Lending Landscape - October 4, 2007

The mortgage landscape has improved over the last week. Mortgage rates for fixed rate loans have dropped and the ten year bond market has leveled out a bit since the Fed rate cut two weeks ago.

Normally, the economic news that affects mortgages has already been released by Thursday. This week the big pending news is the September jobs report, which will be released tomorrow. If the news on jobs is bad, more hope for an additional Fed rate cut should drive rates lower. On the other hand, if this report turns out well, long term mortgage rates should be expected to rise.

On the mortgage front there was good news. The "credit crunch" many had feared would reduce the pool of new home buyers has been resolved at least temporarily. A group of banks established during the Great Depression has injected hundreds of billions of dollars to lenders.

As the credit crunch hit hard in the third quarter, most banks were forced to cut back their lending. But one group of banks increased lending by an incredible $182 billion. Who were these deep-pocketed lenders -- and are they capable of handling such a large rise in loans, especially at a time when credit markets are unsettled and mortgage defaults on the rise?

"Funding has not been a problem," says Dorfman, of the FHLB of Atlanta. The FHLB banks, like Fannie and Freddie, benefit from the market's perception that their debt has a government guarantee, or that the government would step in and provide assistance if any of them ran into trouble. That not only translates into lower borrowing costs, but it also means investors flock to buy FHLB debt for perceived safety when bond markets get jittery. As a result, the FHLBs can borrow cheaply even in tough times.

Mortgage loans continue to be made and no further tightening of lending requirements has taken place. So long as interest rates remain low, it is still a very favorable environment to buy a new home in Utah.