Welcome to Illinois Mortgage Rates and News week in review for the week ending March14th, my take on the 
week's financial news and how it affected Illinois mortgage rates.
Do you remember the scene in It's a Wonderful Life where they had the run on the bank? In the movie Jimmy Stewart was on his way out of town, just about to go on his honeymoon, when he noticed the crowd of people swarming around the Building and Loan. The rumor was that the bank was out of funds, so the town's people were in a panic as they tried to get out with whatever they could before they lost everything. Jimmy stepped in and calmed the people by doling out his honeymoon savings and assuring them that they were all in this together. We had a similar situation in the mortgage backed securities market this week with Fed Chairman Bernanke playing the Jimmy Stewart role, but to much less success.
The run on the bank started last week when Thornburg Mortgage and the Carlyle Group, a heavily leveraged hedge fund, were unable to meet margin calls from their lenders. Panic set in as mortgage bond investors wondered if there was any value in mortgages at all. Like any panic, this was all about confidence. As the big banks sit on their portfolios of mortgages, investors wonder how much of their holdings are junk, and with buyers in short supply the value of the mortgage portfolios deteriorate. The banks are forced to sell their good loans at fire sale prices in order to raise funds to keep their financial numbers up, but this only makes matters worse.
On Tuesday the Fed came in with a plan for a $200 billion dollar fund which banks could borrow against, using their mortgage portfolios as security. This was just what the markets needed. After the news was announced, the stock market had its best day in ages, and the mortgage bond market started to improve, too. Unfortunately, it was too little too late. The Carlyle Group was too far under (they were leveraged to the hilt with $97 borrowed against every $3 of equity) and they missed their margin call on Thursday. But that was just a hint of trouble to come. Friday morning Bear Stearns, one of the biggest players on Wall Street, got caught in the liquidity crunch and had to be bailed out by the Fed and fellow giant JP Morgan. This was truly scary news. If the big boys can be in such bad shape, who is going to be the next to crack?
The reports coming out this week confirmed that the economy is in a recession. The one good piece of news was the release of the Consumer Price Index this morning showing no increase in inflation. The CPI is a measure of inflation in the economy, and inflation has been the fear over the horizon. The low reading means the Fed is now nearly certain to cut rates again next week, a .75% cut is expected. The thing that I wonder is, what comes next? The Fed has already cut short term rates by 2 points in the last 6 months and credit still continues to tighten. Money is much cheaper but the credit market is frozen. What happens when the Fed lowers rates down to the bottom, what can it do next? The major problem in the market now isn't that short term rates aren't low enough; the problem is that no one wants to lend money if they think that things are going to get worse later. We are back to confidence and the Fed's tinkering at the edges isn't enough to do the job. I expect we will have a bailout of some sort. This is going to be a bitter pill for many, but I expect that the only way out of this mess will be through some form of political solution - probably a free pass for the big banks, a plan where the Fed buys up their troubled mortgages. What ever the solution, it won't be fair and it won't be pretty, but we are up the proverbial creek if we don't get the credit machine moving again.
So how did all this mess affect mortgage rates? Volatility was again off the charts. Mortgage rates lately have been like weather in Chicago, constantly changing. The swings have been outrageously wide and it is now normal to have intra-day re-prices from our wholesale lenders. Fixed rate mortgages moved down over the week, but not nearly as much as you would expect given the state of the economy. Even as fixed rate mortgages improved, there were signs that the credit crunch was worsening. Last week adjustable rate mortgages went up sharply. This week they virtually disappeared. The rates on most ARMs is now higher than on fixed rate mortgages, even though short term interest rates are very low. (There are still a few private investors with good pricing - check out their rates below). Again this comes down to confidence. The other big move was that Fannie Mae and Freddie Mac, the 2 big buyers of mortgages in the mortgage aftermarket, came out with their second round of risk based pricing, the idea that those with the best credit scores will get the best interest rate. The idea makes sense, but they have increased the pricing on those with excellent credit and good down payments. This looks more like a way to get themselves out of the hole they dug, then a plan to price according to the risk.
With all the changes in the conventional market, one of the best deals out there is buying with an FHA mortgage. FHA, a government insured program, recently increased their lending limits. Here in the Chicago area the new lending limit for a single family home is now $410,000. With FHA there is no hit to the pricing for credit scores and you can buy with a low or in some cases no down payment. FHA used to be thought of as a loan for those who had few other options, now it is a good alternative for home buyers here in the Chicago area who could go conventional.
Here is what Illinois mortgage rates look like today for an A+, full doc purchase on a 30 day rate lock, with 0 points, and no origination fee. The conventional loans are based on the highest conforming loan amounts, which give the best pricing. (Again, there are many factors which affect mortgage rates and your ability to be approved for a loan. These rates may not fit your situation and this is just a sample of the programs that are out there. If you would like a quote for your personal situation, give me a call or contact me and I'll take the time to find the rate and program that is best for you.) :
Conventional loans up to $417,000
30 year fixed rate 5.875% 6.147% APR
15 year fixed rate 5.25% 5.377% APR
5-1 A.R.M. 5.50% 5.659% APR
7-1 A.R.M. 5.75% 5.879% APR
For Jumbo loans over $417,000
30 year fixed rate* 7.125% 7.262% APR
(*We have one lender at 6.125% for a Jumbo fixed rate - if you meet their guidelines.)
7-1 A.R.M. 6.00% 6.174% APR
FHA LOANS up to $270,200 with 1 point origination fee
30 year fixed rate 5.50% 5.794% APR
These are just a sampling of the mortgage rates available. We have special programs for first time home buyers and all the bond programs including the City of Chicago Bond program which offers no down payment and below market pricing.
The big news next week will be the Fed meeting on Tuesday. I expect it to be another crazy week.
Pete Thompson is an Illinois mortgage banker who provides superior mortgage service and competitive mortgage rates in Chicago, the Chicago area and throughout Illinois. Click here for a Free copy of The Real World Home Buyer's Guide - How to Save Thousands when Buying a Home and Getting a mortgage. For information on the latest mortgage news and current Illinois mortgage rates, please visit http://www.illinoismortgageratesandnews.com/
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