Sunday, April 6, 2008

Mortgage Rates Pretty Stable, for a change

April 4, 2008 -- A compromise bill intended to help more facets of the troubled housing and mortgage markets was being hammered out in Congress as the week closed. As currently proposed, the bill -- reportedly stripped of the most controversial and expensive components -- promises tax breaks to homebuilders, permanent expansion of loan size limits for FHA-backed loans, and even thousands of dollars of tax credit for those buying foreclosed homes.

Off the table, at least for now, are "cramdown" provisions in bankruptcy proceedings, in which judges could modify the terms of a loan or even reduce the outstanding balance. These measures would theoretically help borrowers to remain in their homes. A cramdown provision would have raised concerns about trampling on long-established contract law. A perhaps more significant, if unintended, consequence would be the likelihood of higher interest rates and/or fees charged to all borrowers to help offset the newly-introduced possibility that a lender could be forced to lose money despite the mortgage contract's terms.

Also removed, for the moment, was a contentious revamping of the Federal Housing Administration which would authorize FHA to refinance as much as $400 billion worth of failing or underwater mortgage loans. The complicated arrangements of swapping bad mortgages for new ones (which would provide some chance for lenders to recoup money should property prices appreciate down the road) is intriguing, but fraught with complexity; even if passed, implementation would probably take quite some time%.

True conforming 30-year FRMs (fixed rate mortgages) edged up just two basis points to 6.000%, while jumbo FRMs fell by one basis point. The gap between those two fell to 150 basis (1.50%) points this week.

Preliminary data covering the new "expanded conforming" loans being bought by Fannie Mae and Freddie Mac prices for this new class of fixed-rate loan pretty squarely in the middle of the conforming and jumbo range.

The economic data released this week was collectively muted, if not generally better than expected in some cases. If nothing else, most of the declines were less than feared and perhaps, in some cases, represented a sign of improvement.

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