THE BASIS POINT

FHA Mortgage Insurance Hike Oct. 4, Fannie’s Negative Net Worth, Treasury Stance On Underwater Refis

 

FHA Mortgage Insurance Increasing October 4
FHA mortgage insurance will be increasing as of October 4, 2010 because the FHA insurance pool only has $3.5 billion in cash and Treasury securities left in its “capital reserve account” The money sitting in the CRA represents a 71% decline in just the last three months. The Mutual Mortgage Insurance Fund (MMIF) capital ratio has fallen below its statutorily mandated threshold. On the good news side of the ledger, from October through June the FHA had 19,310 fewer insurance claims on loans gone bad and paid $3.7 billion less than projected by the audit, perhaps due to solid foreclosure efforts although some feel that this is only because some states are experiencing a backlog in processing foreclosures.

Under HR 5981, FHA plans to adjust its annual mortgage insurance premium (effective with any new loans October 4) from .55% to .9%, yielding approximately $300 million per month in value to the FHA Mutual Mortgage Insurance Fund at a time when its reserves are perilously low. To offset this, FHA will lower its upfront premium from 2.25% to 1%. This will be effective for 30yr fixed loans. As you can guess, mortgage insurance companies are pleased with this news, since annual FHA premiums will be closer to annual PMI premiums and that could encourage lenders and borrowers to turn to non-FHA products for more mortgages. Borrowers currently shopping for FHA loans should revisit their strategy with their lender given this new news.

Treasury Won’t Increase Underwater Refi Stimulus
The rumor regarding a massive government-sponsored refinancing of over $1 trillion in loans continued to play in the market until it was shut down by a US Treasury official Thursday. The conjecturing, helped along by Jim Pethokoukis’ Reuters blog, spooked the market for high-coupon loans (at this point, anything 5.25% and above), and could certainly be construed as a political gambit. Investors, of course, are counting on that high yield for a few years, so a made-up threat of a huge refinance drove prices down by almost .5 in some areas. The loans that have not refinanced may not, so the risk in owning such high dollar price MBS’s is headline risk like this. “The administration is not considering a change in policy in this area,” said Treasury spokesman Andrew Williams.

Fannie Mae Negative $1.4b Net Worth
What is not a rumor, unfortunately, is Fannie Mae losing $1.2 billion in the 2nd quarter, and asking the U.S. Treasury Department for another $1.5 billion to stay afloat. At this point, are we supposed to say, “No.”? Optimists are quick to point out that this loss is much better than the nearly $15 billion Fannie lost in the same period a year ago. Regardless, this leaves Fannie with a negative net worth of $1.4 billion at the end of June. The company’s regulator, the Federal Housing Finance Agency, asked for $1.5 billion from the Treasury to eliminate the deficit and so the Treasury will buy another chunk of senior preferred stock from Fannie and bring its equity up to about $86 billion. Credit-related costs, which include provisions for loan losses, provisions for losses on loan guarantees and foreclosed property expenses, were $4.9 billion in the most recent quarter. That’s down from $18.8 billion in the second quarter of 2009, Fannie said.

Low Rates Lead To First 3.5% Mortgage Bond Coupon
A new coupon has been created: the Fannie or Freddie 3.5% MBS. Think of it as a bucket for 3.75%-4.125% loans.) Rates have not been this low before, so there was no need for the bucket/MBS coupon. But like someone feeling around in a dark room and not wanting to stub their toe, MBS traders and originators are being very tentative about trading this new 3.5% coupon. Most small and mid-sized mortgage banks are pricing hefty margins into these low note rates and selling this low coupon production on a best efforts basis, letting an accumulator such as Wells or BofA handle the risk. In this uncharted area, liquidity is critical, and the volume of bonds being bought and sold is being carefully watched as acceptance slowly grows.

Mortgage Bond Flows This Week
$2.4 billion flowed into the MBS market yesterday, with the lion’s share being 4% securities. (The 10-yr was up almost .5 in price and the yield closed at 2.91%, the 5-yr Treasury was better by almost .25 which was the same for mortgages.) Of particular interest to investors, however, was the release of the Fannie Mae prepayment speeds, since maintaining cash flows is important if an investor is going to pay a premium for a pool of mortgages. Overall early pay-offs were about as expected, but the recent lower-coupon production has seen a trend of paying off slightly earlier than had been hoped, which is causing some nervousness out there. That being said, lenders know that refinance volumes might be constrained by pricing in order to keep volumes manageable, so that there is a backlog of business out there – which causes even more nervousness among investors since prepays might pick up steam.

Jobs Report Influence On Fed/Markets
Today we had “the big employment number”, certain to influence the Fed’s meeting next week. The pace of the economic recovery continues to rely on private-sector employment growth, which is a problem since in the last 7 months the private sector added only 593,000 jobs. The ADP survey indicates that small firms (1-49 workers) represent about 45% of the level of employment, but accounted for only 16% of the increase in employment over the past five months. And Initial jobless claims have now fallen in three of the last four weeks, but remain stubbornly around 450,000 – weak.

Prior to this morning’s number, interest rates were about unchanged. The data was weak, pushing the dollar and the stock markets down, but has helped interest rates. Nonfarm payroll was -131k for July, with private sector jobs increasing 71k. The headline unemployment rate was at 9.5%, unchanged from June, and Hourly Earnings were +.2%. The yield on the 10-yr has moved down to 2.89% and mortgage security pricing appears to be better by at least .250 – we’ll see if investors pass that onto their rate sheets.

Daily Humor
Boudreaux, a good old boy from South East Louisiana, while not a brilliant scholar, was a gifted portrait artist. His fame grew, and soon people from all over the country were coming to South Louisiana to have portraits done. “Dah boy could paint dat stuff!” they’d say, and it looked good too!

One day, a stretch limo pulled up to his house. Inside the car was a beautiful woman, and she asked Boudreaux if he would paint her in the nude. This was the first time anyone had made this request of Boudreaux. The woman said money was no object; she was willing to pay $50,000.

Not wanting to get into trouble with his wife, Boudreaux asked the woman to wait while he went in the house and conferred with Clotille, his missus. In a few minutes, he returned and said to the lady, “I can do dat, ain’t no big thang. I’ll paint ya in da nude, but I gotta leave my socks on………. so I’ll have a place to wipe my brushes.”

 

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