Fannie, Freddie, and Bernanke

The biggest economic news of the week was expected to come from Fed Chief Bernanke, but a surprise announcement from OFHEO had the greatest impact on mortgage markets. Wednesday, OFHEO, the government regulator of Fannie Mae and Freddie Mac, announced that it will remove the limits placed on the portfolio sizes of the two companies as of March 1. This will enable the two companies to make or guarantee more loans. The limits had been instituted to constrain the growth of the companies while they fixed accounting errors. To make significantly more loans, the companies will have to raise additional capital, which will take some time. The regulators also announced that they are considering a reduction in the capital requirements the firms must hold for each loan, and this would accelerate the ramp up in loan volume. This measure follows the recent temporary increase in the conforming loan limits for Fannie and Freddie. The potential for Fannie and Freddie to increase their activity drove down mortgage rates. After rising Monday and Tuesday, the OFHEO news turned mortgage rates around on Wednesday. They continued to decline for the remainder of the week, finishing moderately lower than the prior week.

Also on Wednesday, Fed Chief Bernanke presented his semi-annual testimony before Congress. Overall, there were few surprises. Bernanke painted a grimmer picture of the risks to the economy than he had in the past. While he acknowledged that higher inflation is a threat, he expressed greater concern about slower economic growth. He sees housing market activity stabilizing later this year, while adding that home prices may continue to decline into next year. Bernanke also suggested that FHA modernization and Freddie Mac and Fannie Mae regulatory changes are “crucial” going forward.

 In the housing sector, the news was mixed. January Existing Home Sales fell by less than expected, but inventories of unsold homes rose by more than forecasted. Median existing home prices fell by 5% from one year ago. Meanwhile, January New Home Sales fell to a 13-year low. The Mortgage Bankers Association (MBA) activity index, which is released every Wednesday, showed a decline in the level of refinancing activity due to the rise in mortgage rates. Mortgage rates have declined since the data was collected, however, meaning that increases may be more likely next week.

 Compliments of Corey Phelps, Front Street Mortgage (231) 360-7283; email: corey@frontstreetmtg.com

A Roller Coaster Ride for Mortgage Rates

The short week turned out to be one of the most volatile in recent years. Early in the week, mortgage rates surged to the highest levels of the year, before they turned around and recovered nearly to their starting level, leaving only a small rise for the week. With the Fed cutting rates and pumping liquidity into the economy, and the government implementing fiscal stimulus programs, mortgage investors became increasingly worried that the stimulus would lead to higher inflation, which is negative for mortgage markets. The major inflation data released during the week amplified those concerns, as the January Core Consumer Price Index rose at a 2.5% annual rate, which was higher than the consensus estimate. Perhaps contrary to what one would expect, the recent Fed rate cuts have led to higher mortgage rates as opposed to lower mortgage rates. To understand why, it’s important to understand that the Fed only controls short term interest rates. When they cut rates, it generally has the effect of increasing bank lending and consumer spending, which leads to more economic activity. Long term rates, such as 30-year mortgage rates, are determined by trading in financial markets and are highly impacted by expectations for future inflation. To a mortgage investor, a Fed rate cut increases the risk of higher future inflation, and that has been the dominant sentiment in recent weeks. This explains why 30-year mortgage rates have jumped 0.75% since the Fed’s aggressive January 22 rate cut. In the housing sector, the news was mixed. January Housing Starts rose slightly from December, while Building Permits, a leading indicator of future activity, fell to the lowest level since November 1991. The National Association of Home Builders (NAHB) Housing Market Index showed a small increase. According to the NAHB, builders have been attempting to reduce the inventory of homes on the market, and there has been an increase in the flow of prospective buyers.

 Compliments of Corey Phelps, Front Street Mortgage (231) 360-7283; email: corey@frontstreetmtg.com

Mortgage Rates Rise on Inflation Concerns

Fed Chief Bernanke told politicians that the Fed stands ready to cut rates as needed to stimulate the economy. The politicians approved of faster economic growth, but mortgage investors worried that the stimulus could lead to higher inflation and pushed mortgage rates to the highest levels since January 2. According to Bernanke’s testimony on Thursday, the Fed’s next forecast will lower the economic growth projections made in November. The Fed expects a sluggish start this year followed by a second half pickup in growth. They are concerned that housing and labor market conditions could deteriorate more than previously anticipated, which led investors to expect additional rate cuts.

Wednesday, President Bush signed into law the Economic Stimulus Plan. In addition to sending an estimated 130 million Americans a tax rebate check, this new law temporarily (through the end of 200 increases the size of loans that Fannie Mae, Freddie Mac, and FHA can buy or insure. The new loan limits will be determined based on the median home price for each Metropolitan Statistical Area (MSA). Only MSAs with median home prices above $333,600 will see increases in the Fannie Mae and Freddie Mac loan limits. FHA loans limits will rise in most MSAs.

The Housing and Urban Development (HUD) agency has been given thirty days to publish the median home price for each MSA. It will take Fannie Mae, Freddie Mac, and FHA another thirty days or so to prepare their systems and implement the changes. In all, it is estimated to be about sixty days before the new higher loan limits will be available. The expected benefit from the new loan limits is that credit will be more widely available and that qualifying loans should have lower rates than if the limits were not increased, making homes more affordable and refinancings more attractive.

Compliments of Corey Phelps, Front Street Mortgage (231) 360-7283; email: cory@frontstreetmtg.com

FED Cuts Rate by .75

Statement: NAR Commends Federal Reserve Board on Timely Interest Rate Cut

WASHINGTON, January 22, 2008 -  The following is a statement by Lawrence Yun, chief economist of the National Association of Realtors®, on today’s action by the Federal Reserve Board: “Today’s 75-basis-point cut in the Fed funds rate to 3.50 percent is a very good step in the right direction to boost the economy and send a clear message to both the market and to consumers.  This strong rate cut will help lower mortgage interest rates and lessen the burden of adjustable-rate loans that are resetting in the current environment.  It also could help stimulate business investment in the wake of market uncertainties.  We commend the Federal Reserve Board on its bold action, but at the same time we urge it to keep a close watch to see if additional action is needed.”