Mortgage Rates Weekly Review, August 6, 2010

Mortgage Rates Play Waiting Game Before Improving

Summary

Our week of forecasting mortgage rate activity has been similar to my family's experience with my teenage daughter...hurry up and wait!  Much like waiting for my daughter to have her "look" perfectly together, and hearing her wavering back and forth in her self-opinion as she gazed into the mirror, the mortgage market this week played a similar waiting game.  But unlike my daughter who had the mirror to guide her through the evaluation process, the mortgage market had to wait until Friday to have a clear look at the economy.  The uglier the economy, the prettier the mortgage market. 

The Week in Review

The Friday Non-farm Payroll Report was known to be factor that would decide the ultimate position of mortgage rates prior to the week even beginning.  Thus, despite other economic data and news, mortgage rates net move for the week was neutral until today.  Monday saw mortgage pricing head slightly higher after a strong stock market rally and better than anticipated manufacturing sector data.  Tuesday's results were the reverse of Monday's as stocks turned lower and mortgage-backed securities (MBS) demand improved on a report that the Federal Reserve was considering re-initiating MBS purchases.

On Wednesday very little movement in mortgage pricing took place, though what little movement there was, pushed mortgage pricing slightly higher.  Thursday, according to pattern, saw an exact reversal from Wednesday's move in MBS pricing. Which brought us to Friday morning's decisive data release; the Non-farm Payroll Report.

At precisely 8:30 AM ET, the report was released, revealing the true ugliness that is creeping into our economy. Payrolls decreased significantly more than expected and revisions to previous months indicated that even more jobs were lost than had been previously documented.  The response in the stock market and MBS markets was instantaneous resulting in improved initial pricing from lenders this morning which has held throughout the day. Despite the clear direction in mortgage pricing, the actual impact for consumers is quite small, representing a mere fraction of a single percentage point.  Yet every pricing improvement creates a new all-time low.  It's a great time to get a mortgage--if you can!

Will Fannie and Freddie pull an October Surprise?  Can we solve the housing crisis and impact the immigration issue at the same time?

Rumors circulated among analysts, traders and the financial media this week that the Obama Administration was considering directing Fannie and Freddie to write-down the principal of loans held in their portfolio or guaranteed by them, as an economic stimulus measure.  The story went something like this...

Fannie and Freddie would reduce the principal on mortgages held or guaranteed by them.  This in theory would assist those borrowers in the loan modification process, resulting in more affordable, modified terms.  This would stimulative to the economy, it is speculated, because borrowers mortgage payments would be reduced, thereby freeing dollars for them to spend on other things.

A Treasury spokesman did respond to the rumors saying that they had "no plans" to pursue such a strategy.  The proof will eventually be clear to see.  The political calculus involved may ultimately determine whether the Administration does propose such a strategy.  Will enough distressed homeowners benefit from such a move to offset the number non-distressed homeowners and non-homeowners alike that would be upset by the prospect of paying off portions of other people's mortgages with their tax dollars?

My own perspective is that it is a horrible idea.  The government's involvement in the housing sector is largely responsible for the mess we are in.  Actions of the kind rumored would simply extend the pain that the housing collapse is causing in our economy.  Housing values would erode even further, creating distress for even more homeowners.  The national debt would soar (further), and in a very compressed period of time, providing a shock to bond market.  Our ability to finance our national debt going forward could be greatly imperiled.  Inflation in every sector other than housing would likely increase.  Perhaps the greatest damage would be political, with citizens' financial interests being pitted directly against one another, with the government deciding whose interests would prevail. 

I wanted to get an expert's opinion, so I spoke with one of the wisest people I know in the mortgage industry.  Donald Henig is a senior mortgage and distressed real estate professional, who has been on the cutting edge of the industry through the good times and the bad.  I asked Don for his perspective on the Fannie and Freddie rumor:

I think it is just that, a rumor.  They (Fannie/Freddie) should enable refinances to be done at any loan-to-value, as opposed to forcing people into the modification process, which does not work well.  Let the industry help get things done.  Imagine if all the Loan Officer’s knew they didn’t have to worry about the value on a currently owned Fannie or Freddie loan?  Everyone would benefit.

So, Mr. Henig's contention is that enabling those underwater (they owe more than their house is worth) to refinance their existing loans at current, all-time low mortgage rates is a better solution.  Let's see: lower payments for the homeowner, no write-downs for the lender, no tax dollars used to provide a selective benefit, no sudden increase in the national debt, etc.  Yep, that sounds like a better approach to me!  While not perfect, in that some homeowners will still not be able to afford their mortgages, this approach seems much fairer to everyone involved and spreads the pain out in such a way that it will not shock our economy.  Very wise indeed!

During our conversation, Don surprised me with a sidebar on how we might solve the issue of the glut of housing that is keeping prices down, and also impact the immigration debate.  While the subject of immigration reform is quite complex, Don's idea is so creative that I believe it deserves discussion. 

Essentially, Don's proposal is that the US government recruit homebuyers from around the world using the offer of lawful immigration as an incentive.  With roughly 1.1 legal immigrants being permitted into the US each year, it would only take a few years to eliminate the excess inventory in the US if a large percentage of those allowed in were required to buy a house. Not only would the housing inventory be significantly reduced, but as Don says, "Prices would rise.  These new immigrants would buy furniture, appliances, paint….  Consumer spending would rise.  Jobs would be created."

Some would argue that such a criteria has no place among those used to select people to be granted entry into our country.  Yet, we already have a special program that offers immigrants with special skills such as engineering, preferred access.  These skills are stipulated to be "vital to our nation's economy".  At this point in time, immigrants that are willing and able to purchase a home in the US, might very well be similarly "vital" to our nation's economy.  Thanks Don!  Readers, send me your thoughts on this interesting idea.

Next Week

The big event next week that could move mortgage rates is Tuesday's Federal Reserve Open Market committee meeting. How will the Fed respond to increasing signs of economic slowdown?  Also, on Tuesday the monthly Productivity report will be released. Wednesday brings a look at the US trade balance, while Thursday delivers data on Import Prices and Jobless Claims.  Overall expectations are for more data illustrating an economy in poor shape.  This should continue to pressure mortgage pricing in a downward direction, yet outside of a big surprise, still in a narrow range.