The American Recovery & Reinvestment Act was signed into law by PBO on Tuesday. On Wednesday PBO announced the foreclosure prevention program, Homeowner Affordability & Stability Plan. I am going to refer to these two separate initiatives by ARRA and HASP respectively for brevity.
What do they mean to the Everyman? (and woman) At this point it is unclear but they aim to help the economy and more specifically with HASP, the housing market. I will spare you the exact details as the actual texts are easily available for percolation at the Whitehouse website.
ARRA is essentially a spending program designed to get the economy moving again. There are many provisions but as I've already addressed the priority is job creation. As it pertains to people in need of mortgage financing this is a double-edged sword. Quite obviously, to obtain credit of any kind one needs gainful employment. (ie; a job) On the other hand, when applying for a mortgage one would like the benefit of historically low interest rates. Ceteris Paribus, job creation or at least slowed job loss should increase investor confidence spurring a movement towards stocks as the investment vehicle of choice. If money moves into stocks it has to come from somewhere. That somewhere on a very basic, macro-level is the bond market. Mortgage rates are tied to yields one can realize on Mortgage-Backed Securities, MBS. These historically have very similar yields (rates of return) to 10-Year Treasuries. As investors sell these bonds to move their money into stocks the yields rise making them more expensive to invest in. Thus mortgage rates typically rise. This is a very basic explanation of how the markets and investments work but it suits our purposes for the discussion at hand. If you'd like to get a little more detailed, take a class! (or call me)
If you're still following after that paragraph I'll summarize that the ARRA's success will drive up mortgage rates in the long-term.
On to the HASP. This plan is, WARNING: buzzword, "multi-pronged". I will spare you all the details but it's main aim is to spur mortgage servicers to modify loans to a variety of borrowers. This is a commendable effort and it remains to be seen how effective the HASP will be. Needless to say we should all be praying it helps on a meaningful level.
How will HASP affect mortgage rates though for people currently in the market? That is the pertinent question to this long-winded post. The answer isn't clear yet unfortunately. So far we've seen a selloff in the MBS market as well as a somewhat more muted negative reaction for 10-Year Treasuries.
During PBO's press conference to announce HASP, it was announced that the Treasury Department would continue its support of GSEs Fannie Mae and Freddie Mac through the purchase of $200B of MBS. Fannie and Freddie will also be able to purchase more MBS themselves with a $50B increase allowed in their portfolios. This all translates into much needed liquidity to lenders. With the increased liquidity rates should come down, ceteris paribus.
When we will see this relief in rates is a question no one can answer yet though. Hopefully it will be soon. A good indicator will be when / if the yield on 10-Year Treasuries falls to the low 2% range. Currently it is fluctuating around 2.82%. You can follow this if you look to the far right symbol ^TNX in the Market Conditions gadget.
That's all for now folks!
Excellent info, keep up the good work!
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