08 at 09:35 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Breaking News, Fannie Mae, Freddie Mac, GSE's, Interest Rates, The Fed

MN Attorney General Proposes Foreclosure Relief, Fannie/Freddie to Suspend Foreclosures

MN Attorney general Lori Swanson proposed mandatory mediation for foreclosures at a press conference yesterday.  Strib reports:

The Homeowner Lender Mediation Act, patterned after a program from the mid-1980s that helped about 14,000 Minnesota farmers stay on their land, would put a foreclosure on hold for three months if a borrower asks to renegotiate mortgage terms to an affordable level.

So this is essentially a foreclosure moratorium under separate cover.  To which we say: Fine. Great. To the extent that it helps lenders and borrowers make rational decisions, and gets servicers that aren't negotiating in good faith with borrowers to the bargaining table, it's a good thing.

We do maintain a healthy skepticism about the extent of relief a moratorium of any kind will bring.  There are simply many, many foreclosures that will happen, no matter what. It is an unfortunate fact of a declining real estate market and faltering economy.

Also, as we shared with Chris Snowbeck at the Pioneer Press on this subject, if we are going to enlist the power of the state to professionally renegotiate mortgage terms on behalf of borrowers, there's real concern in many quarters that we are rewarding many that, perhaps, took ill-considered risks, and punishing those who stayed within their means. A quick scan of the angry comments on this article at the Strib is telling.

That said, with Fannie and Freddie announcing their own foreclosure moratorium, we're mostly beyond the point where flip arguments about "moral hazard" and "unintended consequences" are even relevant to the current conversation.  The banks, the servicers, and the borrowers need time.  Time to get control of the process and allow other relief efforts to take effect.

11/21/08 at 06:13 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Consumer Protection, Credit Crunch, Fannie Mae, Foreclosures, Freddie Mac

Why Mortgage Rates are not as Low as They 'Should' Be

The Wall Street Journal yesterday addressed the fact that mortgage rates have not fallen - as many expected - after Fannie and Freddie were forced into government conservatorship earlier this year. FTA:

...mortgage rates aren't declining as they should, even as interest rates fall.

Now, we all know that mortgage rates are fickle critters.  Especially this year, where we've seen rates change almost by the hour.  All you have to do is scroll through our rate-focused twitter feed to see this in action.

But the idea that rates should be lower is an odd one.  As faithful readers will know, Mortgage rates are market based. They are not "set" by anyone, so they are always, by definition, exactly where they should be.

What the article is getting at is this:  

At the time they were placed into conservatorship, many (this writer included) assumed that something equivalent to a "full faith and credit" guarantee of Fannie and Freddie by the Federal government was part of the bargian.

But once the dust had settled, investors quickly divined that the conservatorship did NOT mean a full faith and credit guarantee, and that investment in Fannie and Freddie debt was not a "risk free" endeavor.

You can see this illustrated in the graphic. The spread between Treasury and Agency paper narrowed, but is still wider than it would be if the government were fully behind Fannie and Freddie.

[Quick Aside: If you find the concept of spreads confusing, it helps to think of this spread as a "risk barometer" for Fannie/Freddie.  Treasury notes represent a "risk free" investment, since they are backed by Uncle Sam, so they form the baseline/x-axis.] 

So what gives?  Simply put, investors want a guarantee, and Treasury has given little more than a handshake-and-a-wink.  Again from the WSJ:

Mr. Paulson says they now "operate on a stable footing." He added that "investors can bank on" the government's pledge to keep Fannie and Freddie from defaulting...Yet Mr. Paulson and the Treasury have proved unwilling to take further steps to address debt investors' concerns [and offer an explicit guarantee.]

Combine the Treasury's reticence with a still-imploding housing market, and it's easy to understand why real estate related debt is being shunned by many investors, and why mortgage rates are higher than they should, or could be.

But here's the other thing. All of this handwringing over interest rate levels is mostly a waste of time. 

Lets be clear.  Even if we establish that 30 year fixed rates should be at 5%, rather than, say, 5.75%, that's only a difference of $93.00 per month on a $200,000 loan.

That sort of savings won't make any but a marginal difference in demand for real estate.

So let's not pin too much hope in the lower-rates-as-the-salvation-of-the-real-estate-market, okay?

11/14/08 at 03:51 PM Permalink | Comments (1) | TrackBack (0)
Filed Under: Fannie Mae, Freddie Mac, Interest Rates

Born Again: When will you be eligible for a mortgage after a foreclosure or short sale?

Did you miss the fact that foreclosure filings were up 71% in the third quarter?

Which makes it a good time to remind everyone of the rules that govern when and how you'll be eligible for a mortgage after you've been foreclosed, surrendered a deed, or negotiated a short sale.

For borrowers with a foreclosure, short sale, or deed in lieu of foreclosure on their credit history, the following timelines apply before they'll be eligible for a conforming, conventional mortgage (Fannie Mae/Freddie Mac):

• Foreclosure: 5 years from completion date, minimum 680 FICO and 10% down for 7 years, investment property, second homes, cash out refinances not allowed for 7 years.

• Deed-in-Lieu of Foreclosure: 4 years, at least 10% down required for 7 years.

• Short Sale: 2 years.  4 years for Freddie Mac

For what it's worth, under FHA rules you have to wait two years before you are born-again.

Goes without saying that if you do wind up with a foreclosure (or one of it's close cousins) on your record, unless you handle the period after the foreclosure properly by re-establishing credit - no easy trick with a serious derogatory on your record - and accumulating a sizeable down payment, you are likely to be renting for a long, long time.

Or, another way to look at this: At some point in the next five years, buying may look really cheap, and you'll be locked out of the game.

10/24/08 at 09:36 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Credit, Fannie Mae, Foreclosures, Freddie Mac, Short Sales

Monday Market Commentary: 'Treasury Mac' Edition

It would be an understatement to say that the big news this week is the takeover of Fannie Mae and Freddie Mac.

There is, of course, excellent coverage on this everywhere. On Saturday, we actually did a short interview with KSTP to talk about the to-be-announced takeover for the 10PM broadcast. 

We won't spend too much time parsing the particulars, others will surely do this better and more comprehensively (see the related links at the end of this post,) but basically the deal amounts to this:

In the near term, with this takeover (or, more properly, conservatorship) the Federal Government is acting as the ultimate backstop.  They will (as necessary,) take an equity stake in Fannie/Freddie, wbuy Fannie/Freddie Mortgage Backed Securities, and have set up yet another short term lending facility to ensure the Agencies have access to funds.

The broad intent is to ensure liquidity, stability, and security in the housing finance markets for the foreseeable future, and clear up any doubt as to whether and what the Federal Government's role in and relationship with the agencies is.

At the street level, this means mortgage rates will fall.  With (now explicitly guaranteed) mortgage bonds trading at a significantly higher yield than a comparable treasury security, money will flow out of 'traditional' Govt debt, and into Fannie/Freddie Mortgage bonds as investors chase better returns - this additional buying will push mortgage rates lower, and treasuries higher.

So in that sense, this is good news - rates will fall.  Though once the market has 're-calibrated' based on this new reality, which should work itself out in a few days or weeks, mortgage rates will continue to shift based on the same macroeconomic factors that have always driven them.

Beyond that, we expect that the tightening of mortgage guidelines and standards will continue on the same trajectory - perhaps accelerating somewhat - as before.  Defaults and losses will continue to narrow the scope of what constitutes an investment quality mortgage.

And of course, all sorts of open questions about the future form and shape of Fannie & Freddie (this is not envisioned as a permanent change to our housing finance system,) how this impacts taxpayers, the treasury, etc. etc. etc. are still to be answered, so we will follow this as it develops.

Related:
Press Conference Videos [Calculated Risk]
As always Calculated Risk covers this stuff like a blanket, be sure to stop by.
Various Posts by John Jansen at Across the Curve [ATC]
Excellent series of posts on the meaning and import of the takeover
Timeline of the Takeover [WSJ]
The first of what will inevitably be many re-tellings of how and why this came to pass.

09/08/08 at 10:36 AM Permalink | Comments (2) | TrackBack (0)
Filed Under: Fannie Mae, Freddie Mac, Interest Rates, Treasury Mac

As Home Prices Fall, Costs of Financing Continue to Rise

Can we talk about risk based pricing?

In the simplest of terms, risk based pricing is a system where the interest rate and/or fees paid for a mortgage vary based on the characteristics of both the borrower and the loan itself.

Some borrowers are more likely to default.  Some loan types, such as those with lower down payments, cost the lender more when they go bad. It really is a straightforward system designed to equitably align the costs and rewards for banks and borrowers by assigning a rate that, as accurately as possible, reflects the risk of default.

It's a nearly universal practice in mortgage lending, and whether you know it or not, the rate you are carrying right now probably included at least one adjustment to the rate or fees you were charged.

There are, quite literally, dozens of variables that can impact the price, or rate on a given mortgage, but the two most important are loan-to-value (equity in the home), and credit score.

Generally speaking, the higher the credit score, and the lower the loan-to-value, the better your rate.

We bring all this up because with defaults and losses on the rise (Freddie Mac lost $821 Million dollars last quarter) Fannie Mae is changing their risk based pricing fees, or "hits."  At Fannie, these are known as LLPA's or Loan Level Price Adjustments, and this is actually the third such adjustment since November of last year.

Take a look at this graphic (click to biggify), straight from a document called Updated Adverse Market Delivery Charge and Flow Business Pricing Requirements, which was released on Monday, right here.  We can think of no better way to illustrate how down payment and credit score interplay to drive the rate you actually get.

We've marked this up to illustrate what has changed since the last adjustment by Fannie.  Some are for the worse (in red.)  Some were for the better (green).  The negative negative numbers are credits, positive numbers are fees.

It's important to understand that the items in the chart are not adjustments to the rate, but to the price of a loan at any given rate. 

Adjustments can be paid (OR credited) in a lump sum, up front, as part of your closing costs, or as a slightly higher (or lower) rate. 

Here's a prime example of how the specific characteristics of the loan, AND the borrower can impact the cost of financing.

For example, if someone with a credit score of 685 puts 15% down on a purchase, there is a .5% price adjustment.  This means you can pay .5% of your loan amount up front, or take a rate that is .125% higher.  If that same person had a credit score of 675, the adjustment balloons to 1.5% of the loan amount, or .375% higher in rate.

On a $200,000 loan, that's a difference of $2000 up front, or $38.00 per month over a 30 year term.

The moral of the story: Even as home prices fall, the cost of financing those homes will steadily rise, especially if you have imperfect credit and lack a big down payment.

08/07/08 at 01:18 PM Permalink | Comments (1) | TrackBack (0)
Filed Under: Credit, Financing Options, Freddie Mac, Interest Rates, Risk Based Pricing

Deathmatch: NYT vs. Freddie Mac

Interesting little dust-up between the New York Times and Freddie Mac.  The executive summary:

NYT reporter alleges Freddie Mac CEO Syron was warned, ignored these warnings and should have known about looming problems with riskier loans in their portfolio.

Freddie responds, stating that at best, this is revisionist history, sloppy reporting, and utter bunk.

Also worth reading is Tanta's take-down of the NYT article over at Calculated Risk, and Jeff Miller's analysis of over at A Dash of Insight.

This may seem like inside baseball to many, but it would be a mistake to ignore this.  Legislators are already wielding the housing correction like a cudgel (which can be good, so long as they are crushing the right skulls) so it will pay to understand the facts in the rush to assign blame somewhere.

08/06/08 at 07:58 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Freddie Mac, GSE's, Housing Market Politics