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Can financial crisis result in anything positive?
San Francisco Chronicle


September 16, 2008

The United States is undergoing its biggest financial crisis since the Great Depression. Venerable institutions are collapsing. Wall Street is reeling.

What does it all mean to the housing and mortgage markets, whose problems triggered these catastrophes?

Believe it or not, the past several days provided a dose of good news -- at least in the short term, because mortgage rates are down. Long-term impact is harder to predict -- and many experts say fallout from the turmoil could whipsaw housing and mortgages in many negative, as well as positive, ways.

Mortgage rates dropped last week after the government's bailout of Fannie Mae and Freddie Mac, and they dipped slightly on Monday after the bankruptcy of Lehman Brothers, the fire sale of Merrill Lynch and the struggles of AIG.

Last week's drop came because investors regained confidence in Fannie and Freddie thanks to the government's backing. This week's was because investors fled to the relative safety of long-term U.S. Treasury bonds, causing their rates to rise -- which generally triggers a fall in mortgage rates.

Lower rates combined with bargain foreclosures could entice more buyers into the market. Increased sales are crucial for a housing recovery.

"Lenders reported to us a fair upsurge in interest in placing loan applications last week (from) purchase and refi borrowers waiting for a '5 handle' (interest rate in the 5 percent range) on their rates to pull the trigger on a deal," said Keith Gumbinger of HSH Associates, a mortgage research firm in New Jersey.

Increased refinances also might help some homeowners avoid foreclosure; stemming that tide is another important step for the health of housing.

Mark Zandi, chief economist at Moody's in Pennsylvania, said the Fannie/Freddie bailout was key to the housing market, while the impact from Lehman, Merrill and AIG will be slighter. He echoed what Gumbinger and mortgage brokers said about the uptick in refinancing.

Mac and Mae "certainly helped refi activity," Zandi said. "We're down 50 basis points from last week on fixed mortgage rates and are below 6 percent. That should provide a nice, measurable boost to home sales."

But what's next remains uncertain because there are so many moving parts. Here are some of the factors at play:

Mortgage rates: Will the lower rates last? That's going to be crucial if last week's increase in mortgage activity is to be sustained.

"While refi inquiries will flare higher quickly when rates drop, we'll need a longer-lasting period at these levels to get more home buyers interested in looking," Gumbinger said. "After all, the process of locating a home and executing a transaction typically takes weeks, if not months, and conditions will need to remain favorable all the while." Experts were divided on what might happen with mortgage rates going forward.

"Anything like this throws a cold shower on markets," said Brian Bethune, chief U.S. financial economist at Massachusetts consulting firm Global Insight. One possibility is that Fannie and Freddie could be forced to pay more to borrow money -- and of course would have to pass those increased costs along to the consumers getting mortgages.

But another possibility is that increased activity in the bond market will keep downward pressure on rates.

"People are not investing in the stock market; they're moving into the bond market," said Fif Ghobadian, a broker at Guarantee Mortgage in San Francisco. "When there's more money in it, it reduces the yield, therefore rates are better."

Many experts think the Federal Reserve is likely to cut rates again. While that doesn't necessarily translate into lower rates for new mortgages, it would help people with adjustable-rate mortgages, as their reset rates tend to be tied to such a benchmark.

Credit availability: Ease of getting a mortgage goes hand in glove with lower rates as a market spur. As long as getting a mortgage remains difficult for all but the most stellar borrowers, the housing market will stay stagnant.

"Credit markets are still very tight," said John Assily, senior mortgage consultant and vice president at Mechanics Bank in Walnut Creek. Lenders "have (house) value issues; qualifying issues. That will keep things more difficult than they used to be to get people qualified."

Zandi and some others said they think Fannie and Freddie will slowly ease some underwriting standards. "I think mortgage credit should become more available; Fannie and Freddie will be more aggressive in extending credit," he said.

But other experts said the credit crunch that has infected all types of lending shows no sign of abating -- in mortgages or anywhere else.

"This is continued tough news for real estate, financing is going to be hard to get for a long time," said Chris Mayer, senior vice dean at the Columbia University Graduate School of Business.



San Francisco Chronicle Staff Writers James Temple and Sam Zuckerman contributed to this report.
E-mail Carolyn Said at csaid(at)
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