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The Obama administration today eased eligibility rules for its Home Affordable Refinance Program, lifting the maximum loan-to-value ratio to 125% from 105%.
The shift, which regulators had hinted was coming, is aimed at making refinancing available to more homeowners whose homes are worth less than their mortgages.
HARP is open to homeowners whose loans are owned or guaranteed by Fannie Mae or Freddie Mac, the mortgage finance giants now under government control. It covers first mortgages only.
The refi program, launched this year, has gotten off to a slow start, in part because the maximum 105% loan-to-value ratio was too low to include many people whose homes have fallen sharply in value.
The new loan-to-value maximum of 125% means an eligible homeowner with a $375,000 mortgage could refi if his or her house is worth at least $300,000. But the borrower still would have to be able to afford the new loan, and income requirements are an increasing problem as unemployment soars and many workers are forced to take pay cuts.
Treasury Secretary Timothy F. Geithner said the move to raise the loan-to-value limit was "a crucial step in our broader efforts to get America's housing market and economy on the path to recovery."
But refi activity in general remains vexed by the jump in mortgage rates from their generational lows in April. Refi applications to lenders have tumbled since mid-May as rates have surged, according to Mortgage Bankers Assn. data. Despite a down tick in rates in the last two weeks, refi activity hasn’t rebounded.
-- Tom Petruno
Citing the spring jump in long-term interest rates, the Mortgage Bankers Assn. is taking back the wildly optimistic forecast it made in March about home loan refinancings this year.
That will give Federal Reserve policymakers more to chew on as they gather in Washington on Tuesday for their first meeting of the summer.
The mortgage group said it now expected refinancing volumes to reach $1.3 trillion this year, down from the $2 trillion it had predicted just three months ago.
That means, of course, that a large number of homeowners won’t be realizing savings from cheaper mortgages.
 MBA Chief Economist Jay Brinkmann said he scaled back the forecast because of the rebound in home loan rates, which have been pushed up by rising long-term Treasury bond yields. The average 30-year mortgage rate as tracked by Freddie Mac was 5.38% last week, up from 4.78% in late April.
Treasury bond yields have jumped amid the government’s record borrowing wave and as some investors sold Treasuries to buy stocks, commodities and other higher-risk investments. Although the Fed has been buying mortgage-backed bonds and Treasury bonds for its own portfolio this year, it hasn’t been able to keep a lid on long-term interest rates.
The Fed could end its meeting Wednesday by announcing that it will boost purchases of mortgage bonds and Treasuries, but many analysts believe that’s unlikely.
The mortgage group said its pared forecast for refinancings also reflected the very slow start to the government’s Home Affordable Refinance Program (HARP) for loans held or guaranteed by Fannie Mae and Freddie Mac. The plan is aimed at homeowners whose mortgages exceed their property values by as much as 5%.
That still leaves too many underwater homeowners shut out of refinancing, critics of the program say. The chief regulator of Fannie and Freddie suggested last week that to boost participation in the program, the maximum loan-to-value ratio for HARP refinancings might rise as high as 125% from the current 105%.
-- Tom Petruno
Photo: The Federal Reserve building in Washington.
Home loan rates should fall further with the Federal Reserve's latest moves to pull down long-term interest rates -- offering new hope to home buyers and to homeowners looking to refinance.
But how much lower loan rates might drop is a matter of debate on Wall Street. Although the Fed directly controls short-term interest rates, it merely influences long-term rates.
Some experts see mortgage rates tumbling another half-percentage-point in the next few weeks. Others see a smaller decline. Any move lower would be the right direction for the housing market, of course.
The Fed said today it would take two big steps to boost its influence over long-term rates: It will expand its purchases of mortgage-backed bonds to $1.25 trillion from its current commitment of $500 billion, and it also will buy $300 billion of longer-term Treasury securities.
 The idea, with both programs, is to try to push up the market value of mortgage bonds and Treasuries, which in turn would pull down interest rates on the securities.
The Fed began buying mortgage bonds at the start of this year, and is credited with helping to keep downward pressure on loan rates. The average 30-year mortgage rate was 4.89% last week, compared with 6.5% last fall, according to the Mortgage Bankers Assn.
Direct purchases of Treasuries would add more firepower to the Fed’s efforts on interest rates, because Treasury bond yields are benchmarks for other long-term rates, such as on mortgages and corporate bonds.
The Fed’s announcement today had the desired effect: The 10-year Treasury note yield plunged to 2.53% from 3% on Tuesday. Treasury yields had been edging higher in recent weeks, but the Fed put the kibosh on that trend.
Ethan Harris, an economist at Barclays Capital in New York, said his firm figures that the Fed’s new commitment to damping long-term rates could bring mortgage rates down about a half-percentage-point in the next few weeks or so. That could mean rates below 4.5%.
Some mortgage brokers were already quoting rates in the 4.5% to 4.75% range today, not including upfront fees, or points, on the loans. . . .
Read on »
The Federal Reserve opted for shock treatment today in its continuing efforts to ease the credit crunch: The central bank said it would buy up to $300 billion of longer-term U.S. Treasury securities for its own portfolio over the next six months.
The news instantly sent Treasury yields plummeting: The 10-year T-note yield, a benchmark for mortgage rates, dived to 2.56% by about noon PDT, from 3% on Tuesday.
The 30-year T-bond yield plunged to 3.58% from 3.83% on Tuesday. The two-year T-note dropped to 0.81% from 1.03%.
The Fed’s surprise decision, announced after its regular meeting, also triggered a jump in stock prices. The Dow Jones industrial average, which had been modestly in the red for the session, was up 155 points, or 2.1%, to 7,551 at about noon PDT, the sixth advance in seven sessions.
But the Fed's move has sent the dollar plummeting and gold soaring, on fears that policymakers are pulling out all the stops to boost the economy -- even if that stokes inflation.
 The Fed has said in recent months that it was considering buying Treasury bonds, but many bond investors were doubtful the central bank was ready to make that move. The Treasury market was clearly caught by surprise today -- which may be what the Fed was hoping to achieve.
"The Fed has been looking for a new way to make a big headline announcement effect on the markets, and they have found it," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi.
By purchasing Treasuries for its own portfolio, the Fed becomes a source of demand for the bonds at a time of record Treasury borrowing to rescue the economy and financial system. Higher demand could, at a minimum, keep a lid on Treasury yields, which in turn could influence other long-term interest rates -- including mortgage rates.
The Fed made another commitment today to pull mortgage rates lower by saying it would buy an additional $750 billion of mortgage-backed securities this year, raising its total purchase commitment for those securities to $1.25 trillion.
A continuing decline in mortgage rates in recent weeks already has fueled a fresh boom in refinancings.
The Mortgage Bankers Assn. said today that its index of refinancing activity nationwide jumped 30% last week from the previous week, to the highest level since mid-January.
As a share of total mortgage activity, refis accounted for 73% of loan applications last week, up from 68% the previous week. Purchase loans accounted for the rest.
The average 30-year loan rate fell to 4.89% in the bankers’ weekly survey, down from 4.96% a week earlier and matching the recent low reached in January. That rate is for 80% loan-to-value mortgages, with an average of 1.23 points, the group said.
Mortgage finance giant Fannie Mae said its refinancing volume soared to $41 billion in February, nearly three times the level of January.
The company, now under U.S. control, said it expected refis to continue to increase under the Obama administration’s mortgage-help program, Making Home Affordable. The plan will allow homeowners to refinance loans held by Fannie Mae or Freddie Mac for a maximum loan-to-value ratio of 105% -- in other words, for 5% more than their home is worth.
-- Tom Petruno
Photo: The Fed's headquarters in Washington. Credit: Karen Bleier / AFP/Getty Images
The Obama administration last week detailed how it wants to use Fannie Mae and Freddie Mac to refinance millions of mortgages for struggling homeowners who have little or no equity in their houses.
But would it be legal?
From Bloomberg News: President Barack Obama’s plan to use mortgage-finance companies Fannie Mae and Freddie Mac to refinance as many as five million loans may face legal challenges over whether the administration is overstepping its authority.
 The proposal may violate requirements that homeowners put up at least 20% of the appraised value of a home or carry mortgage insurance, said U.S. Rep. Scott Garrett of New Jersey, the ranking Republican on a panel that oversees the companies.
"I don’t see how that stands in face of what the statute says" that governs Fannie and Freddie, Garrett said in an interview. "It certainly seems as though they need to seek a congressional change, a legislative statutory change."
Maybe that's no problem, in any case, with the Democrats controlling the House and Senate.
Fannie and Freddie’s chief regulator, James Lockhart, has said he believes the plan is exempted from the mortgage-insurance rules in the companies’ charters because it would treat the refis as modifications rather than as new loans. . . .
Read on »
Mortgage giant Fannie Mae, now under government control, is planning its first trip to the public trough for money to bolster its balance sheet because of rising loan losses.
The company today estimated it would need between $11 billion and $16 billion of government capital in the aftermath of fourth-quarter losses. The company didn't estimate what its losses would be.
The Treasury in September took control of Fannie and its sibling mortgage firm, Freddie Mac, after the Bush administration decided the companies were in danger of failing. The Treasury agreed to extend up to $100 billion in capital to each, to keep them afloat.
Freddie got $14 billion in aid last fall, and last week said it would need as much as $35 billion more in the near term.
Until now, Fannie hasn't asked for any money. The company warned that the actual amount it draws down from the Treasury "may differ materially from [the] estimate because Fannie Mae is still working through its process of preparing and finalizing" its financial statements.
The two companies own or guarantee a total of $5 trillion in home loans.
-- Tom Petruno
Sometimes, rising interest rates can be good news. That’s the case with the sudden reversal in yields on U.S. Treasury securities in recent weeks.
Even as Treasury yields have moved back up, yields on other bonds have fallen. And the stock market has continued to rally, lifting key indexes to two-month highs.
All of this suggests that some investors are selling Treasuries to buy other securities. It’s a sign that the fear that had been gripping markets since September -- driving many investors into Treasuries as a haven -- is continuing to ease.
The 10-year Treasury note yield, which fell to a record low of 2.06% on Dec. 30, has rebounded to 2.47%. The 30-year T-bond yield, which was 2.52% on Dec. 18, has jumped back to 3% since then.
 On the face of it, this is bad for Uncle Sam and for taxpayers: With Treasury borrowing at record levels to fund the economic and financial bailouts, any increase in yields means a bigger interest bill for the government.
President-elect Barack Obama warned Tuesday that "Potentially we’ve got trillion-dollar deficits for years to come, even with the economic recovery we are working on." Indeed, Treasury yields may be rising in part on concern about the huge supply of bonds coming to market.
But a major goal of the government’s bailout efforts is to restore investors’ willingness to take risks, which should translate into lower borrowing costs for companies, local governments and consumers.
"The whole idea is to get long-end rates down," said Alex Li, interest rate strategist at Credit Suisse in New York.
So far, it’s working:
--- Yields on mortgage-backed bonds issued by Fannie Mae and Freddie Mac sank to record lows Tuesday, which should put more downward pressure on home loan rates. The annualized yield on the benchmark Fannie Mae 30-year bond fell to 3.76% from 4.05% on Monday and 4.73% as recently as Dec. 5.
The Federal Reserve this week made good on its promise to begin buying mortgage bonds for its own portfolio, in an attempt to pull home loan rates lower. The average 30-year mortgage rate was 5.10% last week, according to Freddie Mac, and could fall under 5% this week.
The drop in mortgage bond yields is "extremely important, obviously, and if continued will contribute to an end to the financial and economic crisis," said Tony Crescenzi, bond strategist at Miller Tabak & Co. in New York.
--- In the corporate bond market, the yield on an index of 100 junk bonds tumbled to 13.42% on Tuesday from 14.06% on Monday. The recent peak was 17.70% on Dec. 12. The plunge in yields has driven up bond prices, boosting share values of popular junk bond mutual funds. The T. Rowe Price High Yield fund has surged 9.7% since Dec. 16.
--- In the municipal bond market, the tax-free yield on the Bond Buyer index of 40 long-term bonds has fallen to 5.92% from 6.60% in mid-December.
The question is whether investors are moving back into riskier securities too early. The economic data remain dismal, and the Fed’s report Tuesday of the minutes of its last meeting showed that some policymakers feared a "prolonged contraction" of the economy.
The government on Friday will report December employment numbers. Economists’ consensus forecast is that the nation lost 500,000 more jobs last month.
If fears of a deeper economic crash take hold again, spooked investors may quickly run back to Treasury securities, said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, N.J. That could drive yields on the bonds down to levels that would rival those on Japanese government bonds, he said.
The current yield on 10-year Japanese notes is 1.26%, about half the yield of its U.S. counterpart.
Uncle Sam would save a lot borrowing at Japanese yields. But that isn’t the kind of savings taxpayers should be hoping for.
-- Tom Petruno
IndyMac Federal Bank won’t get sold this year after all.
At least that was the word from the collapsed Pasadena mortgage lender and from regulators late today following the government’s latest round of talks with a New York-based investment group.
One person close to the discussions, who wasn’t authorized to speak publicly about it, said it was likely the negotiators would take off Friday as well as New Year’s Day. So when could an announcement come?
“Maybe Monday,” said the source.
IndyMac spokesman Evan Wagner, who had spent the last few months declaring that a deal would be struck by year-end, was sounding a bit exasperated.
"As of today, I can assure you the sale will occur sometime before the end of 2009," Wagner said.
The Federal Deposit Insurance Corp., which has operated IndyMac since the exotic-loan specialist failed in July, initially hoped for a sale by October, then pushed the deadline back.
The would-be buyers were identified this week as a partnership headed by hedge fund operator John Paulson; J. Christopher Flowers, a prominent investor in distressed banks; and Steven Mnuchin, chairman of private equity firm Dune Capital, which at one point was an unsuccessful bidder for Donald Trump’s troubled casino holdings. The investors haven’t publicly confirmed their interest in IndyMac.
FDIC and IndyMac officials wouldn’t say what was holding up the sale.
One possible snag was an effort by Fannie Mae, the giant mortgage buyer now controlled by the government, to force IndyMac or its successors to buy back dud loans the thrift had sold to Fannie Mae.
Such “put backs” have become common in the industry as loan buyers have argued that sellers misrepresented the integrity of the mortgages being sold.
--E. Scott Reckard
"Nobody could have predicted this," Wall Street pros like to say as they seek to absolve themselves for failing to foresee the financial system meltdown of 2008.
Well, almost nobody at the top of the financial industry saw what was coming, that's for sure. Either that, or they were just flat-out lying to us along the way.
Here, listed chronologically, are my nominees for the most infamous pronouncements as the crisis unfolded this year:
1. Block that metaphor: At Goldman Sachs Group’s annual shareholder meeting in April, Chairman Lloyd Blankfein couldn’t seem to find the perfect metaphor to pinpoint where we were in the credit crisis. So he used three of them.
 "We’re closer to the end than the beginning," he said. "I think we’re getting to that point where people are seeing the light at the end of the tunnel."
Then he went on to make a football game analogy: "Maybe we’re at the end of the third quarter, beginning of the fourth quarter," he said. "If you watch sports, sometimes there’s a lot of timeouts in the fourth quarter. It takes longer to play than any of the other quarters, and sometimes it ends in a tie and goes into overtime."
And sometimes, the financial system just implodes, ruining all sports metaphors.
2. Everything's fine, why do you ask? With IndyMac Bancorp's shares in the $3 range on May 1, as Wall Street bet on the Pasadena mortgage lender's demise, CEO Michael Perry came out swinging against the bears.
In a financial filing, Perry noted that "given the decline in our stock price, some people have questioned IndyMac’s survivability in the current environment. I am here to tell you that I believe we have turned a corner and that our business is improving."
3. Next time you warn me against buying bonds, remind me not to pay any attention: Hard to believe now, but as recently as six months ago Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Jean-Claude Trichet were talking tough on inflation and interest rates, hinting that they were ready to tighten credit.
 The ECB, in fact, raised its benchmark short-term rate to 4.25% from 4% on July 3 -- a move now considered to be one of the most boneheaded in central bank history.
In their defense, Bernanke and Trichet were staring at soaring commodity prices in June, led by oil. Whatever their motivation, their hawkish comments helped create the last great opportunity to buy government bonds: The 10-year Treasury note yield reached its high for the year on June 16, at 4.27%. The current yield: 2.10%.
The German government’s 10-year note yield hit its 2008 high on June 19, at 4.68%. Your yield now: 2.91%.
4. Now who should know better on the dividend, the market or me? Bank of America Corp. Chief Executive Ken Lewis insisted in spring and early summer that the company would maintain its cash dividend payment, even as many other banks were slashing their payouts amid worsening loan losses.
 The market believed otherwise: With BofA’s annual dividend at $2.56 a share and the stock at $22.06 on July 9, the dividend yield was 11.6% -- a sure sign that investors didn’t expect the payout level to be sustained.
But Lewis wouldn’t cave. "Given our view of things, we do not expect to cut the dividend nor do we expect to have to raise capital," he said in an interview July 9. "We get investors and analysts calling us saying, ‘You’ve got to cut your dividend because the market is saying you should cut your dividend.’ We’ve reminded them that the market over the short term is not always right."
Not always, but certainly this time it was: BofA hacked the dividend by 50% on Oct. 6, with Lewis citing the "most difficult times for financial institutions that I have experienced in my 39 years in banking."
The stock now trades for less than $13 a share.
5. Most Ironic Press Release of the Year: The Reserve Fund, the nation’s first money market mutual fund, positively gushed about itself in a July press release, insisting that its parent firm was "the world’s most experienced money fund manager, expertly qualified to help you address ongoing challenges in the market as well as help address questions your clients may have around the soundness, safety, and security of their cash."
Less than two months later the fund became only the second in history to "break the buck," or the standard $1 money fund share price, as investors fled after the firm disclosed losses on Lehman Bros. IOUs.
6. Great sell signals in financial stock history:
--- July 15: Wachovia Corp., with its stock down as much as 20% in a matter of hours, declared itself "a fundamentally strong and stable company on solid footing." A crippled Wachovia has since agreed to be swallowed by Wells Fargo & Co.
--- July 16: Fed Chairman Bernanke told Congress that troubled mortgage giants Fannie Mae and Freddie Mac were "in no danger of failing." Seven weeks later the Treasury grabbed control of the companies, all but wiping out shareholders.
 --- July 17: From an ABC interview with Fannie Mae CEO Daniel Mudd:
Judy Woodruff: How likely do you think it is that Fannie Mae would take advantage of what’s in the [government bailout] package, this line of credit, or that the Treasury would actually buy stock in the company?
Mudd: I think it’s very unlikely. And I think everybody that has described it -- whether Secretary Paulson, Chairman Bernanke, our regulator, director Lockhart -- [says it's] a backstop in case things turn out different than everybody predicts.
--- Aug. 25: "They should assess whether it’s manageable in terms of financial risks and their corporate structure." –- Jun Kwang Woo, head of South Korea’s regulatory agency, the Financial Services Commission, warning Korea Development Bank about its interest in taking a stake in Lehman Bros. Three weeks later Lehman was in bankruptcy.
7. For once, "no" really did mean "no." And the rest is history. On Sept. 15, the day Lehman Bros. filed for bankruptcy protection, a resolute Treasury Secretary Henry M. Paulson told reporters that he "never once considered it appropriate to put taxpayer money on the line" to save the brokerage.
 Less than three weeks later, with markets worldwide in a meltdown triggered in large part by panic over Lehman’s failure, the Bush administration went to Congress for $700 billion of taxpayer money to save the financial system.
8. Unless you count that big one in New York: On Nov. 13, Treasury’s Paulson told NPR that he believed the banking system had been "stabilized," and he implied that there was no major institution likely to present a problem that would shock regulators.
"I got to tell you, I think our major institutions have been stabilized. I believe that very strongly," he said.
Two weeks later the government was forced to hurriedly stitch together a bailout plan to protect Citigroup from losses on $306 billion of toxic assets.
-- Tom Petruno
Photos (top to bottom): Goldman Sachs CEO Lloyd Blankfein (credit: Suzanne Plunkett/Bloomberg News); European Central Bank President Jean-Claude Trichet (credit: Hannelore Foerster/Bloomberg News); Bank of America Corp. CEO Ken Lewis (credit: Lawrence K. Ho/Los Angeles Times); former Fannie Mae CEO Daniel Mudd (credit: Susan Walsh/Associated Press); Treasury Secretary Henry M. Paulson (credit: Gerald Herbert/Associated Press)
If you could refinance your mortgage at a 4% fixed rate, you could probably save a bundle, right?
Veteran Wall Street economist Ed Yardeni says it's time for the Federal Reserve to engage in direct market manipulation of long-term interest rates, pulling them down in order to get conventional home loan rates down.
Yardeni, who heads Yardeni Research in Great Neck, N.Y., says that with the housing market still falling fast and the rest of the economy going along for the ride, a global depression is a real risk.
The Fed has slashed its benchmark short-term interest rate to 1% over the last year, he notes, with little or no effect on most long-term interest rates.
Yardeni is calling for the central bank to launch a program that Chairman Ben S. Bernanke discussed publicly in 2002, before he took the Fed's helm. If the economy ever faced a serious deflation threat, and the Fed had already cut short-term rates to zero, policymakers could turn their focus to directly influencing long-term rates, Bernanke said at the time.
This was the famous "Helicopter Ben" speech, for the imagery of a helicopter drop of money into the economy.
Under Bernanke's plan, the Fed would try to manipulate long-term rates by buying long-term Treasury securities for its own account. That's what Yardeni proposed in an email he sent to clients late last week.
I'm not quite convinced this would work as Yardeni sketches it out; for one thing, I wonder who, other than the government itself, would be willing to make and hold 30-year mortgages at 4%. Plus, there inevitably are unintended consequences in attempts to manipulate markets.
In any case, I wanted to share the highlights of his proposal, for discussion's sake.
Here are some excerpts: The Fed can end the credit crisis today. Chairman Bernanke and his colleagues simply need to announce that the Fed will peg the 10-year Treasury bond yield at 2.0% [down from a market yield of 3.17% on Friday]. This should pull down the 30-year fixed-rate mortgage yield from about 6% now to 4%, possibly lower. That would revive housing sales, home prices, and mortgage refinancing.
The Fed can buy 10-year Treasury bonds with the announced goal of lowering the yield on these securities and pushing down the fixed-rate mortgage rate, which tends to trade off the 10-year Treasury. That's because the average maturity of 30-year mortgages tends to be between 5-10 years as people move and prepay.
How will the Fed pay for the bonds? The Treasury will continue to borrow the funds in the Treasury bill market at rates currently near zero and deposit the proceeds at the Fed. It has been doing so since mid-September to fund the expansion of all the new liquidity facilities established by the Fed to unfreeze interbank lending and money markets. Unfortunately, none of these have done much to open up the mortgage market, which remains in a deep freeze.
The Fed would most likely need to purchase a very small fraction of [outstanding bonds] to peg the 10-year yield. It is very likely that the Fed's purchases would produce capital gains in all sorts of bonds, including mortgage-backed securities, as well as corporate and municipal bonds.
Lower mortgage rates would allow many homeowners to refinance their mortgages. That's what happened after the last recession, with the monthly windfalls helping to boost consumer spending. There is probably enough pent-up demand to significantly reduce the inventory of new and existing unsold homes, which is currently around 4.5 million units, as would-be home buyers respond to the incentive of lower and more affordable mortgage rates.
What if lower mortgage rates don't revive housing activity because lenders are less willing to lend because unemployment is rising? To get out of this "liquidity trap," the Treasury could borrow $1 trillion in the T-bill market and fund a first-come-first-served 4% mortgage sale implemented by Fannie Mae and Freddie Mac with their huge national network of mortgage originators. That should finance up to 5 million home purchases. Americans always respond well to sales. It can be called the Home Recovery Program (HRP).
The best way to remove troubled mortgage assets from complex fixed-income securities and derivatives is to have the borrowers refinance their mortgages. The fairest and most efficient way to do this is with the HRP approach.
There are those who say that housing is going through a necessary "correction." That might explain why the Fed hasn't done more to revive the housing and mortgage markets. It is obvious by now that Mr. Bernanke and his colleagues must act immediately before the housing correction turns into a global depression.
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Tom Petruno
Tom Petruno has been chronicling financial markets' highs and lows since 1979, and has been the Times' financial columnist since 1990. He writes on markets, corporate finance and the economy, and how it all ties in to individual investors' portfolios.
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