HSH Market Trends

Finally: Mortgage Relief for the Masses

November 28, 2008 — The Federal Reserve announced this week a plan to support good-credit quality mortgage markets like never before. A truly massive, $100-billion plan to buy up both Fannie and Freddie-issued debt — coupled with another $500 billion to snap up agency-backed MBS — produced an immediate effect in mortgage markets. From Monday’s to Tuesday’s close of business, conforming 30-year mortgage rates declined nearly a third percentage point and remained there on Wednesday.

It was the largest single-day decline since September 8, when the GSEs were put into conservatorship with the goal of ensuring their function in the marketplace — no certain thing at that time. Also, it is precisely the kind of program we agitated for in last week’s Market Trends — a program which would improve the lot of the good-credit-quality borrowers who are being ‘asked’ to subsidize the rest.

We saw a sizable dip in overall rates this week. HSH’s Fixed-Rate Mortgage Indicator (FRMI) eased by 21 basis points (.21%), finishing the week at an average 6.46%. All of the decline came from the conforming component of the index, as 30-year FRM jumbos edged down by just three basis points. The overall average for Five-one Hybrid ARMs actually increased by .03%, ending the survey week at 6.35%.

HSH’s FRMI includes conforming, jumbo and expanded conforming mortgage prices. See the latest trending charts for these and other series.

The new program’s effect will be multi-pronged.

The most obvious effect comes from what will hopefully be renewed interest in buying homes. Lower interest rates serve to improve borrower affordability, and that could bring at least some new home sales. That increase in demand could serve to temper — perhaps even halt — ongoing declines in home prices. One of the keys to re-sparking the investor demand for mortgages so lacking in this market — and keeping interest rates higher than they would ‘normally’ be — is some belief that should a loan fail, the investor has at least a chance to recover his money. With prices falling, that’s not even close to the case, so investors have stayed away.

Perhaps as — perhaps more — important than that support is that potentially millions of mortgages may able to be refinanced profitably as rates decline. Lenders reported to us, in the course of our regular survey, that their phones came alive this week as news of lower rates hit the street. Obviously there is pent-up demand available, and any number of deals ready to go if rates fall to the right level.

Those refinances can have tremendous economic effects. Borrowers recasting their balance sheets can free up tens or even hundreds of dollars per month to pump into the economy — no better or cheaper stimulus can be found anywhere. That’s the fatal flaw of one-time stimulus checks: they usually don’t change a person’s financial situation, because a one-time check is viewed as ‘found’ money and is more likely to be saved than spent. On the other hand, resetting household obligations — by reducing one’s recurring mortgage payment, for example — makes them more manageable, more stable, and less likely to fail under the considerable stressors in the economy. It also helps that fee income is generated by refinances, which serves to support jobs in the mortgage industry.

One other beneficial consideration, but an important concept, is that lender holdings — frozen and illiquid in light of today’s markets — don’t need to be shed to other entities (often at losses) in order to properly rebalance a portfolio. Refinancing of mortgage debts will make that happen organically, freeing up cash for the rebalancing process; an investor could lighten his position in mortgages without selling at fire-sale prices in favor of adding some new investment into his fold. Hopefully, these returned-to-investor monies ultimately make it into more productive forms of lending, rather than being parked in Treasuries. Regardless, the ability of an institution to change its holdings to develop a more desirable investment portfolio can significantly improve its balance sheet too, helping to promote stability.

This also may help more naturally unwind other complicated debt structures — the CLO and CDO holdings which have vexed so many investors.

If the plan works fully, we could see more stable home values, some economic benefit and more stable financial institutions… and perhaps, just perhaps, some new interest from investors in buying today’s well-underwritten mortgage loans. That would truly drive interest rates downward, but probably isn’t in the cards anytime soon.

While the Federal Reserve program is perhaps the single biggest influence on rates this week, we’d be remiss if we didn’t mention the huge retrenchment in benchmark 10-year Treasury yields. While their relationship to 30-year FRMs remains changeable and fractured in this environment, the decline in yield for the 10yr TCM from around 3.8% for much of this month, to Friday’s closing of 2.98%, is a precipitous drop and does help to pull rates down a bit as well.

That decline in rates mirrors the woes in the economy.

With regards to home sales, well, they could use a little boost. Existing Home Sales have largely stabilized around 5 million annualized, and October’s 4.98 million rate of sale was about typical of the last few months, albeit a decline from September’s considerable increase. Inventory levels ticked back up to 10.2 months of available supply at the present rate of sale, and prices rang in at 11% below last October’s level.

Much the same was the story for new home sales. An annualized rate of just 433,000 was the report for October, rather below expectations. The slump in demand for new homes is unsurprising, given the values available in foreclosed existing homes. Prices here declined by 4.25% during the month, but sale prices are pretty much the order of the day everywhere. It also bears mentioning that many new home developments lie far outside city cores, adding to commuting costs and time. While gasoline is ‘cheap’ again, the effects of $4+/gallon gas remain fresh in the minds of daily commuters.

With the decline in demand, the available months of inventory moved back to 11 months of supply. However, the actual hard number of available constructed homes is now just 381,000 units and falling steadily. New building activity may be a ways off yet, but the need to build comes closer with each passing month.

Of course, building requires capital and demand. With the economy weak, neither is a certainty. The Preliminary estimate of Gross Domestic Production (GDP) came in lower than the Advance, sporting a decline of 0.5%. That mildly negative number will likely be downgraded again somewhat at the end of December when the Final quarterly figure is released. Fourth-quarter estimates won’t come until January’s end, but they should finally actually confirm that we’re in a recession, technical definitions being what they are.

Consumer moods continue to be downbeat. The Conference Board’s report of Consumer Confidence actually rose to 44.9 in October from 38 in October, but that only puts it back into “terrible” territory. Other indicators, like the University of Michigan survey of Consumer Sentiment found no such boost, but instead a mild decline from October’s 57.9 to November’s 55.3 mark. The high-frequency (weekly) ABC News/Washington Post poll of Consumer Comfort held steady at an all-time low of -52 for the week ending November 23. Many things will need to improve before moods do, including job growth, investment growth and more.

New unemployment claims ticked back a little, landing at 529,000 new applications filed during the week of November 22. Hiring remains non-existent, or weak at best, but the number of people receiving on-going benefits slipped back below the 4 million level last week, so that’s perhaps a little better news.

With retailers’ “Black Friday” coming in just two days there’s little advance reason to expect a hugely profitable day. Personal Incomes did manage to rise a better-than-forecast 0.3% in October, but all of those gains and more never made it to the store, as personal spending declined by a full 1%, goosing the nation’s saving rate to a stout 2.4% for the month. Consumers hunkering down is not what retailers want to hear coming into the season which generates much of the year’s profits. Of course, we’d love to be proved wrong on that score.

Fewer shoppers means less ordering of more goods. Orders for Durable goods declined a troubling 6.2% in October, and even leaving out aircraft left a 4% hole in orders. Manufacturers are being hammered, and localized reports covering the Richmond, Kansas City and New York Federal Reserve regions are pointed to considerable declines in activity, while a Chicago-area purchasing manager’s group noted a second consecutive month of barely any activity, with readings on par with those seen in the early 1980s.

It took a Herculean effort, but mortgage rates have come down. We hope the trend continues, but more likely we’ve simply found a new range to wander in. Still, rates are in the fives, and the longer they remain there, the more borrowers will notice and have a chance to take action. The onslaught of data resumes next week with the ISM survey, auto sales, the employment situation and more. Few bright spots are likely, so rates will probably entrench themselves in the new range to a greater degree, with a slight decline likely.

We’d like to take a minute to express our thanks for all our loyal customers, clients and subscribers. We appreciate you even more during these difficult times, and look to serve you to an even greater extent when your own fortunes improve. Happy Thanksgiving to all of you.

HSH is closed on Friday for an extended long weekend.

For today’s top stories, see the HSH Finance blog. For a longer-term analysis, check out our Two-Month Forecast.

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