Dec
30
Conference Board’s measure sinks amid dismal job market and credit crunch.
NEW YORK (CNNMoney.com) — A key measure of consumer confidence fell to an all-time low in December amid a dismal job market and uncertain outlook for the new year.
The Conference Board, a New York-based business research group, said Tuesday that its Consumer Confidence Index fell to 38 in December from the downwardly revised 44.7 in November.
Economists were expecting the index to increase to 45.5, according to a Briefing.com consensus survey of economists.
“The further erosion of the Consumer Confidence Index reflects the rapid and steep deterioration of economic conditions that occurred in the fourth quarter of 2008,” said Lynn Franco, director of the Conference Board Consumer Research Center, in a statement.
Wachovia senior economist Mark Vitner said that assessment is “right on the money.”
“It looks like the uptick in November was a knee-jerk response to the presidential election being over,” he said. The “false reading in November” bumped their expectations too high, leading to disappointment this month, Vitner added.
The gloomy news came at the end of a full year of recession. The credit crunch has strained the financial system as central banks struggle to raise capital.
At the same time, housing prices have plunged and S&P 500 has plummeted more than 40%. The dollar has been weak against major currencies. This year’s holiday retail season is predicted to have been the worst in decades.
Job market concerns
Perhaps most unsettling for Americans is the deteriorating job market. Layoffs and income cuts were widespread this year. The number of Americans filing for first-time unemployment benefits rose to a 26-year high for the week ended Dec. 20.
Nearly 2 million jobs were lost in 2008, and the slumped stock market means some nest eggs have shrunk considerably.
In the report, those saying jobs are “hard to get” rose to 42% from 37.1% in November, while those saying jobs are “plentiful” sank to 6.2% from 8.7%.
2009 outlook
“The overall economic outlook remains quite dismal for the first half of 2009, and only a modest recovery is expected in the second half,” Franco said in the statement.
Consumers anticipating business conditions to worsen over the next six months increased to 32.8% from 28.3% in November, the report said. Respondents anticipating fewer jobs in the months ahead increased to 41% from 33.7%.
Vitner said the index may see a slight uptick in January as the new year can provide a psychological boost, but the poor employment conditions will prevent any long-term improvement.
“While the recession may bottom out in mid-2009, unfortunately we don’t expect unemployment to hit bottom until early 2010,” Vitner said. “I don’t think we’ll see the confidence index improve dramatically for quite some time.”
The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households.
Dec
30
Home Prices Post Record 18% Drop
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The 20-city S&P Case-Shiller index has posted losses for a staggering 27 months in a row.
NEW YORK (CNNMoney.com) — Home prices posted another record decline in October, falling 18% compared with a year earlier, according to a closely watched report released Tuesday.
The 20-city S&P Case-Shiller index has posted losses for a staggering 27 months in a row. In October, 14 of the 20 cities set fresh price decline records.
“The bear market continues; home prices are back to their March 2004 levels,” says David Blitzer, Chairman of the Index Committee at Standard & Poor’s.
Sunbelt cities suffered the most, but most of the country is watching home values fall. In Phoenix prices have plunged 32.7% since October 2007, Las Vegas home values are down 31.7% year-over-year, while San Francisco prices fell 31%. Miami, Los Angeles and San Diego recorded year-over-year declines of 29%, 27.9% and 26.7%, respectively.
“As of October 2008, the 20-City Composite is down 23.4%,” said Blitzer. “In October, we also saw three new markets enter the ‘double-digit’ club.”
Atlanta, Seattle and Portland reported annual rates of decline of 10.5%, 10.2% and 10.1%, respectively.
“While not yet experiencing as severe a contraction as in the Sunbelt, it seems the Pacific Northwest and Mid-Atlantic South is not immune to the overall demise in the housing market,” Blitzer added.
Deteriorating Environment
Many of the factors affecting home prices turned strongly negative this fall, according to Blitzer.
“October was really the first month to feel the full brunt of the credit crunch,” he said. “Up until the Lehman Brothers [bankruptcy filing on September 15], everyone felt relatively optimistic.”
Plus, in many of the free-falling cities the majority of real estate sales consist of distressed properties such as foreclosed homes and short sales. These houses tend to sell at a steep discount to the rest of the market, and when they account for a large proportion of all sales, they can exaggerate the depth of price declines.
Of course, foreclosures continue to be a big problem as well. In October alone, nearly 85,000 people lost their homes to foreclosure, adding vacant inventory to an already overburdened market.
Home sellers should not expect prices to improve any time soon, according to Pat Newport, a real estate analyst for IHS Global Insight.
“I expect it’s going to get quite a bit worse over the next couple of months,” he said. “Existing home sales reports have really been bad.”
And although interest rates are currently extremely low, that’s doing more to help people refinancing existing mortgages than it is to help new home buyers.
“Buyers still have to have a 20% down payment,” said Newport, “and, in this environment, it can be hard to meet that criteria.”
Dec
23
Home Sales, Prices in Deep Plunge
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Realtors: Sales of existing homes fall 8.6% – much worse than expected – as median prices suffer worst decline since Depression.
NEW YORK (CNNMoney.com) — The number of existing homes sold during November plummeted 8.6% as prices plunged by record amounts, according to a closely watched housing industry report issued Tuesday.
The National Association of Realtors said that home sales dropped to an annualized rate of 4.49 million units. That was down from 4.98 in October and much less than the 4.93 million units projected by a consensus of industry analysts as reported by Briefing.com.
“The only region where we’re seeing more sales are where bargain hunters are taking advantage of distressed sale prices,” said Lawrence Yun, the Realtors’ chief economist. “About 45% of transactions, nationally, were of distressed properties.”
Yun blamed the financial market turmoil for the devastating report. For months, sales had hovered 4.9 million to 5.1 million.
“Today’s figure reflects the stock market crash that began in October,” he said.
The drop took place despite bargain prices as property values continued their decline. The median existing home sold for $181,300 in November, down 13.2% from a year ago when the median was $208,800.
Yun said that price drop was the largest the Realtors had ever recorded and probably the worst decline since the Great Depression.
Meanwhile, the glut of homes unsold expanded to 4.2 million in November. That represents 11.2 months of supply, at the current rate of sales, up from 10.2 months in October. Bloated inventories have barely budged over the past 12 months. Last November there were 4.27 million homes on the market.
Dec
15
Home prices are have been hit hard, yet there is still no end in sight to the foreclosure crisis, according to Zillow.com.
NEW YORK (CNNMoney.com) — American homeowners will collectively lose more than $2 trillion in home value by the end of 2008, according to a report released Monday.
The real estate Web site Zillow.com calculated that home values have dropped 8.4% year-over-year during the first three quarters of 2008, compared with the same period of 2007.
Some 11.7 million Americans are now “underwater,” owing more on their mortgage balances than their homes are worth.
Zillow collects home values and analyzes home price trends in 163 markets; all but 30 registered price drops over the nine months ended Sept. 30, compared with the same nine-month period of 2007.
“This year marked the acceleration of the market correction, and is likely to end with the eighth consecutive quarter of declines in home values,” said Stan Humphries, Zillow’s vice president of data and analytics. “Homeowners in most areas we cover are struggling with foreclosures pouring into the market, large amounts of negative equity and dropping home values.”
No Bottom in Sight
One piece of good news is that in some, although not all, of the markets hardest hit by the downturn, such as San Francisco, San Diego and Punta Gorda, Fla., home values are not falling as steeply as they were.
Offsetting that cause for optimism, however, are growing economic problems, especially increased job losses.
“When we look for a turnaround, we look for two or three consecutive quarters [of smaller price declines],” he said. “We also want to see sales numbers pick up, inventories go down and improvements in foreclosure figures. Foreclosures really muddy the picture.”
The foreclosure picture is not likely to clear up in the coming months, according to Humphries. He expects to see more foreclosed, vacant homes added to already bulging inventories, sending prices spiraling down and putting more mortgage borrowers deeper underwater.
Most of the subprime loans that will fail have already done so, but there are other toxic mortgage products whose default rates probably have not yet peaked. The number of option ARMs that fail, for instance, will continue to increase over the next few years according to Humphries. These loans allow homeowners to make minimum payments, which cause the loan principle to balloon. There are also lots of “liar loans” loans, which were issued without checking a borrower’s assets or income, that are still going bad.
Zillow’s home value statistics closely track the foreclosure crisis; price declines are steepest in areas that have been hit hardest by foreclosures.
The worst performing market in the nation was Stockton, Calif. The average home price there plunged 32.3% year-over-year to $210,179 in the first three quarters of 2008. Almost as bad were nearby Merced, down 31.2% to $167,282, and Modesto, was was off 30.4% to $197,368 in the same time period.
Humphries expressed surprise that these areas are still performed so poorly.
“I would have thought that they would have produced some more positive trends by now,” he said, “but we are seeing no slowdown.”
The best performing metropolitan area was Jacksonville N.C., where home values rose 4.9% year-over-year to $139,261 in the first three quarters of the year. Winston-Salem, N.C., also registered a gain, of 4.1% to $136,854. Anderson, S.C., prices climbed 3.5% to $101,816 and State College, Pa., went up by 3.4% to $206,995.
Dec
12
Some see 2006 as ‘lifetime’ peak in prices
More room to fall?
For every $100 spent on a house in 1950 the investment rose slightly through 2002, then soared to about $192 in 2006, adjusting for inflation. Then credit dried up, and the bust began.
Rick Wallick moved into a new, three-bedroom $200,000 home in Maricopa, Ariz., in October 2005. Today, the home is worth $80,000.
The disabled software engineer stopped making mortgage payments this month. His $70,000 down payment is now worthless. His dream house will be foreclosed on next year.
“We’re so far underwater it’s not funny,” says Wallick, 57, who had to return to his original home in Oregon to care for a sick family member and tend to his own medical problems. Wallick, one of the hardest-hit victims in one of the states hit hardest by the housing crisis, lost 60% of his home’s value in three years.
His story is an extreme example, but home values have fallen so sharply since hitting a historic peak in the spring of 2006 that many Americans are wondering how much more prices can sink.
Dec
11
November foreclosure filings dropped 7% from October, but that may be the calm before the storm.
NEW YORK (CNNMoney.com) — Foreclosure filings dropped 7% from October to November, according a report released Thursday. But don’t break out the bubbly. The tide of foreclosures may be ebbing now, but the flood isn’t over yet.
“There are several indications that this lower activity is simply a temporary lull before another foreclosure storm hits in the coming months,” James Saccacio, RealtyTrac’s CEO, said in a statement.
November foreclosure filings fell to 259,085, or one for every 488 households in the nation, according to the latest report from RealtyTrac, the online marketer of foreclosure properties. That was down from October, but up 28% from November of 2007.
A total of 78,179 families lost their homes during the month, down 8% from October when 84,868 homes were repossessed by lenders. A total of 1,014,618 homes have been lost to foreclosure since the housing crisis hit back in August 2007.
November’s decline in foreclosure filings is deceiving, according to Rick Sharga, RealtyTrac’s vice president of marketing, because much of it is attributable to temporary foreclosure prevention efforts.
“The reduction is because Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) both announced moratoriums on foreclosures, while major lenders also put the brakes on foreclosure proceedings,” said Sharga. “State moratoriums are also delaying the onset of foreclosures. But all that will only delay, not avoid them.”
Sharga expects to see another good report in December, but a significant spike in foreclosure filings come January.
Negative Indicators
The economic climate is rapidly deteriorating and job losses are soaring – factors that are sure to exacerbate the housing crisis. And various forward-looking indicators show more trouble ahead.
For instance, the number of homeowners who fell behind on their mortgages hit a record 6.99% in the third quarter, up from 5.59% a year ago, according to the Mortgage Bankers Association.
Last week, Credit Suisse issued a report forecasting 8.1 million foreclosures by the end of 2012, accounting for 16% of all U.S. mortgages.
Meanwhile, evidence is mounting that current foreclosure-prevention efforts are falling well short of the mark.
A Dec. 8 report from the Office of Comptroller of the Currency stated that more than half of the borrowers who had their mortgages modified in the first half of 2008 are already delinquent again. Many of these delinquencies will turn into foreclosures in the coming months.
“A lot of those modifications are simply pushing back principal payments,” said Sam Khater, senior economist for First American CoreLogic, a financial data and analytics company. “They’re not reducing the level of debt. Many homeowners are in such bad shape that only much more drastic or radical modifications will help them.”
To be viable, Khater added, most modifications will require lenders to make a significant principal reduction. And for the most part, that’s not happening.
Biggest Hits
The former boom states mostly in the Sun Belt, as well as Midwestern industrial states hit hard by job losses, continue to bear the brunt of the foreclosure crisis.
Nevada had the highest rate of foreclosures. One of every 76 homes there received some kind of foreclosure filing – notice of default, notice of foreclosure sale, bank repossession, etc. – during November. Florida was second with one filing for every 173 homes and Arizona had one for every 198.
California had the highest total number of filings with 60,491, and the fourth highest rate; one for every 218 households. Michigan was the hardest-hit state outside of the Sun Belt, with one filing for every 309 households.
Among cities, Cape Coral-Ft. Myers, Fla., posted the highest rate of foreclosure filings with one for every 59 households. Las Vegas had the second highest rate with one for every 61 homes.
Dec
11
Mortgage Rates Hit 41/2 Year Low
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Freddie Mac says 30-year mortgage rates fell to 5.47% this week, continuing the decline that began when the Fed said it would buy up $500 billion in mortgage-backed securities.
New York (CNNMoney.com) — Mortgage rates fell again this week, following the government’s efforts to assist the troubled housing market.
Government sponsored mortgage lender Freddie Mac said Thursday that fixed rates on 30-year mortgages averaged 5.47% for the week ending Dec. 11. That’s down from 5.53% last week and well below 6.11%, which is where the rate stood at this time last year.
Mortgage rates began to fall after November 25th, when the administration announced that it would pump another $800 billion into the credit markets to unfreeze consumer and mortgage lending.
Specifically, mortgage rates responded to the Federal Reserve’s announcement that it would purchase up to $500 billion in mortgage backed securities backed by Fannie Mae, Freddie Mac and Ginnie Mae. It will also buy another $100 billion in direct debt issued by those firms.
Rates dipped to 5.77% on a 30-year, fixed rate loan the day after the government’s announcement, down from the previous Monday’s 6.06% average, according to Keith Gumbinger, vice president of HSH Associates. And the downward trend has persisted.
“What we’re seeing is a slight continued decline influenced by the Federal Reserve’s announcement to buy half a trillion in mortgage backed securities,” Gumbinger said. “And this continued minor downdraft is also due to the poor economic climate.”
The 30-year rate has not been this low since March 25th, 2004 when it averaged 5.40%.
“Following the release of the November employment report, which showed the largest monthly decline in jobs since December 1974, bond yields fell slightly this week allowing fixed-rate mortgage rates room to ease back a little further,” said Frank Nothaft, Freddie Mac vice president and chief economist, in a release on Thursday.
The 15-year fixed rate mortgage this week averaged 5.20%, which is down from 5.33% last week. A year ago at this time, a 15-year fixed rate loan averaged 5.78%.
The 15-year rate has not been this low since February 7, 2008, when it averaged 5.15%.
Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.82% this week, up from last week when it averaged 5.77%. At this time a year ago, the 5-year ARM averaged 5.89%.
And the one-year Treasury-indexed ARM averaged 5.09% this week, up from last week when it averaged 5.02%. Last year, the 1-year ARM averaged 5.50 percent.
“The housing market still hangs in the balance,” Nothaft said in a release. “On a year-over-year basis, after rising in both August and September, pending existing home sales fell 1.0% in October, based on figures from the National Association of Realtors. Meanwhile, conventional mortgage applications for home purchases over the week ending December 5th were up 2.0% from four weeks prior, but were still 51% below the same period last year, according to the Mortgage Bankers Association.”
Dec
6
Dec. 6 (Bloomberg) — The U.S. economy may be headed for its deepest and longest recession since World War II as mounting job losses take their toll on consumer confidence and spending.
Employers cut payrolls last month at the fastest pace in 34 years as the unemployment rate rose to 6.7 percent, the highest level since 1993. The 533,000 drop brought cumulative job losses this year to 1.91 million, the Labor Department said yesterday in Washington.
“Almost all businesses are in survival mode, and they’re slashing payrolls and investments just to conserve cash,” Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania, said in a Bloomberg Television interview yesterday. “We’re in store for some big job losses.”
The plunge may spur incoming President Barack Obama to come up with a fiscal stimulus package larger than the $700 billion plan some economists advocate. Obama today promised to make the “single largest new investment” in roads and public buildings as part of his plan to save or create 2.5 million jobs.
Yesterday’s figures added urgency to negotiations over aid to U.S. automakers. Democrats in Congress reached an agreement in principle with the Bush administration on providing funds to prevent a collapse of General Motors Corp. and Chrysler LLC, a congressional aide said.
U.S. stocks fell for the fourth time in five weeks as the worsening job market added to concern the recession is deepening. The Standard & Poor’s 500 Index lost 2.3 percent to 876.07, trimming its rebound from the 11-year low reached on Nov. 20 to 16 percent.
Fourth-Quarter GDP
John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said the jobs report suggests that the economy shrank at annual rate of 5 percent in the final three months of the year. That would be the biggest contraction since the first quarter of 1982.
“Consumer confidence is going to be bad,” Silvia said. “It is going to be a difficult winter for a lot of people.”
Yelena Grinberg of San Francisco is already feeling the effects of a sluggish labor market. The 26 year old has sent out more than 100 resumes since she lost her job as an administrative assistant, and has only landed one position: doing clerical work for $12 an hour over two days.
“It’s really tough,” she said, standing outside an Employment Development Department office in San Francisco. “I was so sure it wasn’t going to be hard. But no one wants to look at me,” she said, starting to cry. “I’m running out of money and I’m freaking out.”
GM, Citigroup
Job losses are likely to mount next year as the collapse in credit and slump in spending hurt companies from Citigroup Inc. to AT&T Inc. Legg Mason Inc., a Baltimore-based fund manager, said yesterday it will eliminate 8 percent of its workforce.
Payrolls in November were forecast to drop by 335,000, according to the median estimate in a Bloomberg News survey. The jobless rate was projected to rise to 6.8 percent.
Revisions for September and October increased losses by 199,000. November was the 11th consecutive drop in payrolls.
The employment slump was a key factor in determining the start of the recession. The National Bureau of Economic Research, the arbiter of U.S. business cycles, announced this week that a contraction began in December 2007, the month payrolls peaked.
Yearlong Recession
At 12 months, the recession is already the longest since the 16-month slump that ended in November 1982. The recession is the 11th since a downturn that occurred in 1945, the year that World War II ended.
To fight the downturn, Federal Reserve Chairman Ben S. Bernanke this week outlined unorthodox policy action that officials can take beyond lowering interest rates. One option would be to purchase longer-term Treasuries on the open market to inject more cash into the financial system.
The central bank may also cut its benchmark rate from 1 percent at its meeting Dec. 15-16 in Washington. HSBC Holdings Inc. economists yesterday forecast the Fed will reduce it to zero, emulating the Bank of Japan’s efforts to defeat deflation earlier this decade.
Factory payrolls fell 85,000, the Labor Department said. The slide would have been even worse without the return of 27,000 striking machinists at Boeing Co.
Also preventing the unemployment rate from climbing even more last month was a surge in part-time workers. The number of Americans saying they worked part-time last month due to economic reasons — either because their hours were cut or they couldn’t find full-time jobs — surged to 7.32 million, the most since records began in 1955.
Hit to Carmakers
U.S. automakers have been particularly hard hit as sales last month dropped to the lowest level in 26 years. The top executives of GM, Ford Motor Co. and Chrysler this week appealed to Congress for as much as $34 billion in government assistance.
Lawmakers who support bailing out U.S. automakers sought to rally support for a scaled-down loan program, citing the grim jobs report as evidence that bankruptcies of any of the Big Three would be disastrous for the economy.
At least some of the acceleration in job losses is the result of the tightening grip of the credit crunch, with loss- ridden banks making it harder to borrow, economists said. Policy makers’ decision in September to let investment bank Lehman Brothers Holdings Inc. fail, while saving other financial institutions, may have contributed to the crisis.
“It’s the collapse heard around the world,” said Ellen Zentner, a senior economist in New York at Bank of Tokyo- Mitsubishi UFJ Ltd., which had the closest payrolls forecast in the Bloomberg survey. “It’s probably one of the worst decisions the Fed ever made — to save everybody else but Lehman.”
Housing Slump
Financial firms decreased payrolls by 32,000 last month, after a loss of 31,000 in October. The report also reflected the housing slump, with builders eliminating 82,000 posts after a 64,000 drop the month before.
“We don’t get the job losses stopping until 2010,” Kurt Karl, chief U.S. economist at Swiss Re in New York, said in a Bloomberg Television interview.
Dec
5
Mortgage Delinquencies, Foreclosures Rise to Record Levels
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Dec. 5 (Bloomberg) — One in 10 American homeowners fell behind on mortgage payments or were in foreclosure during the third quarter as the world’s largest economy shed jobs and real estate prices tumbled.
The share of mortgages 30 days or more overdue rose to a seasonally adjusted 6.99 percent while loans already in foreclosure rose to 2.97 percent, both all-time highs in a survey that goes back 29 years, the Mortgage Bankers Association said in a report today. The gain in delinquencies was driven by an increase of loans with payments 90 days or more overdue.
“Until we see a turnaround in the job situation, we’re not going to see these numbers improve,” said Jay Brinkmann, chief economist of the Washington-based bankers group, in an interview. “We’re seeing more loans build up in the 90-days bucket as lenders work to modify loans and states put in place programs that delay foreclosures.”
The U.S. economy has shed 1.91 million jobs this year, while falling home prices have made it difficult for people who can’t pay their mortgages to sell their property. Payrolls declined in each month of 2008 through November, the Labor Department said today in Washington.
New foreclosures fell to 1.07 percent from 1.08 percent in the second quarter as some states enacted laws to temporarily stop home repossessions and lenders increased efforts to modify the terms of loans, Brinkmann said.
Home Sales Sink
“Some servicers keep a loan in a delinquent state until they see customers carrying through on their agreements, and then they’ll switch it to performing,” Brinkmann said.
U.S. home sales and prices began to tumble in 2006 after a five-year boom, dragging the economy into a recession that began in December 2007, according to the National Bureau of Economic Research.
The median home price in the fourth quarter probably will be $190,300, down 19 percent from the record $226,800 in 2006’s second quarter, according to a Nov. 24 forecast by Fannie Mae, the world’s largest mortgage buyer.
Purchases of existing homes in October slid to an annual rate of 4.98 million, lower than forecast, the National Association of Realtors said in a Nov. 24 report. The median price fell 11.3 percent from a year earlier, the most since the group began collecting data in 1968.
Federal Reserve Chairman Ben S. Bernanke yesterday urged using more taxpayer funds for new efforts to prevent home foreclosures, saying the private sector is incapable of coping with the crisis on its own.
Bernanke’s Plans
The Fed chief outlined four possible options, including buying delinquent mortgages and providing bigger incentives for refinancing loans. He called for addressing the “apparent market failure” where lenders aren’t modifying mortgages even in cases where it’s in their own economic interest to do so.
Bernanke’s proposed changes would go beyond those announced last month by Housing and Urban Development Secretary Steve Preston, who oversees the FHA. The agency will change the amount of the loan a lender must forgive and allow banks to extend the payback time of a mortgage.
There were 111.7 million occupied housing units in the U.S. in the third quarter, 68 percent used by owners and the remainder leased by renters, according to the Census Bureau. One in three U.S. homes has no mortgage, the bureau said.
The bankers’ report cites percentages without providing the number of mortgages. The U.S. had $11.3 trillion of outstanding home loans at the end of June, according to Federal Reserve data. Mortgage lending fell to $80.8 billion in the second quarter, down from $764 billion a year earlier, the Fed said.
The Mortgage Bankers report is based on a survey of 45.5 million loans by mortgage companies, commercial banks, thrifts, credit unions and other financial institutions.
Dec
3
Move would help homeowners and buyers with good credit, but would do little for troubled borrowers, experts said.
NEW YORK (CNNMoney.com) — Lobbyists are pushing the Treasury Department to consider a plan to purchase mortgage-backed securities in the hopes of driving mortgage rates to as low as 4.5%, an industry source said.
Similar to an effort unveiled last week by the Federal Reserve, the proposal calls for Treasury to buy securities backed by 30-year fixed-rate mortgages from Fannie Mae and Freddie Mac. Details on the plan remain sketchy, but an announcement could come as early as next week, the source said.
The increased demand for mortgage-backed securities would prompt mortgage rates to drop. That, in turn, would enable homeowners to refinance into lower-cost loans and make it cheaper for potential homebuyers to get into the market.
Spokeswomen from Treasury and the Federal Housing Finance Agency declined to comment.
Last week’s Fed move drove mortgage rates down to 5.5%, from 6.06% a week earlier. The Fed said on Nov. 26 that it would purchase up to $500 billion in mortgage-backed securities from Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and Ginnie Mae, and that it would buy another $100 billion in direct debt issued by those firms.
Mortgage applications more than doubled as a result, the Mortgage Bankers Association said Wednesday. Much of the activity stemmed from homeowners looking to refinance.
Industry groups have been pressuring President-elect Barack Obama and lawmakers to lend a helping hand to the housing market. The National Association of Realtors, for instance, has called for Treasury to buy mortgage-backed securities. Meanwhile, a coalition of industry groups have banded together under the “Fix Housing First” banner to call for measures including tax credits of up to $22,000 and the creation of a 30-year mortgage, carrying rates as low as 2.99%.
Experts See Both Pros and Cons
Experts, however, had mixed views on how much a new Treasury initiative would help homeowners and the economy. Some felt lower rates would help stabilize the housing market by bringing in new buyers and would give those who refinance more money to spend.
“If it gets people buying homes and spending, it will help reverse the economy and get us out of this recession,” said Scott Talbot, senior vice president of the Financial Services Roundtable, which is pushing the measure.
While it takes time to entice new buyers into the market, low rates accelerate that process, said Greg McBride, senior financial analyst at Bankrate.com.
“It is clearly designed to bring buyers into the marketplace and soak the inventory of unsold homes,” he said.
But others questioned whether rates would remain low and, even if they did, only a narrow slice of credit-worthy borrowers would benefit.
Rates are already inching up, hitting 5.75% on Wednesday, said Keith Gumbinger, vice president of HSH Associates. Several government attempts to lower mortgage rates this year have failed to have a lasting effect.
Also, the proposal would do little to help troubled borrowers who have fallen behind on their payments, have no equity in their homes or have lost their jobs. With credit standards still high, these homeowners would not be able to refinance and take advantage of the lower rates, he said.
Finally, super-low rates could keep private investors out of the mortgage-backed securities market, forcing the government to remain the primary buyer of such investments, Gumbinger said. Rates have not fallen below 5.37% in more than 45 years.
“I can’t imagine there will be a significantly active marketplace of people who want to buy at these low rates,” he said.