The 2nd quarter of 2008 began on a positive note for mortgage borrowers, as a relative lack of news caused the Mortgage - Treasury spread to narrow from its March 13th peak at 2.60% to a low of 2.03% May 30th. The Mortgage Treasury spread is an indicator of relative risk between commonly quoted long-term securities, 30-year fixed-rate mortgages as quoted by Freddie Mac, and 10-year treasury notes. (30-year treasury bonds are not used because 30-year bonds have not been continuously available in recent years). Recent news has been less favorable to the spread, however, as the failure of IndyMac Bank, and worries about the financial stability of Fannie Mae and Freddie Mac have undermined mortgage values. In spite of a 20 basis point decline in treasury yields through June and July, mortgage rates have increased an average of 38 basis points, bringing the spread to a new high of 2.63%
In other words, homeowners now pay 2.63% more to borrow money for the long term than the US Government does. Compare this to an average spread of 1.5% throughout the first half of the decade, and the effect of current market woes becomes quite apparent.
The treasury market has been quite volatile lately, and interest rates have made significant moves both intraday, and day by day. Treasury rates closed sharply lower today on continued worries about the health of the financial sector. While existing home sales results did provide a glimmer of hope, inventory of homes for sale grew further, suggesting that foreclosure difficulties continue to fill the market.
On a positive note, mortgage giant Freddie Mac conducted a successful sale of debt securities, indicating continued investor confidence in the bonds that company depends upon for short-term financing. Freddie, and sister Fannie Mae, underpin the availability of relatively low-cost financing for homeowners, and frequently turn to capital markets for funds.
FHA mortgages are experiencing an unprecedented increase in demand, with mortgage application share three times higher than a year ago, as government insured loans are becoming a bastion of stability in today's trying market.
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