For market and rate commentary this month I want to deal with two aspects of the industry: the reality of what is happening in regards to programs and the hypothetical of what may happening in light of President Bush's remarks yesterday on the industry.

First the reality of our mortgage products and options.  August saw a very large increase in non-conforming rates (you can follow the weekly progression on my mortgage blog reading the entries titled "Weekly Email to Agents") as Wall Street investors continued to shy away from purchasing non-conforming mortgages.  They, the investors, have not yet begun to differentiate between higher risk borrowers with lower FICO scores, lack of income or asset documentation or other factors that separate many mortgages from those that feature highly documented and qualified borrowers with outstanding credit and minimal risk exposure to the lender.  This will come, I am just not sure as to when.

In the meantime we have seen most lenders pull way back on the total loan to value they are willing to lend with their second trust deed programs.  We have very, very limited options for any seconds taking the total loan to value over 95% and many lenders are pulling back to 90% or below (89.99%) total loan to value on their seconds.  In doing this lenders are demanding more equity participation from borrowers, either existing in the property for those refinancing or in the form of down payment for those purchasing.  From our perspective this takes us back as an industry to what products we have available ten to fifteen years ago when the 95% lending was somewhat rare but the maximum for most "A+" products.

Note that Fannie Mae still has a one loan 100% loan to value product available using mortgage insurance. 

We see further tightening in qualifying across many programs:

*No more qualifying at interest only payments, borrowers must qualify using the fully amortized payment

*No more qualifying at the start rate on hybrid ARMs (3/1, 5/1, etc) but instead at the first adjustment rate and payment

*Stricter guidelines as to loan to value of the mortgage, asset reservers and credit score for stated income or no income verification mortages. Many programs are only allowing stated or no income verification loans for self-employed borrowers only.

 With these guideline changes we are pretty much beginning the qualifying process with fully amortized 30 year fixed rate payments as under current rate and market conditions these are the lowest qualifying amounts.

In regards to President Bush's remarks yesterday (White House fact sheet here) he outlined several proposals to assist some homeowners who may be facing foreclosure on their current mortgages.  Several of the proposals would indeed be beneficial to homeowners and at the same time not further hinder the industry's ability to move forward and provide mortgages for American families.  Some of the proposals however have my radar up and concerned about the path down which these proposals would take us.

In particular are proposals based around using FHA mortgages to "bail out" or assist homeowners in default who are unable to find other means to refinance their homes and stave off foreclosure.  For years everyone involved in the mortgage industry has been very aware that mortgage originators and companies can make considerably more profit on FHA mortgages than on Fannie Mae or Freddie Mac mortgages. I have seen so many cases over the years where a client I was working with was being sold an FHA mortgage with higher payment, mortgage insurance and payments when they qualified for a conventional mortgage that was better for them financially. Why? Because the lender selling the FHA loan stood to make up to two or three times more profit on the transaction than I would make on the conforming mortgage.  FHA mortgages certainly have their place and can be extremely beneficial in assisting homeownership--for many Americans they are an excellent bridge between not qualifying for a conventional mortgage and having to take a sub-prime mortgage.  Given the very low maximum loan amounts for California however they are not used as often as they could be--hence the higher percentage of sub-prime mortgages in this state compared to others.

As well for many, many years the FHA lending market has had a very high incidence of fraud compared to other mortgage product markets.  Does anyone remember the large number of lenders, agents, appraisers and other "professionals" arrested, fined or banned from real estate activity in the mid- to late 1990s?  I do because unfortunately a company I was with at the time was one of the ones targetted and banned from funding FHA mortgages due to extensive fraud by several of the loan officers at the company.  It was not an isolated incident and at one point the information from the FBI was that of the FHA loans funded in the "605 Corridor" of Southern California as many as 25-30% may have been fraudulent loans. 

By encouraging many sub-prime borrowers who are having difficulty making there payments, many--not all but many--of whom may have overstated income or assets to qualify to pursue FHA mortgages for their solution increases the opportunity of losses for the FHA lending program and perhaps create solvency problems for FHA as well. 

While the President may propose legislation for Congress to draw up and act upon he cannot create and put into place legislation, therefore his proposals must be turned into legislation by Congress and then presented to him for his signature.  Given the political nature of Washington I am of the assumption that nothing of substance will occur in Congress (they have been sitting on major FHA legislation to rehaul the program for over a year) and if it does we will see it laden with special projects, spending programs and other give-aways as we head into the 2008 elections.  We will probably see any legislation come out of Congress next September before their fall break and going home to their districts bragging about the legislation they have passed.  In the meantime much of the current credit crunch and its affect on the mortgage and housing industries will have sorted themselves out.

For the month of August conforming rates dropped a little bit and Jumbo, or non-conforming, fixed rates continued to climb.

30 year fixed rate conforming mortgage for a purchase transaction with minimum 10% down, good credit scores and full documentation is at 6.125% at 1 point; similar mortgage for a Jumbo borrower is at 7.375%.  Note to Jumbo borrowers I am very effectively using conforming-based piggy-back financing to greatly lower payments over jumbo mortgage payments.  Here is the chart:

Let me know how I can assist you, a family member, friend or co-worker with their mortgage or debt management needs please do not hesitate to contact me.

Have a great September and welcome back to school!

Click on Financial Wire to read this month's wire and articles.

Dennis