A Good Week (!) For Mortgage Markets
While the action of the Federal Reserve to lower its rate to 2.25% grabbed the headlines, a little further behind the scenes were several positive indications for the mortgage markets:
- Regulators cleared the way for Fannie Mae and Freddie Mac to insure more mortgages
- Oil prices — a key element of inflation — took a sharp dive
- Yields on 30-year bonds fell nearly 30 basis points in one week
As much as the regulatory actions indicate a desire to ease the mortgage crisis and stimulate the economy, it is the financial market developments that could indicate a fundamental improvement in conditions on the way.
Policy makers and Regulators Open Their Bag of Tricks
On Tuesday, March 18th, the Federal Reserve dropped its short-term interest rate by 0.75% to 2.25%. This is the latest in a series of aggressive cuts by the Federal Reserve since last summer.
Of course, the Federal Reserve has a big following among financial news reporters, so its action was highly-anticipated and prominently reported. A less sensational, but still significant, governmental action was the decision by the Office of Federal Housing Enterprise Oversight (OFHEO) to lower the capital reserves required of Fannie Mae and Freddie Mac.
Lowering capital reserves may not have the cache of lowering interest rates, but here’s why its important: in a nutshell, it enables Fannie Mae and Freddie Mac to buy or insure more mortgages. The ability of these agencies to back mortgages is what gives private mortgage lenders more confidence to make loans to people with unproven credit histories and/or less money to put down on a house.
What the actions of the Fed and the OFHEO have in common is that they are both supposed to make lending easier. On paper, that is good news for prospective mortgage borrowers, but up till now there has been a catch. While the government can only control short-term interest rates, mortgages carry long-term interest rates. And those rates have been trending upward since hitting bottom in January. This is where our focus needs to shift from the government to the financial markets.
Welcome Signs for Long Rates
Not only are long interest rates somewhat independent of short rates, but they can actually move in the opposite direction when inflation becomes a concern. Thanks primarily to oil and its effect on many other sectors of the economy, inflation has been a concern of late. With the price of oil bursting through the $100 a barrel mark and surging all the way to $110, the fundamentals for inflation have been looking more ominous in recent weeks.
This week though, oil prices experienced a sharp reversal of fortune and headed downward. Any easing of inflation pressures will allow long rates to fall. For example, 30-year Treasury bond yields fell by nearly 30 basis points (0.30%) in just one week. While mortgages and bond rates do not necessarily move in lock-step, mortgages certainly have more in common with 30-year bonds than they do with short-term interest rates. In short, there are fundamental reasons to believe that mortgage rates could follow oil prices and bond yields toward lower territory.
If nothing else, recent developments have been dramatic. This is a good time to keep a close eye on mortgage developments, and act when opportunity presents itself.
Tags: fed, Federal Reserve, interest rates, mortgage lenders, mortgage rates, mortgages, short-term interest rates
