From NMN:

WASHINGTON-It was well known inside HUD that a special program where nonprofit housing groups arranged downpayments for low-income homebuyers was bad news for the Federal Housing Administration mortgage insurance fund. Department of Housing and Urban Development officials tried to stop the seller-funded downpayment assistance program several times over the past decade – only to be blocked by the courts or supporters in Congress.

The homebuyer assistance program allowed sellers to fund the downpayment and then turn around and inflate the home price to recoup the expense. The seller also paid a fee to the nonprofit for qualifying buyers and arranging the transactions. HUD saw it as a scam, though the DPA providers denied it.

It was well documented that DPA buyers generally paid too much for the properties and ended up in high LTV loans that were generally three times more likely to default than other FHA single-family loans.

And default they did. The latest FHA actuarial report calculates the damage the seller-funded downpayment program inflicted on the FHA Mutual Mortgage Insurance Fund with startling findings. If the government had never endorsed SFDP loans, the economic value of the fund would be $13.2 billion as of Sept. 30 – instead of $3.6 billion – a difference of almost $10 billion. In other words, FHA would be in much stronger financial shape today.

The government began insuring SFDP loans in 1998. Over the years the program grew steadily, accounting for nearly 20% of coverage from fiscal 2004 through fiscal 2008.

Congress finally banned seller-funded downpayments and FHA stopped insuring the loans on Oct. 1, 2008.

“On the positive side, following the elimination of this type of high-risk loan … the performance of the FY 2009 and future FHA books of business will be much improved over what would have been the case if these loans were still being endorsed in significant amounts,” the actuarial report says.

The actuarial report also points out that credit scores on FHA single-family loans have improved recently. The average FICO score in September hit 689, up 10% from September 2007.

Lenders originated a record $328 billion in FHA loans in FY 2009 and 44% of the loans have FICO scores above 680 and only 13% have FICO scores below 620, generally considered subprime. In FY 2007, when FHA endorsements totaled $55.5 billion, only 19% of the loans had FICO scores above 680 and 47% of the loans had FICO scores below 620.

“The improved credit quality of FHA’s recent originations debunks the myth that FHA is being overrun by subprime loans,” said Brian Chappelle, a mortgage banking consultant in Washington. The founding partner of Potomac Partners noted that loans with FICO scores above 680 perform four times better than loans with FICO scores below 620.

FHA still has $30.7 billion in reserves (and set-asides of $27.1 billion) – but that’s after auditors made a $4.9 billion positive adjustment in recognition of the improved credit quality for FHA’s current originations.

“No one can dispute that FHA defaults are increasing. However, the cause is the worst housing market since the Great Depression and not that FHA is insuring poor quality loans,” said Mr. Chappelle.

WASHINGTON, DC — Fannie Mae (FNM/NYSE) today announced that the company has launched several initiatives supporting neighborhood stabilization and promoting home purchases by owner occupants and buyers qualifying for public entity housing programs.

To provide owner occupants and public entities an advantage in purchasing Fannie Mae-owned foreclosed properties, the company has created the First Look initiative.

With First Look, only offers from owner occupants and buyers using public funds are considered during the first 15 days a property is on the market.

Offers from investors will be considered only after the first 15 days have passed.

“First Look provides owner occupants and public entities that are committed to the community an early opportunity to purchase one of Fannie Mae’s Real Estate Owned properties,” said Terry Edwards, Executive Vice President for Credit Portfolio Management at Fannie Mae. “As a result, we believe First Look will help us make progress toward stabilizing neighborhoods and building stronger communities in this difficult market.”

In addition to First Look, buyers using Neighborhood Stabilization Program (NSP) funds from the U.S. Department of Housing and Urban Development’s (HUD) Community Development Block Grant (CDBG) program, HOME Investment Partnerships Program funds from HUD, local housing trust funds, or charitable foundation funds may also qualify for the following benefits:

• Deposit Waivers – Fannie Mae will waive the earnest money/deposit requirement for public entities using public funds to purchase a Fannie Mae-owned property. Individual homebuyers who have qualified for public funds and want to purchase a Fannie Mae-owned property do not have to meet the usual earnest money/deposit requirement. Deposits for these buyers can be as low as $500.
• Reserved Contract Period – Upon receipt of an acceptable offer, buyers have the ability to renegotiate their offer after obtaining an NSP-required appraisal.
• Extra Time for Closing – Buyers receive up to 45 days to close — 15 days more than is usually permitted for purchases of Fannie Mae-owned properties.

Fannie Mae’s First Look initiative was piloted in August and is rolling out across the country. Initial response to the initiative has been positive.

http://www.fanniemae.com/newsreleases/2009/4868.jhtml?p=Media&s=News+Releases

Then what?

Let’s consider what the Fed’s influence has been – are rates artificially low currently?

The historic rule-of-thumb has been that you could count on conforming mortgage rates to be approximately 1.75% above the 10-year treasury yield.  The chart below shows that in recent months we’re about back to the norm:

Friday 10-year yield was 3.356% + 1.75% = 5.106%, which is about where conforming mortgage rates are too, or slightly lower, so the Fed’s help is keeping rates in line with historic spreads. 

Jumbo rates were usually about a half-point above conforming rates.  On Bank of America’s website today, their 30-year fixed jumbo rate is 5.50% with 0.75% points.

When it comes to the mortgage industry, you can predict the future with great certainty.  Once we get into 2010 and the Fed’s MBS pullback is all over the news, lenders will seize the opportunity to bump mortgage rates at least a half-point, if not more, regardless of the ten-year yield.  Look at the history – it’s just like gasoline prices, they prey on the fear created in the headlines.

If conforming rates end up in the 5.5% to 6.5% range, the homebuyers will likely tolerate it, especially if prices ease up a bit.  Throw in the housing tax-credit and buyers will forge ahead during the first four months of 2010.

But who is going to fund these loans without a guaranteed secondary market?

Apparently our usual suspects; B of A, WFB, JPMChase, etc., are willing to fund jumbo loans and keep them in their portfolio today at 5.50% with 20% to 30% down payments.  Wouldn’t they be willing to fund conforming loan amounts with those terms too?  Probably, especially if they could get rates into the mid-6’s without the ten-year yield going up much.

The conspiracists will figure that the Fed will be back-door funding a portion of the business anyway, backstopping the whole business all along.

Would there be a market for MBS yields around 6%?  

I’m not sure, but I wouldn’t be surprised if Angelo’s private-label MBS machine gets cranked up again.   But this time they should do it right.

Sell private mortgage-backed securities on Wall Street or elsewhere with full transparency.  Pool the loans with identical terms, and rank/rate accordingly.  

Would there be investors interested in buying a  batch of mortgages that had 20% down payments, full-doc qualifying and FICOs over 720 if they could get a yield in the high-5-percent range?  Let’s break them up into safer 30% and 40% down payments, for a slightly lower yield.

What do you think mortgage rates would need to be to attract an ample pool of investors?

The 30-year fixed-rate mortgage averaged 5.32% for the week ended Thursday, down from last week’s 5.42% average and 6.35% a year ago.

Bank of America’s 30-year jumbo fixed rate today was 5.625% with a point.  They have been pretty aggressive on rates, and ended up ranking as the #1 jumbo lender for the first quarter:

Lenders are still looking for full documentation on the 30-year jumbos.  There are a few brokers that mention easy-qual loans being available, but rates would be higher, and offered only on short-term interest-only terms too.

WASHINGTON — Rates on 30-year mortgages dipped this week after rising a week earlier and remain just above record lows.

Mortgage finance giant Freddie Mac said Thursday that average rates on 30-year fixed-rate mortgages fell to 4.82% this week, down from an average of 4.87% last week. Rates have been below 5% for five consecutive weeks.

The all-time low of 4.78% was recorded the week of April 2.  (Freddie’s records go back to 1971)

The rates do not include add-on fees known as points. The nationwide fee averaged 0.6 point last week for all mortgages in Freddie Mac’s survey except for one-year adjustable mortgages, which had an average fee of 0.7 point.

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We’re still waiting on the “super-conforming” loans to be offered.  Though they’ve been advertised on Fannie and Freddie’s website since February, none of the local lenders are offering it yet.

By May 1st, we should start seeing lenders offering loans up to $697,500 at rates that are roughly 1/8% to 1/4% over the conforming rates, which puts them around 5.0% if rates stay where they are today, with a cost of 1.0 to 1.5 points (1% to 1.5% of loan amount).

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W.C. asked about jumbos.

Surveying the websites of major lenders, and speaking with local mortgage originators found that 30-year fixed-rate jumbos up to $1,500,000 are readily available. 

There were multiple lenders offering rates of 5.75% and 5.875%, and charging 1.125 points.

They are requiring at least a 25% down payment, and your full-doc loan application needs to be “golden”.

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Coming Monday…Shadow Inventory Counts By Zip Code.

http://www3.signonsandiego.com/stories/2009/mar/22/lz1h22harn184154-bank-america-start-financing-jumb/?uniontrib

An excerpt:

Major banks are heading into the jumbo segment, originating big loans at affordable rates – not for Wall Street bond traders but for their own investment portfolios. Bank of America, the country’s largest mortgage lender, is rolling out a large program to finance jumbo loans between roughly $730,000 and $1.5 million, with fixed 30-year rates starting in the upper 5 percent range. The loans will be available through the bank’s retail network and also through its Countrywide Home Loans subsidiary. After April 27, Countrywide will be rebranded – shedding the name it’s had since 1969 – and morph into Bank of America Home Loans. Bank of America acquired Countrywide in 2008.

Though it will almost immediately become the biggest player in the jumbo loan segment, Bank of America will not be alone. With little fanfare, other financial institutions have become more active.

For example, ING Group, an Amsterdam-based banking and insurance conglomerate, offers jumbos as large as $2 million through its online ING Direct unit. The minimum down payment for an ING Direct jumbo is 25 percent; Bank of America quotes a minimum 20 percent.

ING’s jumbos typically are “5/1” and “7/1” hybrids with a fixed interest rate for the first five or seven years, followed by an adjustable rate tied to the LIBOR interbank index for the balance of the 30-year term. Current rates start around 5 percent.

Bank of America’s new program requires hefty liquid resources – six months of principal, interest, property tax and insurance payments in reserve – plus fully documented income, solid credit scores, and a full appraisal.

The Fannie/Freddie websites noted the change a couple of weeks ago.

But have you seen any lenders funding super-conforming loans to $697,500?

Me neither, and no word as to when they might be available.  Think lenders are just too busy to get around to it?  One of them could break out and capture a niche in the marketplace, and if Fannie/Freddie are buying, how risky could it be?

Apparently he and others have decided that their job is now to beg the government for handouts.  He might get his government-sponsored lower mortgage rates, but do we need them?

I don’t think we do – I can live with 5.5% to 6% rates. 

If Larry really wanted to have some direct impact on solving real problems, he’d be saying something about the jumbo financing – that’s where the trouble is brewing. 

At least that’s what I thought before running the January numbers – here’s a preview of January’s closed sales of detached and attached homes in San Diego County, split into three categories; under $300,000, $300,000 to $600,000, and over $600,000:

(click on graph for clearer view)

The lower-end has been on fire lately, with sales under $300,000 almost tripling compared to January 2008’s number.  Sales above $600,000 have continued their descent.

But an interesting uptick on the higher-end cost per square foot.  I’m not sure exactly what to make of this, other than what’s selling are the most superior of the superior homes.

People with money are holding out for the very best, and though we may see the $-per-sf number somehow suffer along, the higher-end sales will be crippled without any change in the jumbo financing. 

Larry, can you do something for us there?  Can you pitch for the government to open up Fannie and Freddie to all loan amounts?

I understand that Freddie/Fannie will only allow 10% of portfolios to include high balance loans.  If they exceed more than 10% then Freddie/Fannie will impose this fee.  Thus, GMAC was really aggressive for a while with the high balance and now more aggressive with regular conforming.
 
Each lender is different and depends what they have going on with the portfolios they are currently trying to sell to Fannie and Freddie.  This fee may be around for a while as many high balance loans have been registered and/or locked.
 
Thus, you can explain to your borrowers that it is a function of the secondary market and at this time the marketplace is saturated with high balance loans at this time.  So much fun.

“High-balance” loans are the super-conforming mortgages – those between $417,000 and $546,250 in San Diego County.  

The lenders that have more than 10% of the super-conforming loans in their portfolio being sold to Fannie/Freddie have to charge an extra 2 points on any additional super-conforming mortgages.  This will cause lenders to very carefully monitor how many super-conforming loans they generate.

Not only will this temper the availability of super-conforming loans, it’s going to drive borrowers away from banks and to mortgage brokers who can shop around to find the lenders who have openings.

Economic stimulus legislation passed into law last year temporarily lifted the loan limits to nearly $730,000 from $417,000 through the end of 2008. The limits dropped to $625,500 from $729,750 on January 1.  

Rep. Gary Miller, Republican of California, introduced legislation Thursday to reinstate the higher limits, arguing the move was crucial for restoring the affordability of mortgages in some regions of the country and stabilizing the housing market.   “As the crisis in housing markets continues, the availability of affordable mortgage loans remains essential to alleviating the credit crunch and stabilizing the U.S
(Dow Jones Newswires 07:36 AM ET 01/16/2009)

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Higher loan limits would make a difference around here, because mortgages are already getting more expensive. 

Check this announcement which came out today from wholesale mortgage banker metlifehomeloans, increasing the cost by two points for loans between $417,000 and $546,250 – will other lenders follow?

“Effective Tuesday January 20th, 2009 we will have a 2.00 add to price for ALL Conforming Plus products.  FHA loans with loan amount >$417,000 will also see a 2.00 add to price.  If you have a Conforming Plus loan and need to lock it you must do it by 5:00PM tonight or be subject to market pricing on Tuesday the 20th.”