Mortgage rates fall in uncertain time

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Mortgage rates fell this week as investors wondered what the Obama administration will do to fix the broken banking system.

The drop in rates occurred Tuesday afternoon, in the hours after Treasury Secretary Tim Geithner delivered a speech that was low on details about the administration’s financial rescue plan. Geithner said the government is still hatching a $50 billion plan to prevent foreclosures and a bigger proposal to create an entity that would buy troubled assets from banks.

Investors apparently wanted to hear specifics. When Geithner didn’t provide specifics, investors sold stocks and bought bonds. Yields went down, and so did mortgage rates.

The benchmark 30-year fixed-rate mortgage fell 36 basis points, to 5.34 percent, according to the national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week’s survey had an average total of 0.37 discount and origination points. One year ago, the mortgage index was 5.96 percent; four weeks ago, it was 5.28 percent.

The benchmark 15-year fixed-rate mortgage fell 28 basis points, to 5.03 percent. The benchmark 5/1 adjustable-rate mortgage fell 13 basis points, to 5.37 percent.

Weekly national mortgage survey
Results of’s Feb. 11, 2009, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:
  30-year fixed 15-year fixed 5-year ARM
This week’s rate: 5.34% 5.03% 5.37%
Change from last week: -0.36 -0.28 -0.13
Monthly payment: $920.36 $1,307.39 $923.44
Change from last week: -$37.30 -$24.22 -$13.41

Anyone who has applied for a mortgage lately knows that the interest rates are attractive, but the qualification guidelines are tough. The borrower has to document income and expenses. Purchases require sizable down payments, and refinances need plenty of equity. Property appraisals are coming in low.

Lenders lending?

In short, lending standards are a lot tighter than they were in the go-go period of around 2002 to 2007. On Wednesday, the House Financial Services Committee held a hearing in which financial services CEOs were asked what they did with their federal bailout billions. The CEOs said their institutions have been lending lots of money. Their implicit message was: Please don’t ask us to loosen lending standards.

Vikram Pandit, chief executive of Citigroup, told the committee that his company lent $75 billion in new loans to consumers and businesses in the last three months of 2008 and that it will continue to lend “in a responsible and disciplined manner.” Later in his statement, he said lenders have tightened credit and that, “in this difficult environment, Citi will not — and cannot — take excessive risk with the capital the American public and other investors have entrusted to the company.” (Citigroup has received $50 billion in TARP money, or $351.87 from every working American.)

Jamie Dimon, CEO of JPMorgan Chase, said his institution made more than $70 billion in loans in the fourth quarter to consumers and small to midsized businesses. He said: “Whenever we lend, but especially now, we must do so in accordance with prudent risk management and underwriting standards, mindful of market and credit risks. We should not forget that eroding credit standards by many market participants played a large role in creating the current economic malaise.” (JPMorgan Chase has received $25 billion in TARP funds, or $175.93 from every working American.)

This is quite a change in attitude from just two or three years ago, when banking executives brushed off criticism that they were taking too many risks, and instead suggested that government regulation was the industry’s biggest threat.

In May 2006, the Federal Trade Commission held a daylong workshop called “Protecting consumers in the new mortgage market.” Consumer advocates argued for more regulation and industry representatives argued for fewer rules.

“If loans are being underwritten that will inevitably fail, there will be no buyers for those loans on the secondary market,” said Michael McKew, general counsel for the American Financial Services Association. “The secondary market acts as a regulator in addition to government regulation.”

It turned out that both sets of regulations were equally effective.