Steve Martin – Born Standing Up, Simon & Schuster, Nov 2007.

Well, pardon me, but I hope you’re sitting down.

My data sources go back to the 1970’s when Steve Martin perfected his “Well, Excuse Me” routine, as described on page 160 of his wonderful stand-up book.

I simply can’t recall the last time that fixed mortgage rates were this low, aside from the mortgage rally of the early 21^st century, which many now claim to despise.

This is important, and will become more so, as we continue to rediscover the joys of the mortgage financing system that prevailed prior to the Savings and Loan crisis of the 1980’s. Specifically:

• Fixed rate government guaranteed mortgages;
• Held on balance sheet; and
• Funded by cheap deposits.

To refresh your memory, examine the following chart:

 
Figure 1: 30 Year Fixed Rate Conventional and FHA Mortgage Rates, Since 1971

As indicated, my weekly feed of conventional rates extends back to 1971, and FHA rates go back to 1990.

As of early Jan 2009, the MBA reported that 30 year FHA rates were about 5.25%, while Freddie’s 30 year “Primary Mortgage Market Survey” rate was just above 5.00%. Mind you, these are primary rates. Secondary government and conventional 30 year fixed rates were, of course, lower – and “tied” as of the 12 Jan close, at 3.79%.

Mortgage rates, by “getting small”,  have heeded Steve Martin’s advice.

Facing the recession’s next leg, investors are understandably focusing upon the return OF their principal. But one of these days they will again attend to the return ON their principal.

When that day comes, they should recall both the chart above as well as my tribute to Martin’s signature line – Well, Assume Me!

That’s because, FHA loans – unlike their conventional counterparts, are “assumable.” HUD lays out the facts in the answer to Question #85 of its 100 Questions & Answers for future homebuyers:

Figure 2: HUD, 100 Questions and Answers - Question 85.

Above is one question that HUD believes 21^st century homeowners should ask.

As 21^st century investors, you may want to recall the advice that PaineWebber gave fixed income investors at the turn of this century:

                                
Figure 3: From PaineWebber Mortgage Strategist - Rethinking GNMA Assumptions, 1 Aug 2000.

As PaineWebber subsequently noted in the same Aug 2000 article, HUD’s post-1990:

1. Imposition of “credit checks” (mentioned in “Question 85, see Figure 2); as well as a
2. New prohibition against private investor (as opposed to homeowner) assumptions

appear to have reduced the proportion of assumptions by 80% (from 1 – 2 % per year to 0.3% per year), at that time.

Relatively recently, Ginnie Mae had been a small player in the MBS market. However, as HousingWire noted at year’s end - Ginnie Mae Issuance Surpasses GSEs, Again - Ginnie Mae has become a key factor in the revitalization of the housing market, with Ginnie Mae’s President observing:

• Ginnie Mae has consistently provided liquidity to the market and it is no surprise that our November MBS issuances were strong. It is further proof that Ginnie Mae is continuing to thrive and provide stability.

This has been reflected in Ginnie Mae’s increased market share, relative to that of Fannie Mae and Freddie Mac, as indicated in Figure 4 below:

                   
             Figure 4: Ginnie Mae’s Substantial Year End MBS Share

Consequently, Ginnie Mae investors should attempt to, if they can, pick their investments with care.

They may be holding onto to their Ginnie Mae MBS, purchased when the current coupon was at 3.79%, for a long time.
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I used to work with numbers for a living, but I hope you won’t think I’m wild or crazy as I  continuing searching  for a new job or at least my next idea. Till next time.

REFERENCES
 
D. Golobay, Housing Wire - Ginnie Mae Issuance Surpasses GSEs, Again, 10 Dec 2008.

HUD - 100 Questions & Answers - #85.

PaineWebber Mortgage Strategist - Rethinking GNMA Assumptions, 1 Aug 2000.