More on Fannie and Freddie – Signs of life in the Refi Market?

By Marshall Auerback On Dec 3, 2008

Below is a chart of variable rate loan applications as per cent of total.

This can be looked at from a contrary opinion point of view, that is people are afraid of variable rate loans after they got burned on the upside in the last several years and thus they are moving to fix rate loans or refi’s but this is the wrong time to do that because 1) fixed rates have not declined to reflect (yet) the decline in long treasurys and the full effect of the bailout program (Paulson where are you?) 2) the yield curve during QE will remain extremely positive and thus locking in fixed rate obligations by borrowers will cost them (as opposed to when Greenspan told them to borrow short circa 2005)3)It is understandable why borrowers are doing this as you can see in table further below that variable rate loans at presently at 6.61% compared to 5.47% for fixed. This is ridiculous as the yield curve is very positive in the interbank market as well as treasury market.

The government needs to step in right now and correct this either by jawboning or by more direct (your idea to do it directly) methods.

If I were a Congressman, and I saw this I would be screaming during a committee meeting. How is it possible that banks are demanding 500 bp margin for variable rate loans? This is the 180 opposite of the teaser rates back in 2003.

This just confirms my strong argument that the government can indirectly move the mortgage market and thus housing prices in a meaningful way almost overnight. In fact, with the quasi-nationalisation of Fannie and Freddie, they can do this directly!

Do you realise how much more affordable a loan is if it is 250 bp less than previously? And I think that many variable rate loans have been reset to much higher levels than prevailing new loan rates so the amount would even be greater. On a $250,000 loan a reduction of 2.5% amounts to $6250 per year.

I don’t know the percentage of total loans outstanding out of the $10 trillion mortgage loans that are variable

Can you imagine if there was a tax rebate of that amount for everyone that had a variable rate loan?

As interest rates go down the housing affordability, all other things goes up.

In terms of affordability, an interest rate of 4% as compared to 6% is the difference at 38% gross income formula is the difference between a family having an income of $26,000 to one requiring an income of $ 42,000 (before taxes and interest). This is a huge difference in terms of the rent/price ratio that Shiller has developed.

Well, I could go on and on but you get the message.

Sometimes the simplest ideas are the best, whether it is in investments, life or governing.

I think that this idea is one of them.

think (sorry if I don’t sound modest here) that this idea is one of them.

By Alex Tanzi

Dec. 3 (Bloomberg) — Following is a summary of U.S. mortgage activity from the Mortgage Bankers Association.

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Nov. 28 Nov. 21 Nov. 14 Nov. 7 Oct. 31

2008 2008 2008 2008 2008 YoY%

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—–Weekly Change (seasonally adjusted)— -NSA-

Market index 112.1% 1.5% -6.2% 11.9% -20.3% -21.9%

Purchases 38.0% 5.3% -12.6% 9.0% -13.9% -45.2%

Refinancing 203.3% -2.1% 2.6% 16.1% -27.8% -3.6%

Fixed rate 115.7% 1.0% -6.4% 12.0% -20.7% -12.8%

Adjustable rate -3.9% 18.2% 3.4% 5.7% 1.5% -90.9%

———- Contract Interest Rates ——– Yr. ago

FRM 30-year 5.47% 5.98% 6.17% 6.23% 6.47% 5.81%

FRM 15-year 5.13% 5.78% 5.87% 5.90% 6.14% 5.38%

ARM 1-yr 6.61% 6.88% 6.80% 6.77% 6.85% 6.28%

FHA 203(b) 5.78% 6.16% 6.32% 6.32% 6.58% 5.92%

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Nov. 28 Nov. 21 Nov. 14 Nov. 7 Oct. 31 Oct. 24

2008 2008 2008 2008 2008 2008

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———— Applications (unadjusted)———— Total

Avg. loan size $246.7 $223.9 $223.8 $223.1 $218.5 $222.6

Number change 51.4% -1.0% -7.2% 10.5% -21.1% 29.6%

$ volume change 66.8% -0.9% -6.9% 12.8% -22.5% 31.1%

Purchases

Avg. loan size $224.8 $219.8 $220.8 $219.3 $216.6 $220.3

Number change -7.8% 0.2% -15.3% 6.3% -15.1% 19.8%

$ volume change -5.7% -0.2% -14.7% 7.6% -16.5% 20.1%

Refinancings

Avg. loan size $256.5 $228.0 $226.9 $227.7 $221.2 $225.3

Number change 112.3% -2.1% 2.6% 16.1% -27.8% 42.8%

$ volume change 138.8% -1.7% 2.3% 19.5% -29.1% 45.9%

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Nov. 28 Nov. 21 Nov. 14 Nov. 7 Oct. 31 Oct. 24

2008 2008 2008 2008 2008 2008

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Refi’s as a % of

total # of loans 69.1% 49.3% 49.9% 45.1% 42.9% 46.9%

Refi’s as a % of

total $ of loans 71.8% 50.2% 50.6% 46.0% 43.4% 47.5%

ARM’s as a % of

total # of loans 1.4% 3.0% 2.6% 2.3% 2.5% 1.9%

ARM’s as a % of

total $ of loans 3.4% 7.2% 5.8% 5.5% 5.2% 4.4%

———- Indexes (seasonally adjusted) ———

Market index level 857.7 404.4 398.6 425.0 379.9 476.7

Purchases 361.1 261.6 248.5 284.4 260.9 303.1

Refinancings 3802.8 1254.0 1281.2 1248.4 1075.4 1489.4

Fixed rate 887.1 411.3 407.2 435.2 388.6 490.2

Adjustable rate 254.1 264.4 223.7 216.3 204.6 201.6

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Conventional Index 1018.8 411.8 410.6 448.7 389.4 520.3

Conv. Purchase 406.6 295.9 285.1 336.7 316.1 369.2

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Nov. 28 Nov. 21 Nov. 14 Nov. 7 Oct. 31 Oct. 24

2008 2008 2008 2008 2008 2008

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———- Indexes (seasonally adjusted) ———

Conv. Refinance 3552.9 896.8 927.3 907.7 688.8 1135.6

Conv. FRMs 1050.4 414.1 417.1 457.1 395.9 533.0

Conv. ARMs 371.9 363.2 277.9 276.1 256.7 259.2

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Government Index 589.4 392.1 378.6 385.5 364.1 404.2

Government Purchas 295.5 212.3 195.7 209.3 181.5 208.1

Government Refi 5176.8 3178.3 3188.7 3085.0 3156.0 3398.0

Government FRMs 614.9 406.1 390.3 398.3 375.9 418.4

Government ARMs 43.3 93.0 129.7 112.3 114.3 101.0

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U.S. MBA’s Mortgage Applications More Than Doubled Last Week

2008-12-03 12:00:01.0 GMT

By Bob Willis

Dec. 3 (Bloomberg) — Mortgage applications in the U.S.

surged by a record last week as lending rates plunged after the

Federal Reserve pledged to buy mortgage-backed debt.

The Mortgage Bankers Association’s index of applications to

purchase a home or refinance a loan jumped 112 percent to 857.7,

the highest level since March, from 404.4 the prior week. The

group’s refinance index skyrocketed 203 percent, while the

purchase index rose 38 percent.

The Fed’s announcement sent the rate on 30-year fixed

mortgages down to a three-year low, sparking demand to refinance

adjustable-rate loans. Even so, rising unemployment and faltering

consumer confidence will keep most buyers sidelined, signaling

the three-year housing slump hasn’t reached bottom yet.

The drop in rates was “a big, early Christmas gift for

borrowers who have enough equity — and solid enough credit — to

qualify for a refinance loan,” Michael Larson, a housing analyst

at Weiss Research in Jupiter, Florida, said before the report.

The refinancing gauge surged to 3,802.8 from 1,254 the prior

week, while the purchase index increased to 361.1 from 261.6.

The Fed on Nov. 25 pledged to purchase up to $500 billion in

so-called agency debt as well as up to $100 billion in direct

debt of Fannie Mae and Freddie Mac, the world’s two largest

mortgage buyers, and Federal Home Loan Banks.

“This action is being taken to reduce the cost and increase

the availability of credit for the purchase of houses, which in

turn should support housing markets and foster improved

conditions in financial markets more generally,” the Fed said in

a statement.

Rates Tumble

The plan sent mortgage rates tumbling. The average rate on a

30-year fixed-rate loan dropped to 5.47 percent last week, the

lowest level since June 2005, from 5.99 percent the prior week.

At the current rate, monthly borrowing costs for each $100,000 of

a loan would be about $565.91, down $71 from three months ago.

As more homeowners seek to switch out of their adjustable-

rate loans, the share of applicants seeking to refinance

mortgages surged to 69.1 percent from 49.3 percent of total

applications in the prior week.

Still, MBA’s weekly numbers can be volatile. For example, in

September, refinancing rose 88 percent in the second week of the

month, only to fall 42 percent in the subsequent two weeks.

Today’s report also showed the average rate on a 15-year

fixed mortgage decreased to 5.13 percent from 5.78 percent. The

rate on a one-year adjustable mortgage fell to 6.61 percent from

6.87 percent the prior week.

Falling Prices

Record levels of foreclosures are driving down prices,

helping to underpin purchases. Home prices have fallen by about a

fifth from their peaks in mid-2006, according to the S&P/Case-

Shiller home price index.

Even so, combined sales of new and existing homes in October

were at a 5.4 million annual pace, down 36 percent from their

July 2005 peak. Housing starts in October fell to their lowest

since records began in 1959, the government said last month.

D.R. Horton Inc., the largest U.S. homebuilder, last month

reported its sixth straight loss.

“People have cold feet,” Donald Tomnitz, D.R. Horton’s

chief executive officer, said on a conference call. “Until

housing prices bottom out, I think the cancellation rates are

going to continue to increase or at least stay high.”