careful what you wish for, especially with lower rates. Every lock, either with a borrower, agent, broker, or investor, taken prior to Monday is now "out of the money". Every mortgage-backed security trade, done prior to Monday, is now 1-2 points ($10-20 thousand dollars per million) under water. And, although rates are a little higher this morning, the lower rates have hit the news media. Borrowers complain to agents, who in turn ask for renegotiations. Much of this is falling on deaf ears, as many investors are taking a hard approach, limiting many mortgage companies from allowing agents or borrowers to change their "locks". "What if the market had gone the other way," they ask, "and we went back to the borrowers and said, ‘We know that you locked in a rate, but since rates are higher now, we want to change it, so it's really not a lock.'?"
Interestingly, remember that the news mainly impacted conforming conventional loans - not FHA & VA loans, or jumbos. The Ginnie/Fannie "swaps" collapsed. So the bulk of the improvement came in Freddie/Fannie product, not jumbo or Alt-A, although much of the mortgage market was helped by the willingness of the government to step in. Many lenders & investors were conservative in pricing on their rate sheets, which, given the magnitude of the news and the potential volatility, was reasonable. In addition, attempting to limit knee-jerk renegotiations was a factor. But as mortgages continued to improve through the day some investors re-priced. Lock volumes on Friday were high, as were yesterday's. Are these just loans switching pipelines? Possibly...
Have you ever heard of Herbert Allison or David Moffett? They are the new CEO's of Fannie Mae and Freddie Mac, respectively. One of the big benefits of the US Government's takeover of Freddie & Fannie is the avoidance of the GSEs reducing their lending in order to conserve capital. Not that this allows them to go out and loan money like drunken sailors, with little thought about underwriting, but it certainly removes this fear from the marketplace. Mortgage rates were volatile yesterday, but generally speaking they were lower, whereas Treasury securities were either unchanged or slightly higher.
One Canadian headline said "Mortgages Should Get Cheaper; But Who is Buying a House?"
Fannie and Freddie's bonds and their MBS's rallied relative to Treasury securities, but the stocks of Fannie Mae and Freddie Mac dropped like rocks below the $2 per share level.
The US Government's takeover of the GSE's does not change the basic economic outlook that many economists have. Yes, it should help the conventional mortgage market, which hopefully may lead to better things down the road, but basic forecasts for the US economy and Fed policy have changed very little. Goldman Sachs, for example, still expects Gross Domestic Product (the sum of all goods and services produced) to be stagnant into early 2009 and unemployment to increase. Accordingly, their forecast is for overnight Fed Funds to remain unchanged at 2%. Speaking of rates, mortgage prices are about .250 in price worse than yesterday afternoon, whereas Treasury rates are unchanged with the 10-yr at 3.66%.
PMI snuck in an announcement during all of the hoopla. "We are revising our Distressed Markets Policy as follows: PMI declared that effective October 1, 2008, all loans for properties in California, including those submitted through Fannie Mae Desktop Underwriter® and Freddie Mac Loan Prospector®, must meet the following guidelines: Minimum 720 credit score, Maximum loan amount of $417,000, Debt-to-income (DTI) ratio cannot exceed 45%.
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