Keeping you updated on the market! For the week of January 14, 2008
Rollercoaster aficionados had a field day last week, for up-and-down volatility was the norm, not the exception. Countrywide Financial, the country's largest mortgage servicer, spent most of the week pressuring capital markets with rumors of bankruptcy, but then Bank of America rallied the markets by stepping forward and announcing it was purchasing the beleaguered mortgage giant in a $4 billion stock-exchange transaction.
Earlier in the week, the National Association of Realtors reported that pending home sales decreased 2.6% in November following a larger-than-expected 3.7% gain in October. But the grim outlook was tempered by Lawrence Yun, the NAR's chief economist, who said that although there could be some minor slippage in the first quarter, existing home sales should hold in a narrow range before trending up.
The disappointing pending-sales report was further mitigated by good news in the mortgage markets, where application volume both refinance and purchase surged 32.2% during the holiday shortened week ending Jan. 4, according to the Mortgage Bankers Association's weekly application survey.
What's more, application activity could surge again in coming weeks, thanks to plunging mortgage rates. By week's end, the prime 30-year fixed-rate mortgage averaged 5.87%, the 15-year fixed-rate mortgage averaged 5.43%, and the five-year Treasury-indexed hybrid adjustable-rate mortgage averaged 5.63%, according to Freddie Mac's weekly survey. Mortgage rates are now at levels unseen since Sept. 2005.
BAD MEDICINE
Bank of America's rescue of Countrywide was received positively last week, as it should have been; no one wants to see the country's largest mortgage servicer go under. But there was a disconcerting acknowledgment in the accompanying press release: The combined company won't make subprime mortgages and will limit its purchases of large packages of loans from other lenders.
That's too bad, because the current mortgage crisis has never been about subprime mortgages per say: It has been about the pricing of subprime mortgages, which didn't reflect the risks involved. Down payments, interest rates, and fees have to reflect borrower risk. This is the economic rationale for giving someone with an 800 FICO score a 6% loan with nothing down and giving someone with a 600 FICO score a 9% loan with 20% down. That paradigm broke down, and needs to be revisited. As homes become more affordable, the last thing we want is to exclude qualified people from the housing market, and that includes people who only qualify for subprime mortgages. The key to successful lending is to appropriately price the risk of lending. Hopefully more people will embrace that economic maxim once the credit crisis subsides.
Bank of America's rescue of Countrywide was received positively last week, as it should have been; no one wants to see the country's largest mortgage servicer go under. But there was a disconcerting acknowledgment in the accompanying press release: The combined company won't make subprime mortgages and will limit its purchases of large packages of loans from other lenders.
That's too bad, because the current mortgage crisis has never been about subprime mortgages per say: It has been about the pricing of subprime mortgages, which didn't reflect the risks involved. Down payments, interest rates, and fees have to reflect borrower risk. This is the economic rationale for giving someone with an 800 FICO score a 6% loan with nothing down and giving someone with a 600 FICO score a 9% loan with 20% down. That paradigm broke down, and needs to be revisited. As homes become more affordable, the last thing we want is to exclude qualified people from the housing market, and that includes people who only qualify for subprime mortgages. The key to successful lending is to appropriately price the risk of lending. Hopefully more people will embrace that economic maxim once the credit crisis subsides.
Subject: Your Weekly Newsletter from Dave Petrucelli TIB Bank 239-552-1006 Direct
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