As I look through the binoculars of a borrower at the economic terrain significant changes have happened over the last week. These events will have a big impact on the availability of loan funds and the way borrowers and lenders will interact.
1. The Campbell/Inside Mortgage Finance Housing Pulse, as reported by Calculated Risk, saw an increase in The HousingPulse Distressed Property Index (DPI) to 48.6% in March. That means almost half of all existing home sales are distressed home sales. The housing market continues to be in a serious slump which has and will drive the Fed to keep interest rates low. Bad new for savers, good news for all the industries that need a hit of interest rate crack to satiate their addiction to the housing industry.
2. The Case Shiller housing index, which is compiled by rating agency Standard & Poor’s, was down 3.3% in February from a year ago. There’s little good news on housing. Low interest rates, more foreclosures, and abundant liquidity will be the norm for a while.
3. MSNBC and others reported that our representatives in congress are getting weak kneed about shutting down Freddie and Fannie. The GSE’s that have cost the taxpayers over $150 billion in bail out funds are benefiting from the many industries that rely on housing and spend gobs of money in Washington to keep the gravy fueling their financial train. It’s looking more likely they will survive in some form and continue to guaranty loans. It’s amazing what time does to memories. The sub prime credit crisis pain is healing quickly. History will be repeated wihout serious reform of these GSE’s. The move to a private market based, unsubsidized loan origination process will be delayed to the detriment of the country.
4. MSNBC reported that the rules for Jumbo mortgages will change on October 1st. Fannie Mae and Freddie Mac loan guarantees are scheduled to drop from $729,750 to $625,500. Those unfortunate souls that can afford a one million dollar home will put up a $100,000 larger down payment. But they can afford to pay a little more, right? Isn’t that the administration’s line? The taxpayers shouldn’t be guaranteeing loans for the wealthy or anyone for that matter. Let the market dictate the appropriate risk adjusted lending rate for everyone.
5. And of course the big news as reported by WSJ.com and others was the Fed’s decision to leave the Federal Funds rate at 0-25bps and keep the “Extended Period” moniker in its statement. The Fed said the economy is growing at a “moderate pace” and the labor market is “improving.” The Fed doesn’t view inflation as a major problem, inflation expectations are still well anchored and commodity price volatility is transient. The biggest change in the April statement was the acknowledgement that QE2 will end in June and there is no plan for another round of quantitative easing although maturing bond holdings will be reinvested to maintain the Fed’s balance sheet holdings. We still seem to be a long way from the first Fed rate hike and some are looking to mid-2012. The weakness in the economy, the excess labor and production capacity in the country and the devastated housing market are keeping a break on rate hikes which should keep borrowing costs subdued for commercial and consumer borrowers.
WJS.com reported that Chrysler is prepared to pay back $7.5 billion of loans from U.S. and Canadian taxpayers. The source of repayment is term loans, private bonds and cash from Fiat. Liquidity is abundant. The kicker i this repayment of high interest debt will trigger the release of $3.5 billion in low interest loans from the Department of Energy for plant retooling. The taxpayers take it in the shorts again.
MSNBC reported a A study titled Paying More for the American Dream V determined that minorities are being unfairly targeted for loan application rejection and subject to less favorable terms than non-minorities. I’ve previously discussed the myth of the american dream of home ownership on this blog and how few people know the history of the principle and how it has been distorted. The inervention by regulators and politicians to right this perceived injustice will only further distort the lending market and create ineficiencies in debt pricing and terms. The law of unintended consequences will reign supreme at the end of the day.
You can read more about what happened in the borrowing markets at my blog
- Jumbo mortgage squeeze: how it will affect home prices (hsh.com)
- Life Without Fannie or Freddie (dgrifflawapc.wordpress.com)
- Without Loan Giants, 30-Year Mortgage May Fade Away (muniratherealtor.wordpress.com)