Rate Watch #688 Rates Down! Did the Fed Help Create the Mortgage Mess?

Rate Watch #688 Rates Down! Did the Fed Help Create the Mortgage Mess?

September 18, 2009
by Dick Lepre

Product Rate Points Est. APR*  
CONFORMING LOAN PRODUCTS (Loans less than $417,000)
30 Year Fixed conforming
4.875% 1.00 5.04%  
5.125% 0.00 5.22%  
15 Year Fixed Conforming
4.375% 1.00 4.57%  
4.625% 0.00 4.74%  
JUMBO CONFORMING (Stimulus) LOAN PRODUCTS (Loans greater than $417,000 and less that the new amount for your county)
30 Year Fixed Jumbo
5.625 0 5.71  
5.25% 1.0 5.43%
15 Year Fixed Jumbo 5.000% 0
4.75% 1 4.97  

* conforming loan limits for 2009 are:

1 unit $417,000
2 units $533,850
3 units $645,300
4 units $801,950

Note that the above table now means something different than it used to. "Conforming" now mean "traditional conforming" (<$417,000 for SFR is the new jumbo-conforming which depends on county. You can find the new Jumbo-conforming limit for your county here. That page says "FHA" but those amounts also pertain to FNMA & FHLMC.

You must not read these as quotes because the rate and price which you will get depends on your precise situation and is affected by but not limited to the following factors: credit scores, property type, occupancy, income, value of property, length of time of the rate lock, whether of not values in your area are declining.

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II) Fundamentals

Initial Jobless Claims was 545,000. Housing Starts were 598,000 (annualized). Core CPI was +0.1% (overall was +0.4%). Industrial Production was +0.8%. Capacity Utilization was 69.6%. The Cap Utilization and IP data are not nearly as significant as they were when this was a manufacturing economy but their psychological value is helping equities and endorsing the message that the recession in ending. Core PPI was +0.2% - a bit above consensus. Retail Sales ex-auto was +1.1% which is a strong indicator that GDP will show recovery. Overall Retail Sales was +2.7%.

III) The Technicals

The daily is downcrossed indicative of higher Treasury yields and mortgage rates. The markets are moving in the opposite direction and should reverse shortly. The week-long rally has countered the techs but nothing has made sense lately. The weekly is still bullish.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

Rates have dropped in the past few days. Take advantage if you have not yet refinanced. This will not last long.

I have started using Facebook recently and post these newsletters and some commentary on the economy there. If you want to see these add me as a "friend". There are not a lot of folks named "Dick Lepre". I am not one of those folks who tells everyone what I had for dinner. It is just not that interesting.

V) Role of Fed in Housing Bubble

I have read a lot recently blaming the housing bubble on the Fed's monetary policy. In its most extreme form some believe that the Federal Reserve is largely responsible for the housing bubble by having made rates too low during the brief post-9/11 recession.

I believe that while low rates were contributory they were by no means the heart of the problem. The housing bubble was created by 1) HUD's insistence that FHLMC & FNMA do subprime and dictating the spread above prime that the interest rate on these loans was to be 2) Wall Street's dishonest packaging of subprime with prime to make all of these investment grade 3) the lack of ethics and lack of honesty of the loan officers who worked with the people who got mortgage they could not afford 4) the general lapse in underwriting standards which enabled more people to do stated income which both burdened people with mortgages they could not afford and served to buoy prices 5) non-securitized bad Option ARM loans which destroyed WaMu and World Savings/Wachovia.

The Federal Reserve controls short term interest rates. Longer term interest rates are set by the market and are largely a function of inflation not the overnight rate. It must be noted here that the Fed is at present a more important player in mortgage rates since the subprime collapse but that is after the fact.

Yes banks had low borrowing costs and those low borrowing costs were caused largely by the Fed but low borrowing costs had little correlation with bad lending practices. In fact if interest rates were too low the lower yield to investors should have discouraged any investor from buying what were in fact high risk securities. But investors were deceived by the investment banks and the debt rating firms into believing that securities backed by subprime loans were investment grade.

Other than HUD one other part of the government which enabled this was SEC when they increased investment banks leverage ability.

In summary, the Fed rate did not dictate mortgage rates. Mortgage rates were affected more by HUD and the Wall Street investment banks. The loan officers who did the actual connections with the borrowers did not suddenly have any lapse of ethics because that was minimal to begin with.

If you have something to add to this discussion please post a comment on the blog.





Dick Lepre
580 Pacific Avenue
San Francisco, CA 94109
DRE License # 01143973
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
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California Department of Real Estate - real estate broker license #01201643