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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 1.55%, 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 1.25%. 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. more…

Rate Snapshot
Conforming, Jumbo, and FHA rates ended last week at record lows again (see rates below), which makes a two-month streak of record lows. A significant rate spike is not expected in the near future, but it’s also not likely rates will stay this low. Here’s why rates could tick up next week.

How Bond Markets Affect Mortgage Rates
We will see June Retail Sales figures Wednesday, June business inflation figures Thursday, and June consumer inflation Friday. These reports are important, but will likely show continued tame inflation and tentative consumers, which won’t surprise rate markets. more…

How Many Can Refi vs. How Many Qualify
There was a story in the Wall Street Journal wondering “But if rates are so low, why isn’t demand for new loans picking up? For one, most borrowers who could refinance probably did so last year, when rates fell below 5% in March, August, and December. Many borrowers with an incentive to refinance can’t qualify with today’s tougher lending standards or don’t think it’s worth paying the closing costs on a new loan. Credit Suisse estimates that around 61% of all borrowers with a 30-year fixed rate mortgage could lower their mortgage rate by 0.75 percentage point at current rates. But analysts estimate that only 38% of those borrowers could actually qualify at current standards. More borrowers can’t qualify because they don’t have enough equity in their homes, their credit scores have taken a hit, or they’ve seen their income reduced.”

Covered Bonds Rejected By Reform
It is one thing to pass financial reform, and other to actually implement and enforce financial reform. That may be what faces the mortgage industry after the Dodd-Frank (nicknamed “Frank ‘n Dodd”) reform bill passes. Votes on flood insurance and the extension of loans funding under the First Time Home Buyer Tax Credit are due this week. Due to opposition from the Treasury Department, an amendment that would allow covered bonds to get a start in the U.S. mortgage market was blocked (wait a second, didn’t previous Treasury Secretary Hank Paulson advocate for covered bonds during the crisis?). Federal regulators will oversee appraisal management companies that are affiliated with federally insured banks under the Dodd-Frank regulatory reform bill. more…

Rates Benefit on Stock Weakness
The drop in the equity markets yesterday, and possibly again today, certainly helped the flow of funds into “safer” investments – such as Treasuries and MBS’s. But we also had some economic news of note, the first being Pending Home Sales. The index was up 5.3% in March, with sales in the South up 13%, up 2% in the West, up 1% in the Midwest, but fell 3.3% in the Northeast. Second, Factory Orders here in the US were up 1.3% in March. And the Federal Reserve released its “Senior Loan Officer Survey” which showed that banks kept their lending standards tight during the first quarter – no surprise there, huh? There may have been a little movement in commercial and industrial loans to large and medium-size firms.

Greece Bailout Is Like US Needing 10x TARP Funds
Returning to the Greek issue for a moment, some believe that this will be the end of the Euro currency, at least in Greece. Let them print their own currency! The odds of sharp recession have increased, obviously, and naysayers are skeptical about any bailout plan based on the recession-stricken Portuguese and Spanish contributing billions of Euros to the cause. We have the ECB adopting a pure bailout strategy by accepting all Greek collateral and have seen almost $150 billion in potential economic aid offered to the Greeks. This figure is almost 50% of Greek GDP, and is the equivalent of the United States needing 10x the TARP funds! Greece’s GDP is only about 2% of US GDP and slightly less than that of Eurozone GDP, and one analyst likened it to Ohio going bankrupt and taking the entire US economic system with it. more…

Secondary Mortgage Market Returning
I am continuing to see signs that the mortgage market is coming back somewhat. Not so much that guidelines are loosening, which they aren’t, and in fact documentation requirements continue to increase, but more in the secondary markets. This was demonstrated yesterday with the news that Redwood Trust will be coming out with a $222 million private-label mortgage security. (The loans are not guaranteed by Fannie Mae, Freddie Mac or any other government-related entity.) Recent deals sold older loans; these are new creampuff loans, arguably exactly what we need, with the offering’s lead manager being Citigroup and the co-manager being JPMorgan. The bonds are backed by 225 loans, mostly jumbo 5/1 ARM’s, originated by Citigroup Inc. over the past 11 months. CLTV’s are about 60% (none are above 80%), and average credit scores hover around 768 (none have FICO’s below 700). 85% of the loans came through Citi’s retail channel, 10% correspondent, 5% wholesale. Many of them have 10-yr IO periods, almost half are from California, most of them are R&T refi’s, and almost all of them are owner-occupied. The issuer gives a detailed accounting of the extent of verification of income and assets. A REIT is issuing the securities, offering a senior AAA piece but not offering (e.g., retaining) the subordinated tranches – like a covered bond. Here is the link to term sheet.

The U.S.’s New 3-D $100 Bill
Times are tough in the mortgage business, and the last time I saw a $100 bill was a few years back. The U.S. Department of the Treasury, the Board of Governors of the Federal Reserve System and the United States Secret Service unveiled the new design for the $100 note which will be issued on February 10, 2011. The old bills, like the ones my father keeps in his shoeboxes in his closet, are still fine. The new bills will have a “3-D Security Ribbon” and the “Bell in the Inkwell”. (“The blue 3-D Security Ribbon on the front of the new $100 note contains images of bells and 100s that move and change from one to the other as you tilt the note. The Bell in the Inkwell on the front of the note is another new security feature. The bell changes color from copper to green when the note is tilted, an effect that makes it seem to appear and disappear within the copper inkwell.”) more…

Lawmakers Solicit Consumer Comments On 7 Financial & Housing Reform Topics
Do you want some input in financial reform? There are many ways to do this, and here is another. The public will have the opportunity to submit written responses to seven questions that will be published in the federal register online at www.regulations.gov. The administration also plans a series of public forums across the country on housing finance reform. The questions are:

1. How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy? more…

Today’s historic signing of health reform into law by President Obama has overshadowed something else that happened today: Treasury Secretary Tim Geithner testified before the House Financial Services Committee about the future of housing finance, and the fate of Fannie Mae and Freddie Mac—the two government entities that guarantee $5t and 50% of our residential mortgage market. Here’s the link to the full testimony, and below are the excerpts that are most critical, starting with how Fannie and Freddie were taken over by the government in September 2008, and what Geithner proposes as a structure for the future of housing finance.

This is the basic framework for less reliance on Fannie and Freddie in the future, and Geithner points out next steps as follows: Treasury and HUD will submit a list of questions by April 15, 2010 for public comment and will seek responses from a wide variety of constituents, market participants, academic experts, and consumer and community organizations. Then the administration would use that feedback to provide a proposal for housing finance reform to Congress. So it appears this will happen closer to summer but well before the 2010 election. more…

Despite volatility last week that caused rates to move up and down about .2%, we ended the week even. Business and consumer inflation reports both showed that inflation is under control. The Fed reiterated this after their FOMC meeting Tuesday, and left overnight bank-to-bank and Fed-to-bank rates at .25% and .75% respectively.

Rates were especially volatile Friday as mortgage bond traders contented with the threat from Moody’s and Fitch that U.S. debt may lose its AAA rating, and the volatility will continue next week. We’ve got 2, 5 and 7 year Treasury auctions, and while these shorter durations don’t directly compete with mortgage bonds, it’s still more bond supply—too much supply can cause mortgage bonds to sell off which pushes rates up. more…

Denver Pot Club Fun Fact
According to news sources in Denver, where the City Council voted to regulate medical marijuana dispensaries, more applications have been received for licenses for selling pot than there are Starbucks coffee shops in the entire state, 390 versus 208. Fun with numbers…

Mortgage Volume Projections for 2010
There seems to be a disconnect between many smaller mortgage companies’ projections for their own volumes and profit margins for 2010, and the industry-wide projections. Every large investor has production projections that range from $1 trillion to about $1.5 trillion for 2010. The MBAA came out yesterday with a projection that residential mortgage originations will drop 40% this year to the lowest level in a decade: $1.28 trillion down from $2.11 trillion in 2009. They expect purchases to rise slightly to $776 billion from $742 billion in 2009 but expect refinances dropping to $502 billion this year from $1.372 trillion last year. Yet many smaller companies are expecting to increase their production. more…

Goodbye, 2009. Typing “2009″ is so much easier than typing “2010″, but such is life. And folks who are better at using words than I am (“than me”?) say 2010 is pronounced “twenty-ten”, not “two-thousand ten”. Speaking of “2’s” and “1’s”, The U.S. Treasury had a record year of debt sales last year, selling more than $2.1 trillion in bonds and notes, a record and more than the amount in the previous two years combined.

Rates Up on Fewer Jobless Claims, 4yr High For ISM Index
Why are rates where they are? The answer is stronger-than-expected economic news. Well, Thursday morning we learned that Jobless Claims unexpectedly fell by 22,000 to 432,000, which is their lowest level in almost a year and a half. Continuing Claims fell by 57,000. So the thinking goes that “if fewer people are filing jobless claims, the employment picture is starting to look a little rosier, which means that the economy must be doing better…” We also had the ISM Index print its highest level in almost 4 years. more…