Hover over this image for caption and link ↓↓↓

Saw this story on San Francisco Realtor Katy Dinner’s blog today, a WSJ piece I missed which highlights a Fed study about underwater homeowners. According to the Fed, “the median borrower who ’strategically’ defaults doesn’t walk away from the mortgage until the amount owed exceeds the value of the home by 62%.” Below are some other good excerpts from WSJ, the whole piece is worth reading.

Nearly 80% of all defaults in the sample resulted from the traditional combination of income shocks and negative equity. But for borrowers that had a loan-to-value ratio of 150%, half of all defaults were strategic defaults, driven purely by negative equity. more…

Effective June 1, anyone looking to obtain a home purchase or refinance loan will most likely have their credit run twice during the loan process: once in the beginning pre-approval process like normal, and again prior to loan funding. This process will apply to most loan amounts up to $729,750 because of the recently announced Fannie Mae Loan Quality Initiative (see Undisclosed Liabilities Q&A top of page 3), which includes many new quality control measures lenders must follow when underwriting, approving, and funding loans—but this one is the most important to call out for consumers right now.

Why Run Credit Twice?
The purpose of this guideline is to make sure that borrowers didn’t go out and open up new credit accounts while in process of being approved for their home purchase or refinance loan. Borrowers sometimes don’t tell their lenders about their non-mortgage activities, but going forward you should definitely let your lender know of any other credit card, car loan/lease, student loan, business loan, or any other type of credit application you might be processing while obtaining a home loan; you should also inform your lender of any current or planned credit card or other purchases you intend to make during the home loan processing period—if any new credit activity is revealed by this newly-required prior-to-funding credit report, the loan won’t fund because it will have to be re-underwritten and approved with whatever new debts or new credit accounts might show up on the new report. more…

In the past week, we’ve seen promising economic and home price data, but many homeowners are still strained to the point where foreclosure is inevitable—or perhaps “viable” for those deeply underwater homeowners considering strategic defaults. So the often repeated question is: what do late mortgage payments, foreclosures and bankruptcies do to your credit score? A couple weeks ago, Les Christie at CNNMoney did a great job of answering this question, and since the story got a bit lost in the SEC/Goldman Sachs lawsuit hysteria, we just wanted to highlight it again.

Excerpted below are some estimated credit score hits a borrower would take by being late on their mortgage, and eventually going into foreclosure and/or bankruptcy. These are based on models from Fair Isaac, one of the three major credit bureaus … in other words, these aren’t real consumer scores. But it’s still a useful ballpark for debt-strained consumers who need scenarios of what might happen to their credit score. Every profile will be different based on overall credit profile, and the recovery time to get back to a favorable score vary based on credit history prior to the derogatory filings. Derogatory reports remain on the credit scores for 7 years (and in the case of bankruptcy, it’s 7 years from the time of discharge), but if an otherwise top-tier credit score consumer is hit by default, foreclosure or bankruptcy, their score can rebound in less than half that time if they resume a well-maintained credit profile immediately. more…

For the past three weeks, rates have closed market trading days within .25% of record lows. But the intraday rate swings have been dramatic as mortgage bond traders sort through economic data releases.

Case in point: how rate markets reacted to today’s Jobs Report. Stocks rallied and mortgage bonds (that rates are tied to) sold off on the initial reaction to unemployment decreasing from 10% in December to 9.7% in January. But the report also said that actual January job losses of -20k were greater than the 15k new jobs estimates called for, and December’s previously reported -85k job losses was revised up to -150k. Markets seemed to realize this as the trading day continued because stocks went negative and bonds rallied.

All told, mortgage bonds traded in a 68 basis point range today, which caused rates to trade in a .25% to .375% range as lenders issued new rate sheets throughout the day (Sidebar: can we still say “rate sheets” in this online era). more…

A common question among mortgage shoppers is: what if rates get better after I lock a rate for my loan? The answer is that locking a rate is much like buying a stock.

When you choose to buy a stock at a specified price, you’re executing a Limit Order. This means you set the price at which the trade will be executed rather than being subject to the market price at a trade interval.

So if you execute a limit order to buy a stock at $55.00, you own it at $55.00. If the market price declines to $52.50 after you own that stock, you can’t go back to the securities firm and re-purchase those shares at the lower price. You could elect to use some kind of hedging strategy to offset the loss but even then, you’d be incurring more cost to buy more securities to create a hedge. more…

Since sending the WeeklyBasis 2010 Rate Outlook this Monday (as opposed to normal Friday delivery), rates are still holding. See below for current levels as of the end of mortgage bond trading today.

Now onto the critical alert for the week: Homebuyers intending to use FHA loans to finance condo purchases should be advised that FHA condo “Spot Approvals” are going away February 1. A Spot Approval is when a lender can approve and fund a loan on a specific unit in any condo building provided the building meets certain conditions (building is 4 units or greater, 90% of units sold, 51% owner-occupied, no more than 20% commercial space, healthy condo budget, etc.). more…

WeeklyBasis is normally published Fridays, but this Monday report is an exception so I can do an outlook on this first business day of 2010. To summarize, my outlook is for waning Fed support to push rates to about 1% higher, and choppy economic recovery marked by modest GDP growth and minimal employment improvement. Rationale for these positions is below.

Please note that conforming rates are assumed when discussing rates because these are the broadest proxies for how all rate tiers behave. Current conforming, super conforming and jumbo rates are also included at the bottom along with loan amounts designated by each of these categories. more…

There are certain elements of economic analysis that elude or bore many consumers. One of them is the yield curve. But the yield curve is pretty easy to understand and it’s very important for how consumer credit—like credit cards, car loans, mortgages, etc.—is priced. A yield curve is a simple line graph plotting short to long term rates. If short rates are roughly the same as long rates, the yield curve will appear flat, and this usually means there is a lot of uncertainty in the economy. If short rates are significantly lower than long rates, the yield curve will be steep, and this usually means the economy is improving.

There are many iterations of yield curves to plot many different short-to-long cost-of-money relationships but the record steep curve that’s been cited is the relationship between 2yr and 10yr Treasury note yields. Most consumer rates aren’t tied directly to Treasury yields but since these securities are so widely traded, they do provide a good representation of broad economic expectations. And again, a steep yield curve like this Treasury curve contains expectations of an improving economy. more…

RELEVANCE OF FHA LOANS

Q: Are FHA loans even relevant for the San Francisco Bay Area?
A: Yes. In the 9 county San Francisco Bay Area, FHA loan limits are $729,750. With a 3.5% down payment, this translates into a $756,217 home purchase price. So on a condo with $350 HOA dues, all-inclusive pretax monthly costs are $5632 and all-inclusive cash-to-close is $46,172. With a 10% down payment, this translates into a $810,833 home purchase price. So on a single family home, all-inclusive pretax monthly costs are $5405 and all-inclusive cash-to-close is $103,252. Cash-to-close figures include 8mo prepaid taxes and 1yr prepaid insurance. About $145,000 gross annual household is needed to qualify for these scenarios.

OVERVIEW OF FHA LOANS more…

RATE/MARKET UPDATE
This is the sixth consecutive week with rates hovering just above record lows we saw from January to through May 21. That day began a massive mortgage bond selloff caused by bond oversupply concerns. It was the pre-summer kickoff of an unprecedented campaign of Treasury security issuance to raise money for government economic stimulus. When mortgage bonds sell off, bond yields (or rates) rise.

Market sentiment shifted in the past six weeks to be more in favor of Treasury debt since government-backed assets seemed the better bet than the stock market. As we kick off this week, we’ve got yet another record $112b of 2yr, 5yr, and 7yr auctions to absorb. After such a nice run, we may see a shift back to oversupply sentiment for mortgage bond traders. It will depend largely what the Fed says Wednesday after their FOMC meeting. If they say firmly inflation isn’t a threat, bonds and rates should hold their ground. If there’s a signal inflation will be an issue sooner than anticipated, rates will suffer. more…