Mortgage Market Update

Following is a great update on the most recent changes in the mortgage industry as originally distributed by Shane Price with Houston Capital Mortgage.

Sometimes one should be thankful for small favors, such as three-day holiday weekends.

There were only four days of bad news last week instead of the usual five. No surprise, the Federal Reserve was at the forefront of the brigade.

The Fed’s beige book, an overview of U.S. economic activity, showed that the economy continues to sputter amid weak housing, difficult credit, and reduced consumer spending. The beige book indicated little improvement from the sluggish pace of economic activity that has prevailed since July.

The book also provided evidence that residential real estate has yet to reverse course, with demand still trending down in many major metropolitan regions. Residential mortgage demand, to no one’s surprise, is trending in the same direction.

The Fed noted “weakening demand for residential mortgages” in most districts, thanks to tighter lending standards and the near-disappearance of the non-agency mortgage lending market.

The professional prognosticators don’t expect a reversal in either market’s fortunes anytime soon. Property information firm Radar Logic Inc. doesn’t foresee a recovery until 2011.

Based on the Residential Property Index (RPX), rather on futures trading on the RPX, Radar Logic says that “the [trading] curve suggests weakness through 2009, stability in 2010, and a recovery in 2011.”

Of course, as the housing markets goes, so goes the mortgage market. Industry research firm iEmergent predicts that total national originations could fall more than 20% next year, falling as low as $1.53 trillion, compared to this year’s predicted range from $1.94 to $2.1 trillion. The forecast from iEmergent comes after officials at the Mortgage Bankers Association predicted a drop to $1.66 trillion in 2009.

A COUNTER PERSPECTIVE

Then again, maybe a recovery is more imminent than what the prognosticators are prognosticating.

One sign that the purse strings might be loosening is recent activity in the commercial paper market – short-term debt that is a significant source of funds in the mortgage market. The amount of outstanding commercial paper has risen for the past three weeks to $1.79 trillion, its highest level since April, the Wall Street Journal reported last week.

The commercial-paper market was among the first victims of the credit crisis, mainly due to problems with paper backed by subprime mortgages. Worries about the quality of that collateral caused the asset-backed market to shrink by nearly $450 billion, or more than a third of its value, from mid-August to December 2007.

But the worst is probably over; the riskiest borrowers have been purged from the market, making a sustained recovery more likely to occur sooner than later.

The mortgage market has been quietly improving in recent weeks as well. Rates have been trending lower, without the accompanying volatility that has distinguished this year’s market.

The reduction in volatility has been attributed to everything from reduced stock-market volatility to lower oil prices to tightening interest-rate swaps (a hedge used by mortgage companies). The more likely reason is that borrowers and lenders are simply growing more confident.

Whatever the reason, the fact is that continued lower volatility and lower interest rates will only improve the housing and mortgage market outlook – that’s good news everyone can use.