February 12, 2010 — Weather issues and overseas financial troubles got much of the market’s focus this week, while mortgage rates remained quite stable. In fact, the last four weeks of averages for 30-year conforming rates all were within just a few basis points of each other, a remarkable bit of stability in a market which still faces many challenges.
The overall average for 30-year fixed-rate mortgages tracked by HSH.com’s FRMI declined by six basis points (.06%), ending a snowy northeast week at 5.36%. The FRMI includes conforming, jumbo and the GSE’s “high-limit” conforming products in its calculation. The FRMI’s Hybrid 5/1 ARM counterpart, shed just three basis points (.03%), during the latest survey cycle, landing at 4.57% at the close of Friday’s workweek.
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While ARMs aren’t very popular at the moment, they can still be used to a homebuyer’s advantage. A borrower buying a $375,000 home with a 20% downpayment would have a $300,000 mortgage. At recent rates, and compared against a traditional 30-year FRM, a 5/1 ARM would produce a savings of about $138 per month and would see a borrower spend over $11,000 less in interest over the 60-month fixed-rate period.
At the end of that period, the remaining balance of the loan would have shrunk by $3,000 more than the 30-year FRMs (that is, the borrower would have $3,000 more equity). This could be improved to a more significant degree by using the differential in payment ($138) as a prepayment for the ARM, which would produce another $9,000 in equity over that fixed-rate period.
Of course, selecting an ARM isn’t without risk; rates could rise in the future, eroding some of the accumulated savings. However, if a borrower banked the $138 per month for the entire period, they would have built an $8200 “mortgage subsidy account” to be used to ameliorate the effects of a rise in monthly payment after the 60th month. In the prepayment arrangement, they would have a $12,000 smaller loan balance, which would serve to partially offset the rise in monthly payment caused by a higher loan reset rate.
Of late, we continue to field questions about the coming end of the Fed’s MBS purchase program. As we wrote in the January 15 MarketTrends, we don’t think the end of the program necessarily means the end of low mortgage rates. As one condition, we mentioned that Fannie and Freddie might start to balloon their holdings of loans now that their portfolio limits had been lifted, and the first of what will probably be more such announcements came this week. The GSEs revealed plans to start buying back poorly- or non-performing loans from lenders and investors, as doing so will ultimately be less costly than making good on the loan performance guarantees the GSEs provide to these investors.
Daily FRMI rates are available on HSH.com.
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While technical in nature, this process will flush perhaps $200 billion dollars of cash back into the hands of Mortgage Backed Securities (MBS) investors; presumably, these market participants will begin the process of replenishing depleted holdings, and that appetite should serve to at least partially offset the Fed’s plan of diminishing involvement. At the same time, and free of size limits, Fannie and Freddie are under no pressure to immediately turn stocks of newly originated performing loans from lenders into new MBS, and so can mete or tune the supply of new MBS product to more closely match demand, which would also serve to keep the lid on any increases in rates. In this way, they would act in the same “sponge” capacity as the Federal Reserve, absorbing excess supply before it can distort prices in the market.
All this is to say that it appears that the Fed program is unlikely to be extended since a mechanism now seems to exist to perform the same essential function.
At the same time, questions have come about expiring homebuyer tax credits, which will conclude at the end of April. The program was last slated to expire in November 2009, but was not only rescued but substantially expanded at the last minute. However, the “damage” had been done; in anticipation of the expiry, sales flared higher in October and November, only to come crashing back to earth in December (and possibly January).
Will they expire? We think that there is a good likelihood that they will be extended, at least through the “spring homebuying season,” if not longer. In addition to the enormous political pressure sure to be brought by Realtors, builders, and other interest groups as we near the deadline, the spike in sales at the last expiry approached provides demonstrable evidence that the program works and has value. As such, “success” can be claimed, providing the necessary political cover to advocate extending the program… especially since the simple fact is that it if doesn’t work — that is, if it’s not being utilized — that it costs nothing. Deficit issues and the concept of whether we’re rewarding those who might have bought anyway will take a back seat. Keeping home sales going promotes home price stability, and that makes for less-grumpy voters as election time rolls around.
We’ll probably need any additional sales we can gin up in 2010, as the number of short sales and bank-owned sales from deed-in-lieu (DIL) and foreclosures are expected to continue to rise. With the recent changes to HAMP, where paperwork must accompany the request for a modification, fewer borrowers will enter trial mods, and instead skip right to short sale or DIL avenues required by the Home Affordable Foreclosure Alternative (HAFA) program. At the same time, many trial mods will continue to fail, then be pressed down the same pathways.
How all this rolls out, we’ll need to wait to see. In the meanwhile, there are economic concerns to keep our attention, and some of the above may be affected if the economy grows or continues to stumble.
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|Current Adjustable Rate Mortgage (ARM) Indexes|
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Sources: FRB, OTS, HSH Associates.
There were a few positive signs out this week, most notably that Retail Sales managed a 0.5% gain in January, a figure which improves to a 0.6% lift when auto and gasoline-station sales are excluded. Gift card redemption during the month now technically extends the holiday shopping season, which started strong in November, eased considerably in December but ended on a pretty reasonable note. It’s interesting to note that sales gains are happening even as credit usage continues to decline; more folks are using cash and debit cards to pay for purchases, and revolving credit card balances have been declining now for 15 consecutive months. Of course, there are now consumers who are making payments on their credit card account even as they eschew mortgage payments, an interesting turn of credit events brought on by the “great recession.”
Increases in sales were the impetus for a drawdown in December inventory levels at businesses of all stripes. After months of stockpile reductions, inventory levels got lean enough as to warrant some rebuilding in October and November 2009 in anticipation of a firming sales climate, and that does seem to have been the case. The renewed depletion means that more orders are likely to come, improving somewhat more the strength of the manufacturing-led economic recovery.
Another hopeful signal was that weekly unemployment claims dropped back to 440,000 for the week ending February 6. The substantial drop could be a signal that we’re moving back toward the downward trend established as 2009 waned (then distorted upward by holiday adjustments), or it could be that the wicked storm in heavily populated areas late last week kept folks from getting to the unemployment lines. We’ll need a few weeks to sort out any new trend here.
One thing that might help the trend is some certainty from Washington. A new tens-of-billion-dollars “jobs” bill has been expected, but seems likely to end up a watered-down mess which would be largely ineffective. The present business climate — ranging from bashing business executives, to potentially huge future tax increases, to enormously costly cap-and-trade rules, to a budget-breaking health insurance reform bill — continues to push business to sit back and wait to see what develops, preventing a stronger recovery from forming. Businesses prefer clarity and the ability to plan for the near and distant future, but this climate provides very few certainties on which to base plans and forecasts. At the moment, if we cannot have leadership in one direction or the the other, gridlock will make an acceptable substitute, provided we can count on it for a while.
Faced with these things, it’s little wonder that consumer moods and attitudes cannot improve. The weekly ABC News/Washington Post poll of Consumer Comfort sits steadily in bleak territory; at -48 for the week ending February 7, holding tight to the middle of its recent range. As well, the preliminary value for the University of Michigan survey of Consumer Sentiment was virtually flat, coming in at a reading of 73.7 after posting a 74.0 figure to close last month. In both cases, we remain a long, long way from from the “happy” levels which are said to promote strong consumer spending.
Looking forward to next week, there is the President’s Day market holiday on Monday, so we’ve a short week to contend with. Treasury yields moved up some this week, amidst another sizable auction of Treasury Debt, and enough to suggest that rates will be moving somewhat higher as we roll into next week. That’s where we’ll start on Tuesday, and that leaves out the effects of new reports on housing starts, producer and consumer price indices, industrial production and the minutes of the last Fed meeting. Based on where we are ending this week relative to last week, we think there will probably be perhaps an eight basis point increase in the overall 30-year FRM average by week’s end.
It’s never too late to look ahead. If you’ve got a couple of minutes, you should check out our 2010 Outlook for Mortgage Markets and Rates. It covers what we think are the ten most important considerations for the market next year.
Our latest two-month forecast offers our predictions for the immediate future.
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