Wednesday, October 1, 2008

Mortgage Rates Falling

The Emergency Economic Stabilization Act of 2008 bill prevents the treasury from borrowing too much money too quickly -- a positive, inflation-containing provisionWith jumbo mortgage rates moving faster than anytime in recent history, let's take a few minutes to recap what's going on, and what's causing rates to be so volatile.

First, the bailout.

Late Sunday, Congress drafted the Emergency Economic Stabilization Act of 2008 bill and it goes to vote sometime today. The key provision in the bill that's helping mortgage rates is on Page 110.

The passage reads, summarized:

  • The U.S. Treasury gets access to $250 billion immediately

  • The U.S. Treasury has to ask the President for its next $100 billion

  • The U.S. Treasury has to ask Congress for its next $350 billion

Because of how the bill is worded, the U.S. Treasury can't go spending taxpayer money willy-nilly, lessening the likelihood of inflation nationwide. This is good because anytime inflation pressures ease, mortgage rates stand to benefit and this is one of the catalysts for today's rate drop.

Another reason why rates are falling is death of banking giants Washington Mutual and Wachovia.

It's no coincidence that these two institutions shut down within 3 days of each other. Both were heavy pushers of the now-famous Negatively Amortizaing Mortgage, the time-bomb assets of which clogged the banks' respective balance sheets.

Consider: When Washington Mutual was rescued bought by JP Morgan Chase & Co. and the buyer devalued WAMU's portfolio by a massive $31 billion, it forced investors to reassess Wachovia's mortgage portfolio, too.

When Washington Mutual sold, Wachovia's balance sheet was transformed into a ticking time bombWithin minutes, Charlotte-based Wachovia lost a quarter of its value and was a Dead Man Walking. Then, before even a weekend could pass, Wachovia had been packaged and sold to Citigroup with the help of the U.S. government, leading to another $42 billion in mortgage portfolio writedowns.

That's $73 billion in mortgage losses practically overnight.

Surprisingly, this is good news for mortgage borrowers because each time a bank acknowledges losses like this, the mortgage market as a whole gets one step closer to discovering what an individual home loan is really worth on Wall Street.

In fact, it's this exact conundrum that defines the mortgage market domino chain, dating back to July 2007. If markets could just accurately answer "What is a mortgage worth?", this little credit mix-up thing would be over.

WAMU and Wachovia hitting the showers brings us one step closer, and at least for today, brings mortgage rates down.

(Image courtesy: The Wall Street Journal Online)

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