October 6th, 2008

“Bailout” Passes. What’s Next?



From HSH’s Market Trends Newsletter:

October 3, 2008 — After an initial and shocking failure, elected representatives spent most of the week scurrying to come up with a “better” version of Treasury Secretary Paulson’s plan to use up to $700 billion in taxpayer funds to buy up bad mortgage and financial assets. In the end, the tab could run as high as $810 billion, with hopes that some of the assets can be resold back into the market for a profit. Of course, this assumes there will still be a market for them — or any market at all — when it’s time to sell them.

It’s believed that with such a plan in place, credit spigots will begin to crack open to a greater degree, and perhaps they might. There’s no certainty there, either. Investors may simply shed bad assets in exchange for cash, invest the money in 100% guaranteed Treasury obligations, and swear off any form of risks for the foreseeable future.

Ultimately, we think the bill will help, but any bill which grew from a two-page sketched proposal to 451 pages surely cost more than necessary and could contain any number of items which may cause unintended consequences. It will take some time to read and digest it.

That said, the question has been asked many times of us over the past two weeks: “What does it mean for mortgages?” Unfortunately, the short answer seems to be “Very little.” In reality, mortgage markets are not really the focus of the bill; they’ve already been considerably supported, what with the Federal takeover of Fannie and Freddie and the expanded role for FHA. Those markets aren’t going anywhere. Rather, the creeping malaise of credit markets has infected commercial lending, business credit, credit cards, auto financing and other areas of the economy. As those markets and audiences are now being starved for credit, the economy faces more serious peril.

With the “support plan” now in place, lenders and investors should begin clearing certain of the bad assets off their books. This will hopefully loosen up credit for all borrowers, not just mortgage shoppers. However, it is possible that private-market jumbo mortgage rates — the old traditional, non-agency jumbos now supported primarily by portfolio lenders — could have some space to fall once the book-clearing process begins. Those high-quality jumbos make nice investments with rates in the mid-sevens, and banks with fresh capital generated by shedding losing bets may push some more money out their doors to this audience. Still, those rates are likely to remain extraordinarily high (relative to their conforming counterparts) for some time to come.

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One Response to ““Bailout” Passes. What’s Next?”

  1. Dana & Robin Bain Says: December 4th, 2008 at 8:59 pm

    Rates are already inching up, hitting 5.75% on Wednesday, said Keith Gumbinger, vice president of HSH Associates. Several government attempts to lower mortgage rates this year have failed to have a lasting effect.

    Also, the proposal would do little to help troubled borrowers who have fallen behind on their payments, have no equity in their homes or have lost their jobs. With credit standards still high, these homeowners would not be able to refinance and take advantage of the lower rates, he said.

    Finally, super-low rates could keep private investors out of the mortgage-backed securities market, forcing the government to remain the primary buyer of such investments, Gumbinger said. Rates have not fallen below 5.37% in more than 45 years.

    Hi Keith,

    Regarding the article above. I am not sure if the CNN Writer misquoted or not, however mortgage rates have been below the 5.37% in the past and as early as October 2008 and the banner year of 2003 come to mind.

    Best Regards,

    Dana Bain
    Premiere Mortgage Services Inc.

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About the HSH Blog's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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