Las Vegas Undressed

A Conversation About the Current Mortgage Market

In my last article, concerning the mortgage market and rates, I indicated that we might see the yield on the 10 year Treasury note trade between 4.6% and 4.9%. Remember, the direction of the 10 year Note yield is often a reflection of where 30 year fixed rate mortgages are heading. At this writing, the yield has fallen below 4.6%. The rate on a 30 year fixed rate mortgage (conforming……more on this later) is currently around 6.25%. Prior to the debacle in the sub prime market and capital markets, such a downward move in the 10 year Treasury note yield, would have translated into a rate that would be lower than what we are currently seeing. So, with the perceived risks in the mortgage market, rates are just not falling like they would have in the past. Investors still perceive more risk in the mortgage market and they want higher returns on their money.The sub prime woes are starting to impact other sectors of mortgage lending. When we talk about conforming loans that means that we are looking to Fannie Mae or Freddie Mac. Their current guidelines, on conforming loans, limits mortgage loans at $417,000. So, if you buy a home for $521,500 and put down 20% your loan amount is $417,000 and your loan is conforming. Anything above a $417,000 loan is non-conforming and you have to look beyond Fannie Mae and Freddie Mac for a loan.The problem is that investors in the capital market that buy mortgage backed securities are gun shy right now for mortgages other than conforming, that are backed by housing agencies such as Fannie Mae, Freddie Mac or Ginnie Mae.Given the troubles in the sub prime sector, investor appetite for all types of mortgage loans not guaranteed by the above agencies, has dropped off significantly. Lenders had been able to move the risk of jumbo loans by selling them to investors. However, these investors have been burned by the sub prime market and they have become very picky and as a result they are demanding higher returns.Countrywide Financial has said that they are now focusing on making loans that can be guaranteed by Fannie Mae or Freddie Mac. Other lenders have tightened their borrowing guidelines. They may want the borrower to fully document their incomes and assets even though they have great credit and they are making a large down payment. With the lack of investor demand, banks that are still making jumbo loans (over $417,000) are charging higher rates as dictated by the capital markets.

There is a psychological impact going on here and it is affecting certain high-priced real estate markets. Times of uncertainty tend to push people into delaying purchase decisions. Some people may be waiting to see if conforming limits will be increased. They are just waiting to see what will happen and how it might affect their home buying decision. All of this is going to start to put more downwards pressure on the real estate market should the lending environment remain tight. In California, the median home price is well above $500,000 and jumbo mortgages make up over 40% of all mortgages issued. In San Francisco, the median priced home is $1.1 million.

Here is a look at the 10 Year Treasury Note yield. The trend is still down (the red line) and we are testing the lows of March: