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Salt Lake City Mortgage Market Update for January 13, 2009

Stocks are trading a bit higher today, particularly the NASDAQ which historically has been a good indicator of what mortgage rates will do: when the NASDAQ is down rates are down; when the NASDAQ is up, rates are up.  This is because of the inverse actions of Stocks and Bonds.  When Stocks look bad investors move their money to lower yield, yet safer Bonds thus adding strength to them and lowering interest rates also on Mortgage Bonds.  When  Stocks look good investors transfer their money from safer, lower return Bonds to riskier but higher earning Stocks.

So far this morning the +0.49% uptick in the NASDAQ hasn’t had any real effect on Mortage Interest Rates though with rates at the same point they were at closing yesterday.

The Senate votes on the Stimulus Plan today and we’ll see what effect that has on the Stock Market.  One modification from Obama’s plan that I’m not happy about is changing the original plan’s tax credit for homebuyers from $15,000 for all home buyers this year  that does not have to be paid back to an $8,000 tax credit for first-time home buyers that only has to be repaid if the home is resold within 36-months of purchase.  This isn’t much different than the current $7,500 tax credit, and as many real estate industry advisors have stated isn’t helping much anyway because many first-time home buyers don’t have the initial downpayment to buy a home in the first place to take advantage of the tax credit 10 months from now.

If the government really wants to do something to stimulate home sales they need a credit that can be used at the closing table for down payment purposes or to pay closing costs, and they need to make it available to all home buyers for the next 12 months, or so.

But what do Realtors and loan officers know?  We’re just the one’s in the trenches dealing with home buyers everyday, so we must be way more out of touch with the market than some congressman that has never represented a home buyer in a purchase transaction.

With mortgage bonds facing resistance and stocks on the cusp of a rally today the market favors locking if you have a loan closing soon that isn’t locked yet.

For Salt Lake City, UT today’s average mortgage rates are as follows:

30-year fixed: 5.125%

15-year fixed: 4.625%

Conforming Jumbo 30-year fixed: 5.625%

FHA 30-year fixed: 5.50%

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Mortgage rates wild ride

Stocks down. Rates down. What’s going on here?

After a bad day on Wall Street yesterday rates fell dramatically this morning only to have three upward adjustments as the day went on?  Why, a few reasons today:

1. Stocks

2. Bonds

3. Fed Funds Rate

Mortgage rates are based on bonds. When stocks are not attractive, investors move their money to bonds which pay less, but are more secure. This drives mortgage bond yields up and thus rates down. So when Wall Street had it’s worst stocks day since September of 2001 yesterday, bonds got a big boost and rates dropped almost a full point this morning to around 5.5% for a 30-year fixed or an FHA 30-year fixed.  The day began with stocks falling 1.5% and as the day went on and the Fed decided not to cut the Funds Rate again it gave investors confidence in the course of the Fed and the markets and stocks rallied to a 2.5% increase. Hence, stocks got better, bonds got worse and so did mortgage rates.

How much worse? Well still better than they were last week.  A 30-year fixed loan is still pricing around 6.00%, which is better than 6.375% to 6.50% it was last week.  If I had to guess I’d say that rates are going to continue to bounce between 5.75% and 6.375% for the foreseeable future.  The last two days could have just been a momentary blip, an anomaly like we had last February when rates fell dramatically for about half a day.

Why didn’t the Fed cut the Funds Rate?  Because they have injected $120 billion into the banking system in the past two days.  It would seem the Fed wants to make borrowing more accessible rather than simply cheaper.  This is probably a good long term move to stave-off inflation increases because more money will be available to more people which will help fuel the economy rather than simply make a limited amount cheaper to less people.

The upshot though is that it’s still a good time to buy because rates are still low. Sure, maybe not the 4.50% low of a few years back, but those days are not sure to return for quite awhile, if ever.  Rates are still at historical lows, though, and home prices are stabilizing in Salt Lake City and throughout Utah, which will make homes available to more potential buyers.  I have a payment calculator available on my website as well as an affordability calculator.  Fool around on them to figure-out how much home can be afforded as well as what the payments would be.

Also, with rates where they are at now, it might be a good time to look into refinancing an 80/15 or 80/20 loan into a single loan.  A better rate might be in place on a first, but the second is higher and the blended rate of the two is the one you want to beat to save money.  There is also a blended rate calculator on my website to figure-out what the true rate is on a combo 80/10, 80/15 or 80/20 loan.

Call me if you have any questions.  Also, I appreciate and referrals you may provide since my business is almost fully referral-based.

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The Treasury Department has announced a government takeover of Fannie Mae and Freddie Mac. Can they do that?

The short answer is: “yes”, initially the government can do whatever they want to do. The long answer is “no”, it’s not that easy.

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On Friday the Treasury Department announced what is amounting to effectively a government takeover of the two mortgage guarantor giants, Fannie Mae and Freddie Mac. This sent shock waves through the investor community because it would also effectively wipe-out any equity shareholders of Fannie and Freddie have, but guarantee the borrowers rights.

Will this happen? It could, but it could also spell big trouble for the U.S. Government if they do. Here’s why:

Fannie Mae and Freddie Mac are GSE‘s, Government Sponsored Enterprises. The government in reality does not guarantee the assets of these entities, but the idea that they were set-up by the Federal Government to enhance credit flow to targeted segments of the economy gives investors the warm-fuzzies that the investments are safer because the government could guarantee them in times of trouble, which Congress did earlier this summer when it gave the Treasury permission to inject $25 billion into Fannie and Freddie to help shore-up security of the two entities.

Fannie Mae and Freddie Mac guarantee over 50% of all the mortgage in the United States. If they were to fail the repercussions of such would be very devastating to the American homeowner and the economy.

But now there is talk of a government take-over and that has investors running, not walking away from Fannie and Freddie, right at the time that they needed to raise $225 billion to refinance short-term debt. Not a wise move the the Feds… Not wise at all. In my opinion, what the Feds have done is effectively guaranteed the demise of Fannie Mae and Freddie Mac.

Can the Feds do this?

No, not really. Well, not without problems that is. The Federal Government, and the Treasury in particular, do not have the authority to wipe-out stockholders equity in these two private companies. Both Fannie Mae and Freddie Mac are presently above statutory capital requirements, the amount of liquid reserves that are placed upon them by governing bodies. Any shareholder equity taken by the Treasury has to be approved by Fannie Mae/Freddie Mac. The Treasury may be given permission to purchase stock and change board members or management, but they do not have any legal method upon which to take-over and wipe-out shareholder equity.

An actual takeover attempt of Fannie Mae and Freddie Mac would be illegal and would have the potential for legal action against the Federal Government by defrauded investors. It could turn into a big mess for the Federal Government.

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