Hal's Mortgage Blog

That is what the government threw at the mortgage situation a week ago, when they took control of Fannie Mae and Freddie Mac. This is a big, big deal and needs to work, because there aren't a lot more things they can do that will have such an impact.

Let me take a few seconds to explore some of the impact of this takeover.

First of all, interest rates have dropped and should stay low, whatever that means. My take on that is, they should hover around mid 5's on a 30 year fixed. This should be for an extended period of time. However, rates never move in straight lines up and down, so expect some volatility.

Initially, the rate drop is mostly attributable to the government backing of the mortgage bonds. Now, mortgage bonds look like treasury bonds in investors eyes. And mortgage bonds have higher yields. So money moved from Treasury Bonds into mortgage bonds, driving interest rates down.

What leads to the feeling rates will stay down is the continued support of the US Government for one, plus the sense that foreign investors will come back into the US bond market strongly. In addition, large domestic investors are now in a buy mode for mortgage bonds (PIMCO). Plus, inflation may be showing signs of slowing, given current economic conditions and the price of oil dropping.

Overall, plenty of indicators of a favorable rate environment. It may be a good time to refi or purchase. Contact me to discuss.

Some things this bailout will not do is change the underwriting environment. It will continue to be very tight on qualifying standards. Jumbo rates and qualifying will stay elevated, for the most part. These loans are not purchased by Fannie and Freddie, so private sources need to fund them, and they are still suffering from low capitalization.

Some good news, though, for jumbo borrowers. (Jumbo is a loan above $417,000). The lending industry is realizing there is a very good block of business for some of the jumbo borrowers. Really good rates are being offered, but the lending criteria is VERY tight. You'll need help wading through these products, so call me on this, if you have a loan or combination of loans, that

exceeds $417,000. As a little teaser, a 5/1 ARM could be had on a purchase loan of $417,000+ for a rate in the low 5's.

The bad news? Well, there is the continued stringent underwriting criteria. Don't expect that to go away. Also, we have probably had the largest escalation of government size in any one day in history. That just makes me queasy. I always want to duck when the government says, "We're here to help!" We'll have to wait and see how much more bailout is required and how long this lasts.

Hopefully, the initial cost to the tax payer is mitigated by returns on the assets now in the hands of the government. I heard some numbers regarding the S&L bailout a couple decades ago. The initial cost was placed at $300 billion and by the time the government had closed the RTC, the government had captured about $225 billion in asset sales and the like through the life of the RTC. We should hope for results in this neighborhood.

Finally, all things considered, this had to happen. Things were looking pretty grim unless this action was taken by the government. Let's all hope we can work through this quickly and decisively and get back to a rational approach to housing and home mortgage financing.

Do you have any questions about your current situation?

Call me at 615-895-4265

Hal