bubbleinfo.com

Commentary on today’s MBS market, written by Adam at the MDN:

We were forced to sit in on another slaughtering today. It didn’t start that way but by 5pm the 10 yr note had totally shed all gains, gone red, and broken two or three more support levels on its way up to 3.538%. The FNCL 4.0 MBS coupon actually revisited the 96 handle in after hours trading. April was the last time 4.0s saw the 96s. Lenders repriced for the worse.Lenders repriced for the worse again. The best execution 30-year fixed mortgage rate is now 5.00%

WTF?

Lots of explanations out there. Not much of a consensus on the actual cause of this mess though. Everybody seems to be grinding a different axe or taking another angle.

Onlookers attempt to rationalize but always end up wrapped in a web of conflicting conclusions. Me included. We have so much on our plate. How could anyone make sense of it all?

Tax cut extensions. QEII. Inflation. Deflation. Reflation. Disinflation. Weak dollars. Strong exports. More Jobs. Strong dollars. Weak exports.Fewer Jobs. Investments in productivity. Faster factories. Fewer Jobs! Super high savings rate. Seasonal spending sprees. Temporary hiring? Long term unemployed!?Lazy labor force. Lower wage rate.  Private payrolls growth. WAGE RATE GROWTH. Aggregate demand. Foreign investor demand. European states. State and local governments. Budget Deficits. Credit Ratings…………..currency crisis…..NORTH KOREA…IRAN….CHINA……2012. BOOM.

And I didn’t even mention housing or financial reform or the assorted entitlements that may or may not lead to the downfall of the greatest country in the world.

SEEMS LIKE IT MIGHT BE HARD TO WRITE AN ECONOMIC FORECAST WITH ALL THAT TO CONSIDER AT ONCE RIGHT?

And Then. To make matters worse. This is all being digested in a trading environment that is primed for price volatility. Allowing for an easy misinterpretation of the market’s exaggerated momentum which in the process has drawn more onlookers who are attempting to explain which leads to more ambiguity which takes us full circle on what I am calling the “UNCERTAINTY PREMIUM”. <—There it is. The root cause under the recent spike in rates. (SELL IN DECEMBER BUY IT BACK IN JANUARY?)

The market is really just glad to be getting out of 2010 with profits on the book and no FBI on its back. And unfortunately the buyers we need to get this sell off moving in the opposite direction are clearly sitting on their wallets….watching as fast$ day traders commoditize the benchmarks that dictate the directionality of our mortgage rates….which has sadly led to an incredulous amount of snowball selling (remember the relentless rise in oil prices during the summer of 2007? the current herding behavior of the TSY market is very similar)

All this nonsense certainly makes you wonder about the sudden shift in economic outlooks we keep hearing about though. Especially when you stop to consider that all economic outlooks are essentially incomplete  because at least one of the underlying assumptions in every model is pushing the boundaries of “guesstimating”. Leaving much room for a wider margin of error. Or as the Federal Reserve puts it, “Participants continued to attach an unusually high degree of uncertainty to their projections”.

So Yeh. The “uncertainty premium”. And yes I think this sell off has been exaggerated. No I do not know when momentum will turn for the better. But if I had to venture a guess it would probably revolve around the release of the December Employment Situation Report on Friday January 7th, 2011.

From HW:

The Federal Housing Administration released approved loan limits on mortgages it would insure in 2011, leaving the ceiling unchanged at $729,750.

The Economic Stimulus Act of 2008 and the Housing and Economic Recovery Act of 2008 raised the FHA loan-limit ceiling to help stabilize a shaky housing market. The national floor remains unchanged as well at $271,050.

The limits apply to all mortgages originated between Jan. 1, 2011, and Sept. 30, 2011, or the fiscal year for the FHA.

With the mortgage insurance industry still in recovery mode, the FHA has seen its share of the market swell. In 2010, the FHA insured $319 billion in single-family mortgages, 40% of all purchase mortgages in 2010.

Some areas of Alaska, Hawaii, Guam and the Virgin Islands receive special exceptions to account for higher costs of construction. The FHA set the ceiling in these areas at $1,094,625 for 2011.

The FHA kept its loan limit unchanged for the Home Equity Conversion Mortgage program, or reverse mortgages. It remained at $625,500 even in special exception areas.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

FHA Gifts

Buyers can still receive a gift for their down payment and closing costs:

Mortgage rates spiked up in the last two days, here’s an excerpt from Adam at MND:

Tensions remain high in the primary mortgage market as mortgage rates have extended their losing streak.  We’re in a tough spot here…

The best conventional/FHA/VA 30 year fixed mortgage rates have risen into the 4.25% to 4.50% range for well-qualified borrowers.  The best conventional/FHA/VA  15 year fixed mortgage rates have risen into a range between 3.500% and 3.875%.

This liquidation of long trading positions is a necessary evil in the recovery process. That cleansing process was once again evident today in the bond market and it might continue to play out over the next few days, but once it’s washed out, I think we’ll at least see 4.25% no cost loans on the board again. When that occurs we’ll revisit the notion of mortgage rates moving back below 4.00% again…until then we’re stuck in a waiting game…

What’s the difference?  Here are the P&I payments for a 30-year mortgage:

Regardless of the situation, homebuyers always have the option to buy down their interest rate – and the seller can contribute too.  But if you think that you can comfortably afford your mortgage payment at 4%, but the thought of 5% is unaffordable, you should re-evaluate your house-buying plans.  Homeownership is expensive - there are repairs, improvements, utilities, furniture, etc. to consider, and if a couple of hundred dollars per month can make or break you, then proceed with extreme caution.

Will home prices come down if rates go up? Only with regards to the long-term trend. Sellers are already extremely resistant to lowering their price, and if you find the perfect house, don’t be surprised if the competition from other buyers erodes your ability to get a discount.

Here is a report on the seller-assisted down payments, where the seller donates an amount of money (equal to the buyer’s down payment) to a “non-profit entity”, who then gifts it to the borrower. 

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.

Nov. 24, 2009

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

So the government says that they are going to stop buying mortgage-backed securities sometime inthe first quarter of 2010. 

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?

An update on mortgage rates – they are staying in a tolerable range, so far.

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.

From the Associated Press

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.

***************************************************************************************

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).

***************************************************************************************

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”.

***************************************************************************************

Coming Monday…Shadow Inventory Counts By Zip Code.

Lenders are getting back into the jumbo-loan market.  From the U-T:

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 recent bailout legislation included raising the super-conforming loan limits back to where they were last year – $697,500 in San Diego County.

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?