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.

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.