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Mortgage Matters


Blog by | April 6th, 2009


Although the problems are far from fixed, there seems to be a positive push in the US markets.

Kathleen M. Howley, Bloomberg News  Published: Friday, April 03, 2009

U.S. Federal Reserve Chairman Ben Bernanke is delivering what he promised five months ago, record-low mortgage rates and a refinancing boom that's putting cash in consumers' pockets.

Fixed 30-year mortgage rates fell to a record low for the second consecutive week last week, hitting 4.78%, Freddie Mac said on Thursday in a statement. The rates are the lowest in records dating to 1971, and come after Bernanke told Congress in November that helping the most creditworthy borrowers was essential to reviving the economy.

Mortgage applications in the U.S. rose for the fourth straight week last week as a decline in borrowing costs spurred homeowners to refinance, while purchases of new houses unexpectedly rose in February. The Fed's effort to bring down fixed rates may give consumers as much as US$25-billion, said Mark Zandi, chief economist of Moody's Economy.com.

"It certainly gives further fuel to consumer spending," said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies in Cambridge, Massachusetts. "It puts more money into circulation."

The extra cash may help boost first-quarter consumer spending by 1% to 1.5%, said Barton Biggs, managing partner at New York-based hedge fund Traxis Partners LLC. Consumer spending accounts for about two-thirds of the U.S. economy.

Creditworthy Borrowers

Bernanke signaled the Fed's effort to bring down fixed mortgage rates in Nov. 18 testimony to the U.S. House of Representatives' Committee on Financial Services.

"It is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met," he said.

One week later, the Fed said it would buy up to $500-billion in home-loan securities, causing the biggest one-day drop in mortgage rates in at least seven years, according to Bankrate.com. On March 18, the central bank almost tripled the size of the program to up to $1.25-trillion in purchases during 2009. The intent is to lower rates and make real estate financing easier to get, the Fed said.

The plan to buy mortgage bonds this year is succeeding where US$11.6-trillion of government lending, spending, and guarantees so far have failed.

‘Successful Effort'

"This has been the most successful effort, at least so far in this crisis, to shore up the economy," said Zandi.

Bernanke's mortgage purchase program may help curb a recession that is in its second year and being driven by the highest jobless rate in a quarter century and shrinking household wealth.

"If you throw enough money at one credit market, you will bring down the price," said Gerald O'Driscoll, a senior fellow at the Cato Institute and former vice president of the Dallas Federal Reserve. "They are targeting the mortgage market in an attempt to speed the process of establishing a floor in the price of housing."

Homeowners who refinance with a half-point drop in fixed rates may save $150 a month on a $300,000 mortgage, said Stephen Stanley, chief economist at RBS Securities Inc. in Greenwich, Connecticut, and a former Fed economist.

Home Prices

Cheaper financing may also help spark a turnaround in the housing market. Sales of previously owned homes rose 5.1% to 4.72 million at an annualized pace in February from the prior month as low mortgage rates spurred demand, the National Association of Realtors said. The NAR's affordability index rose to a record in January, helped by lower home values and mortgage rates. The median U.S. home price in February was $165,400, the NAR said in a March 23 report, down 28 percent from its 2006 high.

Bernanke cited lower mortgage rates in testimony in February as evidence that Fed policies were working, noting that rates had fallen "nearly 1 percentage point" since the program was announced.

On April 1, Federal Reserve Bank of Cleveland President Sandra Pianalto said the Fed's program was resulting in "encouraging signs" for the economy. Besides falling rates, "we are also beginning to see a resurgence in refinancing activity in the residential mortgage markets, spurred on by these lower rates," she said.

The bankers' group boosted its forecast for 2009 home-loan originations by US$800-billion to US$2.78-trillion last month as a wave of refinancing and low interest rates spur homeowners to seek out new loans. Refinancing will increase to US$1.96-trillion in 2009 and purchase originations will total US$821-billion, the group said.

The London interbank offered rate, or Libor, for three- month dollar loans dropped to 1.17% on Thursday, down from 1.43% at the start of the year, showing banks have become more willing to lend.

TED Spread

The so-called TED spread, the gap between what banks and the Treasury pay to borrow money for three months, shrank to 96 basis points from 1.35 percentage points on Dec. 31. It touched a yearly low of 91 basis points on Feb. 2. The gauge reached a high of 4.64 percentage points in October, up from 1.35 percentage points on Sept. 12, the last trading day before Lehman Brothers Holdings Inc. filed for bankruptcy.

U.S. home prices fell 6.3% in January from a year ago, the smallest decline in five months, according to the Federal Housing Finance Agency in Washington.

"We have seen evidence that home sales are bottoming," said Jim O'Sullivan, senior economist with UBS Securities LLC, in Stamford, Connecticut. "This should be positive."

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