Welcome to Illinois Mortgage Rates and News week in review for the week ending September 19th, my take on the week’s financial news and how it affected Illinois mortgage rates.

I expected this to be a wild and volatile week. I never expected it to be this wild. There was a near melt down in the financial markets and at the end of the week in an unprecedented move, the government was putting together a bailout of the entire banking system. Ever since the credit crunch kicked in over a year ago, the economy has been crippled by a lack of credit. All this goes back to the banks and brokerage company’s exposure to bad mortgage loans. While the real estate market was hot, they loaded up on loans that seemed risky at the time, and down right stupid in hindsight. It was a herd mentality that said risk didn’t matter as long as home prices continued to rise. When the bubble popped, the market for these securities disappeared overnight. Pools of theses riskier mortgages (Sub prime and Alt A loans) which used to sell for a premium, were suddenly so toxic that investors wouldn’t touch them at any price. The economy runs by money constantly changing hands. All these loans were like a game of hot potato or musical chairs. You were safe as long as the music was playing and the money and loans were being passed along to the next in line. But when the music stopped, these financial companies were stuck with billions of dollars of loans that they couldn’t sell. Their balance sheets overloaded with debt, they had trouble borrowing and cut back on who they would lend to. With less credit available, the economy has contracted and the real estate market has continued to fall, cutting the value on their collateral causing the entire market to cycle lower to the point this week where the system almost collapsed. Now the government is stepping in with a plan to buy out all the non-performing loans at a deep discount, as a way to bring liquidity back and get the banks to start lending again.

This week started out with Lehman Brothers forced into bankruptcy and insurance giant AIG being virtually nationalized by the government to keep it from failing. The Fed along with a consortium of other national banks extended another $250 billion dollars of credit into the financial system. These were the latest in a long line of falling dominoes. Over the course of this year the Fed and Treasury have stepped in to bail out Bear Stearns, sent out billions of dollars of stimulus checks, opened the discount window several times making credit easier for the big banks and brokerages, rescued Fannie Mae and Freddie Mac, and took over AIG. Each move was supposed to be the one that made the difference. This time they have abandoned the piecemeal approach and decided to take on the whole enchilada. The plan will allow these companies to sell off their toxic loans to the government at a deep discount, getting the junk off their balance sheets and putting them into a position where they can lend and money can flow again. The cost of this plan will be as much as 1 trillion dollars – about the cost of the Iraq war.

How this all turns out depends on the details of the plan. The Fed and Treasury are working through the weekend to get something to send to congress. The balancing act will be who they will allow into the program and how they will buy out the toxic loans. The truth is that as toxic as these loans are, there is some value there. Many of the loans in these pools are non-performing, that is in default or in foreclosure, but many are also paying as agreed. If the government takes on these loans, provides workouts to the ones that are in trouble and sells off as the market improves, it is even possible that they will end up making a profit on the deal. On the other hand, the last time they tried this, after the savings and loan crisis in the 80s, much of the best assets were sold to politically connected companies who then made the profits. However it happens, in the short term the treasury will be printing more money to fund this plan.

So here are my questions:

Is this enough to restore confidence and get the markets moving again?

How will this plan affect mortgage interest rates?

Will this be enough to kick start the real estate market?

At this point we don’t know any of the answers. A big part of this crisis is due to a lack of confidence. The economy was surging forward on a wave of greed, but now fear has gripped the markets. The stock market has signaled that it likes the plan so far, but who knows whether this is a long term positive or if fear will win out again, and more will be required.

I’ve been pondering how this will affect mortgage rates and so far I don’t have a clue. On the one hand, this buyout is inflationary, the government will print more money to make it happen, and mortgage bonds hate inflation. This points toward higher rates on mortgages. On the other hand the credit crunch has taken money out of the system and the bad loans being marked to market mean we have lost a ton of global value. The economy is still slowing and this plan won’t turn that around any time soon. The whole point of this emergency plan is to stabilize the real estate market and the way to do that is to get mortgage rates down. If confidence is restored, the spread between treasury bills and mortgages would narrow and mortgage rates will come down. Will see how this plays out over the next weeks.

As to the real estate market, there are a lot of prospective home buyers sitting on the side lines waiting for the right time to jump in. If this is the event that signals that it is okay for them to make the move, we could see the market come to life. There is still a lot of inventory to work through, and with the foreclosures on the market there are still more sellers than buyers available. So I don’t see home values rising quickly, but my guess is that we may be closer to the bottom than people think and this will start to turn things around. It won’t be a quick process, but there will be opportunities, and if you are prepared, it could be a great time to buy.

Mortgage rates this week were all over the board. The week started with a flight to quality into mortgage bonds and rates dropping near their lows for the years. Then as panic set in, we had a roller coaster market where each day the swing between the high and the low was nausea inducing. On Friday mortgage bonds bounced around in a range of over 100 basis points, ending up down for the day but better than their low point leaving rates up for the week.

Because of all the confusion in the market this week, I’m going to hold off on posting the current rates. If you want to know what Illinois Home mortgage rates look like today, give me a call or contact me and my illinois mortgage company and I’ll take the time to find the rate and program that is best for you.

Next week promises to be just as wild. Stay tuned and buckle your seat belts.

Illinois Mortgage Rates and News

Tags: economy, Fed bailout Fannie Mae and Freddie Mac, mortgage rates

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