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May 22, 2011

WeeklyBasis 5/22: Future of Mortgages, Part 7

May 22, 2011

WeeklyBasis 5/22: Future of Mortgages, Part 7

Rates remain near 2011 lows for the same reasons discussed last Thursday’s market recap: questionable economic recovery.

Below is a summary and rate outlook for next week, plus I address panic about lower loan limits effective October 1. Since the New York Times published Fed Retreat on Bigger Loans Rattles Housing on May 10, I’ve been sent that article 14 times, including twice yesterday. So it’s time to clarify a few points.

Rates should end the week even to slightly up on the data points below.

Monday, Tuesday, and Friday bring April new home sales, March pending home sales, and the Federal Housing Finance Agency’s March home price report. All data have been weak, and there’s not much to suggest a big change here (better for rates).

Bond markets will get $99b in new Treasury note supply, with auctions as follows: $35b in 2yr Notes Tuesday, $35b in 5yr Notes, and $29b in 7yr Notes. Concerns about bond oversupply sometimes causes mortgage bond traders to sell, pushing rates higher, but these are shorter durations that don’t impact mortgages as much (neutral to worse for rates).

Thursday brings the second of three 1Q2011 GDP readings to confirm whether the economy grew 1.8% like the first reading said, or whether it will tick up to a still-weak 2% like estimates call for. Either way it’s well below the 3.1% pace set in 4Q2010 (better for rates).

Friday brings personal income and spending, as well as the Personal Consumption Expenditures Index, the Fed’s favorite measure of consumer inflation. The “Core” number that excludes food and energy should continue to remain low, but the all-inclusive number will likely show an uptick and ignite more inflation debates in economic and mortgage bond trading circles. (neutral to worse for rates).

Future of Mortgages, Part 7
The above-noted New York Times piece on the October reduction of Fannie/Freddie-backed loans from $729,750 to $625,500 was well written in that it plays to consumer fears.

But this loan limit reduction has been known and planned for throughout the mortgage industry since January. It’s therefore not merely coincidence we’ve seen the Jumbo market re-emerge since then after laying dormant during the three years Fannie/Freddie were allowing up to $729,750.

There is (and will continue to be more) reliable, competitive loan options from $625,500 to $2m.

It will come from mortgage banks more so than brokers. Banks control their own funds and underwriting, so they have more flexibility when it comes to delivering non-Fannie/Freddie-backed products.

Remember: before the crisis, we didn’t have “super-conforming” loans backed by Fannie and Freddie. All we had was one single tier of conforming loans up to $417,000. After October 1, we’ll still have the $417,000 tier, and we’ll still have the Fannie/Freddie-backed super-conforming tier up to $625,500.

So when that time comes, privately-backed loans will take the place of Fannie/Freddie-backed loans.

Underwriting will remain strict for Fannie/Freddie loans and for privately-backed loans above $625,500, but qualified borrowers will get loans.

As for rates, daily mortgage bond market pricing dynamics will always dictate rates whether the loans are backed by Fannie/Freddie or private investors.

I’ve been writing about this since February, so here is the full series to date. Part 1 and Part 2 are especially consumer-friendly.

Stay tuned, and hope you have a great week.

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