Mortgage News and Commentary by Guaranteed Rate

The last ten days have seen announcements of the Obama Administration’s three main initiatives aimed at solving the housing and credit crisis. First, a $790 billion stimulus package was passed by Congress that combines middle class tax cuts with a large variety of spending programs primarily focused on infrastructure, healthcare, education, and green energy. The tax cuts will have an immediate effect of putting extra money in individuals’ pockets and hopefully will stimulate consumer consumption in the coming months. The various spending programs will be implemented over time with the goals of creating or saving 3-4 million jobs as well as make the U.S. economy more competitive and efficient going forward. The stimulus package also included an $8000 tax credit for first time homebuyers in an attempt to increase housing demand. The stimulus package debate was very partisan and somewhat controversial for several spending earmarks that many argued to be wasteful. 

The second initiative targeting the frozen credit markets was announced by Treasury Secretary Tim Geithner and is an extension of the TARP program that was implemented last October. The main thrusts of the program are a five-fold increase to $2 trillion in the Federal Reserve’s lending facilities for non-Treasury fixed income assets such as mortgage backed securities, credit cards and student loans. The concept of the expanded facility is for private banks to trade these types of assets with the Federal Reserve freeing up their cash and balance sheets. The Treasury also discussed starting a private-public partnership that would purchase toxic assets off of bank’s balance sheets at discounted prices that would free up more of their capital. The main part of the plan was increased capital contributions to private banks that will improve their health and ability to lend. Banks receiving additional capital would be subject to stress tests that would confirm their health and viability with the additional public funds. The announcement of the program was considered a disappointment in that few details were given on how the process and implementation of the various programs would work. The Dow Jones Index responded by promptly selling off almost 6%.

The third, and probably most promising announcement, came on the housing front when President Obama announced a $275 billion package directed at limiting foreclosures and the freefall in housing prices. The package includes $75 billion to reduce at-risk homeowners from going into foreclosure by reducing their monthly payments and outstanding principal. This piece of the plan is expected to help between seven and nine million homeowners. The plan also targets refinancing ‘under-water’ and high LTV loans which could potentially help an additional four to five million homeowners. The U.S. Treasury will also double the FNMA/FHLMC preferred stock backstop agreements to $200 billion each. All elements of the plan should help stabilize housing prices, limit foreclosures, and lower mortgage rates.   

Mortgage rates remain very attractive, benefiting from numerous market, fiscal and monetary forces. Mortgage rates have moderated from their mid-January lows, but still remain exceptionally attractive on a historical basis. Conforming rates remain around 5%. The new lower rates translate into improved affordability for homebuyers as projected monthly housing costs decrease. Mortgage applications have sky-rocketed as current homeowners find it beneficial to refinance their mortgages and lower their monthly debt burdens.

Home prices have fallen almost 30% nationally over the last two and half years. Prices today are beginning to attract purchasers although many are waiting for the credit crunch to show greater signs of ending. Particularly with the recent decrease in mortgage rates, the economics of buying a home have shifted materially with the current environment strongly favoring buyers. Sales of existing homes have slowly increased in the last seven months. Inventory is also slowly moving down, but remains historically high as new foreclosures flood the market every month.

Home sales are currently running at an annual rate of 4.2M units which is actually lower than where the rate was 10 years ago. However, during the last decade, the population of the United States has grown by almost 10%, seven million new jobs have been created, and the percentage of households owning their own homes has risen from 66% to 69%, an increase of 3.2 million homeowners. Prices, interest rates, inventory, and motivated sellers make the current market one of the best in a generation to purchase a home.

Carrie Bertsos is VP of Mortgage Lending at Guaranteed Rate

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