Cincinnati OH- The mortgage industry continues to change and July was no exception. As reported, President George Bush signed an historic bill this month aimed to protect home owners facing foreclosure, insurance for Fannie Mae and Freddie Mac and assistance for home buyers looking to buy a home for the first time.



Mortgage rates remained in a relatively narrow range in July, and the Fannie Mae Required Net Yield rose by 13 basis points during the month. Fannie Mae and Freddie Mac were in the spotlight.

Fed Chief Bernanke presented the latest Fed forecast for the economy during his testimony before Congress. The Fed lowered its projections for economic growth for 2008 and 2009 and expressed concern about the risk of higher inflation. Bernanke described the inflation outlook as "unusually uncertain". From Bernanke's comments, investors concluded that the Fed's primary goal right now is to promote stability in financial markets, rather than fighting inflation, and they expect the Fed to hold rates steady in the near-term.

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 month. 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. 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. 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. 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.

On the economic front, investors were closely watching the important monthly Employment report. The economy lost 62K jobs in June, very close to the consensus forecast, and the data from prior months was revised downward a little. Average Hourly Earnings, a proxy for wage growth, increased modestly. In a separate report, weekly Jobless Claims jumped more than expected, rising above the 400K level. It may be difficult for the Fed to raise rates to fight inflation while the weakness in the labor market persists.

In the housing sector, the news was mixed. June Housing Starts rose 9%, far above the consensus. Similarly, June Building Permits, a leading indicator of future housing market activity, rose 12%, which also far exceeded the forecasts. However, a change in the New York City building codes contributed much of the gains. June Existing Home Sales fell slightly, and inventory levels of unsold homes increased. In contrast, New Home Sales were significantly higher than expected in June, and the May figures were revised higher as well.

A comprehensive Housing Bill was agreed upon by the House, the Senate, and the President late in July, and it was successful in increasing confidence in the guarantees provided by Fannie Mae and Freddie Mac. One primary feature is that it authorizes the Treasury to provide credit to and buy shares in Fannie and Freddie, if needed. According to industry trade publications, Fannie and Freddie, along with the FHA, accounted for 90% of US home mortgages originated in the second quarter of 2008, up from just 49% one year earlier. Keeping the two firms healthy is vital for the US housing market.

Besides providing support for Fannie and Freddie, the Housing Bill will also help the housing market in other ways. One program will allow the FHA to insure up to $300 billion in new loans targeted at troubled homeowners. Another program adds tax credits for first-time homebuyers, which in essence will be a 15-year interest free loan for up to $7,500. In addition, the bill provides funds for more low income housing and grants to be made for local community redevelopment. A wide range of smaller programs are included as well.