Government Regulations — Refinance .net

Home Mortgage Rates Drop on 800 Billion Fed Debt Buyout

Home Mortgage Loans Eased by Fed The Federal government expanded its bailout deeper into the consumer and mortgage credit markets. In the past few weeks efforts have focused on capital infusion and solvency. The government has made direct investments into banks- essentially handing them money – so that they would have some operating capital. Now the financial bailout programs are turning to liquidity in the consumer lending market. The effect was felt immediately as home mortgage rates dropped sharply yesterday when the government announced that it will use another 800 billion dollars to buy up consumer debt and mortgages to remove them from the balance sheets of commercial and mortgage lenders. Together with the direct infusion of capital it should loosen up the flow of credit to consumers and businesses. Hopefully this will free up additional credit for small businesses and ease small business financing. Read more about yesterdays infusion here at CNN MONEY

“The feds agreed to spend a half a trillion dollars to buy up mortgage backed securities and another $100 billion to fund lending for Fannie and Freddie; we’re not talking chump change anymore,” said Keith Gumbinger of HSH Associates, a publisher of mortgage information.

Rates averaged 5.77% for the day on a 30-year, fixed rate loan, down from 6.06% Monday, according to Gumbinger. They fell as far as 0.75 percentage points during the day, according to Orawin Velz, Associate Vice President for Economic Forecasting at the Mortgage Bankers Association.

That could save a typical homebuyer more than $90 a month on a $200,000 mortgage.

“The government action was geared to bringing mortgage rates down,” said Velz, “and it did.”

The drop was the largest since early September, when the administration announced that it was taking control of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), and stemmed from similar market sentiment.

Both actions sought to give confidence to the investment community. Most mortgages are sold to investors in so-called secondary markets but with foreclosure rates so high and expensive write downs of mortgage-backed securities so common over the past several months, investors had fled the mortgage market.

Instead of buying mortgage bonds, they’ve been snapping up Treasurys, a virtually risk-free investment. That showed up in the falling yields of Treasury bonds and the greater difference between Treasury yields and mortgage interest rates.

Interest Rates are Falling but Banks aren’t Lending

It’s helpful to remember that ours is a market economy. That means that economic decisions aren’t forced from the top by a government bureaucrat, but rather the reasoned (or sometimes emotional) decisions of millions of individual consumers, business executives, bankers, marketers etc. Reports from a number of sources today hint that even with the push of substantial capital into the marketplace, many businesses are reluctant to borrow, and many lenders are still hesitant to lend. With uncertainty in the real estate market throwing valuations and appraisals off kilter, its hard for lenders and borrowers to strike a deal. General economic uncertainty and the spector of unemployment or business declins, brings into question the ongoing financial stability of potential borrowers.

All in all a situation that needs to unwind through the decisions of millions not just a handful in Washington, Wall street or London.

Home Mortgage Lending - image courtesy of GreekShares.Com Here’s what CNNMoney has to say about it.

NEW YORK (CNNMoney.com) — Lending rates fell again Friday, but as the cost of borrowing eases, some government data suggest private lending is not expanding.

The 3-month Libor rate dropped to 2.29% from 2.39% on Thursday, according to Dow Jones, marking the rate’s lowest point since Nov. 12, 2004.

The overnight Libor rate held steady at 0.33%, according to Bloomberg.com. The overnight rate is just a hundredth of a percentage point above the all-time low.

About a month ago, 3-month Libor was at 4.82%, and the overnight rate was at an all-time high of 6.88%. Lower rates are a major boost for the strangled credit markets because more than $350 trillion in assets are tied to Libor.

A number of U.S. government programs aimed at easing funding concerns for banks and encouraging lending between financial institutions have also helped lower Libor rates. Such initiatives include lowering interest rates, injecting capital into banks and providing insurance on all non-interest bearing accounts.

Falling Libor rates are “a very important ingredient” in the recipe for economic recovery, said Michael Strauss, chief economist at financial research firm Commonfund.

“Improvement in the Libor market is an important first step towards getting banks to act like banks again,” Strauss said.

As financial institutions become more confident in lending to each other, they will become more willing to lend to businesses and consumers, according to Strauss.

But with the economy likely in a recession, some indications show the Federal Reserve’s programs and lower rates have not yet encouraged banks and free market investors to lend to businesses.

The Fed announced Thursday that it lent another $100 billion to companies over the past week through a new short-term funding program. In its so-called Commercial Paper Funding Facility, the Fed has provided critical short-term financing to businesses and financial institutions in desperate need of cash.

But in a separate report, Fed data showed the market for commercial paper expanded by just $50.5 billion. Even as the Fed’s program has dragged down borrowing rates, the difference of $49.5 billion between the Fed’s injection and the market’s growth suggests that the commercial paper market would have contracted without the Fed’s involvement.

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