Countrywide’s Loan Production Plunges

Countrywide’s home loan production dropped 40% year-over-year in November, the lender announced Thursday. Loan fundigs were up 5% compared to October’s results, quite a feat amid all the trouble the mortgage lending sector is experiencing currently. Countrywide almost eliminated origination of subprime home loans and significantly reduced adjustable-rate mortgages. Delinquencies rose from 4.57% in November 2006 to 6.34% last month. In October, 5.89% of Countrywide loans were delinquent.

Mortgage interest rates climbed up from record lows after the Fed’s rate cut, and this week 30-year mortgage rates averaged 6.11% - still some of the lowest rates for this year, but above 6% nevertheless. The rate dropped below 6% briefly last week. 15-year fixed-rate loans were at 5.78%, up from 5.65% a week ago. 5-year ARMs averaged 5.78%, compared to 5.75% last week. Interest on one-year adjustable home loans increased from 5.46% last week to 5.50%. Which way rates go from here will depend on a number of factors, including the market for Treasuries and the job market.

FDIC says, cancel interest-rate adjustments

It sounds a little off to me, but that’s the next brilliant bailout idea: modify loans that are about to adjust and “freeze” the interest rates. This is exactly what FDIC’s (Federal Deposit Insurance Corp) Chairman Sheila Bair asked lenders to do. Naturally, the changes should only affect “good” borrowers who occupy their homes, are current on their payments and own adjustable mortgages that haven’t reset yet.

However, surveys show that only a fraction of the ARMs scheduled to adjust in the coming months get modified, partly because of restrictions in the servicing agreements that limit the number of loans that can be modified. Investors who own the loans are unwilling to allow modifications because this will cause mortgages and the securities backed by them to lose value.

OK, ARMs were designed to adjust at some point, that’s their essence. Converting them to fixed home loans is against the rules – after all, they were marketed as a bet against economic fundamentals and market conditions that affect interest rates. And if a large number of ARMs do somehow get modified, who knows what may happen next? More troubled hedge funds? More credit rating downgrades? Elimination of all types of ARMs? I don’t think this is the solution yet.

Spike in mortgage rates

Rates on 30-year fixed mortgages rose again in the week ending May 31, 2007. The 30-year fixed-rate mortgage averaged 6.42%, up from 6.37% a week ago. 15-year fixed-rate mortgages climbed up as well, to 6.12% from 6.06% last week. 5-year hybrid adjustable-rate mortgages were at 6.19%, up from 6.02%. The 1-year adjustable-rate loan was the only type of mortgage to decline, with an average of 5.57%, down from 5.64%. Last year this time, the 30-year mortgage rate was 6.67%. 15-year fixed-rate mortgages and 5-year adjustable-rate loans carried an interest of 6.26%, and 1-year adjustable-rate loans were at 5.68.

Freddie Mac attributed the rise in interest rates to improving business and consumer spending, which are signs of a strong economy – outside of the housing market. Rates are currently at the highest level in 8 months.

Whatever the reasons, rising interest rates bode nothing good for the housing market. With higher mortgage rates come bigger monthly payments, which means that fewer buyers will be able to afford new homes. Considering the already existing glut on the market, a recovery in the near term seems impossible. The National Association of Realtors and the MBA pushed back their forecasts for a rebound in the Real Estate industry from mid-2007 to early 2008.

Mortgage rates slide again

30-year fixed-rate mortgage rates dropped to 6.22% this week, from 6.30% last week. This is the lowest level since mid-January, when it averaged 6.21%. According to analysts, the drop reflected a relative weakness in the real estate industry, illustrated by reports of slowing new home construction. Housing starts fell 14.3% in January to the lowest reading since 1997, sparking concerns that the declining housing market may have a serious impact on economic growth. The drop was in part due to large numbers of unsold inventories currently on the market.

15-year fixed rates also dropped this week, reaching 5.97%, compared to 6.03% last week. 5-year adjustable rates fell to 5.96% from 6.01 a week earlier. One-year ARMs dropped from 5.52% to 5.49%.

Lower mortgage rates will make new homes more affordable, so there’s hope this will help absorb the oversupply of unsold houses. But will low rates be around for long enough to really influence the market? This week’s drop is definitely caused by changing circumstances, and yet home prices have to drop further before balance is restored. When and how this is going to happen is not entirely clear, as increasing sales volumes tend to push home prices up as well, so if houses begin to sell faster again, sellers won’t be willing to cut prices.