Fixed Mortgage Rates as Flat as Economy
February 8, 2008 -- Weary mortgage markets found little reason to
move much in one direction or another this week. The overall
combined average for the 30-year fixed rate mortgage (FRM)
finished the week at 6.21%, unchanged from last week's final
average. Five-one Hybrid ARMs marched higher by twelve basis
points (0.12%), ending the nation's leading survey of mortgage
pricing at 5.57%.
There was only a slight improvement in the differential between
fixed conforming and jumbo , which narrowed slightly
to just under a percentage point.
30-year FRMs closed the week at 5.77%, a level low enough to keep
rs coming into lender offices.
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|Current Adjustable Rate Mortgage (ARM) Indexes
||For the Week Ending
|Feb 01||Jan 04||Feb 02|
|FHFB NMCR||6.23% ||6.35% ||6.45%|
|SAIF 11th Dist. COF||4.072%||4.172%||4.358%|
|HSH Nat'l Avg. Offer Rate||6.21%||6.47%||6.45%|
|Get the most popular indexes from ARMindexes.com.
Email and direct-to-database delivery are available.
Sources: FRB, OTS, HSH Associates.
FOR BORROWERS WHO NEED a jumbo mortgage -- or have one
now -- some interest rate relief may be on the way... or not. The
congressional "economic stimulus" package made it through both
houses in short order. While the cash rebates will be welcomed by
many, we'll be watching the effects of the expansion of conforming
loan limits in certain geographic markets and for certain
borrowers. Exactly which markets, which borrowers, what sort of
rates and terms, and how soon these "expanded conforming loans"
will become available is still unclear, but any number of high-cost
markets will see at least some borrowers enjoying the
opportunity to shave perhaps a full percentage point off the
interest rate they otherwise would have to pay.
At the moment, it's hard to tell where the benefits will fall. The
index used to calculate the high cost areas isn't available yet
(it may be based upon certain indexes used in the past, or it
might be a new one); without that, the potential benefit to a
given area can't be known. About all that is known is that
the formula used will be that of a 25% increase from the median
home price in a defined marketplace, with a 'maximum maximum' loan
amount of $729,750.
Even once those geographic areas are established, exactly how many
borrowers will ultimately be helped is unclear, too. Aside from
the arbitrary $417,000 starting point, jumbo (aka non-conforming)
mortgages frequently have different underwriting characteristics
than do conforming loans, so a borrower may not be able to fit
into the strictures of conforming criteria in order to meet those
There's also the not-so-small matter of the markets themselves.
Fannie and Freddie have not yet revealed how these expanded
conforming loans will be priced. Will they be available at the
same rates and terms as the more traditional conforming loans are
now, or will there be some premium for loans above the present
BUT AN EVEN BIGGER QUESTION will be: how will investors react? One
reason that the conforming loan markets remained so liquid during
this credit crisis is because the loans which are packaged and
ultimately turned into securities are trusted instruments, made in
a well-known, fully understood and historically modeled process.
While adding jumbos into the mix may be a change for good (or
not), the simple fact that there is a change adds an unknown level
of risk. Investors faced with unknown risks frequently demand
higher compensation (yields, in this case), and it's certainly
possible that all conforming borrowers might ultimately end
up paying a higher rate than they would have without this rescue
Did we forget to mention that this plan is temporary? It will only
cover those loans made from July 2007 through the end of this
year. The 'back-dating' provision is presumably to allow portfolio
lenders (so important in maintaining liquidity to jumbo markets
these last six months) a chance to sell loans off to the secondary
markets if they wish to clear their books and free up some capital
or lessen loan-loss reserve needs. Depending upon how quickly the
above concerns are addressed by the regulators, the time window
for these "enhanced conforming" loans could be brief.
HOW IT WILL ALL WORK OUT is quite unknowable at the moment. The
lever has been pulled and the wheels are spinning; what will come
up is anyone's guess at the moment. As things become clearer,
we'll cover them here.
One thing about mortgage markets is certain, though: Underwriting
requirements are continuing to tighten, making it harder on
balance to obtain a new mortgage loan. According to the Federal
Reserve's latest Senior Loan Officer Opinion Survey, some 53% of
respondents tightened requirements for prime-quality borrowers,
72% for subprime borrowers, and a whopping 85% for non-traditional
mortgage borrowers. Non-traditional mortgages include
PayOption ARMs, loans with interest-only payment structures, and
other such products. Lending criteria have also become more rigid
for commercial and industrial loan borrowers, raising new concerns
that economic growth may suffer from additional dehydration due to
a lack of credit liquidity.
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While there is little doubt that the economy is staggering along,
the Institute for Supply Management survey of service business
pointed to a hard downshift in activity in January among
non-manufacturing firms. Their index plummeted from a
moderately-expanding 54.4 in December to a considerably-contracting
41.9 in January, the weakest reading in the history of the survey
(nearly ten years). There was a revision to how the number is
calculated with this month's data, but revision or no, the figure
was quite weak.
Consumer outlooks were also weak. The weekly ABC News/Washington
Post poll of Consumer Comfort sported a fourteen-year low level of
-33 during the week ending February 3. The six point drop in the
index may have been inspired by the slew of negative news
emanating from presidential candidate's camps leading up to the
Super Tuesday primaries. Of course, the groundhog's predictions of
the winter yet to come (or not) may have soured moods, too. If
either is the case, some rebound may be likely next week, but
probably only a little.
Although the broadest measure of Factory Orders expanded by 2.3%
in December, the fourth consecutive monthly increase, the
stockpiling of goods on intermediaries' shelves points to a
slowing of orders to come. In December, inventory levels at the
nation's wholesaling firms rose by 1.1%, and final sales slumped
by 0.7% during the month, indicating that more goods need to be
moved before new orders are placed. As a result, factories will
probably start out 2008 on a weaker footing.
While hiring remains quite soft, businesses are getting more out
of their employees, which is good news for those concerned about
inflation spreading beyond commodities. Worker output expanded by
1.8% in the fourth quarter of 2007, and unexpected increase from
the 1% seen in Q307. The costs of labor per unit of work produced
rose by 2.1%, a still-mild reading. For the year overall,
productivity rose by 1.6%, a healthy clip.
According to outplacement firm Challenger, Gray and Christmas,
more people are losing their jobs, with nearly 75,000 job cuts
announced in January. Given the weakening state of the economy and
the recent surge in new claims for unemployment, such
announcements are not surprising. Not all the job losses are
firings (some are by attrition), and not all are here in the US as
After a huge spike upward during the previous week, the number of
first-time unemployment claims eased back a little. During the
week ending February 2, some 356,000 new applications for benefits
were filed at state windows, an elevated number. However, the 22,0000
decline is at least a small move in the right direction.
Unsurprising to any retailer you might visit, consumer borrowing
rose by only a slight $4.5 billion in December, down from a $15.5b
binge in November. Credit card balances rose by just 2.1%, while
non-revolving debt expanded by 2.4%. Uncertain consumers splurged
in November, then retrenched in December, while initial reports on
retail sales for January have been soft (if perhaps not as dire as
feared) so far. The Retail Sales report is due out next Wednesday.
A light economic calendar this week is followed by a similar one
next week. The retail sales number could sway the market, as could
the price components reflected in import and export costs, or even
industrial production figures. As weaker news is most likely,
bonds might get a little additional bid on top of this Friday's
little rally, so mortgage rates may ease off by a couple of basis
points at best.
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