Dennis' Mortgage Blog

Important information next week on loan limits and funding time lines 

Question of the week:  How come private mortgage insurance is not covering all the defaulting loans we are reading about?   Answer:  Mortgage insurance is, and has been, required on most loans over 80% loan to value (LTV)—I say most because some lenders will “self-insure” and not use mortgage insurance companies for high LTV mortgages.  Around 1998-1999 Chase developed a home equity product and division that would go to LTVs up to 90%, this product became more and more popular into 2000 and by 2007 almost every lender had their own Equity lines and 2^nd Trust Deeds they were offering, many allowing financing up to 100% LTV—or the full value of the property.  Our industry started using “piggy-back” financing slowly at the end of the 1990s and the use exploded in the early 2000s; by 2007.  A piggy-back would be a primary or 1^st trust deed up to 80% of the purchase price, with no mortgage insurance because of the LTV, and then a 2^nd trust deed to cover the remaining difference between the purchase price, or value, and the down payment.  A $500,000 price with 10% down would be structured:  $50,000 down, $400,000 1^st mortgage and $50,000 2^nd mortgage; no mortgage insurance.  The borrower benefited using the piggy-back financing from a lower monthly payment and a higher tax deduction.  After about 2001 our company did not have a loan that I am aware of with mortgage insurance until this year when the equity-line and 2^nd trust deed markets had collapsed.  The sub-prime mortgages were not eligible for mortgage insurance as the premiums were too high, or the mortgage insurance companies would not insure high loan to values for borrowers with poor credit histories and no verification of income or assets.  Because of the piggy-back transaction structures a huge percentage of the transactions up to and through 2007 had no mortgage insurance despite high loan to values on their transactions; therefore no coverage when the borrowers default.

If you have a question you would like me to answer send it to me!

This week the Fed announced it would guarantee $500 billion in MBSes (mortgage backed securities), essentially guaranteeing the investments in Fannie and Freddie.  This caused a steep drop in rates early in the week, with some give back on Wednesday.  Today, Friday, the market is all over the place because of the holiday weekend and very light trading.  Also boosting the drop in conforming and FHA rates is the pulling back on the “agency/FHA-jumbo” investments ahead of their expiration at the end of December; as I have been announcing and communicating these loans will need to be funded within the next two weeks so lenders can meet their delivery dates to Fannie, Freddie and FHA.

As of today we still do not know what the pricing and structure will be for mortgages over the current loan limits for conforming and FHA and the new limits that will come into effect on January 1, 2009 for high price areas such as Los Angeles and Orange Counties.  While we know we will have loan limits up to $625,000, we do not know if we will have two tiered pricing for loans above $417,000 for conforming and $325,000 but at or below the new limit of $625,000; every lender is waiting for the official announcement of how these loan amounts will be handled.  Rest assured when I know you will as well.

Looking forward we are having industry reports of many problems in the “Hope” and other programs that the agencies have developed to assist homeowners facing foreclosure.  Not surprisingly for huge bureaucratic organizations the idea and desire was way out in front of the policy, then the implementation and then the reality.  As we get further away from the $700 billion bailout package passed in early October we see very little of those funds committed and the markets working themselves out somewhat with very little tapping of the funds; essentially a lot more has been committed than actually spent at this point—which is a great position if we can continue it.

Looking forward you can see from the chart today that rates have been falling since Halloween, the week the Fed funds and discount rates dropped by 0.500% prior to markets opening.  As I indicated that week rates went up on the news and then proceeded to decline.  The downward trend will likely continue into Christmas barring some exceptional economic news, such as inflation roaring into the economy.

You will notice that I have altered the chart, dropping Jumbo all together as it has now been several months since we had “normal” jumbo financing, next week we may see the disappearance of the conforming-jumbo—included today merely for reference as only one of our lenders is quoting that market today.

NOTE PRICING BELOW IS BASED ON 20% DOWN FOR CONFORMING, 3% FOR FHA, FULL DOC, AND FICOS OF 740 AND ABOVE (change from last Friday):

30 year conventional at 1 point 5.375%            ê 0.25%

30 year conforming-jumbo at 1 point 5.625%            ê 0.25%

30 year FHA at 1 point 5.25%                                    ê 0.5%

We had a nice quiet Thanksgiving, just Leslie, the girls and I with plenty of leftovers.  I hope your Thanksgiving was as nice as ours and you had the opportunity to enjoy family and friends.

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.