Mortgage Topics

Mortgage rates are down more than 0.5% just this morning on news of the U.S. Government bailout of beleaguered mortgage giants, Fannie Mae and Freddie Mac.

ACTION STEPS
Homeowner:

• If you missed out on refinancing in January and April of 2008 when mortgage rates were lower, this is a golden opportunity to secure your mortgage into a low fixed rate loan. Rates on 30-year fixed mortgage had gone up to 6.875% this summer.

Homebuyer:

• If you are in the midst of purchasing a home, the timing couldn’t be better to secure a solid low rate.
• Keep in mind the deadline for lower conforming-jumbo loan limits. Conforming loan amounts will go down from the current $729,750 to $625,500 starting January 1, 2009.

BACKGROUND
Fannie and Freddie the two government sponsored entities have been leaking major cash since the advent of the credit crises 12 months ago. The two firms have reported $14 billion in losses over the past year. There was mounting concern over the companies rapidly shrinking capital and increasing nervousness that large holders of their debt, including overseas central banks, would pull their money by selling mortgage bonds issued by Fannie and Freddie. If the companies were allowed to fail, this could have a devastating effect on the economy, leading to higher interest rates in overall consumer finance and further deterioration of the financial and housing crises, as we reported in our June newsletter.

IMPACT OF THE US TREASURY’S ACTIONS ON THE MORTGAGE MARKETS
Large institutions and foreign governments (most notably Europe, China and Japan) that have huge stakes in the two firms through holding of mortgage backed securities (MBS) issued by them can breathe a sigh of relief on assurance from the U.S. Treasury that their investments will be safer. This action has also given investors a lot of confidence to step in and buy more mortgage bonds. For a higher rate of return, investors can now buy mortgage bonds with the same guarantee as lower yielding Treasury Bonds, propelling investors to move money into mortgage bonds this morning. As we have noted in our February and June 2008 newsletters, purchase of mortgage backed securities makes yields attractive and thus go higher, while mortgage rates that can be offered on these MBS go lower. That is exactly what we are experiencing today, a rally in MBS purchases on increased investor confidence leading to lower mortgage rates.