Rates Fall Dramatically in Wake of GSE Bailout
While investors are still grappling with the fallout from a Treasury-led bailout of both Freddie Mac (FRE) and Fannie Mae (FNM), borrowers are clearly benefiting as mortgage rates have fallen dramatically since Sunday's takeover of the twin mortgage giants. Freddie Mac's weekly rate survey found that rates on a 30-year fixed-rate mortgage averaged 5.93 percent with an average 0.7 point for the week ending Sept. 11, down an astounding 42 basis points from last week and below the 6.31 average recorded last year. Five-year Treasury-indexed hybrid ARMs fell 10 basis points to 5.87 percent, while one-year ARMs rose slightly, reaching 5.21 percent compared to 5.15 percent one week earlier, Freddie Mac said. Bankrate.com reported that the drop in average rates in its own separate survey represented the largest one-week drop since March; rates are now at levels last seen in May. Despite the drop in rates, however, mortgage spreads remain historically high. The margin between fixed mortgage rates and risk-free Treasuries contracted from a 22-year high just one week ago and now sit in the neighborhood of 250 basis points, Bankrate said -- while down from more than 280 basis points last week, they're still far above the historical norms of 160-180 basis points. "Interest rates for 30-year fixed-rate mortgages are down almost 0.6 percentage points over the past 4 weeks, which will help to spur home purchases and loan refinancing in coming weeks,” said Frank Nothaft, Freddie Mac vice president and chief economist. HW sources said the drop in rates was welcome news, but likely only a benefit for well-qualified borrowers. "Low mortgage rates aren't as important to a national housing recovery as looser mortgage guidelines," said Dan Green, loan officer at Chicago-based Mobium Mortgage and author of a mortgage blog at www.themortgagereports.com. "A 5 percent rate is useless if you can't get approved for it." Treasury secretary Henry Paulson hinted this week that part of the government's takeover of both GSEs would include a loosening of underwriting criteria in an attempt to jump-start the mortgage market, a move widely criticized by analysts and GSE observers alike. "A re-loosening of credit standards and pricing is bound to disappoint all those who believe authentic stabilization of housing, as well as the US financial system, cannot occur until the excess liquidity – and the financial behavioral excesses easy money engendered – are wrung out,” wrote Linda Lowell, a 15-year MBA/ABS market veteran, in a published column at Market News International earlier this week. Disclosure: The author held no positions in FNM or FRE when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.