Saturday, April 11, 2009


The mortgage market is working, thanks to government support. Refinancing volumes of existing mortgages have soared, up 40 percent since the December 2007 beginning of this recession, according to the Mortgage Bankers Association mortgage applications survey. The purchase market has been hurting with the MBA Purchase Index down approximately 58 percent from 2007 highs. The precipitous drop in purchases began in January 2008, at the beginning of the recession.

Some 80 percent of applications are either conventional conforming or high balance conforming loans sold to Fannie Mae, Freddie Mac or FHA. Fannie and Freddie offer the full range of adjustable and fixed mortgages, but in fact the 30 and 15-year fixed rates are the most popular, since only the 5-year fixed rate ARM has a lower conforming rate.

Fixed rates have been fluctuating between 4.75 to 5.25 percent since January. They have been edging up because of the massive volume of refinancings. Part of the purchase slowdown is attributed to rumors that the new Homeowner Affordability and Sustainability Plan (HASP) will include a buy down of interest rates for a purchaser.

But in fact HASP makes no distinction between purchase and refinance transactions. HASP reduces monthly payments either by offering a lower rate to a floor of 2 percent for conforming loans with payments above 38 percent of gross monthly income, or with a principal amount between 80 to 105 percent of current home value. It can also offer a 40-year amortization period if payments cannot be brought down with the other measures. The Treasury Department will also have some assistance for those with equity line second trust deeds that need to be paid off to qualify.

New HUD Secretary Shaun Donovan, who regulates Fannie and Freddie, said in an interview that this will also apply to existing jumbo mortgages up to a high balance maximum of $729,750. Lenders who participate will be required to offer the Treasury’s plan to all of its mortgages that fit the criteria, not just its worst.

The consensus is that this should help to bring down interest rates even further. Both the Treasury Department and Federal Reserve are also working to bring down rates by buying up Mortgage Backed Securities. These are the securities that pool mortgages sold to Wall Street, many of which have become toxic, or non-performing.

All of these efforts have caused the NAR’s Affordability Index to soar to 166.8, 55 percent since its 2006 low. This means that a household with a $59,821 annual median income can now afford a home that is 166.8 percent above the current existing-home median price. Affordability has risen because of a 23 percent drop in the median home price, while the conforming 30-year mortgage rate has fallen almost 1.5 percent from 2006.

We will have to wait for the jumbo market to come back to life. Most of the non-performing assets were either jumbo subprime or negatively amortized, teaser rate ARMs. And so the Treasury is willing to guarantee up to $1 trillion of those assets in a public-private partnership with hedge funds and their like, in order to help establish a market price for them, since no one knows their value at present.

But those assets cannot really be valued until a floor has been established on foreclosure rates, which is in turn dependent on whether HASP is able to keep more people in their homes. That will in turn set a bottom to real estate values, and only then will we see a broad improvement in the real estate market.

In fact, the combination of improving affordability plus willingness of the federal government to spend what is necessary to stabilize the mortgage market is what is needed to resolve both the banking and credit crises.

Harlan Green © 2009

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