On November 26, 2008, as part of the ongoing stimulus package, the Federal Reserve announced that they will buy up mortgage backed securities issued by Fannie Mae, Freddie Mac, Ginnie Mae and Federal Home Loan Banks. Mortgage backed securities are investment vehicles with mortgages as the underlying asset. The FED has pledged up to $600 billion dollars to buy up the mortgage backed securities. Yes, that’s billion with a capital B. This announcement had an immediate impact to current mortgage rates. Rates fell by as much as 0.75% overnight. Talk about volatility!
As with most loan originators, my office was flooded with calls from past clients wanting to refinance. This brings me to the conundrum of the current market place. I’m sure we have all come to the realization that the current market is anything but ordinary. Qualifying criteria have become more stringent, minimum credit scores have been raised, and overall credit market has become tighter. On top of all this, home prices have fallen in value approximately 12-15% year over year across the nation. Although I would love to refinance my customers, majority will not qualify today. It does not make them bad borrowers. Many have good scores, good income and good assets. The biggest issue I see is the state of current home prices. With the erosion of the equity in their homes, many borrowers will have a high LTV issue. Even if you put down 20% down payment when you bought your home 3 years ago, you will have only 5-10% current equity. If you bought your home 3-5 years ago with less than 20% down payment with a 30 year mortgage, you will currently own more than what the home is worth.
Many analysts have said that the move by the FED to buy up MBS’s thus lowering mortgage rates will have significant positive impact to the current housing market. Although I agree that it will have a positive impact, it certainty will have not be significant. The lower rates will motivate some buyers to get off the fence and enter the housing market but majority of buyers are not buying due to other more grave factors than interest rates. Most buyers have put off buying homes or any other big ticket items because they are uncertain about the future of the economy and the job market. Consumer spending has been contracting and will continue to contract. Just because you will save a few hundred dollars on your mortgage payment will not motivate these buyers into buying a home when their job security is uncertain and they perceive the home they are buying today will continue to decline in value.
I’m not a pessimist nor do I want to depress anyone. The reality of the matter is that we are in an unprecedented economic situation and what the FED has currently done is not a fix all. It will help buyers who are currently in the market to purchase. It will create additional buyers but not in any great number to tip the balance of the current supply demand ratio. It will create a mini refi market but the borrowers must have extensive equity in their home and must meet tight qualifying criteria.
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