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By Knight Kiplinger

The Kiplinger Washington Editors

July 3, 2008

 

Big-Bank Woes
Begin to Spread

The largest U.S. banks are hurting badly, and the pain is starting to spread. Most small and midsize banks are still ready to lend to businesses, but they're getting nervous. This week's Kiplinger Letter examines the outlook.

 

ALSO IN THIS ISSUE: Jobs, Employer Health Costs, Estate Taxes, Retail Retrenching, Legal Trends, Infrastructure Spending

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Mortgage rates aren't likely to ease the rest of the year. The edgy credit markets are taking a toll, severing the link between yields on 10-year Treasuries, down a half point this year, and 30-year fixed rate home loans, which have dipped only a quarter point.

Nervous investors flocking to Treasuries are trimming those yields, but equally nervous mortgage lenders aren’t loosening their purse strings. And the series of interest rate cuts by the Federal Reserve don't affect fixed-rate mortgages because long-term rates are sensitive to broad economic trends. The Fed's moves aren't totally irrelevant but have a delayed and indirect impact.

Look for the 30-year fixed mortgage to end the year at around 6%, up a tick from the current 5.88%. Why? Investors in bonds will fret about higher inflation and push interest rates upward. Bond buyers will also pay more attention to the fiscal stimulus passed by Congress, which will help boost the federal budget deficit to around $500 billion. As Congress borrows to raise money for that rising deficit, the added supply of Treasuries will also hike long-term rates higher.

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POSTED BY: Lel (April 21, 2008 03:50 PM)
Are the jumbo rates (that is, on new "conforming jumbo" loans) ever going to come down to the level of the traditional conforming loans?

POSTED BY: Jerry Idaszak (April 22, 2008 04:51 PM)
The mortgage market remains a swamp. Conditions won't return to normal until some degree of securitization returns, and there's no prospect for that soon. Regarding you specific question, I think you're referring to expanded loans up to $729,750 in 71 high-cost markets in the U.S. These are called "expanded conformings" and they're just becoming available. The hope is that the gap between them and so-called "true conformings" (which have a ceiling of about $414.000) will be about 50 basis points, or one-half a percentage point, down from 75 basis points. Some gap, or spread, will remain.

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