treasury plan pushes up mortgage rates...
Posted by
x (aka dmuck)
Oct 17 '08, 05:10
|
"US mortgage rates have soared this week in an unexpected reaction to the latest Treasury financial rescue plan, which has prompted investors to buy bank debt and sell bonds backed by home loans.
Interest rates on 30-year fixed-rate mortgages, as measured by Bankrate.com, rose to 6.38 per cent on Thursday from 5.87 per cent last week - before the Treasury said on Tuesday that it would take equity stakes in banks and guarantee new bank debt.
Investors responded to the new guarantee by buying existing bank debt, reckoning it could be refinanced with the new government-supported bonds. As they did so, they sold lower-yielding paper issued by Fannie Mae and Freddie Mac, the mortgage companies put into government conservatorship last month.
The sales of Fannie and Freddie paper pushed up yields on their debt, which is backed by mortgages. This, in turn, pushed mortgage rates to levels not seen since the government took over Fannie and Freddie on September 7.
Fannie and Freddie had been taken into conservatorship by their regulator to help keep mortgage rates low and – it was hoped – revive the housing market.
However, the opposite is now happening, making it more difficult for struggling homeowners to refinance their mortgages and for prospective homebuyers to get financing. As a result, house prices may fall further before they find a bottom.
“Agencies (debt issued by Fannie and Freddie) have been under huge liquidation pressure in recent days,” said Bill O’Donnell, strategist at UBS. “The 30-year mortgage rate leapt higher by almost 50 basis points in the latest week – likely pressuring home prices even lower in the weeks ahead, at least.”
Some analysts believe that further government intervention in the housing sector could be forthcoming to push down the cost of borrowing and help prices recover.
“Weak housing remains at the heart of the economic and financial turmoil, and the policy imperative will remain improving housing affordability,” said Janaki Rao, analyst at Morgan Stanley. “The possibility of a policy response to what is obviously an unacceptable outcome for policymakers has increased, in our opinion.”
The conservatorship brought down the cost of funding for Fannie and Freddie by making explicit a previously implicit government guarantee of their debt, allowing them to buy more mortgages. Before they were taken over, the fragile state of their finances had limited Fannie and Freddie’s participation in the mortgage market."
|