February 5, 2008

Super Tuesday

This economic commentary is being published of all days on Super Tuesday. By the end of the day we may know who one or both of the Presidential candidates will be. This is the same day that either New York or Boston will be hosting Super Bowl parades–making it a real "Super Tuesday." We will boldly make a prediction. Whatever two candidates arise from the fray, they will claim that they have the plan to rescue the economy and the real estate foreclosure issue. But is this reality? Of course, not. The Federal Reserve Board has moved rates down 1.25% in less than two weeks. Finally they are acknowledging the severity of the problem. As we have said all along, this move will do more to help the markets than anything else. Adjustables will not adjust upward as much and rates are more affordable to finance real estate in general.

But lower rates do not solve all issues. We still have record high oil prices and the threat of inflation. If the slower economy does not bring oil prices and the threat of inflation down, the Fed may have applied all the medicine it has. We have a huge budget deficit and proposed economic packages will cause the deficit to rise even more. This will cause government to borrow even more money and could cause upward pressure on rates in the long-term. This is why we favor solutions such as lower rates and higher loan limits for Fannie Mae and Freddie Mac. These solutions do not cost money. Actually, lower rates can save the government money because of the massive spending on our debt. But don’t expect that the politicians will take our advice. After all, it is an election year.

The Markets. The latest move by the Fed did not help push rates lower again as the markets had already anticipated this move. Freddie Mac announced that for the week ending January 31, 30-year fixed rates averaged 5.68%, up from 5.48% the week before. The average for 15-year fixed rose to 5.17%. The average for one-year adjustables increased to 5.05% and five-year adjustables rose to 5.32%. A year ago 30-year fixed rates were at 6.34%. "Mortgages ended their four-week descent this week, with average rates on 30-year and 15-year fixed rates coming up by about 0.2 percentage points," said Frank Nothaft, Freddie Mac vice president and chief economist." This increase completely erased the previous week’s decline. The movement in fixed rates was broadly consistent with the movements of Treasury bonds over the week. Reinforcing the Fed’s resolution to thwart a recession, the Federal Open Market Committee announced another cut in the target federal funds rate by half of a percentage point in their most recent scheduled meeting. This came on the heels of the Fed’s rate cut of three-quarters of a percentage point the previous week, and the shaping-up of a fiscal package by Congress and the White House. This cut was in line with market expectations."

Current Indices For Adjustable Rate Mortgages
Updated February 1, 2008

	Daily Value	Monthly Value
	Jan. 31	December
6-month Treasury Security	1.96%	3.34%
1-year Treasury Security	2.11%	3.16%
3-year Treasury Security	2.27%	3.13%
5-year Treasury Security	2.82%	3.49%
10-year Treasury Security	3.67%	4.10%
12-month LIBOR–WSJ		4.431% (Dec)
12-month MTA		4.522% (Dec)
11th District Cost of Funds		4.072% (Dec)
Prime Rate		6.00% (Jan, 2008)

Homeowners having trouble paying their mortgages usually don’t ask for help until it’s too late, according to a survey conducted by Roper for Freddie Mac. The study found that 58 percent of delinquent homeowners don’t know that lenders may offer ways to help them keep their homes and 56 percent don’t realize that free counseling is available. Only about 50 percent knew that a missed payment could be added to their loan balance or that a mortgage term can be extended, the survey found. "When we go into a house that’s been foreclosed to clean it out, we find stacks and stacks of letters from the servicer that have never been opened," says Robin Stout Migala, senior manager of Freddie Mac’s loss mitigation team. "Many think the servicers just want to take the house back, which, of course, is not true." Common forms of mortgage help can bail out four out of five borrowers, but one out of five homeowners who get assistance defaults anyway, Freddie Mac says. Source: USA Today

The House, in a 383-35 vote, has passed an economic package that temporarily increases the loan limits for Fannie Mae, Freddie Mac, and the Federal Housing Administration. The bill (H.R. 5140) raises the loan limits to 125% of median area home prices in high-cost areas, with a $729,750 cap, and it is expected to increase home sales and help stabilize real estate markets. Raising the loan limits for Fannie and Freddie could generate 300,000 additional home sales, reduce the inventory of unsold homes, strengthen home prices, and help 210,000 families avoid foreclosure, according to the National Association of Realtors. "Simply lifting the loan limit will have an immediate impact on lessening foreclosures," NAR chief economist Lawrence Yun told reporters. Preliminary estimates also indicate that raising the FHA loan limit could generate 200,000 to 250,000 additional home sales and 500,000 refinancings. It would also reduce foreclosures, the association said, but NAR economists have not completed that analysis. The Senate is expected to pass its own bill shortly. Source: National Mortgage News