The End of the Crisis in Mortgage Credit Markets?
Submitted by CARPE DIEM
From Global Insight:
The ailing U.S. mortgage credit market and housing market is poised to get a lift from a significant potential boost in lending activity by the GSEs (Fannie Mae and Freddie Mac). The ability of the GSEs to respond to the severe housing downturn had been severely constrained by: a) caps that have been placed on the overall growth of their retained lending portfolio; b) the conforming loan limit of $417,000—which effectively had frozen these lending entities out of the jumbo mortgage loan market; and c) the requirement from OFHEO (Office of Federal Housing Enterprise Oversight) to hold a 30% capital cushion over and above their usual capital minimum.
The reduction of the required surplus from 30% to 20% would unlock about $7.1 billion in capital in the case of Fannie Mae, and about $6.1 billion in the case of Freddie Mac. Given that total new mortgage credit was about $743.3 billion in 2007, the GSEs could make a significant positive impact on the flow of mortgage credit to the housing market in 2008.
A modest reduction of about 50 basis points in the risk premium on 30-year conventional mortgages, to near 200–210 basis points, would bring 30-year mortgage rates back down to a range of 5.30% to 5.50%. That could stimulate significantly more demand for mortgage loans, and the GSEs are now in a good position to meet that demand.
The big question is, can the recent Fed moves to provide significant new liquidity, unlock the credit markets, and lower benchmark borrowing costs lead to such a reduction in the risk premium? We believe they can. If we pass that important watershed in the next few weeks, it perhaps could mark the beginning of the end of the crisis in the mortgage credit markets.
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