MortgageHouse.mobi

by Patrick McGee

For a packed week Tuesday is pretty light, but that hasn’t stopped equity futures from dropping sharply lower. Markets in Europe are the likely culprit as Germany’s DAX is down -1.8% and shares in France and London are each 2.2% lower. 

Two hours before the opening bell, Dow futures are looking to open 97.00 points off at 9638, while S&P 500 futures are down 11.75 points at 1027.25.

Meanwhile, WTI Crude has fallen $1.09 to $77.04 per barrel, Spot Gold is trading $0.78 lower at $1058.72, and the US dollar is stronger against most currencies except the yen.

The only major data release today from the US is the factory orders index. In addition, markets will look at the weekly retail sales numbers from the ICSC (7:45) and the Johnson Redbook (9:55).

None of those are too influential, so attention could shift to speculation on medium-term monetary policy, as the FOMC begins its two-day policy meeting today. Chairman Ben Bernanke has already made the headlines this morning thanks to a Bloomberg report that says the Fed hopes to stop its purchases of mortgage-backed securities come March.

“The central bank says it must eventually withdraw its unprecedented economic stimulus to avoid a surge of inflation as a recovery takes hold,” the report said. “Plans to buy $1.25 trillion of housing debt are the centerpiece of its program to pull the nation out of the worst recession since the 1930s.”

Key Events Today: 

10:00 ― The Factory Orders report should advance by 0.8% in September. The durable goods report already posted a 1.0% advance, but the performance from non-durable goods was probably less impressive.

“Factory orders likely rose by 1.0% m-o-m in September following a 0.8% decline in August,” said analysts from Nomura Global Economics. “The report will contain data on inventories of non-durable goods and possibly revisions to capital goods shipments and could thus imply revisions to Q3 GDP growth.”

by Brian Montgomery

In January of this year, both Joe Murin and I were asked by HUD Secretary Donovan to remain as Ginnie Mae president and FHA Commissioner respectively to help the new Administration deal with the on-going housing crisis.  We both were privileged to be asked and were honored to continue serving in the Obama Administration for several more months.

However, today, as a former government official, if I could leave you with one message it would be this: 

There has never been a point in our nation’s history that better illustrates exactly why FHA and Ginnie Mae exist. During these uncertain economic times, their counter-cyclical role of ensuring adequate mortgage activity and liquidity has been necessary and vital.

FHA has saved close to one million sub-prime/Alt-A borrowers from possible financial ruin by allowing them to refinance into a safe and secure 30-year fixed rate mortgage.  Another 2 million qualified borrowers (80% of them first-time homebuyers) have taken advantage of the declining house prices and historically low interest rates to purchase a home using FHA.  FHA’s role has grown substantially from three percent of lending activity by dollar volume in 2006 to nearly 25 percent of all mortgages originated today. That massive uptick in volume occurred almost overnight beginning in spring 2008.

Through it all…. FHA has helped pump more than $400 billion of mortgage activity and liquidity into the market since 2008, while still managing to deliver a higher credit quality borrower whose average FICO score is 700. 

One can only imagine how much worse our economy would be right now without the FHA. However, the growth of FHA in the past 18 months has understandably attracted a lot of attention. While the FHA did not take part in the housing boom, it is feeling its effects. 

As many anticipated, given the current sluggish economy, the FHA is experiencing an increased rate of delinquencies and more foreclosures. 

Simultaneously, as home values fall or just fail to appreciate, the number of homes the FHA insures is rising significantly. In October, this forced HUD to announce that in 2010 the FHA’s reserves could dip below the mandatory 2% level required by Congress.

Reminder: FHA collects premiums from borrowers (revenue) and also pays out claims to lenders when loans go into default and foreclosure (outlays).  

For FHA, the primary reason for continued defaults and foreclosures will be macro-economic problems that go beyond the scope of underwriting. For instance, continued job losses and the further decline of home values and equity.

Absent a massive economic downturn, I don’t believe FHA will face the same type of catastrophic losses we saw in the subprime sector. The reasons for FHA’s problems are very different from the ones experienced in the subprime sector where unsafe loan features and poor underwriting made investing in non-agency mortgages risky from the start.

The FHA has undeniably tightened guidelines in an effort to help ensure a higher loan quality.  Prospective borrowers must verify income and job history as part of a rigorous underwriting process. 

I offer this assurance in an effort to raise your comfort level as to the future of FHA.  FHA must keep its eyes on the ball to make certain that American homeowners and renters are served while American taxpayers are protected.

As a reminder, I offer the following insight about the strategies the FHA is considering to ensure the market remains confident in the FHA’s risk management models:

• Tighten underwriting criteria
• Increase premiums
• Raise the down payment requirements above 3.5%
• Overlay a credit score cut-off

Looking forward it’s important for all of us to continue advocating for reforms that better ensure a vibrant, transparent, and sound mortgage marketplace. Current market conditions highlight the critical role of the private and public sectors in keeping mortgage credit flowing. 

All of us are trying to make sure we are well positioned to continue serving customers as this industry moves through truly tectonic change. I welcome the opportunity to hear about the challenges you face and discuss how all of us are addressing this brave new world of mortgage finance.

by Rob Chrisman

What do Bank USA, National Association of Phoenix; California National Bank of Los Angeles; San Diego National Bank; Pacific National Bank of San Francisco; Park National Bank of Chicago; Community Bank of Lemont, Illinois; North Houston Bank; Madisonville State Bank of Madisonville, Texas; and Citizens National Bank, of Teague, Texas have in common?

Their deposits and assets all became part of US Bancorp after being shut down by the FDIC on Friday. The FDIC and taxpayers (in a roundabout way) are out $2.5 billion. USB, who has not been immune to their stock sliding almost 20% in the last year, has repaid almost $7 billion in TARP money. Friday they added 153 branches with combined assets of $19.4 billion and deposits of $15.4 billion.

And what do Eddie Bauer Holdings and Dunkin’ Donuts have in common? They, along with literally one million other businesses, have both received loans from commercial lender CIT Group. CIT filed for Chapter 11 bankruptcy protection, which analysts say will help bondholders and customers but not stockholders and taxpayers. Apparently we’ve put about $2.33 billion of our money into CIT, which is now the largest firm to go bankrupt after getting a federal bailout. None of CIT’s operating subsidiaries, including Utah-based CIT Bank, were included in the filing, CIT said in a statement.

The US government ended its program of buying Treasury securities on Thursday after hitting the $300 billion mark. In a similar vein, the Bank of Japan will stop buying corporate debt by the end of the year, as there seems to be no further need to prop up those markets. The mortgage-backed market, however, is still reaping the benefits of the US government purchasing those bonds, with several more months to go. Keep in mind that at some point it will end, and the markets know this. Occasionally rates will shoot up for a day, and someone will blame “the eventual ending of the mortgage purchase program”. This makes little sense, as it is well known by investors – but there is hope for an extension if the Fed doesn’t see secondary market interest.

Although we won’t have the numbers for a few days, locks desks picked up their activity late last week. Of course this resulted in some selling pressure on mortgages, although the Fed has been in buying and a few dealers report some bank buying of mortgage-backed securities. It seems like supply is running between $2-5 billion a day, and Fed buying has about matched it.

At the end of last week most eyes were on the stock market, which, on Thursday, had its largest increase in three months, but then had its largest decrease in four months on Friday. The Chicago Purchasing Manager’s survey hit a 13 month high and beat expectations, but the University of Michigan Consumer Sentiment survey dropped from 73.5 to 70.6.

We have yet another full slate of economic news this week. We begin slowly with “second tier” numbers like Construction Spending and the ISM Index today and Factory Orders tomorrow. Thursday we have the ISM services number, along with the Employment Cost Index and Jobless Claims. The biggest economic event this week will either be the Fed meeting on Wednesday or the unemployment data on Friday.  So although overnight rates, which don’t directly impact mortgage rates, should stay put, the Fed may indicate future changes in monetary policy. Nonfarm Payroll is expected to drop 165K jobs for October. In addition, the ISM Manufacturing index and Pending Home Sales will come out today. ISM Services will be released on Wednesday. Productivity, Construction Spending, and Factory Orders will round out the busy schedule. The Treasury will announce the size of upcoming auctions on Wednesday as well. Ahead of all that the 10-yr is at 3.41% and mortgages are worse by about .125.

A story came out saying that “The National Association of Realtors thanked Congress for speedy action in passing a congressional resolution…that would extend the current higher Fannie Mae, Freddie Mac and FHA loan limits through 2010. The present loan limits would expire at the end of 2009 and revert to previous lower limits.” The resolution is not a law – it would extend the present conventional loan limits for Fannie and Freddie through the 2010 calendar year at 125 percent of local median home sales prices, up to a maximum of $729,750 in high-cost areas. This legislation was approved by both the House and Senate late last week that extends the higher loan limits currently in place for agency mortgages. The higher loan limit measure was attached to a budget and appropriations bill that was approved by the House with a vote of 247-178 and passed by the Senate just hours later, 72-28.

Although there is widespread support in Congress for extending the life of a home-buyer tax credit scheduled to expire at the end of this month, there is nothing to report. Hopefully the entire industry doesn’t hinge on the result, but an extension is expected soon. Congress still hasn’t finished work on the legislation. As many who have survived because of it know, the credit amount is 10% of a home’s purchase price, with a maximum of $8,000 for a single taxpayer and a married couple filing a joint return. Eligible taxpayers will get the credit even if they don’t owe any tax, or if the credit is more than the tax they owe for 2008 or 2009.
I had not heard of “Financial Mortgage USA Inc.” until the U.S. Department of Housing and Urban Development took action against this reverse mortgage lender in Hawaii. “HUD’s Mortgagee Review Board wants to permanently withdraw the HUD/Federal Housing Administration approval of Financial Mortgage USA Inc.” after the company failed to implement an FHA-required quality control plan and separate its lending operations from those of its affiliated insurance company. But now, supposedly, their phones don’t work…

On Friday I mentioned some changes that “US Bank” was making in their “declining markets” LTV’s and states. I was reminded that US Bank has two different divisions, and that US Bank Home Mortgage made the changes. U.S. Bank Consumer Finance, Mortgage Wholesale Division, handles mostly portfolio product, as opposed to USBHM which is focused on conforming/agency product. USB’s Consumer Finance group has the states divided into three tiers, with Tier One has a 75% cap on LTV (CA, NV, AZ, FL, UT, OR, WV, DC, and HI), Tier Two has a 80% cap on LTV for 2nd position, 85% cap on everything else, except first position refinance can still go to 90% (ID, IL, MI, NJ, NM, RI, and WA), and then “Non Tier” states have an 85% cap on LTV (all lien positions) except first position refinance can still go to 90% LTV. I apologize for any confusion.

GMAC came out with some FHA & VA news late last week. “Regardless of AUS decision, the minimum FICO is 640 for purchases and refinances and IRRRL’s” along with credit qualifying streamline refinances. The following are no longer eligible:

• Non credit qualifying streamline refinances including transactions with or without an appraisal
• Manufactured homes
• Non-traditional credit – is defined as a credit history having no established traditional credit trade lines or minimal established traditional trade lines that are not sufficient to generate a FICO score.
• All loans with a credit score must meet the minimum score of 640.”

November 3rd is the date these updates take effect.
A guy walks into a bar with a dog. The bartender says, “We don’t allow dogs in here.”

The guy replies, “Wait a minute. This is a talking dog. If I can get him to answer a question, can I get a free drink?”

The bartender thinks for a minute and says, “Well, ok. Go ahead.”

“Okay, Rex,” the guys says to the dog, “what’s on the top of a house?”

“Roof!” the dog replies.

“Oh, come on…” the bartender responds. “All dogs go ‘roof’.”

“No, wait,” the guy says. He asks the dog “what does sandpaper feel like?”

“Rough!” the dog answers.

The bartender gives a condescending blank stare. He is losing his patience.

“No, hang on,” the guy says. “This one will amaze you.”

He turns and asks the dog, “Who, in your opinion, was the greatest baseball player of all time?”

“Ruth!” goes the dog.

With that the bartender, having seen enough, boots them out of his bar and onto the street.

And the dog turns to the guy and says, “Maybe I shoulda said DiMaggio?”

Last week ended on positive note for mortgage backed securities and mortgage rates. As stock indexes fell, market participants re-allocated portfolios from risky assets to safer investments, resulting in added demand for government AAA rated fixed income securities. The benchmark 10 yr Treasury note moved back under 3.40% and MBS closed near their best levels in the past few weeks.  Most lenders repriced for the better.

This morning we had a several economic reports hit the news wires.  First out was a read on the manufacturing sector with the ISM Manufacturing Index.   The Institute for Supply Management surveys more than 300 manufacturering executives across the country on the strength of business conditions.   Readings above 50 indicate expansion while readings below 50 indicate contraction.    Since March of this year this report has consistently shown conditions improving with August’s report moving above 50 for the first time since January 2008. Today’s report indicates continued growth in the manufacturing sector, with a higher than expected reading of 55.7.

Next, the U.S. Department of Commerce released the monthly construction spending report which simply gives us a reading on whether construction spending increased or decreased. Construction spending for September (2 month lag) came in higher than expected, posting a monthly increase of 0.8% vs a 0.2% decline.   Offsetting this positive report was last month’s numbers were revised much worse from an initially reported 0.8% gain to a 0.1% decline.  Increased spending on construction should lead to additional construction jobs giving consumers more income that can be spent into the economy.  Secondly, when a new building, residential or non residential, is completed there are many items that need to be purchased such as flooring, window treatments and furniture.  This increased spending could lead to higher corporate profits, so the stock market likes to see stable growth in construction.