Problems at Loan Giants Push Mortgage Rates Higher [NYT]
By VIKAS BAJAJ
Mortgage rates are rising because of the troubles at the loan finance giants Fannie Mae and Freddie Mac, threatening to deal another blow to the faltering housing market.
Even as policy makers rushed to support the two companies, home loan rates approached their highest levels in five years.
The average interest rate for 30-year fixed-rate mortgages rose to 6.71 percent on Tuesday, from 6.44 percent on Friday, according to HSH Associates, a publisher of consumer rates. The average rate for so-called jumbo loans, which cannot be sold to Fannie Mae and Freddie Mac, was 7.8 percent, the highest since December 2000.
Loan rates are rising because of concern in the financial markets about the future of Fannie Mae and Freddie Mac, which own or guarantee nearly half of the nation’s $12 trillion mortgage market.
Worried about the companies’ financial health, bond investors are driving up interest rates on their debt, and the added cost is being passed on to consumers through the mortgage markets. For a $400,000 loan, the increase in 30-year rates in the last few days would add $71 to a monthly bill, or $852 a year.
The rise in rates is of greatest concern for homeowners whose mortgages required them only to pay the interest due on their loans for the first few years. If such borrowers are unable to refinance into lower-cost loans, many of them will face the prospect of having to pay both interest and principal at higher, adjustable rates. For borrowers with a $400,000 loan, such a jump could send their monthly payments to $2,338 from $1,417, estimates Louis S. Barnes, a mortgage broker at Boulder West Financial in Boulder, Colo.
While mortgage rates approached these levels earlier this year and in 2007 during times of stress in the financial markets, the latest move adds urgency to the government’s efforts to restore confidence in Fannie Mae and Freddie Mac. Lawmakers this week are expected to vote on a measure that would give the Treasury Department authority to lend more money to and buy shares in the companies if they falter.
The uncertainty surrounding the two companies is the latest in a series of pressures bearing down on the housing market and the broader economy. Higher interest rates make it harder and more expensive to refinance existing debts and buy homes.
“When we get to rate levels like this, the market just shuts down,” Mr. Barnes said.
While mortgage rates remain relatively low by historical standards, they are higher than what homeowners and the economy became accustomed to during the recent housing boom. Lending standards have also tightened significantly in the last 12 months, and many popular loans are no longer available.
A government report based on data on Fannie Mae and Freddie Mac loans said on Tuesday that home prices fell 4.8 percent in May from a year earlier. That compared to a 4.6 percent decline in April. Other home price indexes that track a broader set of loans show much bigger declines.
Analysts say the rise in rates is a result of weaker demand for securities backed by home mortgages and of rising concern about inflation, which tends to send bond prices down and bond rates up.
In a securities filing released on Friday, Freddie Mac suggested that it might have to pare back or slow the growth of its mortgage portfolio to bolster its capital.
Freddie and Fannie together own about $1.5 trillion in mortgage securities and home loans, and they guarantee another $3.7 trillion in securities held by other investors. The companies have a combined net worth of $55 billion as of March. Analysts and critics say the companies need significantly more capital to cushion the blow of growing losses on the more-risky mortgages made during the boom.
Important players in the mortgage market for decades, the two companies have become even more vital in the last year as several large lenders have gone out of business and investors have lost confidence in mortgage securities that are not backed by the government or Fannie and Freddie.
Earlier this year, the regulator overseeing the companies gave them more leeway to use their capital and the companies responded by increasing their portfolio. Freddie’s holdings grew 6.9 percent in the first five months of the year from the end of 2007, and Fannie’s portfolio increased 1.8 percent.
But now, it appears the companies, particularly Freddie Mac, might have to slow its purchases of mortgage securities. In its filing, Freddie Mac said it aims to increase its portfolio by a total of 10 percent in 2008. A spokeswoman for Fannie Mae declined to comment on its plans.
“That’s one of the ways in which the agencies can increase capital, by slowing down their purchases,” said Derrick Wulf, a bond portfolio manager at Dwight Asset Management. “I don’t think the market expects a dramatic slowdown in purchases but there clearly is uncertainty about that.”
Mortgage rates have been driven up in part by a rise in the yield on Treasury notes and bonds. On Tuesday, bond prices, which move in the opposite direction of yield, slumped after the president of the Federal Reserve Bank of Philadelphia, Charles I. Plosser, said the central bank may need to raise interest rates to combat inflation “sooner rather than later.”
Some analysts say the rise in mortgage rates can be explained by technical factors in the bond market that are forcing mortgage companies and banks to sell securities to manage their portfolios. These analysts add that at current prices the mortgage securities guaranteed by Fannie and Freddie should be attractive to investors. Mortgage bonds backed by Fannie Mae, for instance, are trading at a 2.1 percentage point premium to the 10-year Treasury note, up from 1.8 points on July 14.
“I don’t see how anyone could argue that the fundamentals of mortgages are not attractive,” said Matthew J. Jozoff, an analyst at JPMorgan.
In March, for instance, rates surged after some big investors were forced to sell billions in mortgage bonds. But rates fell back slowly in the spring after the selling pressure eased and other investors, including Freddie Mac and Fannie Mae, made big purchases.
This time, the coming Congressional vote on the Treasury plan to support the companies could help allay investors’ fears, said W. Scott Simon, a managing director at Pimco Advisors, the giant bond fund firm that owns mortgage securities. “It will go a long way toward reviving demand.” |
