Monday, March 31, 2008
Finance Market Update March 31, 2008 Brentwood TN Real Estate
Brentwood TN Real Estate
Mortgage bond prices fell last week pushing mortgage interest rates considerably higher. Most of the data was bond friendly showing signs the economy continued to struggle. Unfortunately Fed warnings of creating "conditions for sustainable inflation over the long term" rekindled inflation concerns. Inflation erodes the value of fixed income securities and generally leads to higher mortgage interest rates.
For the week, interest rates on government and conventional loans rose by over a full discount point.
The employment report Friday will be the most important event this week. The potential for market volatility is high surrounding the ISM Index and factory orders data.
Economic Indicator Release Date Time Consensus Estimate Analysis
Construction Spending Tuesday, April 1, 2008 Down 0.9% Low importance. An indication of economic strength. A significant decrease may lead to lower rates.
ISM Index Tuesday, April 1, 2008 48.2 Important. A measure of manufacturer sentiment. A larger decline may lead to lower mortgage rates.
Factory Orders Wednesday, April 2, 2008 Up 0.7% Important. A measure of manufacturing sector strength. A larger decrease may lead to lower rates.
Employment Friday, April 4, 2008 Unemp. @ 5.0%, Payrolls -40k Very important. An increase in unemployment or a large decrease in payrolls may bring lower rates.
In years past a borrower would visit their local savings and loan to obtain a mortgage. The Loan Officer at the bank would approve the mortgage and fund it with cash reserves from the vault. This system worked well until the bank ran out of money to lend. Borrowers came to the S&L looking for a loan and were told to come back when a current mortgage paid off. What the bank needed was a way to sell the loans they made freeing up the capital to lend to new borrowers. This way they could lend the "same" money over and over, earning an income from servicing the loans and assisting the community by offering a near limitless pool of money.
To address this issue, FNMA and GNMA were established. The goal is to provide cheap mortgage money to prospective homeowners and a high quality bond for the investment community. The bond or Mortgage Backed Security (MBS) take mortgages with similar risk characteristics and pool them together. Investors in the MBS's know ahead of time the return they are going to receive, much like a Certificate of Deposit. To ensure the performance of the bond, each mortgage is underwritten to specific guidelines.
During the recent real estate boom underwriting guidelines were relaxed giving way to a whole new menu of mortgage products such as 100% financing. In addition, to streamline the influx of applications, income and asset verification took a back seat to a borrower with strong credit. With housing prices rising rapidly, the property could be sold to cover the note and foreclosure costs if this occurred. This cycle worked well until the price of houses moderated in 2006. Once the housing market began to cool and prices moderated, foreclosed homes were being sold for less than the notes. To add insult to injury, the loans underwritten to the looser guidelines did not perform as hoped. With the value of the collateral in question (falling home prices) and the future performance of the borrowers unknown, investors' appetite for this risk has waned. To attract investors in this environment, rates had to increase.
Unfortunately the liquidity issues associated with Alt A and subprime loans carried over to more secure AAA GNMA and FNMA loans. Sellers of AAA MBS's are finding it more difficult to find buyers. Many analysts believe the reaction has been too severe. Sanity will eventually return to the markets and AAA pricing will come in line with risk characteristics. Unfortunately it may take some time for this to occur. Be cautious during these times of extreme market volatility.
* Info. courtesy Tonya Esquibel, WR Starkey Mortgage, Franklin TN*
Brentwood TN Real Estate