Tuesday, September 9, 2008

What Does Fan/Fred Takeover Mean for Mortgage Rates? And for Whom?

What does the Fan & Fred takeover mean for current mortgage holders, and what can it mean for prospective buyers?

Rates should go down:

"The average interest rate for a 30-year fixed rate mortgage dropped 0.3 of a percentage point to 6.04 on Monday, according to HSH Associates, and are expected to decline a little more in the coming weeks."

Why? Because the government has now taken on the "risk" of losses. For an explanation of this--and in 265 words!--click here.

Many people expect to see rates eventually drop much lower, somewhere around 5.5.

So for borrowers whose ARMs (Adjustable Rate Mortgage) haven't yet reset to a higher rate, help may be at hand.

However, the Treasury's actions probably can't stem the wave of foreclosures. The AP reports:

"President Bush earlier this summer signed a bill that aims to prevent foreclosures by allowing an estimated 400,000 homeowners to swap their mortgages for more affordable loans, but only if their lender agrees to take a loss on the initial loan."

"The Bush administration also has expanded guidelines for the Federal Housing Administration, which backs loans to borrowers with poor credit and small down payments. But that program has helped only a tiny number of borrowers who are actually behind on their mortgages."

"Of the 356,000 borrowers projected to use the government's refinance program through the year ending Sept. 30. — about 1.5 percent, or about 5,000 consumers, are likely to have been delinquent. The Bush administration says borrowers are taking advantage of the program before they fall into delinquency and notes that the program was expanded over the summer to allow more delinquent borrowers to qualify."

Still, there are
consumer advocacy groups who want more help for mortgageholders in trouble:

"Consumer groups were already urging the government to place more pressure on Fannie and Freddie to aid borrowers in trouble."

"'Since we are using tens of billions of dollars to bail out entities engaged in these lending practices, it's time for the nation to demand those same entities fix it by restructuring loans and avoiding the further demise of the housing market,'" said Bruce Marks, chief executive of the Neighborhood Assistance Corporation of America, a Boston-based group that helps troubled borrowers."

There's talk of more congressional action. We doubt, as do minds greater than ours, that anything will happen before there's a new President in place.

Of course, a takeover was inevitable. From the WSJ:

"Fannie and Freddie's credit problems are largely a reflection of the overall weakness in the housing market. Some 9.2% of mortgages on one- to four-family homes were at least a month overdue or in the foreclosure process in the second quarter, according to the latest survey of the Mortgage Bankers Association. That is the highest percentage in the 39 years that the trade group has been doing the surveys."

"Make no mistake, anybody in the mortgage business is going to see much higher losses than they thought they would a year ago because we've had the worst housing market and the largest home price declines that anybody has seen," said Thomas Lawler, a housing economist in Leesburg, Va., who formerly worked for Fannie.

Additionally, from the WSJ:

"[Fan & Fred] are also exposed to some of the mortgage industry's most troubled players. Countrywide Financial Corp., now part of Bank of America Corp., was the largest provider of loans purchased by Fannie Mae, accounting for 29% of its business in 2007, according to Inside Mortgage Finance, and was the second largest source of loans for Freddie Mac, with a 16% share.

IndyMac Financial Corp., which previously had focused its business on Alt-A loans that didn't meet Fannie and Freddie guidelines, switched to a policy of making loans that could meet their standards in 2007."

Countrywide Financial is being sued in a number of states; the Center for Responsible Lending even has a database of the lawsuits. And many expect Angelo Mozilo, former chair, to be indicted for fraudulent lending practices.

IndyMac failed this summer, after a bank run.

So yes, mortgage rates will drop. But let's keep things in perspective: This takeover is going to be paid for by taxpayers--billions and billions of dollars. A little saved on the mortgage will go right back to the treasury via higher taxes.

And as for the prices of houses? The takeover does nothing for the gigantic supply. Nationally, there's about 11.2 months of inventory. Locally, there's over 14 months of inventory.

Prices on houses will come down, but this of course is dependent on how much an individual seller really wants to sell.


brokerex said...

Refis may increase, GSE fees (points paid for credit score, loan to value, etc) may decrease in the near term. Purchasers of real estate will probably still stay on the sidelines...

matt s. said...

Depends on how long Paulson can keep investors such as China and Bill Gross invested in the dollar.

Deals were made- Hank saves their bond investments, and they keep buying his bonds. For how long, a day or a year? How long can he keep juggling this mess?

If it becomes clear that they, rather than American taxpayers, are the ones putting up the next round of bailout capital, and it disappears into the black holes of bank balance sheets, like Ben's emergency cash infusions do, it won't last long.

Inflation increases would necessitate interest rate hikes to keep them in the game. This would be in direct opposition to pressure building yet again to lower rates to counter the continuing declines in the economy.

They can't keep doling out money to/for the banks AND keep bond holders happy at the same time. Rock meet hard place.