Unzipped Mortgage Rates Report: October 3, 2008

The bailout bill passed the House after a decisive victory in the Senate; it is certain to be signed into law by President Bush.  From Bloomberg.com:

These steps represent decisive action to ease the credit crunch that is now threatening our economy,” President George W. Bush said at the White House after the vote. He said he will sign the bill into law when he receives it. House Speaker Nancy Pelosi said the measure has been sent to him.

The House approved the measure in a 263-171 vote, four days after rejecting an earlier version. The bill’s defeat on Sept. 29 caused a 778-point drop in the Dow Jones Industrial Average, prompting dozens of lawmakers to reverse their vote on the legislation, the government’s largest intervention in the markets since Franklin Roosevelt’s New Deal.

I expect the mortgage-backed securities market to gradually improve.  The euphoric response that followed the Nationalization of Fannie Mae and Freddie Mac was a result of pent-up anxiety about the explicit government guarantee of their debt.  This “bailout” is different than the Fannie/Freddie bailout.  While this bailout will provide support for battered mortgages, which should result in lower mortgage rates, it is clearly a signal that the Federal government will assume a lot of losses.

What worries me (and mortgage-backed securities traders) is the propensity for other governments to stick their hand out and ask for help:

California Governor Arnold Schwarzenegger today warned that his and other states may need emergency loans if a $700 billion financial-rescue package isn’t passed by Congress soon.

If this bailout restores order to the credit markets, California should be able to raise money through tax-advantaged municipal bond offerings.  If this bailout is insufficient to cure the credit crunch and states need to turn to the US Treasury to solve their cash flow problems, credit markets have seized to the point of financial Armageddon.

You can safely delay mortgage locks if your closing after October 17th.  Delaying your lock is a bit different from a “float” recommendation.  It means that you should expect lower rates and jump on one when you feel it’s “good enough”. The market should remain volatile.  The par rate (with no yield spread premium to the originator) should drift as low as 5.625% in the next 60 days but it may have to go through 6.125% to get there.  If you’re planning on refinancing your home loan, get your documentation in line, watch the mortgage rates reports carefully, and jump on the opportunity when it presents itself.

MBS traders know in their heart that the bailout package and weakened employment data will lead to lower mortgage rates but every bump in the road (like the California request) will give them reasons to sell.

Delay your lock if you have time; lock those rates if you’re closing in 14 days.

Originally posted on Millionaire Real Estate Lender

October 3, 2008