Monday, Aug. 25
Posted 2 p.m. EDT
RISING: Mortgage rates went up about an eighth of a percentage point Friday. Looking at mortgage bond prices, it appears that rates might be down a little today, but not much.

WIDENING: In the mortgage and bond world, there's a concept known as "spread." A spread is the difference between two interest rates or bond yields. One that I pay attention to is the spread between the 30-year fixed and the 10-year Treasury. That spread has widened considerably.

To show what I mean, let's take a look at last week and the same week in the previous two years. Going from oldest to most recent:

On Aug. 23, 2006, the 30-year fixed averaged 6.48 percent in Bankrate's weekly survey, and the 10-year Treasury note yielded 4.83 percent.

On Aug. 22, 2007, the 30-year fixed averaged 6.58 percent and the 10-year Treasury yielded 4.63 percent.

Last week, the 30-year fixed averaged 6.66 percent and the 10-year Treasury yielded 3.79 percent.

The 10-year Treasury yield kept going down, and the mortgage rate kept going up. In 2006, the difference, or spread, was 1.65 percentage points. A year later, it was 1.95 percentage points, and last week it was 2.87.

Why is this happening, and what will reverse it? I plan to tackle those questions in an article this week. The short answer to the first question is that investors are leery of mortgage debt. A few years ago, everyone on Wall Street was trying to make money. Now they're trying to keep money. If you want to keep money, you buy risk-free instruments such as U.S. Treasury notes, which are low-interest loans to the federal government. You won't make much money, but the government won't default on the note.

If you want to make more money, you invest in mortgage-backed securities. These instruments have a higher yield because they come with the risk that mortgage borrowers will default on their home debts. If fewer people send in their monthly payments, mortgage-backed securities are less valuable.

All over the world, investors prefer to buy safe Treasuries over less-safe mortgage-backed securities. To entice investors, the yields on mortgage-backed securities must rise. And that causes mortgage rates to rise when compared to Treasury yields.

Another thing is happening, too. Fannie Mae and Freddie Mac, which guarantee mortgages, have been adding fees to mortgages this year. Fannie calls them loan level price adjustments and Freddie calls them post-settlement delivery fees. These fees vary, depending on the loan-to-value ratio, credit score and location of the home. They can add a quarter of a percentage point to the rate that you pay, or more.

Thursday, Aug. 21
Posted 4 p.m. EDT
DON'T GET YOUR HOPES UP: The FDIC's chairman, Sheila Bair, has said all year that mortgage servicers need to do more to help homeowners who have fallen behind on their monthly payments. Now that the FDIC controls IndyMac, an institution that used to be one of the country's biggest mortgage lenders, she has her chance to show other mortgage servicers how it's done.

IndyMac specialized in Alt-A mortgages, which were designed for people who wanted to lie about their incomes so they could qualify for home loans. When the FDIC shut down IndyMac Bank in late July and reopened it as IndyMac Federal Bank, the bank serviced tens of thousands of mortgages. Over the next few months, the FDIC-controlled IndyMac will mail packets to about 25,000 borrowers who are late on their IndyMac-serviced mortgages.

Before I describe what will be in these packets, let me stress that we're talking only about homeowners who have mortgages serviced by IndyMac. Hundreds of thousands of people got mortgages from IndyMac, and then their loans were sold, and are being serviced by other companies. Those borrowers aren't going to receive these packets from the FDIC. If you're supposed to send your monthly house payment to IndyMac, the FDIC offer applies to you. If you're supposed to send your check elsewhere, the FDIC offer doesn't apply to you.

I await the deluge of e-mails from people asking, "But what if I got my loan from IndyMac but they sold it?" Grrrr!

People who are late on their IndyMac-serviced loans will get a packet in the mail. The packet will contain a loan modification contract. Here's what the FDIC says about these contracts:

Under the IndyMac Federal program, eligible mortgages would be modified into sustainable mortgages permanently capped at the current Freddie Mac survey rate for conforming mortgages (now about 6.5%). Modifications would be designed to achieve sustainable payments at a 38 percent debt-to-income (DTI) ratio of principal, interest, taxes and insurance. To reach this metric for affordable payments, modifications could adopt a combination of interest rate reductions, extended amortization, and principal forbearance.

Does this mean that the FDIC risks wasting a bunch of time and energy drawing up modification agreements that it will be unable to accept because when it finally sees those income docs, it realizes that the borrowers still don't qualify? Well, yeah. But the borrowers won't be made to wait weeks and weeks for a mod offer, unlike with those lousy private mortgage servicers. The actual ratio of successfully executed mods might be more or less the same, but nobody had to spend three weeks listening to hold music.

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