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| Mortgages: Jumbo Rate Spike August 10, 2007 -- As the subprime mortgage market mess continued to make itself felt more widely, the reassessment of mortgage risks crossed over more heavily into the jumbo mortgage markets this week. The pullback in credit availability for even good-credit quality borrowers helped widen the spread between conforming-loan rates and those of jumbos, as buyers for usually desirable jumbo paper have all but vanished of late.
While we usually report combined averages in this space, reserving more precise data for our clients, the sizable bifurcation in the pricing for loans in the market bears reporting using our proprietary data. Simply put, conforming mortgage markets -- with their rigorous standards for income, debts, asset strength, down payments and such -- continue to function as normally as before; investors have a sense of certainty about the value of the instruments they are buying. The average conforming 30-year fixed rate mortgage (FRM) actually declined this week, falling to an average 6.61% from 6.68% last week.
On the other side of the fence are jumbo mortgages, which are more properly called 'non-conforming' loans because their underwriting does not conform to FNMA/FHLMC requirements. Non-conforming loans are placed into private markets via any number of conduits, largely Wall Street, where they are packaged into various investments, including securities, and sold to investors. Their valuation relies upon representations and warranties about the quality of the loans, as well as the quality of the investments themselves. With the fallover in subprime markets joined by troubles in high-LTV piggybacks (see last week's Market Trends) and the collapse of American Home Mortgage -- which was a major player in so-called 'alt-A' and 'alt-doc' loans -- investors are no longer certain of the value of their non-conforming holdings. Investors who are uncertain of the value of what they hold will be loath to buy any more of the same investment risks -- or, if they can be persuaded to buy, it will be at a price more likely to (at the least) guarantee no loss, if not a profit. That buyer's strike for these kinds of loans means that when, or if, such mortgage money is available, it is at a cost more dear to borrowers. The average 30-year FRM jumbo shot up from 7.09% last week to an average 7.40% this week in our weekly editorial survey. The difference in price between conforming and jumbo mortgages depends upon market conditions and investor appetite for the two, but commonly ranges between 1/8 to 3/8 of a percentage point. As recently as a month ago, that spread was 20 basis points (.20%), a fairly typical spread, but had surged to a bloated 31 basis points this week.
This week's overall (combined) average for the 30-year FRM was 6.88%, unchanged from last week, belying the tumultuous market. Hybrid 5/1 ARMs now averaged 6.68%, up from 6.47% last week, as ARM pricing has been hit by swings in Treasury values. It's unclear how long the pronounced dislocation between these two markets may last. Before any improvement will come, we'll first need to develop some sense of stability, a situation which has not yet occurred. The calls for cash to support the markets which make mortgage lending possible were heard at the Federal Reserve and at the European Central Bank, both of which added funds to their respective reserve pools to help provide some liquidity to markets and investors. While some quarters have called for a cut in the Fed Funds rate, mortgage interest rates aren't directly affected by the Fed's moves. Any move would have little immediate effect on mortgage prices, and in any event certainly wouldn't persuade investors to purchase mortgages with any risk elements they consider to be unacceptable. There wasn't much fresh economic news for the markets to focus upon this week, so the seizure in credit markets took center stage. The estimate of worker output per hour, known as productivity, rose by 1.8% during the second quarter. That was an improvement over the 1.7% lift seen in Q107, and such increases means that the cost of labor per unit -- an important component of inflation -- can decline. Unit Labor Costs in the first quarter rose by a flat 3%, but that cooled to 2.1% in the second quarter. With labor markets tight, the Fed is watching to see if a wage spike may form, but so far the numbers have been moderate during the ongoing economic expansion. Borrowing can serve to fuel that expansion. New borrowing by consumers rose by $13.2 billion in June, and that came on the heels of a $12.9B lift in May. Until recently, much consumer borrowing had been occurring in the form of home equity loans and lines of credit, but softening home prices and rising rates have made those form of debt somewhat less appealing in favor of installment loans, such as auto loans, and credit card purchases.
All that borrowing means someone is buying. At least one measure of activity in that regard shows continued strength: inventory levels at wholesaling firms rose by 0.5% in June, but those stockpiles grew in expectation of new sales. Sales are strong enough as to have kept the ratio of goods on hand relative to sales at a lean 1.11 months of inventory. Consumer moods have been all over the board of late, but largely improving. Measurable declines in stock prices this week will probably overcome improvements in the costs of gasoline which have helped buoy spirits by the time we get into next week. The weekly ABC News/Washington Post poll dipped a single point to -9 during the week ending August 5, but in light of current headlines, it's reasonable to expect that we'll see a bigger decline next week. Prices of goods imported into the country rose by 1.5% during July, as oil prices rose to new record highs. Outside of those costs, a manageable 0.2% lift in prices was seen. Goods leaving these shores were priced at an aggregate 0.2% higher than last month. On an annualized basis, the cost of imports and exports achieved balance last month, as both are now rising at a 2.8% clip. As has been the case many times over the past year, the mortgage market remains unsettled. Unlike the long-unfolding (and ongoing) saga of the subprime mortgage market, it's probable that the troubles in jumbo mortgages will find a faster fix; the credit quality and underlying value of the assets on which these loans are based is probably less suspect -- or at least not as suspect as the markets are now inclined to believe. Historically, jumbo mortgages are among the best performing of all loan classes. It's not the borrowers who are in trouble, or the markets in which their homes are located; rather, it's a liquidity issue. The liquidity crunch is just that -- a market in which, in this case, buyers are in short supply -- and the only fix for an illiquid market is to find buyers. At least some buyers are likely hovering on the sidelines of the market, waiting for the prices of those assets to fall. There's ample cash floating around, and when prices become attractive, that cash will return. Overall, mortgage rates probably don't move much next week, at least on the surface. Conforming and jumbo mortgage markets are on rather different paths at the moment, and we'll let you know if those paths diverge to any additional significant degree, and if needed, by how much. For more in-depth commentary, see our latest two-month forecast. And for today's top stories, see our daily news column.The latest HSH survey, Are You a Subprime Success Story?, needs your input -- just scroll down. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| For further Information, inquiries, or comment: Keith T. Gumbinger, Vice President Copyright 2007, HSH® Associates, Financial Publishers. All rights reserved. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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