Mortgage Blog

Mortgage rates have slowly eased over the past week as President George Bush signed into law an emergency Federal plan to rescue Fannie Mae and Freddie Mac, which hold nearly half the country’s housing debt. Freddie Mac spokesman was quoted as saying in its weekly mortgage-rate report Thursday that short-term, long-term, fixed and adjustable rates all have swooned. The spokesman attributed the drop to lower commodity prices as well, which eases concerns about inflation, despite mixed reports on the housing market. Oil price speculation seems to be coming back into check which also contributed to the commodity bounce.

Freddie’s 30-year fixed mortgages averaged 6.52% with an upfront payment of seven-tenths of a point, down from 6.63% a week earlier. Shorter term 15-year fixed mortgages averaged 6.17% with a payment of 6/10th of a point, down from 6.18%.

Five-year adjustable-rate mortgages that are indexed to Treasury notes averaged 6.07% with a payment of six-tenths of appoint, down from 6.16%. One-year ARMs posted an average rate of 5.30% with the same payment, down from 5.49%.

All four rates are also below year-ago levels.

Freddie Mac spokesman was quoted as saying “A drop in commodity prices eased market concerns over inflation pressures,” says Freddie Chief Economics Frank Nothaft, who noted that oil and gasoline prices reached their lowest levels since May.

On the other hand, it was difficult to get a clear reading on what housing reports released during the week meant for the relative strength of the market. The supply of existing homes climbed to 11 months in June, while the supply of new homes dropped to seven months for the second time in a row. The U.S. homeownership rate rose slightly to 68.1% during the second quarter from 68% the previous one, but was still below the 68.3% level a year earlier.

While most analyst still don’t see a true mortgage rebound occuring until early 2009, this Federal relief package should help stabilize the Texas home market and prevent further sliding of house prices across the state.  The long of the short of the Federal bailout is that it is a temporary fix that will only expand the life of this recession. To describe one economist opinion “It’s like giving a heroin addict a fix instead of rehabilitating him. It solves the short term problems, but does nothing to address the long term.”

A lot of my customers have questioned me in the last few weeks as to why interest rates are jumping - even as the Fed is busy cutting interest rates.

What happened is that mortgage rates jumped by three-quarters of a percentage point in a matter of weeks — reversing a sharp drop that began in the middle of last year.

Here’s Mr. Bernanke’s answer to Congressman Guiterrez from the Congressional hearing:

“Even as the Fed has lowered interest rates, and as the general pattern of interest rates has declined, the pressures in the credit markets have caused greater and greater spread, particular for risky borrowers, like risky firms, for example,” he said. “Our easing is intended to, in some sense, you know, respond to this tightening of credit conditions. And I believe we’ve, you know, succeeded in doing that, but there certainly is some offset that comes from widening spreads. This is what’s happening in the mortgage market.”

The Congressman moved on to another question, leaving the discussion of tightening credit and widening spreads for another time.

But, judging from our mail, the question is still on many readers’ minds these days. How can mortgage rates go up if the Fed is cutting rates? Doesn’t that mean that banks are, in effect, price gouging?

It turns out that lenders don’t control the price of long-term loans any more than consumers do. What’s happened in the past month or so is that, even as the Fed has been aggressively slashing short-term rates — and flooding the banking system with as much money it will take — the global capital markets are still very nervous about the latest headlines on rising foreclosures, a weakening economy and losses from banks and other lenders that have topped $100 billion — so far.

It turns out there are two mechanisms for setting interest rates. All the Fed can do is target the interest rate paid by U.S. banks for overnight loans among themselves. But using short-term loans to back long-term mortgages can be risky.

If National Bank takes out a short-term loan of $200,000 from the Fed and lends it to Tom the HomeBuyer for 30 years, it still has to come up with $200,000 right away to pay it back. It could do so with another short-term loan, but then it has to keep doing this over and over, indefinitely “rolling it over.” If, during this process, short term rates go up, the bank loses money. 

That’s why mortgage lenders making long-term loans turn to the capital markets — a global network of banks, corporations, institutions, pension funds, governments and individual investors who buy and sell money. When these players lend money for the long term, they agree to get paid back in installments, plus an interest rate that’s usually fixed for the life of the loan. As long as the rate the mortgage lender agrees to pay the investor is lower that the rate it charges its customer, the lender makes money.  Visit Texas Mortgage Lenders for current mortgage rates.

With a light schedule of economic events, Texas investors focused on a stream of Fed officials making appearances last week, and two conflicting themes emerged. Thursday, the Fed’s Fisher emphasized that the risk of higher future inflation remains a concern, and Texas mortgage rates rose after his comments. Friday, however, the Fed’s Yellen pointed out that the risk of slower economic growth or recession has increased. A decline in economic growth generally leads to lower inflation, so it was viewed as good news for mortgage markets. As a result, mortgage rates fell, ending the week just a little higher than the previous week. In contrast, slower economic growth and higher inflation are both unfavorable for stocks, and the Dow suffered a 500 point loss during the week. Friday, the government moved closer to passing an economic stimulus package which President Bush has signed, is expected to boost economic activity as well as help the housing market, and the passage of the bill appears to be imminent. Under the terms of the pending legislation, Fannie Mae and Freddie Mac will temporarily be allowed to purchase or insure loans up to 125% of the median home price in the area, subject to a maximum cap of about $730,000, which means that in some markets loans above the current limit of $417,000 will be considered conforming loans. FHA loan limits will increase as well, according to a similar formula and subject to a maximum of 175% of the current limit. Qualifying loans should have lower rates than if the limits were not increased, making homes more affordable and refinancings more attractive. In the Houston, TX housing sector, the December Pending Home Sales index fell more than the expected from November, and the index was down -24% from one year ago. Pending Home Sales are a leading indicator of future housing market activity, so the next Existing and New Home Sales reports may show declines. The National Association of Realtors (NAR) latest forecast predicted that conditions will remain soft for the first half of 2008, but that activity will pick up during the second half of the year.