Dennis' Mortgage Blog

Question of the week:  Last week you presented “Mortgage 101” showing how bond and mortgage rates work.  How about a Mortgage 2010 with a look into what may be ahead in the coming year?

Answer:  To begin with our look into next year I want to share this link with you.  Columnist George Will’s “A Gold Standard On Debt.”  Will brings together much of what I have been writing for the past year regarding debt, bond financing, inflation and higher rates.  I encourage you to read it as it is not just about interest rates but about our national economy. 

Loyal readers know that regarding our 2010 mortgage market I have been predicting higher rates in 2010 for much of the year.  The Federal Reserve just went over the $1 trillion mark in purchasing mortgage backed securities and will purchase another $250 billion by the end of March.  Once they leave the market the artificial demand created by the Fed goes away, less demand means lower prices, lower prices mean higher rates.  Read Mr. Will.

Regarding the mechanics of the mortgage industry, a few weeks ago I gave a review of how many of the different programs enacted this year have done.  Today I will look at how the different changes will impact the industry and consumer in 2010.

Tighter lending criteria:  FHA is losing money and its reserves are well below the level established by Congress.  Fannie Mae and Freddie Mac are losing money and looking for additional funds to prop them up from Washington.  Mortgage Insurance companies are losing money and some will leave the business. 

FHA:  The losses from FHA are on newer loans, an inordinate amount of refinances that were used by homeowners to get out of Interim or Option ARM programs. From 2000 to 2007 FHA mortgages as a percentage of overall mortgages funded dropped.  In 2008 and 2009 the percentage of FHA mortgages funded leapt due to declining equity across the country, higher loan limits for FHA mortgages and lack of low down payment/equity financing.  With unemployment breaking through 10% FHA defaults are being impacted.  FHA is raising the bar on qualifying. 

The biggest changes in FHA are going to be on the industry side.  A major change is anticipated to be issued with a “Mortgagee Letter” in December that will reduce the number of companies able to originate FHA mortgages and shifting liability from FHA to lenders for originator oversight.  What this means is that lenders will reduce the number of brokers who they will allow to originate FHA mortgages.  This will result in many mortgage brokers to close up shop without the ability to fund FHA mortgages. (Not Stratis Financial as we have met the strictest criteria and standards and have assurances from our primary FHA sources they will continue our relationships.)

The tighter criteria for FHA in 2010 may include higher down payment requirements, higher mortgage insurance premiums, higher FICO score requirements and lower debt-to-income requirements.  Also on the block could be non-occupant co-borrowers and gift funds for down payment and closing costs.  Greatly impacting the FHA market will be FHA requiring the disastrous Home Valuation Code of Conduct, or HVCC, appraisal process for all FHA mortgages starting in January.

Conventional:  Fannie Mae has already announced lower debt-to-income requirements and as the saying goes, as Fannie goes Freddie follows.  The new limit is 45% for the back or bottom ratio for total debt to income.  Fannie is also releasing a new version of its Desktop Underwriter software program that is used to approve mortgages (and in my opinion one of the most under-reported causes of the mortgage market meltdown).  The new version of the program will have other “enhancements” that will further tighten down the underwriting criteria for consideration of non-employment income, reserve requirements for borrowers and credit.

Lenders:  Many of the lenders still standing have already introduced “over-lays” on underwriting guidelines from FHA and Fannie/Freddie.  These over-lays are stricter requirements than the agencies require and/or pricing add-ons to discourage the use of certain criteria.  Lenders are insuring their portfolios will be purchases on the secondary market, are anticipating upcoming guideline changes from agencies and most importantly want to make sure they will not have foreclosures and defaults in the future.  Using analytical programs they have been able to analyze all the criteria of defaults and foreclosures, spot patterns such as gifts for closing, co-signers, etc and target those underwriting standards.  While defaults mount in 2010 more and more will be as a result of the current economic situation and less and less from the mortgages made in 2004/5-2007 heyday of no down, stated income programs.

Politics and Policies: Many of the major banks that are left have been working Barney Frank’s little committee in Congress very hard, their objective is to eliminate mortgage brokers.  While this may sound paranoid since it is coming from a mortgage broker, those of us who been in the industry for as long as I have and who stay abreast of the politics and policies are aware of this intended goal. The biggest method of doing this is through changes to the Real Estate Settlement and Procedures Act, central to this is a new policy that banks have been pushing for years and that is not just disclosure of yield spread premiums paid to brokers (required in California by the way since mid-1990s) but requiring the borrower release such funds to the broker in writing at closing.  This will essentially have the impact of killing no point mortgages from brokers, in the meantime banks will still be able to offer them through their retail branches, with less competition and higher rates. 

While there have been almost no new regulations imposed on Wall Street traders at this point relative to derivatives, hedge funds and margins, our industry keeps seeing political over-reactions to “protect the consumer” that are creating more and more obstacles to homeownership.  HVCC, MDIA, TILA, RESPA changes, GFE changes, HUD, the Fed, OTC, everyone wants to make new policies, increase disclosure, add forms, and evidently further confuse the consumer.  Currently our application package in California runs over 25 pages for a conventional transaction (we crest 30 on FHA).  With the new changes we look to add at least five more pages to do what our current forms already do.

For those out there who have an obsessive dislike of my industry and feel me and my fellow brokers are the scourge of the earth, I ask that you merely look at the banking landscape and who is gone, and why.  Certainly there were, and are, plenty of bad guys in the mortgage brokering business, just as there were and are in the banking business, these new laws and regulations do little to change that.  Liars will still lie and cheaters will still cheat, but now the honest and solid brokers such as those at Stratis Financial will have more obstacles to providing quality mortgages to our clients as we assist them in obtaining and maintaining homeownership.

Outlook for 2010? More regulations, more policies, more paperwork and fewer opportunities for borrowers.  And at some point rates will break and stay above 5% and probably 5.5% before summer.

Have a question for me?  Ask me!   

Update on First Time Homebuyer Tax Credit:  The Senate and House have passed an extension of the homebuyer tax credit and extended it to non-first time buyers.  The new law awaiting Obama’s signature:

·        Maximum 1^st time buyer credit of $8000, must sign purchase agreement on or before April 30, 2010 and close on or before June 30, 2010

·        Maximum previous homeowner credit of $6500, to be eligible you must have owned your primary residence at least 5 years

·        Phased out credits for individuals earning over $125,000 and couples earning over $250,000 adjusted gross income

If you have purchased in 2008 or 2009 and are eligible here are links for you, if the forms change for the new credit I will post them.

Click this link IRS Form 5405 for Frequently Asked Questions click here IRS FAQ

With little economic news this week Mortgages took their cues off of the Treasury auctions and the stock markets.  Yesterday was a microcosm of the market recently with huge intraday swings up and down, the 3^rd time in four days the Fannie Mae securities traded inside a range of 50 basis points or more.  That is what happens when there is huge government intervention in capital markets; yesterday the mortgage market went from a pretty decent drop (in price) to a large gain when the Feds stepped in and started buying.   By the time they were finished the Federal Reserve had crossed the $1 Trillion threshold of purchasing Mortgage Backed Securities in 2009.

Who can compete with a competitor that gets to print its own money to buy what it wants to buy?  Keep this in mind when the health care debate reheats and you hear people speak of “competition for the insurance companies.”  Right now the only competition for the Fed seems to be the Chinese government which has been stockpiling U.S. debt and dollars. 

The little economic news we did have this week was weak.  New claims up, consumer sentiment down (2^nd month in a row) and the trade imbalance higher—not surprising with a weak dollar and an American consumer making do with the 2007 HD flatscreen for now. 

I sense a creeping malaise in the economic data.  Now that unemployment has officially topped 10% it is as if everyone is looking around say, “Huh? Now what?”  Three-quarters of a trillion in passed stimulus funding was supposed to provide us millions of job, or save them.  The only jobs that appear to be saved are those at GM and major recipients of TARP funds; jobs where the U.S. government now has an ownership interest.  Since the overwhelming majority of Americans, albeit a shrinking overwhelming majority, do not work for companies being bought in whole or part by the government, a bunker like fiscal mentality is taking hold it seems.

Seeing, reading, hearing about deficits and growing debt in local and state governments Americans observe Federal pols argue over another One Trillion Dollars or more in spending for health care and wonder if they are saving enough.  Every level of government to which they pay taxes is out of money, or in the case of Washington printing more of it, and the sneaking suspicion is they will have to pay more to bail them out.  Hard to hock a new side-by-side GE Monogram refrigerator to pay for higher taxes, fees and premiums so why buy it?

Back to today and reality for tomorrow.  We continue to see a mortgage market that is volatile during the day but gentle through the week.  With the added buying from the Fed and more foreign investment our week has seen a gradual increase in prices the past six sessions.  We may break through a resistance level that has held firm for several weeks, but every time tested during that period the level has held. 

With the volatility I recommend locking rates early to take out any upside risk.  The risk is you may lose out on a lower rate, but not much lower given the resistance levels that have held firm.  The penalty for losing to a higher rate is far greater however than the benefit of your risk paying off with a lower rate.  Be cautious, be prudent.

Mortgage Backs are moving higher this morning, but recent trends have been reversals after traders get back from lunch.  As I post this around 10:00 a.m. the trend is higher for MBS, experience lately has said plan on a near flat finish.  We’ll see next week if I was right.

For the moment the market has moved lower with FHA this morning at all time lows and conforming nearing the mark—for now. 

Rates for Friday November 13, 2009:

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.625%                            Down 0.075%

30 year conforming-jumbo 4.875%                   Down 0.125%

30 year FHA    4.5%                            Down 0.25%

30 year FHA jumbo 4.875%                            Down 0.125%

Remember we have true, honest to goodness quality Jumbo rates again! Call for quotes as they vary depending on LTV, FICO and loan amount. 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

For those of you who experience triskaidekaphobia (thank goodness for spell check), good luck today. 

Enjoy a great weekend, between the usual family activities I am available if you need me.     

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com ; feel free to forward the link to family and friends who may be interested in past commentaries.

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