Illinois Mortgage Rates and News

As expected, the US government stepped in today and placed Fannie Mae and Freddie Mac into a conservatorship under federal control. This is the long talked about bailout of the two mortgage giants. This action has been anticipated for a while as both the Fed and Treasury Secretary Paulson announced a month ago that they were ready to stand behind and guarantee any losses. Announcing the guarantees calmed the markets at first, but further losses have now forced the Government’s hand. The new plan means that the Federal Government is not just standing behind Fannie and Freddie, but propping them up completely. They now have virtually unlimited access to capital. This plan will dilute common shares of stock in the companies to the point they are near worthless. Preferred shares (owned mostly by big banks) will still be viable, but a new treasury class of preferred stock (owned by the Treasury) will be issued. This new stock will have first dibs on any profits the company makes, and the stock holders won’t see any dividends until all the money lent from the treasury has been paid back.

By doing this over the weekend (as they did with Bear Stearns several months ago) the intent is to avoid a panic in the markets. The initial response is positive. The Asian markets are rallying on the news as I write this. But the initial reaction is not always the lasting response. It is hard to know how this will play out in the short term, but in the long run this should bring mortgage rates down and be a boost for the real estate markets.

Over the last year the mortgage chicago il market has been nearly frozen. Investors in mortgage backed securities, lacking confidence in Fannie and Freddie being able to stand behind their losses, have avoided mortgage bonds and demanded a much higher premium for those they bought. The spread of mortgages over Treasury bills used to be about a 1% premium, over the last year it has grown to about 3%. All the big banks have huge portfolios of mortgages they haven’t been able to sell. Fannie and Freddie have pulled back and are only taking on the most risk free loans. With the US Government behind it, this will give investors the confidence that if they buy a mortgage bond, they won’t be left holding the bag if Fannie and Freddie go down.

The markets will be volatile this week, but when this all shakes out I expect that it will lead to a more normalized exchange and that the risk premium (the spread between mortgage bonds and treasury bonds) will begin to narrow. That means rates will come down.

This is an unprecedented move, and it puts all the risk of losses on the tax payer’s shoulders. With a combined portfolio of about $5 trillion this is a huge risk, but the risk of doing nothing would be worse. The hope is that over the next 5 years as the real estate market improves, this could actually pay for itself. We will see how it all shakes out, but I think this is a good sign for the real estate market.

Illinois Mortgage Rates and News

The stock and mortgage bond markets were in turmoil last week as rumors circulated that Fannie Mae and Freddie Mac were on the edge of insolvency. Not just the mortgage market but our entire economy are dependent on the health of these organizations. It’s always been assumed that the government would do whatever was necessary to keep them afloat. The question was more a matter of what they would do to support them, whether the stock would remain solvent and who would foot the cost.

Tonight the Fed stepped in and announced a deal had been put together, just before the Asian markets opened. This was the same way they put together the Bear Stearns buy out in March, and like then it was designed to calm the markets and avoid a sell off that could have gotten out of control. This deal will increase the Treasury credit line for Fannie and Freddie, and  gives the Treasury the authority to buy the companies stocks.

By promising bold action the Fed and the Treasury hope to re-instill confidence, in the hopes that they won’t have to do a full scale bail out down the road. Here’s a Wall Street Journal Article which gives the specifics.

Illinois Mortgage Rates and News

Over the last year mortgage qualification has become increasingly harder. Two new changes go into affect next week which will ratchet loan approvals a little tighter still.

One is a change that only affects mortgages here in Illinois. Senate Bill 1167 will become law as of June 1^st. This law is aimed at predatory lending and the problems caused by sub-prime loans. It restricts the types of loans available, requires home buyers counseling for home buyers in Cook County who are taking out specific types of loans, and it requires more transparency so the consumer knows exactly what they are getting when they enter into any mortgage financing. There are some good features in this bill, but most of what they are legislating against has already gone away due to market forces in the mortgage market. Sub-prime loans have been a big problem and there is no question that they were abused. But there is no such thing as a sub-prime mortgage now, so this bill is coming too late to make any real impact.

The one part of this that is going to hurt some is that stated income loans will no longer be available in Illinois. Stated income loans were loans which didn’t verify the borrower’s income, but took whatever was stated as the Gospel truth. As you can imagine, this was a license for abuse, and there were way too many borrowers who bought homes with no idea how they would pay for them. That said, stated income loans do make sense for well qualified borrowers with complicated tax returns – self employed borrowers. These loans, like so many others, have been disappearing over the last year. The guidelines in the law are somewhat vague as to what is considered stated income, but the lenders who were offering this program are taking the cautious path, and are withdrawing from the market. It looks like this will be the final nail in the coffin for any loans that don’t verify income, which means it will be harder for self employed borrowers to qualify for a mortgage.

The other big change is that Fannie Mae brings out their new version of their automated underwriting system, DU 7.0. Most conventional loans are approved through the automated underwriting system, so this will have a huge impact on how loans are approved. On the good side, this version does away with the declining market policy. Last December, in a reaction to the down turn in the housing market, Fannie Mae came up with a plan to identify markets where the prices were falling, and require a higher down payment in those areas. The plan basically made it harder to get financing in the areas that needed it most, and was not a popular move. So getting rid of this plan is a step in the right direction. It will be looked at as a bigger step if the mortgage insurance companies follow the lead and stop their declining market policies, too. The rest of the changes in version 7.0 are not going to be positives for mortgage borrowers. Some of the changes include:

• Borrowers must wait a longer time after a bankruptcy or foreclosure before they can get a mortgage again, and when they are ready they will need a higher down payment and a better credit score.
• Debt to income ratios, that is how much debt you are carrying, will be much lower.
• Condos will now be considered riskier, and harder to approve.
• Having mortgage insurance on your loan will not reduce the risk of having less than a 20% down payment.
• ARMs will be considered riskier than fixed rate loans.

There’s more, but the bottom line is that this is a way of tightening more, and some borrowers who will qualify for a loan today, may not next week.

Illinois Mortgage Rates and News

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