Fannie and Freddie – Proud Parents of Many New Mortgages to Come!

Government backing of GSE giants Fannie Mae and Freddie Mac has bolstered the mortgage industry outlook for now and ensured us that Fannie and Freddie will continue to adopt new mortgage offspring, adding to their already huge family of home loans.

The Bush administration and the Federal Reserve announced an emergency rescue plan Sunday to bolster Fannie Mae and Freddie Mac, which hold or guarantee more than $5 trillion in mortgages -- almost half of the nation's total.

The plan would temporarily increase a long-standing Treasury line of credit that could be provided to either company. Treasury also said it would, if necessary, buy stock in the companies to make sure they have enough money to operate. The Fed also announced it would allow Fannie and Freddie to get loans directly from the Fed -- a privilege previously granted only to commercial banks until this March, when the Fed extended the borrowing to investment banks to deal with the collapse of Bear Stearns.

Fannie and Freddie buy mortgages and then package them into bonds, which they guarantee. They then sell the bonds to investors, including mutual funds, hedge funds, pensions, annuities - just about any institutional investor you can think of. Monday began with a good sign for Freddie Mac: It attracted more bidders than it had all year for one of its regular debt auctions which raised $3 billion in short-term securities.

The government has caught flak from many sides for it’s response to the Fannie and Freddie credit crisis. The biggest outcry is that the Fannie-Freddie lifeline puts taxpayers on the hook for the bill. The sad truth is that without government assistance, taxpayers would ultimately pay a much higher price with a Fannie-Freddie collapse.

A collapse of Freddie and Fannie would mean disaster for this economy, already walking on a tight-rope. Warren Buffett has made statements in the past that he feared the failure of Fannie and Freddie could set off a "derivatives time bomb" that would implode the whole financial system.

According to Bloomberg, "Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules... The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter." Both companies need to raise billions of dollars to stay afloat and that is the issue. With shares of both companies in collapse and little investor faith in their new bond issues, it would have been impossible for them to raise the money they need. The government backing has at least in the short term, relieved this capital infusion issue.

What will the cost to the taxpayer be? No one can tell at present, but it might not be as much as some feel. A new investor faith in the security of Fannie-Freddie bonds, coupled with a rebound in their share prices could significantly reduce the need for Fannie-Freddie to dive into its government credit line. The severity of the continued housing slump and inflation will ultimately determine the depth of taxpayer burden in this matter in my opinion.

How will this affect mortgage rates? Again, there are two opposing views. One camp feels that mortgage rates will rise significantly as inflation rises and mortgage investors demand a higher spread premium for risk.

Others, including myself, feel that we will continue on for the remaining year in a relative tight range for mortgage rates, not moving too far from current historical low levels. Investor confidence in Freddie-Fannie may even reduce the mortgage spread premium as evidenced this week.

Refinancing at current mortgage rate levels is advisable if you’ve been waiting on the fence. The best-case scenario, rates drop slightly from here. Worst-case, we get hit with heavy inflation and worse housing numbers and rates go up 1 percent to 2 percent. Don’t be that borrower sitting on the fence and missing the opportunity for great mortgage rates!

May the Mortgage Rates be with You!

Refinance Tool Box

Government Shuts Down Mortgage Lender IndyMac, While the Fannie/Freddie Wild Ride Hits Full Speed

IndyMac Bank's assets were seized by federal regulators on Friday after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. The bank is the largest regulated thrift to fail and the second largest financial institution to close in U.S. history, regulators said.

IndyMac grew rapidly during the real estate and home building boom. Its specialty was so-called Alt-A loans, those for which home buyers were asked to produce little or no evidence of income or assets other than the house they were buying. But when the housing bubble burst and prices began to fall, losses at IndyMac began to rise. Investors ran away from the mortgage-backed securities, leaving the bank to suffer the loan losses itself and without the funding it needed to make new, safer loans.

I’ve been harping for months about mortgage lenders sitting on the fence, and now you have a major league example of why investors are not exactly excited about venturing into mortgage-backed securities (MBS).

Today, the only real competition among conventional mortgage lenders is in the Low Loan-to-Value mortgages coupled with fully documented High Credit Score borrowers. We’re talking 80% LTV and below coupled with 700 and up borrower credit scores. This A Grade loan type presents a relative small risk to the investor because there is enough equity to absorb a loss in the event of default on the mortgage, and a lower risk of default for high credit score borrowers that have provided full documentation on their mortgage. Mortgage rates are still near historic lows for this loan type because the relative low risk and high liquidity in the mortgage after-market.

So, where do you go to get a great mortgage rate if you have a high LTV loan scenario and/or less than perfect credit?

Just a minute as I cue my broken record….. FHA …. Of course! Since FHA home loans are Federally Insured, lenders are more than happy to jump in the pool for these mortgages. Mortgage rates are as low as conventional Grade A home loan types, without the restrictive entry qualifications. LTV’s can go as high as 97% of the appraised value of the borrower’s home. The three major qualifications that must be met on today’s FHA are: 1) No mortgage late payments in the previous 12 months 2) A mid fico credit score at 580 or above 3) You must meet the Debt-to-Income ratio (DTI) requirement as “Stated Income” loans are not offered with the FHA home loan program.


IndyMac's failure came the same day that financial markets plunged when investors tried to gauge whether the government would have to save mortgage giants Fannie Mae and Freddie Mac.

The anxiety over Fannie Mae and Freddie Mac, crucial to a recovery of the battered housing market and the economy as a whole, reached a fever pitch on Friday and took shares of the companies and the broader markets on a wild ride.

The well-being of Fannie Mae and Freddie Mac is crucial because they hold or guarantee about $5 trillion worth of mortgages, or about half the outstanding mortgages in the United States. Fannie and Freddie both said in statements issued late Friday that they have the adequate capital they need to operate and to meet targets required by regulators. "In fact, we have more core capital, and a higher surplus over our regulatory requirement, than at any time in this company's history," said Fannie's statement.

"Freddie Mac is not on the threshold of conservatorship because we are adequately capitalized," said the statement. "The preliminary indications of our expected financial performance for the second quarter, while reflecting the challenges that face the industry, do not point to an immediate need to raise additional capital."


We really need to see what Fannie and Freddie’s true current credit losses are. News of a liquidity crisis for a major financial institution will always create market panic. Investors are worried that continued problems in the housing market would cause more than the $12.7 billion losses the two firms have lost between them since last July. The decline in their stock value makes raising additional capital to cover those future losses that much more expensive and difficult.

Still, analysts say there is little doubt that the federal government would step in to rescue Fannie and Freddie should rising losses and plunging stock prices leave them without the capital they needed to continue to be the primary source of mortgage funding in the nation.

We’ll wait and see where the Fannie-Freddie wild ride takes us, but rest assured, it will be headline news for some time to come.

May the Mortgage Rates be with You!

Refinance Tool Box

Mortgage Rates Dipping on Week

Mortgage rates have dipped on average of 1/8 to 1/4 percent this week thanks to an upsurge in buying activity on the bond market. 10 Year treasury yields have declined .125% over the past week and mortgage shoppers are reaping the reward.

With a slow economic week past and present, the market seems focussed on the price swings in oil. We'll take what we can get in the mortgage market and run to the closing table on any dips. Those on the refinance fence might want to venture on in for a quote and seriously consider locking now. Continued threats of rising inflation and weak financials accompanied by a continuation of poor housing numbers could move mortgage rates out of their historical low range very quickly. It's better to lock a sure thing when the getting is good than to gamble on lower rates down the road in my opinion. Many mortgage shoppers waited on this January's mortgage rate lows and are kicking themselves at present time.

Not much more to report of any significance, so we'll hope the recent dip in mortgage rates hold for the remaining week.

May the Mortgage Rates be with You!

Refinance Tool Box

Falling Dollar, Rising Mortgage Rates

The rate of “Inflation” plays a pivotal role in the final mortgage rate percentage quoted for home loans. Mortgage lenders and investors will expect a certain pre-defined rate of return after inflation, to cover their anticipated profit, and to account for risk of default on the mortgage coupled with insufficient home equity to cover the original note.

This is where the dollar enters the picture. The almighty dollar has been declining steadily for six years against other major currencies, undercutting its role as the leading international banking currency. The long slide is fanning inflation at home and playing a major role in the run-up of oil and gasoline prices everywhere.

A Falling dollar makes everything made in America near dirt cheap to many foreigners. Meanwhile, American consumers, both those who travel and those who stay at home, are seeing big price increases in energy, food and imported goods. The dollar has lost roughly a quarter of its purchasing power against the currencies of major U.S. trading partners from its peak in 2002.

Since oil is bought and sold in dollars worldwide, the devalued dollar has made the recent surge in energy prices even worse for Americans, leading to $4 gasoline in the United States. Analysts suggest that of the $140 a barrel that oil fetches globally, some $25 may be due to the devalued dollar. Further declines in the dollar will add to oil's appeal as a commodity to be traded.

The only thing keeping current mortgage rates near all-time lows is the bond market. Luckily for mortgage shoppers, mortgage rates are made up of US bond yields (10-Year Treasury Yield) plus a mark-up for lender return (anticipated return + risk factor + rate of inflation). Despite the fact that mortgage lender mark-ups are historically high, we are still experiencing low mortgage rates.

The national average 30-Year fixed mortgage rate is currently in the 6.25% range, despite the unusually high lender mark-up averaging approximately 2.3%. Now, without the current lender risk and high inflation, the lender mark-up would be more in the 1.5% range historically, and result in current mortgage rates for 30-Year fixed rate mortgages at 5.5%!!!

The impact of the falling dollar is not always visible to the average consumer. Not like the big numbers on gas pumps that give stark evidence of price levels. Since the falling dollar has a significant impact on inflation, and inflation has such a large role in the make-up of mortgage rates, mortgage rates shoppers should keep an eye on the value of the dollar. For the sake of continued low mortgage rates, we hope The Buck Stops Here!

May the Mortgage Rates be with You!

Refinance Tool Box

Mortgage Lenders Sitting on The Fence, Trying to make a Dollar out of 95 Cents

With today’s market close, we have experienced a .302% decrease in the 10 Year treasury yield, which should mean that mortgage rates have decreased by the same amount…. Right? Well, in normal times yes, but today, no. In fact mortgage rates have nudged down very little in that time span.

It seems that mortgage lenders are still sitting on the fence and hoarding as much cash as possible. In fact, the lender spread premium in mortgage rates for shorter term 20 year, 15 year, 10 Year, and assorted 1 to 10 Year ARM mortgages have increased steadily in the previous three weeks.

There is little for lenders to get excited about as unstable home values, credit liquidity concerns, and inflation hold center court with little positive news as of late. Simple supply and demand tells us that lenders can charge a higher yield on mortgage rates because they have little worry about competition for your mortgage.

Fortunately for those that enjoy low mortgage rates, the treasury yields are at such a low level that we are still experiencing near historic low mortgage rates, despite the non-historic high lender spread.

Now, these historic low mortgage rates do not apply to everyone. As the loan-to-value ratio heads above 80% to the 95% level, lender spreads and mortgage rates are increasing significantly. In my opinion, FHA home loans will be the best bang for your buck if you are refinancing at over 85% LTV. FHA mortgage rates are still at excellent levels for those high equity loans and should at least be checked out before blindly going conventional.

As a recap, conventional mortgage rates are still at excellent historic levels if you have good credit and are refinancing lower than 80% of your home’s value. For those with poor credit and/or refinancing over 85% of your home’s value, FHA is the place to go for current low mortgage rates.

Take care, and Happy 4th of July!

May the Mortgage Rates be with You!

Refinance Tool Box

Mortgage Rates Recap June 28, 2008

What a week for the economy, with a slew of major economic reports delivered in addition to the Fed Policy Statement. This is not to mention the continued spike in crude oil prices. The stock market took on heavy losses, resulting in an investor flight to bonds, creating a dip in mortgages rates as yields dropped. Personal spending rose 0.8 percent in May as taxpayers began to receive their tax rebate checks. The reading was above projections, and signaled that consumers are still managing to spend despite higher food and energy prices. This put treasury bond investors at ease that the Fed can hold off raising rates to combat inflation. Higher rates and inflation tend to erode the value of fixed-income investments, so Friday's news was reassuring to bond investors.

The average contract interest rate for 30-year fixed-rate mortgages decreased to 6.39 percent from 6.57 percent, with points increasing to 1.12 from 1.10 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

The average contract interest rate for 15-year fixed-rate mortgages decreased to 5.95 percent from 6.14 percent, with points increasing to 1.16 from 1.10 (including the origination fee) for 80 percent LTV loans.

The average contract interest rate for one-year ARMs decreased to 7.09 percent from 7.22 percent, with points increasing to 1.59 from 1.56 (including the origination fee) for 80 percent LTV loans.

The National Association of Realtors (NAR) said Thursday that the number of existing homes sold during May rose 2% to a seasonally adjusted annual rate of 4.99 million units in May from a level of 4.89 million in April. Sales remain 16% below the 5.93 million-unit pace in May 2007, the report showed. And Thursday's report marks only the second time in 10 months that sales have increased. Home buyers may finally be getting off the fence as prices have dropped substantially in many markets. The large supply of homes on the market favors buyers, but it should take several more months to draw the inventory down.

More home sales will lead to an advantage for those looking to refinance in two important ways. First, increased demand leads to increased home prices, creating a higher equity value for those refinancing. Secondly, a more stabilized housing market will bring more investor and lender competition into the mortgage market and bring mortgage rates down. Lenders will take on less of a profit yield on the interest rate as perceived risk diminishes with stable and rising home values.

For the week, financials lost 6.5%. This is not a positive sign for the economy or mortgage rates. Mortgage investors and lenders are still on the diving board due to their continued financial liquidity issues. Those with cash are hoarding and those with more subprime write-downs to come are only participating in low ltv and low credit risk mortgages. Just another reason to always check FHA refinance options when getting a quote.

The Chicago PMI and Unemployment Rate report will be coming up in the next week. The market is spooked at the moment, so just about anything, both positive or negative relating to inflation, the housing market, employment, spending, currency, or financial liquidity will result in large moves one way or the other.

The current dip in mortgages could be an opportunity for those looking to refinance and waiting for lower refinance mortgage rates. The concern is that continued inflation will increase mortgage rates for some time to come.

May the Mortgage Rates be with You!

Refinance Tool Box

Fed Leaves Rates Unchanged, Inflation Continued Concern

The fed left rates unchanged as expected.

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

The Fed speak, as usual, makes it difficult to determine if they will raise rates come this fall, but inflation numbers are clearly a top priority on their agenda.

Inflation is an enemy to us all, and particularly to mortgage rates. The 10-Year Treasury yield took a bump up on the Fed decision. We'll have to keep a close eye on inflation numbers in the remaining year.

On the bright side, if inflation numbers do get better in the third quarter, we could experience a dramatic shift in mortgage rates to the lower side. The key is definitely a lowering of energy costs. Crude oil has gone straight up this year and you know what they say.... what goes up must come down. We hope!

May the Mortgage Rates be with You!

Refinance Tool Box