Weekly Mortgage Market Report

While there have been concerns for months about the size of losses at Fannie Mae and Freddie Mac due to the credit crisis, the troubles at the two firms increased significantly during the week. Monday, a report from an investment bank suggested that the two firms would have to raise enormous amounts of capital to comply with revised accounting rules. Thursday, Former Fed member Poole claimed that the two firms are insolvent under standard accounting rules and warned that a government bailout might be needed in the future. Friday morning, there was speculation that the government was considering a takeover of the two firms.

The response from government officials was swift. The director of OFHEO, Fannie and Freddie's regulator, reported that they both remained "well capitalized" based on their charters. On Thursday, Fed Chief Bernanke and Treasury Secretary Paulson attempted to reassure investors that the financial system was sound. Since Fannie and Freddie are government-sponsored enterprises, and together account for about 70% of mortgage originations and hold $5.3 trillion in home-loan debt, most investors believe that the government would step in to prevent the collapse of the firms. Friday, Treasury Secretary Paulson stated that he sees no bailout on the horizon for Fannie and Freddie and that the government is working to support them to carry out their "important mission" in their "current form".

Bottom line, despite the negative headlines, comments from OFHEO, the Fed, and the Treasury eased investor concerns. While the stock prices of Fannie and Freddie plunged during the week, investors apparently were comfortable that the firms' guarantees of the mortgage loans were not at risk, and mortgage rates ended the week moderately lower.

Global inflation concerns pushed average mortgage rates to the highest levels of the year. In both the US and in Europe, central bank officials have focused recently on the threat of higher inflation. Monday, the Fed's Fisher pointed to increased global demand as a major source of inflationary pressures. Later in the week, the Fed's Plosser described inflation as a very serious problem for the economy. Fed Chief Bernanke warned that the Fed will "strongly resist" a rise in long-term inflation. He also remarked that the surprising jump in the Unemployment Rate from 5.0% to 5.5% didn't have much impact on the Fed's outlook for economic growth and inflation.

With so much talk about the threat of higher inflation, many mortgage investors positioned their portfolios very conservatively ahead of Friday's big Consumer Price Index (CPI) inflation report. The report, however, revealed no startling surge in inflation. May CPI came in slightly higher than expected, while May Core CPI, which excludes the food and energy components, matched the consensus forecast. Mortgage investors were pleased that the news wasn't worse, and mortgage rates declined after the report was released, although they remained far higher than the prior week.

In the housing sector, the April Pending Home Sales index jumped 6% from March, far exceeding the consensus forecast for a small decline. Pending Home Sales are a leading indicator of future housing market activity, so the next Existing and New Home Sales reports may show increases. The National Association of Realtors (NAR) latest forecast predicted that conditions will remain soft in the short term, but that activity will pick up during the second half of the year.

In the housing sector, April New Home Sales rose modestly from March. Inventories of unsold new homes fell slightly, and median prices were higher. Separately, the S&P/Case-Shiller home price index showed that first quarter prices for existing homes declined 14% from one year earlier. Bigger picture, though, the data indicated that home prices are still 60% higher than at the start of the decade.