Real estate news and features

By David Debonis of Reliant Mortgage

Mortgage Rates Drop

Wall Street staged its biggest rally in a month Monday as stock investors bet that the government’s move to seize and backstop the USA’s two largest mortgage finance companies will help stabilize the housing market, thaw credit markets and boost the ailing economy.

The jubilant response to the historic federal takeover of Fannie Mae and Freddie Mac was driven by a belief among investors that a financial panic can be averted. Investors had feared that home buyers wouldn’t be able to get credit if the two institutions folded.

“It takes one of the major issues off the table: the uncertainty of what would happen if these two entities failed” under the weight of a tsunami of unpaid mortgages, says Chuck Carlson, a portfolio manager and contributing editor of Dow Theory Forecasts.

Michelle Clayman, chief investment officer at New Amsterdam Partners, says the rescue “calmed fears” and sent a message to investors, homeowners and potential home buyers that cash to fund real estate purchases and transactions would not dry up.

The housing market has been suffering from falling prices, a record spike in foreclosures and a weak economy. The government’s plan to inject up to $100 billion in each of the two government-sponsored entities has already helped lower mortgage rates, reducing costs for borrowers.

Here’s a look at some possible consequences:

Mortgage Rates

Average rates on 30-year fixed-rate mortgages, which have hovered well above 6% for months, plunged from 6.5% Friday to near 6% Monday, says Bankrate.com, according to national overnight averages. And most analysts expect the government’s takeover of Fannie and Freddie to extend that decline, at least in the short term.

In part, that’s because in taking control of the two companies, the U.S. Treasury will buy mortgage-backed securities, thereby driving their prices up and mortgage yields down. The takeover should also shore up confidence in Fannie and Freddie and the mortgages they own or guarantee.

“Early indications are that mortgage rates are dropping about half of a percentage point,” says Greg McBride, senior financial analyst at Bankrate.com.

As of Friday, mortgage rates were a full percentage point higher than they would be expected to be based on the benchmark 10-year Treasury yield, he says, noting that the spread between the two rates was the widest it had been in 22 years.
“Short term, this is a definite win for borrowers,” he says. “The availability of mortgage credit is not in question. Borrowers will see better terms.”

Cameron Findlay, Lending Tree chief economist, says borrowers will see better rates, but maybe not as attractive as they’d hoped.

Home Affordability

The takeover could provide relief to the housing industry and ultimately help lower-income home buyers. But, in the short term, it will not aid homeowners behind on their mortgages or those who owe more than their homes are worth. Still, it is expected to help low- and moderate-income buyers in search of affordable homes — part of the companies’ founding missions.

“Theoretically, it should open the markets back up for lower- and moderate-income buyers,” says David Grunwald, president of American Sunrise Communities, a Los Angeles-based organization that helps families with affordable housing and foreclosure issues. Many lower-income families looking to buy homes were squeezed out of the market because they were unable to get loans because of tighter lending standards and a general lack of liquidity in the market. The takeover is expected to lower mortgage rates and make mortgage credit more widely available. That should allow more loans for creditworthy low- and moderate-income home buyers who meet current underwriting standards.

“The federal government stepping in should have a positive impact on low- and moderate-income buyers, because it will free up capital for those mortgages,” says Grunwald.

Bond Market

Interest rates for the most creditworthy borrowers should fall as a result of the Treasury’s intervention. The government’s bailout of Freddie and Fannie does little to help struggling corporate borrowers. In fact, yields on high-yield corporate debt, or junk bonds, rose modestly on news of the bailout.

Risk-averse investors rushed to safe U.S. Treasury bonds Monday, tugging the yield of the bellwether 10-year Treasury note to 3.68% from 3.69% Friday. Treasury securities, which are backed by the U.S. government, are considered free from default risk.

The government pledged that bonds issued by Freddie and Fannie would continue to pay interest, and that reassured investors in other government agency bonds, such as those issued by the Federal Home Loan Banks.

Financial Sector

Investors hope the rescue plan for Fannie and Freddie may also throw a life preserver to the financial sector. Shares of financial-company stocks, which have been sinking for more than a year, jumped Monday as uncertainty surrounding the mortgage giants lifted.

The financial Select Sector SPDR exchange traded fund, which tracks banks and brokerage stocks, soared 4.3% Monday, and the KBW Bank index, which mirrors bank stocks only, jumped 6.9%.

What the financial industry and financial stocks need most is for home prices to stop dropping, says Rod Smyth of Riverfront Investment Group. The government’s move might not stop prices from falling an additional 10% to 15%, he says, but it does reduce the likelihood of a steeper slump, he says.
Ideally, the government’s plan to deal with Fannie and Freddie will help lower mortgage rates, slow the fall in home prices and prevent more loans owned by banks and other financial services firms from going sour. All that could boost financial companies and their stocks, which account for roughly 15% of the value of the stock market.

“If this stabilizes the housing market, you can connect the dots to the financials,” says Quincy Krosby, chief investment strategist at The Hartford. “It removes uncertainty weighing on the market.”

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