By Kate Hughes
Mortgage brokers have come under attack over poor advice standards after an undercover Which? investigation found just four out of 50 advisers gave acceptable levels of guidance.
Over 80 per cent of those contacted failed to provide key information about the lending process, as required by the financial regulator. Some 35 advisers failed to make a proper check to ensure the individual could afford to repay the mortgage, the investigation revealed, which "mystery shopped" advisers at banks, building societies, estate agents and independent mortgage advisory companies.
Martyn Hocking, editor of Which? Money, said: "Listening to people's needs and giving tailored advice should be the bread and butter of a mortgage adviser's job, but too many of the advisers that we visited took a "one size fits all" approach or seemed as concerned with selling an insurance policy on the side. With mortgage costs soaring and the spectre of negative equity returning to the property market, it's important people get help to find the right deal from the 3,000 on offer," he added.
Chris Cummings, director general of the Association of Mortgage Intermediaries, said the findings highlighted the need for consumers to seek independent advice. "During difficult periods in the market, consumers need advice more than ever," he said. "They must be made aware what they are receiving. Independent mortgage advisers provide advice wholly focused on the individual's needs. In contrast, banks and building societies may offer only generic information."
Consumers have turned in increasing numbers to independent advisers, Mr Cummings said, adding: "The number of first time buyers using an intermediary increased to 82.5 per cent in the first quarter of 2008, 10 per cent higher than in quarter one 2007."
The report comes amid expectations of a huge shake-up in the way financial advice is provided and paid for – in an attempt to reduce consumer confusion. Currently a financial adviser can advise on the whole market, a selection of product providers or work for one company. But proposals from the Financial Services Authority's Retail Distribution Review include a uniform benchmark for professional qualifications among advisers.
All advisers would be independent of product providers, able to recommend products from across the market. In-house sales services at banks, building societies and other providers would be strictly non-advised.
source: http://www.independent.co.uk/news/business/news/most-mortgage-brokers-give-poor-advice-which-inquiry-finds-875845.html
How the Credit Crisis Has Changed Mortgages
By Melissa Cohn
There has been a lot going on in the past week alone in the financial markets. Last Friday, IndyMac Bank was seized by the FDIC — the largest bank failure in nearly 25 years.
Then over the weekend, the Fed came in with a rescue plan for Fannie Mae and Freddie Mac — the two mortgage agencies that guarantee or own approximately half of all outstanding mortgage debt in our country.
In addition, there has been talk of further bank failures, most notably banks located on the West Coast and in the Mid-West and Southern regions of the U.S.
The good news is that the Fed will not let Fannie Mae and Freddie Mac go under. They may get reorganized, broken up or consolidated, but one way or another, our mortgage giants will survive and continue to buy and guarantee loans in the marketplace.
While Fannie Mae and Freddie Mac are purchasers of “conforming” loans only — traditionally to $417,000 and temporarily to $729,000 — and therefore not a big player in our marketplace, all eyes are on their survival and all banks are watching to see the impact that the trouble with FNMA and Freddie Mac will have on mortgage rates in general.
What Does This Mean to US?
New York is primarily a Jumbo mortgage marketplace, and we are lucky to have a large group of healthy portfolio lenders (banks that lend off their own deposits) that are here and willing to lend in our market. Our portfolio lenders never got involved in sub-prime loans or the Option ARMs that have hurt the big banks so badly; therefore, they are out there still lending.
We also have new lenders coming into the marketplace everyday and they will become an integral part of our lending marketplace. These new lenders may include hedge funds and private equity firms with lots of cash in their pocket. They have already entered the commercial marketplace and we should see them shortly in the residential market.
Have Banks Changed Guidelines?
Yes, banks have changed guidelines. It is definitely harder to qualify for a mortgage today. Banks are demanding larger down payments, better credit scores and verification of income.
The rate that you will be able to get on a new mortgage will be dependent upon how strong you are from a credit standpoint. The rate on a five-year adjustable rate mortgage (ARM) is going from a low of 5.50 percent to a high of well over 7 percent. The bigger your down payment, the lower your ratios, and the better the rate that you will get.
Foreign Borrowers
International residents living in the United States can still get financing today. There are lenders that will entertain up to 80 percent loans for a foreigner who is able to document their income, assets and credit history. The rates offered to foreigners are competitive.
The biggest challenge we face is a non-resident who doesn’t want to verify their income and assets. We still have a bank available today that will entertain no income verification loans for foreigners but they demand a larger down payment and escrows of mortgage payments for 6 months.
New Development?
The good news is that banks are lending in new developments projects today, willing to be the first to close. It’s very important to be in touch with buyers who signed contracts last year as they may not understand the changes in the mortgage lending environment. A pre-approval they obtained last year may no longer be valid. Bottom line: mortgages are to be had, but don’t look to the old players to be the lenders of choice these days. There are plenty of portfolio lenders that are taking their place and if you have never heard of them, take it as a good sign that they are solvent!
Melissa L. Cohn is President and Chief Executive of the Manhattan Mortgage Company.
source:http://www.theimproper.com/Template_Article.aspx?IssueId=4&ArticleId=1988
There has been a lot going on in the past week alone in the financial markets. Last Friday, IndyMac Bank was seized by the FDIC — the largest bank failure in nearly 25 years.
Then over the weekend, the Fed came in with a rescue plan for Fannie Mae and Freddie Mac — the two mortgage agencies that guarantee or own approximately half of all outstanding mortgage debt in our country.
In addition, there has been talk of further bank failures, most notably banks located on the West Coast and in the Mid-West and Southern regions of the U.S.
The good news is that the Fed will not let Fannie Mae and Freddie Mac go under. They may get reorganized, broken up or consolidated, but one way or another, our mortgage giants will survive and continue to buy and guarantee loans in the marketplace.
While Fannie Mae and Freddie Mac are purchasers of “conforming” loans only — traditionally to $417,000 and temporarily to $729,000 — and therefore not a big player in our marketplace, all eyes are on their survival and all banks are watching to see the impact that the trouble with FNMA and Freddie Mac will have on mortgage rates in general.
What Does This Mean to US?
New York is primarily a Jumbo mortgage marketplace, and we are lucky to have a large group of healthy portfolio lenders (banks that lend off their own deposits) that are here and willing to lend in our market. Our portfolio lenders never got involved in sub-prime loans or the Option ARMs that have hurt the big banks so badly; therefore, they are out there still lending.
We also have new lenders coming into the marketplace everyday and they will become an integral part of our lending marketplace. These new lenders may include hedge funds and private equity firms with lots of cash in their pocket. They have already entered the commercial marketplace and we should see them shortly in the residential market.
Have Banks Changed Guidelines?
Yes, banks have changed guidelines. It is definitely harder to qualify for a mortgage today. Banks are demanding larger down payments, better credit scores and verification of income.
The rate that you will be able to get on a new mortgage will be dependent upon how strong you are from a credit standpoint. The rate on a five-year adjustable rate mortgage (ARM) is going from a low of 5.50 percent to a high of well over 7 percent. The bigger your down payment, the lower your ratios, and the better the rate that you will get.
Foreign Borrowers
International residents living in the United States can still get financing today. There are lenders that will entertain up to 80 percent loans for a foreigner who is able to document their income, assets and credit history. The rates offered to foreigners are competitive.
The biggest challenge we face is a non-resident who doesn’t want to verify their income and assets. We still have a bank available today that will entertain no income verification loans for foreigners but they demand a larger down payment and escrows of mortgage payments for 6 months.
New Development?
The good news is that banks are lending in new developments projects today, willing to be the first to close. It’s very important to be in touch with buyers who signed contracts last year as they may not understand the changes in the mortgage lending environment. A pre-approval they obtained last year may no longer be valid. Bottom line: mortgages are to be had, but don’t look to the old players to be the lenders of choice these days. There are plenty of portfolio lenders that are taking their place and if you have never heard of them, take it as a good sign that they are solvent!
Melissa L. Cohn is President and Chief Executive of the Manhattan Mortgage Company.
source:http://www.theimproper.com/Template_Article.aspx?IssueId=4&ArticleId=1988
Mortgage advisers 'are failing'
Many mortgage advisers give poor advice to customers, according to research by the consumers' association Which?.
Its researchers posed as customers when visiting 50 banks, independent advisers and estate agents.
They found that just four gave advice to an acceptable standard, with 41 failing to provide at least one key piece of information.
Which? said many advisers appeared more interested in selling insurance rather than giving tailored advice.
"Too many of the advisers that we visited took a 'one size fits all' approach or seemed as concerned with selling an insurance policy on the side," said Martyn Hocking, editor of Which? Money.
"There are still more than 3,000 mortgage deals out there, and the difference in cost can be thousands of pounds a year, so it's vital people do their homework and choose their adviser with care."
Which? said it had reported the mortgage advisers that performed poorly to the Financial Services Authority (FSA).
Regulations
The Which? researchers visited advisers in England and Scotland between February and April this year.
Although there was a general failure among mortgage advisers to give acceptable mortgage advice those that performed best were independent mortgage advisers
Chris Cummings, Association of Mortgage Intermediaries
Of these, 24 were banks or building societies, 13 were estate agents and 13 were independent mortgage advisers.
Which? said 41 of them failed to give the researchers all the information required by the regulations of the FSA.
This meant they failed to say if their services involved giving advice as well as information, they failed to show the customers an initial disclosure document, or they failed to give them a "key facts" illustration.
Only four managed to do these things while also checking if the customers could afford the mortgage, explaining properly the type of deal on offer, and then advising if it was suitable or not.
Two-thirds of the advisers tried to sell the researcher an insurance policy at the same time, which Which? claimed was usually unsuitable for the customer.
'Not typical'
The Association of Mortgage Intermediaries (AMI) said people needed to realise that there is a clear difference between an independent adviser and a salesman in bank or building society.
"Independent mortgage advisers provide advice that is wholly focussed on the individual consumer's needs," said Chris Cummings of the AMI.
"In contrast, banks and building societies may offer only generic information.
"The study found that although there was a general failure among mortgage advisers to give acceptable mortgage advice those that performed best were independent mortgage advisers," he added.
But a spokesman for the British Bankers' Association said the researchers' experience of advice in bank branches was not typical.
"The Which? survey covered only 19 bank branches and we do not accept that the low standard of service reported by Which? reflects the overall level of service offered by bank mortgage advisers," he said.
"Clearly if a customer feels that the adviser has been unable to answer their questions satisfactorily or is not providing the high standard of advice that they should be getting, they should take this up as a formal complaint with the bank concerned."
No improvement
David Elms from unbiased.co.uk, which is the website of the industry body for independent financial advisers (IFAs), stressed the importance of taking independent advice.
"Whole-of-market IFAs are the best-positioned of all advice types to serve consumers' needs when it comes to mortgage advice," he said.
"As the housing market has begun to slow we have continued to see consumers putting their faith in IFAs to advise them on how to finance their home loans."
At the beginning of 2007 similar research by the FSA found that only one-third of mortgage advisory firms could show they had given their customers suitable advice
source: http://news.bbc.co.uk/2/hi/business/7519755.stm
Its researchers posed as customers when visiting 50 banks, independent advisers and estate agents.
They found that just four gave advice to an acceptable standard, with 41 failing to provide at least one key piece of information.
Which? said many advisers appeared more interested in selling insurance rather than giving tailored advice.
"Too many of the advisers that we visited took a 'one size fits all' approach or seemed as concerned with selling an insurance policy on the side," said Martyn Hocking, editor of Which? Money.
"There are still more than 3,000 mortgage deals out there, and the difference in cost can be thousands of pounds a year, so it's vital people do their homework and choose their adviser with care."
Which? said it had reported the mortgage advisers that performed poorly to the Financial Services Authority (FSA).
Regulations
The Which? researchers visited advisers in England and Scotland between February and April this year.
Although there was a general failure among mortgage advisers to give acceptable mortgage advice those that performed best were independent mortgage advisers
Chris Cummings, Association of Mortgage Intermediaries
Of these, 24 were banks or building societies, 13 were estate agents and 13 were independent mortgage advisers.
Which? said 41 of them failed to give the researchers all the information required by the regulations of the FSA.
This meant they failed to say if their services involved giving advice as well as information, they failed to show the customers an initial disclosure document, or they failed to give them a "key facts" illustration.
Only four managed to do these things while also checking if the customers could afford the mortgage, explaining properly the type of deal on offer, and then advising if it was suitable or not.
Two-thirds of the advisers tried to sell the researcher an insurance policy at the same time, which Which? claimed was usually unsuitable for the customer.
'Not typical'
The Association of Mortgage Intermediaries (AMI) said people needed to realise that there is a clear difference between an independent adviser and a salesman in bank or building society.
"Independent mortgage advisers provide advice that is wholly focussed on the individual consumer's needs," said Chris Cummings of the AMI.
"In contrast, banks and building societies may offer only generic information.
"The study found that although there was a general failure among mortgage advisers to give acceptable mortgage advice those that performed best were independent mortgage advisers," he added.
But a spokesman for the British Bankers' Association said the researchers' experience of advice in bank branches was not typical.
"The Which? survey covered only 19 bank branches and we do not accept that the low standard of service reported by Which? reflects the overall level of service offered by bank mortgage advisers," he said.
"Clearly if a customer feels that the adviser has been unable to answer their questions satisfactorily or is not providing the high standard of advice that they should be getting, they should take this up as a formal complaint with the bank concerned."
No improvement
David Elms from unbiased.co.uk, which is the website of the industry body for independent financial advisers (IFAs), stressed the importance of taking independent advice.
"Whole-of-market IFAs are the best-positioned of all advice types to serve consumers' needs when it comes to mortgage advice," he said.
"As the housing market has begun to slow we have continued to see consumers putting their faith in IFAs to advise them on how to finance their home loans."
At the beginning of 2007 similar research by the FSA found that only one-third of mortgage advisory firms could show they had given their customers suitable advice
source: http://news.bbc.co.uk/2/hi/business/7519755.stm
Regulator targets mortgage fraud
The Financial Services Authority has announced tough new measures to try to curb soaring numbers of mortgage fraud cases, by tightening its surveillance of lenders and brokers.
The plans include sharing intelligence with other law enforcers and regulators including the National Fraud Strategic Authority, and increasing the intelligence received from lend-ers to improve enforcement. The regulator also intends to investigate hundreds of mortgage intermediaries, assessing their financial crime systems and reviewing the qualifications required to give mortgage advice.
"With the pressures facing UK consumers, it's not surprising that there is an expectation that levels of fraud will be on the increase", said Neil Lewis, head of Fraud & ID products at Equifax. He warned that the first quarter of 2008 showed an alarming 68 per cent annual increase in mortgage application fraud. "Fraudsters are becoming ever more inventive with ways to succeed with application fraud and, unless lenders start to deploy more sophisticated data-sharing solutions than have been traditionally used, fraud losses will increase."
But Cifas, the credit industry fraud avoidance organisation, has warned that there was little reliable data available on the true scale of the problem, and that the number of cases was likely to increase. Sue Anderson, a spokesperson for the Council of Mortgage Lenders, said: "The published figures are only the apparent cases of mortgage fraud, based on questionable data. As the housing market continues to fall, the visibility of these crimes will increase and the true extent of the problem will emerge."
Just 35 of the 140 mortgage lenders operating in the UK currently share fraud intelligence information with the FSA.
Philip Robinson, director of financial crime and intelligence at the FSA, said: "Mortgage fraud is a serious and widespread problem, and we expect the industry to do its part in tackling this menace."
source: http://www.independent.co.uk/news/business/news/regulator-targets--mortgage-fraud-874933.html
The plans include sharing intelligence with other law enforcers and regulators including the National Fraud Strategic Authority, and increasing the intelligence received from lend-ers to improve enforcement. The regulator also intends to investigate hundreds of mortgage intermediaries, assessing their financial crime systems and reviewing the qualifications required to give mortgage advice.
"With the pressures facing UK consumers, it's not surprising that there is an expectation that levels of fraud will be on the increase", said Neil Lewis, head of Fraud & ID products at Equifax. He warned that the first quarter of 2008 showed an alarming 68 per cent annual increase in mortgage application fraud. "Fraudsters are becoming ever more inventive with ways to succeed with application fraud and, unless lenders start to deploy more sophisticated data-sharing solutions than have been traditionally used, fraud losses will increase."
But Cifas, the credit industry fraud avoidance organisation, has warned that there was little reliable data available on the true scale of the problem, and that the number of cases was likely to increase. Sue Anderson, a spokesperson for the Council of Mortgage Lenders, said: "The published figures are only the apparent cases of mortgage fraud, based on questionable data. As the housing market continues to fall, the visibility of these crimes will increase and the true extent of the problem will emerge."
Just 35 of the 140 mortgage lenders operating in the UK currently share fraud intelligence information with the FSA.
Philip Robinson, director of financial crime and intelligence at the FSA, said: "Mortgage fraud is a serious and widespread problem, and we expect the industry to do its part in tackling this menace."
source: http://www.independent.co.uk/news/business/news/regulator-targets--mortgage-fraud-874933.html
Woes Afflicting Mortgage Giants Raise Loan Rates
By VIKAS BAJAJ
Mortgage rates are rising because of the troubles at the loan finance giants Fannie Mae and Freddie Mac, threatening to deal another blow to the faltering housing market.
Even as policy makers rushed to support the two companies, home loan rates approached their highest levels in five years.
The average interest rate for 30-year fixed-rate mortgages rose to 6.71 percent on Tuesday, from 6.44 percent on Friday, according to HSH Associates, a publisher of consumer rates. The average rate for so-called jumbo loans, which cannot be sold to Fannie Mae and Freddie Mac, was 7.8 percent, the highest since December 2000.
Loan rates are rising because of concern in the financial markets about the future of Fannie Mae and Freddie Mac, which own or guarantee nearly half of the nation’s $12 trillion mortgage market. The federal government has proposed a rescue, and has urged Congress to approve it quickly.
But bond investors, worried that the companies may not be as big a support to the market as they have been, are driving up interest rates on securities backed by home loans. That added cost is being passed on to consumers through the mortgage markets. For a $400,000 loan, the increase in 30-year rates in the last few days would add $71 to a monthly bill, or $852 a year.
The rise in rates is of greatest concern for homeowners whose mortgages required them to pay only the interest on their loans for the first few years. If such borrowers are unable to refinance into lower-cost loans, many of them will face the prospect of having to pay both interest and principal at higher, adjustable rates.
For borrowers with a $400,000 loan, such a jump could send their monthly payments to $2,338 from $1,417, estimates Louis S. Barnes, a mortgage broker at Boulder West Financial in Boulder, Colo.
While mortgage rates approached these levels earlier this year and in 2007 during times of stress in the financial markets, the latest move adds urgency to the government’s efforts to restore confidence in Fannie Mae and Freddie Mac. Lawmakers are expected to vote this week on a measure that would give the Treasury Department authority to lend more money to the companies and buy shares in them if they falter.
The uncertainty surrounding the two companies is the latest in a series of pressures bearing down on the housing market and the broader economy. Higher interest rates make it harder and more expensive to refinance existing debts and to buy homes.
“When we get to rate levels like this, the market just shuts down,” Mr. Barnes said.
While mortgage rates remain relatively low by historical standards, they are higher than what homeowners and the economy became accustomed to during the recent housing boom. Lending standards have also tightened significantly in the last 12 months, and many popular loans are no longer available.
A government report based on data on Fannie Mae and Freddie Mac loans said on Tuesday that home prices fell 4.8 percent in May from a year earlier. That compared to a 4.6 percent decline in April. Other home price indexes that track a broader set of loans show much bigger declines.
Worries about Fannie Mae and Freddie Mac have led to weaker demand for securities backed by home mortgages, analysts say. Inflation, which tends to send bond prices down and bond rates up, is another concern.
In a securities filing released on Friday, Freddie Mac suggested that it might have to pare or slow the growth of its mortgage portfolio to bolster its capital.
Freddie and Fannie together own about $1.5 trillion in mortgage securities and home loans, and they guarantee an additional $3.7 trillion in securities held by other investors. The companies had a combined net worth of $55 billion as of March. Analysts and critics say the companies need significantly more capital to cushion the blow of growing losses on the more-risky mortgages made during the boom.
Important players in the mortgage market for decades, the two companies have become even more vital in the last year as several large lenders have gone out of business and investors have lost confidence in mortgage securities that are not backed by the government, or by Fannie or Freddie.
This year, the regulator overseeing the companies gave them more leeway to use their capital and the companies responded by increasing their portfolios. Freddie’s holdings grew 6.9 percent in the first five months of the year from the end of 2007; Fannie’s portfolio increased 1.8 percent.
But now it appears the companies, particularly Freddie Mac, might have to slow their purchases of mortgage securities. In its filing, Freddie Mac said it aims to increase its portfolio by a total of 10 percent in 2008. A spokeswoman for Fannie Mae declined to comment on its plans.
“That’s one of the ways in which the agencies can increase capital, by slowing down their purchases,” said Derrick Wulf, a bond portfolio manager at Dwight Asset Management. “I don’t think the market expects a dramatic slowdown in purchases but there clearly is uncertainty about that.”
Mortgage rates have been driven up in part by a rise in the yield on Treasury notes and bonds. On Tuesday, bond prices, which move in the opposite direction of the yields, slumped after the president of the Federal Reserve Bank of Philadelphia, Charles I. Plosser, said the central bank might need to raise interest rates to combat inflation “sooner rather than later.”
Some analysts say the rise in mortgage rates can be explained by technical factors in the bond market that are forcing mortgage companies and banks to sell securities to manage their portfolios. These analysts add that at current prices the mortgage securities guaranteed by Fannie and Freddie should be attractive to investors. Mortgage bonds backed by Fannie Mae, for instance, are trading at a 2.1 percentage point premium to the 10-year Treasury note, up from 1.8 points on July 14.
“I don’t see how anyone could argue that the fundamentals of mortgages are not attractive,” said Matthew J. Jozoff, an analyst at JPMorgan.
In March, for instance, mortgage rates surged after some big investors were forced to sell billions in mortgage bonds. But rates fell back slowly in the spring after the selling pressure eased and other investors, including Freddie Mac and Fannie Mae, made big purchases.
This time, the coming Congressional vote on the Treasury plan to support the companies could help allay investors’ fears, said W. Scott Simon, a managing director at Pimco Advisors, the giant bond fund firm, which owns mortgage securities. “It will go a long way toward reviving demand.”
source: http://www.nytimes.com/2008/07/23/business/23rates.html?hp
Mortgage rates are rising because of the troubles at the loan finance giants Fannie Mae and Freddie Mac, threatening to deal another blow to the faltering housing market.
Even as policy makers rushed to support the two companies, home loan rates approached their highest levels in five years.
The average interest rate for 30-year fixed-rate mortgages rose to 6.71 percent on Tuesday, from 6.44 percent on Friday, according to HSH Associates, a publisher of consumer rates. The average rate for so-called jumbo loans, which cannot be sold to Fannie Mae and Freddie Mac, was 7.8 percent, the highest since December 2000.
Loan rates are rising because of concern in the financial markets about the future of Fannie Mae and Freddie Mac, which own or guarantee nearly half of the nation’s $12 trillion mortgage market. The federal government has proposed a rescue, and has urged Congress to approve it quickly.
But bond investors, worried that the companies may not be as big a support to the market as they have been, are driving up interest rates on securities backed by home loans. That added cost is being passed on to consumers through the mortgage markets. For a $400,000 loan, the increase in 30-year rates in the last few days would add $71 to a monthly bill, or $852 a year.
The rise in rates is of greatest concern for homeowners whose mortgages required them to pay only the interest on their loans for the first few years. If such borrowers are unable to refinance into lower-cost loans, many of them will face the prospect of having to pay both interest and principal at higher, adjustable rates.
For borrowers with a $400,000 loan, such a jump could send their monthly payments to $2,338 from $1,417, estimates Louis S. Barnes, a mortgage broker at Boulder West Financial in Boulder, Colo.
While mortgage rates approached these levels earlier this year and in 2007 during times of stress in the financial markets, the latest move adds urgency to the government’s efforts to restore confidence in Fannie Mae and Freddie Mac. Lawmakers are expected to vote this week on a measure that would give the Treasury Department authority to lend more money to the companies and buy shares in them if they falter.
The uncertainty surrounding the two companies is the latest in a series of pressures bearing down on the housing market and the broader economy. Higher interest rates make it harder and more expensive to refinance existing debts and to buy homes.
“When we get to rate levels like this, the market just shuts down,” Mr. Barnes said.
While mortgage rates remain relatively low by historical standards, they are higher than what homeowners and the economy became accustomed to during the recent housing boom. Lending standards have also tightened significantly in the last 12 months, and many popular loans are no longer available.
A government report based on data on Fannie Mae and Freddie Mac loans said on Tuesday that home prices fell 4.8 percent in May from a year earlier. That compared to a 4.6 percent decline in April. Other home price indexes that track a broader set of loans show much bigger declines.
Worries about Fannie Mae and Freddie Mac have led to weaker demand for securities backed by home mortgages, analysts say. Inflation, which tends to send bond prices down and bond rates up, is another concern.
In a securities filing released on Friday, Freddie Mac suggested that it might have to pare or slow the growth of its mortgage portfolio to bolster its capital.
Freddie and Fannie together own about $1.5 trillion in mortgage securities and home loans, and they guarantee an additional $3.7 trillion in securities held by other investors. The companies had a combined net worth of $55 billion as of March. Analysts and critics say the companies need significantly more capital to cushion the blow of growing losses on the more-risky mortgages made during the boom.
Important players in the mortgage market for decades, the two companies have become even more vital in the last year as several large lenders have gone out of business and investors have lost confidence in mortgage securities that are not backed by the government, or by Fannie or Freddie.
This year, the regulator overseeing the companies gave them more leeway to use their capital and the companies responded by increasing their portfolios. Freddie’s holdings grew 6.9 percent in the first five months of the year from the end of 2007; Fannie’s portfolio increased 1.8 percent.
But now it appears the companies, particularly Freddie Mac, might have to slow their purchases of mortgage securities. In its filing, Freddie Mac said it aims to increase its portfolio by a total of 10 percent in 2008. A spokeswoman for Fannie Mae declined to comment on its plans.
“That’s one of the ways in which the agencies can increase capital, by slowing down their purchases,” said Derrick Wulf, a bond portfolio manager at Dwight Asset Management. “I don’t think the market expects a dramatic slowdown in purchases but there clearly is uncertainty about that.”
Mortgage rates have been driven up in part by a rise in the yield on Treasury notes and bonds. On Tuesday, bond prices, which move in the opposite direction of the yields, slumped after the president of the Federal Reserve Bank of Philadelphia, Charles I. Plosser, said the central bank might need to raise interest rates to combat inflation “sooner rather than later.”
Some analysts say the rise in mortgage rates can be explained by technical factors in the bond market that are forcing mortgage companies and banks to sell securities to manage their portfolios. These analysts add that at current prices the mortgage securities guaranteed by Fannie and Freddie should be attractive to investors. Mortgage bonds backed by Fannie Mae, for instance, are trading at a 2.1 percentage point premium to the 10-year Treasury note, up from 1.8 points on July 14.
“I don’t see how anyone could argue that the fundamentals of mortgages are not attractive,” said Matthew J. Jozoff, an analyst at JPMorgan.
In March, for instance, mortgage rates surged after some big investors were forced to sell billions in mortgage bonds. But rates fell back slowly in the spring after the selling pressure eased and other investors, including Freddie Mac and Fannie Mae, made big purchases.
This time, the coming Congressional vote on the Treasury plan to support the companies could help allay investors’ fears, said W. Scott Simon, a managing director at Pimco Advisors, the giant bond fund firm, which owns mortgage securities. “It will go a long way toward reviving demand.”
source: http://www.nytimes.com/2008/07/23/business/23rates.html?hp
Subscribe to:
Posts (Atom)