FED: MBS Purchase Program To Begin In January

Release Date: December 30, 2008

For immediate release

The Federal Reserve on Tuesday announced that it expects to begin operations in early January under the previously announced program to purchase mortgage-backed securities (MBS) and that it has selected private investment managers to act as its agents in implementing the program.

Under the MBS purchase program, the Federal Reserve will purchase MBS backed by Fannie Mae, Freddie Mac, and Ginnie Mae; the program is being established to support the mortgage and housing markets and to foster improved conditions in financial markets more generally.

Further information regarding the structure and operation of the MBS purchase program is provided in the attached set of Frequently Asked Questions (FAQs).

Frequently asked questions

Effective December 30, 2008

General

What is the policy objective of the Federal Reserve’s program to purchase agency mortgage-backed securities?
The goal of the program is to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally.

Why is it necessary for the Federal Reserve to transact in the agency MBS market via external investment managers?
The operational and financial characteristics of MBS purchases are significantly more complicated than those associated with the assets that have traditionally been purchased by the Federal Reserve. The Federal Reserve has chosen external investment managers as a means of implementing the MBS program quickly and efficiently while at the same time minimizing operational and financial risks.

Because of the size and complexity of the agency MBS program, a competitive request for proposal (RFP) process was employed to select four investment managers and a custodian. The investment managers are BlackRock Inc., Goldman Sachs Asset Management, PIMCO and Wellington Management Company, LLP. The selection criteria were based on the institution’s operational capacity, size, overall experience in the MBS market and a competitive fee structure. The contract for a custodian is not yet final.

What securities are eligible for purchase under the program?
Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible assets for the program. The program includes, but is not limited to, 30-year, 20-year and 15-year securities of these issuers. The program does not include CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents. Eligible assets may be purchased or sold in specified pools, in “to be announced” (TBA) transactions, and in the dollar roll market.

What is the investment strategy that will be employed?
Investment managers will employ a passive buy and hold investment strategy in accordance with investment guidelines prescribed by the Federal Reserve. Purchases will be guided by commonly referenced market indices. The agency MBS program will involve the outright purchase of up to $500 billion in agency MBS by the investment managers on behalf of the Federal Reserve by the end of the second quarter of 2009. The New York Fed will adjust the pace of its purchases based on input from the investment managers about market conditions and the impact of the program. The investment managers will be required to purchase securities frequently and to disclose the Federal Reserve as principal.

The investment strategy may involve the use of dollar rolls as a supplemental tool to smooth market supply and demand. A dollar roll is a transaction involving the sale of agency MBS for delivery in the current month and the simultaneous agreement to repurchase substantially similar (although not the same) securities on a specified future date.

Does the agency MBS program expose the Federal Reserve to increased risk of losses?
Assets purchased under this program are fully guaranteed as to principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae, so the Federal Reserve's exposure to the credit risk of the underlying mortgages is minimal. The market valuation of agency MBS can fluctuate over time based on the interest rate environment; however, the Federal Reserve's exposure to interest rate risk is mitigated by the conservative, buy and hold investment strategy of the agency MBS purchase program.

When will the purchases begin?
Purchases are expected to begin in early January, 2009.

Who will the investment managers trade with and who is eligible to sell agency MBS to the Federal Reserve under the program?
Initially, the investment managers will trade only with primary dealers who are eligible to transact directly with the Federal Reserve Bank of New York. Primary dealers are encouraged to submit offers for themselves and for their customers.

Will the agency MBS held by the Federal Reserve through this program be eligible for lending through the Treasury Securities Lending Facility (TSLF) or the daily System Open Market Account (SOMA) securities lending operations conducted by the New York Fed?
There are no plans for the agency MBS held by the SOMA to be available for borrowing through the TSLF or the daily securities lending program.

How will purchases under the agency MBS program be financed?
Purchases will be financed through the creation of additional bank reserves.

What is the legal basis for the agency MBS purchase program?
Purchases of agency MBS in the open market, under the direction of the FOMC, are permitted under section 14(b) of the Federal Reserve Act.

How is the Federal Reserve’s agency MBS purchase program related to the U.S. Treasury’s efforts to purchase agency MBS?
The Federal Reserve’s agency MBS program is separate and distinct from the U.S. Treasury’s program but both programs are aimed at fostering improved conditions in mortgage markets.

How will holdings under the agency MBS program be reported?
Balance sheet items related to the agency MBS purchase program will be reported after settlement occurs on the H.4.1. statistical release titled “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.” There will be an explanatory cover note on the release when the new items appear for the first time. However, these data may be published well after trade execution due to agency MBS settlement conventions. In addition, the New York Fed will publish the SOMA agency MBS activity in more detail on its external website on a weekly basis.

What measures will the Federal Reserve take to ensure that an investment manager implementing the MBS program will not have an unfair advantage relative to other market participants due to the information it receives about the MBS program?
Each investment manager will be required to implement ethical walls that appropriately segregate the investment management team that implements the Federal Reserve’s agency MBS program from other advisory and proprietary trading activities of the firm. The New York Fed will monitor each investment manager’s compliance with this requirement.

Where should questions regarding the MBS purchase program be directed?
Questions regarding the MBS program should be directed to the New York Fed’s Public Affairs department: 212-720-6130.

Find the press release here.

"I Remember When Mortgage Rates Were So Low, That..."

That's how the conversation will begin when you're sitting in your rocking chair, grandkids at your feet, being asked what life was like in 2008/2009. You'll go on to say how you saved X amount of money because you had the foresight to lock in an historically low rate. And they'll be impressed.

Okay, so maybe that won't impress any of the kids. And the story may include recollections of how the stock market dropped 40% that year and World Market filled your inbox with "Up To 75% OFF!" emails.

But here's my point:

30 year fixed mortgage rates are currently in the 5% range, a level that hasn't been seen since 1971, the year Freddie Mac began it's weekly rate survey. It's a once-in-a-generation type of thing.



Of course this doesn't mean you should go out and get a mortgage loan at all costs. No mortgage rate is worth making yourself worse-off. But those who are in the market for a home or anyone who could significantly reduce their current monthly mortgage payment should seriously consider pulling the trigger on a new home loan or refinance. Sure, not everyone can take advantage of these rates - credit issues, no downpayment, NO INCOME. Yet there are many who can, and it's not hard to find out by calling your loan officer.

Yeah, there's a conflict of interest in me saying all this (I'm "talking my book"). After all, I make a living originating mortgage loans. But it doesn't take a rocket scientist to figure out that jumping on these low rates could save you money. And I believe I would be remiss not to inform those around me (clients, readers, etc). In fact, it was a conversation I had on Christmas Eve in St. Louis, MO while visiting family that encouraged me to do this post. While chatting about work life, a friend admitted he didn't follow economic/business news and had no idea what was going on with mortgage rates. There are many I've run into who are in the same boat.

Contact your financial advisor. Talk with one (or several) of the many reputable mortgage professionals here in town. Get quotes and crunch some numbers. Call a local Realtor if you're thinking of buying. And seriously consider making a move if it fits your situation/goals/wants/needs.

Merry Christmas

We wish everyone a happy holiday season and hope all can enjoy the time with your family and friends!

Santa Claus Blog

Fannie/Freddie Friday Links

Freddie Mac: 30-year fixed mortgage rate at 37-year low (MarketWatch.com, 12/18)
"The average rate fell to 5.19% with an average .7 point for the week ending Dec. 18, down from 5.475% last week and 6.124% a year ago."

"... lowest since the survey began in April 1971."

Fast Track Workouts for Delinquent Borrowers with Freddie Mac-Owned Mortgages Underway (MarketWatch.com 12/18)

Fannie Mae, Freddie Mac foreclosures slow-regulator (Reuters.com 12/16)
"Fannie Mae and Freddie Mac, the largest providers of funding for U.S. home mortgages, slowed the pace of foreclosure starts on delinquent loans for the second straight quarter, their regulator said on Tuesday."
"...but loans reinstated by the former's HomeSaver Advance loan program to borrowers jumped to 27,277 last quarter from 16,658 in the second quarter, the FHFA said."

Loan terms can now be modified before you're late (Chicago Tribune 12/19)
"Starting immediately, Fannie Mae—the mortgage giant with an estimated 18 million home loans in its portfolio or in mortgage bond pools it guarantees—will allow borrowers who face imminent financial difficulties to request "early workout" loan alterations, even if they've never been late."

Homeowners Are Rushing To Refinance As Rates Fall (CNBC, 12/18)
I concur.

Yesterday's MBS Action

A chart of yesterday's pricing action in the FNMA 5.0 coupon, from the Mortgage News Daily's MBS blog


Wednesday's movement is from the middle of the chart on (1st half is Tuesday). Traders were on a shopping spree in the morning and rates improved to the best levels we've seen since 2003 (just under 5%). But within 15 minutes the buyers remorse kicked in and prices fell precipitously for the next 2 hours and continued to trade down for the remainder of the day. Our sub-5% rates had come and gone in a blink of an eye.

Some material to chew on:

Paulson Denies Rumored 4.5% Mortgage Rate Plan (Housing Wire, 12/17)

Jim Cramer seems to think we'll see 3.5% rates - Cramer's Stop Trading (Seeking Alpha, 12/16). Then he said on Mad Money (12/17) that "Benjamin Booyah Bernanke" will "take mortgage rates down to 4%, I'm telling you, that's where they're going to go." For those who follow or know of Cramer, a statement like this is no surprise. Jim likes to entertain, he often changes his tune, and he has quite a few critics.

And even with the FED buying MBS, not all lenders are able to meet the increased demand for loans - Mortgage Rates Left In Dust By Treasury Yields, Failed Lenders (Bloomberg 12/18)

MBS Reversal

MBS took a nosedive this afternoon. We're now back to yesterday's prices, and sinking. Rate worsening.

More to follow.

MBS Market Rallies on FOMC Announcement - Mortgage Rates Going Lower

MBS saw an afternoon rally yesterday, due to the FOMC's announcement to cut the Fed funds rate to a range of 0-.25% and their statement: "... the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant." MBS investors were overjoyed and are hopping on the (gravy) train.

MBS is also spiking higher (up 90bps so far) in early trading this morning and we should see rates improve by 1/4% or more this AM. When prices go up, rates go down.

FNMA 4.5 coupon


If you're on the fence with refinancing or purchasing, you may want to jump off.

A Perspective Behind The FED's Plan To Lower Mortgage Rates, aka The MBS Bailout

In his most recent post, Brad Setser doesn't specifically address the FED's recent action in the Agency MBS market (remember the FED's $500b MBS purchase program?), but he does provide some great analysis of the numbers that are behind the FED's move.

From one of my new favorites, Brad's Follow The Money blog:

This is what a crisis looks like in the balance of payments data, 12/15/08

[Agency - Fannie, Freddie, Ginnie Mae]

"So much for talk that central banks are always a stabilizing presence the market. They clearly have destabilized the Agency market. The fall in demand for Agencies over the past three months — and most Agency demand has come from central banks until recently — has been sharper than than the fall in demand for US corporate bonds (think securitized subprime mortgages, the category “corporate bonds” in the BoP data includes asset-backed securities) after the crisis of last August."

"The Agency market is a rather important market. Increased lending by the Agencies offset the fall in demand for “private” mortgage-backed securities after the crisis last August. More recently, the absence of a “central bank bid” has kept
Agency spreads wide even after the US Treasury bailout of Freddie and Fannie. And that in turn has pushed the US to adopt other measures to bring down long-term mortgage rates. The Fed and the Treasury are literally now buying the Agencies that foreign central banks are selling. Action, reaction …"

Earlier in the same post, Brad points out "[foreign investors added] $400 billion in demand for safe dollar denominated assets [T-bills, T-bonds]. If that kind of monthly inflow is annualized it is a shockingly large number. It allowed foreigners to reduce their holdings of Agencies by close to $75 billion (including a $25 billion fall in short-term Agencies), their holdings of long-term corporate bonds by $13 billion and their holdings of US equities by $6 billion without causing any strain on the dollar."

According to Brad, that's $75b just in October. I'm sure numbers like these make the FED and Treasury nervous.

Questioning Lockhart's Grasp Of The Situation

I want to give FHFA Director James Lockhart the benefit of the doubt. I really do. He's been willing to take on the giant mess that the GSEs, Fannie Mae and Freddie Mac, find themselves in. It takes guts and brains and ability.

But his latest comments make me wonder about, well, his understdanding of the problems in the housing market. From Bloomberg, Dec. 10, Fannie, Freddie May Waive Appraisals for Refinancings:

Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the U.S. government, are considering forgoing new appraisals on refinanced loans to help struggling homeowners, their regulator said.

“If they refinance someone, rather than doing a loan mod, do they need a new appraisal if they already have the credit?” Federal Housing Finance Agency Director James Lockhart told reporters after a speech in Washington today. “That’s an issue that’s being discussed. They’re looking at it.”

They're looking at it? You mean "they" (and you, Mr. Lockhart) are actually considering the idea of ignoring the actual/current value of the collateral on which tens or hundreds of billions of loans would be based? I certainly don't expect that you'd go as far as allowing loan applicants to place their own value on their properties. Of course not, that would be crazy.

Maybe you're thinking about just requiring an AVM (Automated Valuation Models) instead of a full appraisal. But wait, that's still a type of appraisal, and you did say "... do they need a new appraisal if they already have credit?"

Or would the plan be to have Fannie/Freddie accept the original purchase price or appraisal done for a previous refinance? If that's what you're going after, you'd certainly take care of a lot of underwater mortgages. But what about the investors, who Fannie/Freddie depend on for capital? The folks who buy your loans, do you really think they will accept this? I have a hard time believing they will if they know that what they're buying is upside down from the get go. Okay, you at least have the FED - they'll buy anything.

There's also a post (and tons of comments) on Calculated Risk - Report: GSEs May Waive Appraisals For Refis

After(post) Thought: FHFA could bring back the PIW (property inspection waiver) or the FNMA 2075 (Property Inspection Report) . The PIW required no appraisal/inspection, was used for purchases and refis with low LTV (80% or less) and applied to borrowers with high credit scores. A PIW cost the issuing bank $50, a fee which they passed on to the borrower at closing. The 2075 was also used for purchases and refis with low LTV, but did come from an appraiser and required them to inspect the property (but no value given). But using these on a nationwide, across the board basis in today's market could be very problematic.

Grill On The Hill

Former Fannie/Freddie chiefs testified at a House Financial Services Committee hearing on Tuesday (CSPAN Video).






Raines Faults Regulators For Fannie, Freddie Missteps (Bloomberg 12/09)

Fannie, Freddie Ignored Risky Loan Warnings (ABC News 12/09)
Fannie and Freddie Execs Defend Their Decisions as House Members Question Motives

Evading Fiscal Responsibility (op ed from Charlottesville's Daily Progress 12/10)

New Protections

Part of the reason we’re in the present mess is that many of people who originated loans during the housing bubble had no business doing so.  In the heyday, mortgage brokering promised a lot of money without requiring a lot of skill.  This attracted more than its share of scoundrels.

Personally, I know of one loan officer, still in the business I understand, who wrote subprime loans in between jail stints for drug possession.   Let’s call him, Jimmy.  Something of a local legend in the biz, there are lots of Jimmy stories.  He reportedly made forty-grand or more a month suckering decent people into bad deals. 

He even continued writing new loans in the prison yard using a smuggled cell phone.  Since he couldn’t go to closing during these stretches, Jimmy would even send his mother to the table to make sure that no honest title rep informed his clients as to how obscenely overcharged they were.

Fortunately, there should be a lot less of these reprobates coming into the mortgage business.  Starting last July, the state of Virginia put a new law into effect to raise the notoriously low barrier of entry into this industry.

Part of this law requires employers to perform background checks on any new employee who may have access to or process personal indentifying or financial information of a Virginia customer. 

Mercifully, new employees do not need to be fingerprinted.  But it is a thorough check.  It includes a criminal history generated by the Virginia State Police.

In no instance can a mortgage company employ someone with any felony or any misdemeanor involving fraud, misrepresentation, or deceit.

That means there will be less Jimmy’s entering this industry.  And that’s no small comfort.

Bair's On Board With Obama

This morning's story on Bank.com's blog:

Sheila Bair Encouraged By Barack Obamas Foreclosure Ideas

"The chairperson of the FDIC, Sheila Bair, has been pushing an aggressive plan, modeled off of what was tried when IndyMac went under, to help stop foreclosures. Her efforts, though, have been running into opposition from the Treasury Secretary, Henry Paulson, as well as other prominent members of the Bush Administration. The current administration seems reluctant to fund such a comprehensive plan aimed at helping individual homeowners. Now, though, it seems as though she can bide her time and wait for a Barack Obama administration. Maybe Timothy Geithner will be a more compatible and understanding Treasury Secretary."

Bair has been standing out on a limb for some time now with her forward thinking ideas about mortgage modifications. As we discussed in an August post, Indy Mac's failure and quick takeover by FDIC in August provided Bair and team an opportunity to do things her way. The success or failure of the modification program is yet to be seen, but I'd be very surprised if President-elect Obama didn't keep her on board to see it through (and possibly help implement it with other banks/lenders).

The Morning After-Still Just Rumors

The morning after has revealed few details of Paulson’s latest plan to save us.   In fact, more questions and concerns have reared.

Here’s what we do know.  Treasury would give us 4.5% 30-year fixed loans through Fannie and Freddie.  The two GSE’s would buy the bonds at around 4%.  Banks would sell the loans around 4.5%.   

This is a point below current market rate.  (As a historical note, rates have not fallen below 5.375% in the last 45 years).  That means Federal bucks will be needed.

Whatever will be spent will most probably be in addition to the $600 billion committed last week to buying mortgage-backed securities (MBS).  But there’s still no clearer idea of where the money might come from.

Concerns about private investors have reared.  Will they still want to buy MBS while the government floods this market with dollars and forces down the return on bonds?  Will government become the all but exclusive buyer of agency MBS?

Who will this help?  Less than the numbers might suggest.  Bloomberg quotes Rajiv Setia, a fixed-income strategist for Barclays Capital.  “Over 90 percent of the mortgage universe out there would be refinancable, but you can't force banks to lend to people. . .”

These would be agency loans.  That’s not going to help people in trouble, those facing foreclosure.  Homeowners nearing this precipice are going to have damaged credit.  They won’t qualify for an agency product. 

Same with most of the consumers in subprime loans.  They were in subprime because they couldn’t get an agency loan.

This will also mean nothing for those with jumbo loan amounts.

And one of the biggest questions is whether this was just a trial balloon floated up to see if anyone thought this might work or a genuine leak. 

If it was a leak, some have suggested that it came from one of the realtor or builder lobbyists who have been pushing for something similar.  They might be publicizing it in hopes of pushing Treasury more towards this.

Our brothers in these industries may not realize what havoc this will cause to us in the mortgage industry.  This news is disrupting loan pipelines throughout the country, as borrowers now want to wait for what may be the much better deal.

But if it was a trial balloon, I wonder if Paulson and his crew realize how all this is starting smell of desperation.  They keep trying one thing after another and nothing seems to work.  Nevertheless, it keeps costing the taxpayer untold billions.

Everybody Limbo!

How low can we go?  4.5% mortgage rates?

That’s the breaking story on CNBC, Wall Street Journal and others in what could be one of the biggest headlines for our business this year. 

A leak has emerged suggesting that the Treasury Department wants to stimulate the housing market by lowering the mortgage rates to 4.5% on a 30 year fixed. The devil will be in the details, which remain sketchy at this point.

How will they do it?  Where all the money come from?

And will it be for all mortgage types?  If it includes refi’s, this leak could destroy whatever pipelines loan officers have at the moment.  All current customers could pull their loans in the hopes of waiting for that magic number.

Even those still in the midst of their recession days could be pulling out of their closed but not funded loans. 

If this was the Drudge Report, we’d have a spinning siren at the top of our page.  Stay tuned.

For The Modern Pilgrim: Plymouth or Jamestown?

As I'm still not ready to let go of the Thanksgiving holiday, I thought I'd share this interesting post I found on the Cyberhomes blog.

Plymouth vs. Jamestown: Which is best?

"As you enjoy leftover turkey today, Cyberhomes offers something to think about: If the first U.S. settlers were to choose a settlement in 2008, which would be the better place to live: Plymouth, Mass., or Jamestown, Va.?"

Happy Thanksgiving!

MBS Market Rallies, Mortgage Rates Set To Improve

10:20am



I guess this is what happens when the Federal Reserve announces a plan to purchase $500b MBS from Fannie Mae and Freddie Mac. Here's today's Bloomberg article about the plan.

And here's the Treasury's announcement to purchase $200b in additional asset backed securities.

Looks like the Administration is directly targeting mortgage rates.

I expect rates to be ~.25% better this morning, and wouldn't be surprised to see the 30yr fixed in the low to mid 5% range this week.


FNMA 30yr 5.5 coupon
up 130bps at 10:15am

The Fixin might need Fixin

Chairman of the Federal Deposit Insurance Corporation, Shelia Bair has found religion.  She believes that she has found the solution to the foreclosure crisis:  loan modifications.

Qualifying homeowners in serious delinquency get a letter from the FDIC offering them a way off the foreclosure highway:  more affordable monthly payments! 

The Feds can do this through reducing the interest rates on the loans, extending the amortization and deferring principal payments.  We commented on this here.

As we mentioned in an earlier post, the FDIC has used this pilot program on more than 5000 formerly Indymac borrowers the corporation inherited when the bank collapsed. In congressional testimony over the last several weeks, Bair has been hailing the success and wants other banks to follow the FDIC’s example.

Of course, all this costs money.  Millions so far.  Which will make Barney Frank and some of his Democratic colleagues on the Hill very happy.  They want some of Paulson’s 700 billion bailout money to be used for homeowner relief instead of the many curious ways the Treasury Secretary has disbursed it so far.

But will this work?

The Wall Street Journal’s MarketWatch does not fill me with confidence.  “For the industry in general, after mortgages are modified roughly 25% go delinquent again after just one post-modification payment and more than half end up delinquent after several post-modification payments. . .”

Maybe the solution will need a solution.

Better than BOGO for Genworth

What's better than "buy one, get one" free? How about "buy one, get more" free. That's the kind of deal Genworth Financial is looking for.

On Sunday the Richmond, VA based Fortune 500 company announced that they were applying to the Office of Thrift Supervision to become a savings and loan. Genworth isn't a bank or a thrift but a self proclaimed "financial security" company. And one of their main businesses is mortgage insurance - they are, in fact, the spinoff of GE's mortgage insurance unit.

So why does the company want to be a federally regulated bank? Because it wants to qualify for government assistance through the TARP (Troubled Assets Relief Program). As you can imagine the mortgage insurer hasn't been doing well lately, after an abysmal 3rd quarter and recent credit rating downgrade. I would guess that management is depending on government funding to stay afloat. And they know they they need to get in the handout line ASAP.

But in order to get money they need to spend money. In the same press release they announced that they have reached an agreement to buy a bank. Specifically, they're going to purchase Interbank FSB of Minnesota, which has $1b in assets.

At this point the sales price has not been disclosed and we don't know how much Genworth would receive (if any) from the US Treasury. But I doubt that they would go through the trouble just to break even.

Here's the Bloomberg story.

Final RESPA rule issued

HUD ISSUES NEW MORTGAGE RULES TO HELP CONSUMERS SHOP FOR LOWER COST HOME LOANS: New 'Good Faith Estimate' will help borrowers save nearly $700 (HUD press release, 11/12/2008)

"For the first time in more than 30 years, the U.S. Department of Housing and Urban Development today issued long-anticipated mortgage reforms that will help consumers to shop for the lowest cost mortgage and avoid costly and potentially harmful loan offers. HUD will require, for the first time ever, that lenders and mortgage brokers provide consumers with a standard Good Faith Estimate (GFE) that clearly discloses key loan terms and closing costs. HUD estimates its new regulation will save consumers nearly $700 at the closing table."

And from Inman News, HUD: New Respa rule out this week:

"The new rules are intended to help borrowers avoid paying excessive loan origination and closing costs, and understand potential issues like payment shock from adjustable-rate mortgage (ARM) loans, balloon payments, and prepayment penalties for refinancing.

Preston said HUD plans to publish the new regulations under the Real Estate Settlement Procedures Act, or RESPA, in Friday's Federal Register. If Congress does not stand in the way, the RESPA rule changes would take effect within 60 days after publication."

(bolding mine)

The final rule deals primarily with the new Good Faith Estimate and revised Settlement Statement.

New Standardized Good Faith Estimate (GFE)

• Make GFE easier to read/understand
• Increased up front disclosures
  
• Makes it easier to compare offers
  
• Increased from 1 page to 3 pages
  

Revised Settlement Statement (HUD-1)

• Easier comparison of charges between the GFE & HUD-1
  
• Will limit the amount fees can change from GFE
  
• HUD-1 terminology conforms more with GFE terminology
• Increased from 2 pages to 3 pages.
  

The requirements on the new GFE and HUD-1 would not go into effect until January 1, 2010. Other provisions will be effective January 16, 2009


No complaints here about the changes. If it provides more consumer protection, more transparency and a clearer understanding of the loan product(s), we're all for it. Besides, as an UpFront Mortgage Broker, we're ahead of the curve.

The 341 page rule is HERE.

Remember our Veterans

Today is Veteran's Day

Visit a charity and give if you can:

Wounded Warrior Project
Operation Shoebox
Fisher House
Disabled American Veterans

2009 Conventional Loan Limits Announced

Fannie Mae confirms conventional loan limits for 2009 (Announcement 08-29 issued 11/7/2008)

Limits are unchanged from FNMA's previous announcement on the introduction of high cost loan limits and the elimination of jumbo conforming.

2009 Loan Limits

Fannie Mae's new minimum income doc requirements

Just thought I should reiterate the minimum income and employment documentation requirements coming down the pike. Listed as #5 in Monday's post on the new FNMA guidelines, effective December 13, 2008.

Income & Employment Documentation Requirements (click for FNMA announcement)

• Salary/Bonus/Overtime: The minimum documentation level required will be one current paystub and a verbal verification of employment.
• Commission/Self Employment: The minimum documentation level required will be one year’s personal federal income tax return.

Believe it or not, until recently, many of our files have only required a verbal VOE (salary/wage borrowers) or verbal VOE & independent verification of business address/phone # (self employed borrowers).

MBS WOW!

MBS Update 11/04/2008:

The FNMA 30yr opened up approx. -20bps from yesterday, and by 3:30pm we were up 109bps from the open. That's almost 110bps in a single day, and we're heading higher. This is the largest single day climb since the FNMA/FHLMC takeover in September. The 30yr fixed has improved ~1/4% since yesterday.



We have seen 2-3 rate improvements (depending on the lender) so far today and we might see one more by 5pm. The 30yr fixed was 6.5% last Thursday. Currently we are at 6.125%. What (or who) is moving today's market? Unsure at this point, but obviously buyers have entered the market in a big way.

Do you want to know how mortgage rates are moving? Sign up for our free daily rates email - No obligation.

You can also contact us if you want up-to-date analysis on the MBS market and how it's affecting mortgage rates.

Fannie Mae guideline changes coming

FNMA announced guideline changes on October 16, 2008, effective December 13, 2008.

The changes:

1.) High Cost Area Loan Limits - Phase out of Jumbo Conforming and implementation of Permanent High Cost Area Limits. The general loan limits will continue to be used, although it is unclear if the limits will change. In the past, FNMA increased the limits as home prices rose. But even now that we have seen a 25% decline in the national average home price since peak in 2006, I doubt FNMA will reduce the limits. In fact, some industry groups (including the Mortgage Bankers Association) are pushing FNMA to lift the limits altogether.

Permanent High Cost Area Limits will be a loan feature (add on charge to conforming limit product) instead of a separate product like the Jumbo Conforming. The 2009 High Cost Limits will be announced by the FHFA, expected November 7. Jumbo Conforming will be phased out on December 31, 2008.

2008 Limits:


2.) Bankruptcy policy change - extended the minimum allowable time period between a bankruptcy file date and the date of the credit report from 24mo. to 48mo. The bankruptcy still must be satisfied prior to the date of application.

3.) LTV Eligibility Requirements - new LTV limits for specific transaction types. Most notable:
Primary Residence
** Cashout Refi --> from 90 to 85%
2nd Home
** Purchase/rate & term refi --> from 95 to 90%
** Construction --> from 95 to 90%
** Cashout refi --> from 90 to 75%
Investment
** Purchase --> from 90 to 85%
** Construction --> from 90 to 85%
** Rate & term refi --> from 90 to 75%
** Cashout refi --> from 85 to 75%

Here is the fully updated Eligibility Matrix.

4.) Mortgage loans with interest only feature - interest only period must be for 10 or more years.

5.) Income & Employment Documentation Requirements

• Salary/Bonus/Overtime: The minimum documentation level required will be one current paystub and a verbal verification of employment.
• Commission/Self Employment: The minimum documentation level required will be one year’s personal federal income tax return.

6.) Miscellaneous

• Verification of rental income (crackdown on "buy & bail")- "If the property was formerly a primary residence, a fully executed lease agreement, receipt of a security deposit, and documented equity in the property of at least 30 percent must be provided.
• Disputed credit report tradelines - lenders must confirm accuracy of disputed tradelines.
• Borrowers without traditional credit (no credit scores) - ineligible for interest only loans
  

FNMA requirements effective January 1, 2009:
Homebuyer education for first time home buyers (FTHB) on all MyCommunity Mortgage loans and all borrowers relying on non-traditional credit to qualify.

An Apples to Apples look at House Deflation

In the local appraisal business for over five years, Troy Johnson has seen the market reach the heights of the housing bubble.  He has also held a front row seat to its recent rapid decline.  Johnson owns and manages Charlottesville-based Absolute Appraisals.  His team not only valuates properties in Albemarle but in the surrounding counties.

His experience in this market gives a clear picture of what is happening in our area with declining real estate values. 

In that time, he has seen a 15-30% decline in housing values. 

His figures aren’t hard and up to a statistician’s rigor, but they have great illustrative merit.  His approach gives an apples to apples comparison.  Absolute uses the same criteria and methods to assign value to the same property over the same period of time.

“Of all the orders we get,” Johnson says, “20% are reappraisals.”

Seeking more cash out of their homes for one reason or another, many homeowners go back to their loan officer for a new mortgage.   The loan officer contacts Absolute to redo the appraisal for the new mortgage.

Having a lot of repeat customers, Johnson has assessed the same homes over and over, some up to four times in the last two years alone.  “The same people keep coming back until they can’t come back.”

Curiously with all the press of the housing bust, many still believe their houses to be at the peak of their value.  Johnson finds that many, “still think their houses have risen in as much value as they heard about homes going up in Northern Virginia.”

So often, Johnson has to deliver the bad news.  It comes with a shock.  “What do you mean the house is only worth $250,000? That’s impossible.  I owe $270,000.”

Reporting the results back to loan officers who have ordered the appraisals, Johnson gets a now familiar response that sounds like Kubler-Ross’s stages of facing death. 

First is denial.  “How can that possibly be?  They did up grades.”

Then there’s the negotiation stage.  “See what you can do.  I got 55 loan officers in my office.  I’ll pass your name on to them.  You’ll get plenty of business.”

Finally, there’s desperation.  “This old lady is so nice.  She’s going into bankruptcy.  And she lost her son in an auto accident last year.”

Johnson doesn’t doubt the pitiful stories.  Many of these homeowners are desperate.  “But you can’t put that into an appraisal.”

In the present market loan officers know when they get a possible deal that it may not work.  They want him to check comparables before he even goes out to inspect the property.  They tell him, “If the value’s not there, stop immediately.”

He notices the most heavily declining areas are where there is excess supply.  These days, that is in condos and in new construction neighborhoods.  Builders who have gotten in over their heads have been dumping their excess inventory to the detriment of their previous customers.

Older neighborhoods have seen less decline.

Not only has this deflation led to less loan activity, Johnson has also seen it lead to the uglier side of this bubble bust – foreclosures.

“In 2006, not many people in this business [appraisers] knew what REO’s were.”

REO’s, short for Real Estate Owned, are properties that have reverted back to the mortgage lender/bank after a foreclosure sale has failed. 

In late 2007, Johnson started seeing REO business come in the door.  Banks hire his company and others like Absolute to make accurate assessments of how much their repossessed houses are worth in the present market.  The lenders use the numbers so they can wisely consider offers made by potential buyers on the properties.

Does he see a typical pattern in REO’s?  “It’s all across the board, except for the demo that pay cash for their higher-priced homes.”

But if it cuts across all racial and most demographic lines, the middle-class seems to be particularly hard hit.  The homes going into REO’s are mostly in the “$190,000 to $350,000,” range.

Now, between ten to fifteen percent of Absolute Appraisal’s business comes from REO work.  And Johnson sees no slow down in this area. 

The unfortunate fact is that it seems to be accelerating.

The rate rollercoaster

Lately, watching the action in the mortgage backed securities (MBS) markets has been like watching a car full of screaming teenagers hang on through the peaks and valleys of a world class roller coaster. In other words, it's been wild ride.

Just since September, we have seen the 30yr fixed mortgage rate fluctuate nearly 3/4 1 percent - between 5.625% and 6.375% 6.5% (stay up-to-date with our free daily rates email).

In normal markets, one can often get a general sense of the direction. Fundamentals can be followed and trends can be observed. But what we're witnessing in MBS is not the gradual inclines or declines of a functioning market. We're seeing wild swings in prices and reversals that occur in a matter of days.

Yesterday, Bloomberg reported on the difference in yields on MBS vs. US Treasuries. Fannie-Freddie Mortgage Bond Spreads Hit Widest Since March. The recent increased spreads have been driving MBS prices down and rates up.

"Agency mortgage-bond spreads have fluctuated since their record drops on Sept. 8 after the U.S. seized control of Fannie and Freddie. The spreads have widened on days when concern mounted that buyers relying on borrowed money including banks and hedge funds will have less demand for the debt -- including the past five trading sessions. Spreads have tightened when investors heeded a government pledge to support the market."

Predicting the direction of mortgage rates with accuracy in a stable market is a difficult task. But in current conditions it's nearly impossible.

So how does how does this translate for consumers? If you have a purchase contract on a home and plan on closing within the next 60 days, go ahead and lock your rate. Waiting for a particular rate that may or may not come is not worth the risk to your plans or your deposit. And the same goes for those who plan to refinance within the next 6 months - take advantage of the current historically low rates. Keep in mind that the average 30yr fixed rate since 1978 is 9.5% (Freddie Mac)

I'm not trying to "talk up my book" (giving advice or making an argument that bolsters one's position). Just pointing out what I see.

Visual evidence:

FNMA 30yr

We All Could Use Some Good News.

CNNMoney reports that new construction home sales rose in September.   From August, the sales increased 2.7% to an annualized aggregate of 464,000.  

The significance of this number may be diminished by the fact that most of these sales were in process before the bulk of the public front of the financial crisis began.  However, it is good news in that the increase was in new homes – not just existing residences.

The rash of bargains created by foreclosure sales have pumped up other home sales numbers.  And not many people are cheered that there are a lot of foreclosures going on.

We all wait with baited breath to see what October sales look like.

Modifications Coming?

In yesterday's testimony before the Senate Banking Committee, the FDIC Chairman Shelia Blair revealed that her agency is working with the Treasury to mainstream a new program that will supposedly be the help Main Street has been waiting for.

When Indymac collapsed (and no, I’m not obsessed with Indymac), the FDIC took over.  The Feds froze all the bank's foreclosures.  Since, they have offered 15,000 loan modification proposals to borrowers in trouble.  70% of those have responded to the offer.  3,500 of these borrowers have accepted the new terms; thousands more are in process.

The FDIC thinks this is a great model.  As Luke Mullins reports at US News & World Report, Blair testified, “The hope is that our mortgage relief program can be a model and a catalyst to spur loan modifications across the country. It's a process that most loan servicers can use under existing legal arrangements.”

Apparently, Paulson inherited some extra powers in the bailout bill (we’ll probably be hearing about all kinds of extra special powers for years to come.  I think he's going to be the government equivalent of Harry Potter) that could allow him to encourage (strong arm is such an offensive term) banks to offer workouts with troubled loan holders rather than foreclose on their properties.

Questions remain about who would be offered these workouts and under what conditions. 

I, myself, have an ARM that is due to reset in less than a year.  Currently I could pay about $3000 in closing costs to refi this to a higher rate than I presently have.   But now I’m beginning to think I should just wait and see what’s coming.

I’ll be honest.  Working as a mortgage broker means times are tough.  Of late, it’s an effort to scrape up the money to make my monthly housing payment.  Perhaps, if I stop paying my mortgage now, the government will force my bank to modify my mortgage.  I’ll get a great rate and avoid the refi costs. 

And I could use what I would be paying for my mortgage in the intervening months for a great new stereo from Crutchfields. 

Such is life when there is no moral hazard.

Don’t worry.  It’s just a nasty thought, a fleeting temptation to exploit the system.  But I wonder to how many it will be much more than that?

On to Bailout #2 - Is the Hubbard Plan next?

Earlier this month The $700b Bailout was passed into law. Labeled the Emergency Economic Stabilization Act of 2008, it provides Paulson & Co. $700b with which to purchase any type asset from any investor it deems worthy of its favor (among other things).

Not only did it receive a considerable backlash from the general public and quite a few government representatives, but it also drew criticism from a significant number of economists around the country. One of those economists was Jeff Miron of Harvard, who suggested that the banks and investors who purchased all of these risky, non-performing assets bear the responsibility and file for bankruptcy if need be and the American taxpayer should not bail them out.

Another such economist (though not on the list linked above) is Glenn Hubbard, current dean of the Columbia University Graduate School of Business and former chair of the Council of Econimic Advisors. Mr. Hubbard has come up with his own plan which he presented in an editorial in the Wall Street Journal on October 2nd:

First, Let's Stabilize Home Prices

"We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25% (matching the lowest mortgage rate in the past 30 years), and place those mortgages with Fannie Mae and Freddie Mac. Investors and speculators should not be allowed to qualify."

In addition to focusing on the very real problem in the housing market, the plan could be implemented immediately. As a result of the U.S. government's conservatorship of Fannie Mae and Freddie Mac, origination of new mortgages can be financed quickly. Congress would have to raise the overall borrowing limit and approve the new federal purchases of negative equity loans. But it will likely take the Treasury much longer to buy troubled assets than Fannie and Freddie, and it would have to seek the involvement of many additional private actors, as opposed to using vehicles already in place. The decline in housing prices remains the elephant in the room in the discussion of the credit market deterioration. Let's start there."

The Hubbard plan was also covered by NPR:
Bailout Critics Say It Won't Fix Underlying Problem, NPR Morning Edition 10/3

Is this a viable and/or appropriate solution for our ailing economy? Or is Hubbard just trying to score a few points on Bernanke (the guy who took his spot at the Fed)?

Schumer/Indymac 2

I grew up in Louisiana during several terms of Governor Edwin Edwards. Noted for his numerous affairs, gambling junkets and slick demeanor, Edwards was a man best described as colorful.  Everyone knew he was corrupt to the core.  Nevertheless, the people of the Pelican State loved him and kept re-electing him.

This was a man who admittedly kept two million dollars cash in the governor’s mansion for that unexpected emergency or impromptu casino road trip.   It was public knowledge that if you needed a pardon for some state infraction, you hired Edwards’ brother, a lawyer.  For five to ten thousand, depending on the crime, he could get you a pardon from his governor brother.  This arrangement worked until one of the clients, who had been pardoned for a previous murder, upped and killed brother Edwards the lawyer.

Despite numerous trials and impeachment attempts, Edwards remained untouchable.  He goaded prosecutors and press alike.  He used to say that the only way he would lose office is if he was found in bed with a live boy or a dead girl.

Weeks ago, I wrote about Senator Chuck Schumer’s reprehensible behavior involving Indymac Bank.  Quick recap:  last summer, he publicly questioned the bank’s viability which government and financial critics claim caused its collapse.

To the howls of outrage, Chuck claimed that he was merely doing his job as chair of the Senate Banking Subcommittee.  He believed it was his duty to express his “concern” about Indymac’s viability in an open letter to regulators.  Unfortunately, the public understood the “concern” to mean they should get their money now before the bank is shut down.  And they ran the bank.  The Federal Government was left with an eight plus billion tab and a lot of clean up.

Ex-employees who had been “concerned” out of a job pressed the California Attorney General to bring charges against Schumer.  The AG, former Democratic Governor Jerry Brown, declined to pursue a criminal investigation.  The broader defense was that Schumer was just a little naïve, maybe stupid, possibly inept.  But his actions were not illegal.

Now part II.  On Friday, the Wall Street Journal published a disturbing article suggesting that there might be a little more to all this than Chuck just being soft in the head.  At the same time the Senator was performing his patriotic duty in starting a bank run, some of his best friends had a lot to gain.

A group of investors led by Los Angeles-based OakTree Capital Management LP had considered investing in Indymac and thus were given access to the banks books.  Seeing a bank that was not in the best health, they determined they didn’t want to buy the bank.  But they could see a lot of assets worth picking out of the debris should the bank collapse.  They anticipated a lot of great bargains if the bank was taken over by the FDIC and its assets sold.

These OakTree vultures had been major donors to the Democratic Senate campaign committee that Schumer chairs.  They’ve given $700,000 over four years.  And in the culture of D.C., big donors equals big friends.

Despite this warm, close and deep relationship, Schumer and execs at OakTree claim they never talked to one another about Indymac.  And we are asked to take Schumer’s “highly-unusual” behavior in releasing his public “concern” letter as merely coincidental to their perusal of the Indymac books.

To suspicious minds, the question becomes did Schumer cause this panic for OakTree’s benefit.  And that’s going to be really hard to prove beyond a reasonable doubt.

So far, OakTree Capital has not pounced on any of the defunct bank’s assets.  As one exec put it, “there remains a ‘distant possibility’ that OakTree will be interested in buying remnants of IndyMac from the government. Now, though, the rash of institutional failures has presented his firm with a rich smorgasbord of distressed assets.”

To be honest, I don’t see a part three to this.  I’d love to be wrong.  But I doubt there will be any political will from California or the Federal government to pursue a criminal investigation.   

There’s not a dead girl or live boy anywhere to be seen.

More Unintended Consequences

Earlier this week, I wrote about the rising mortgage rates coming after the Fed lowered its Fund rate by 50 basis points.  At that point, I suggested the reason for the increase coming on the decrease may have resulted from investor fears of inflation.  While that may be a part of the case, something else more immediately ominous may be in play.

Bloomberg has an article on Monday’s bond sales reporting a disturbing trend.  Yields on Freddie and Fannie corporate debt rose to record heights against treasuries.  The reason comes from another government attempt to stabilize the mortgage market.

 In a Monday announcement, the Federal Deposit Insurance Corporation (or the FDIC as many of you may have seen engraved on placards hung on your bank walls) put the full faith and guarantee of Uncle Sam on newly issued, unsecured debt from some banks. 

Their good intention was to raise confidence in U.S. banks, calm investor nerves and thus get the lifeblood of credit flowing again.

However, these bank notes are carrying greater yields than those for the GSE’s.  So why should an investor buy troubled Fannie and Freddies’ notes when they’ve got a choice for safe, higher paying bonds backed the FDIC? 

Of course, there’s good will and a general humanitarian spirit.  But in lieu of that, there’s going to be less demand for Fannie and Freddie’s bonds.  And that means to compete the GSE’s will have to offer a higher premium.

CNN Money has a concurring report under the headline, “Mortgage rates spike - biggest jump since '87 

The whole credit crisis started from the collapsing housing market.  Now some of the attempted treatment may have the side effect of worsening the onset illness.

Dance This Mess Around

I still see that stupid, Flash-driven woman dancing on various websites.  She’s still telling me how mortgage rates are even lower, as the Fed cut rates again.  Again, she’s lying to me.

Last week, I wrote about mortgage rates not corresponding to the rates that Fed Chairman Ben Bernanke was cutting.  Well, after the markets for mortgage backed securities market opened, rates for mortgages actually climbed.  I’ll use the rates offered by the company I work at for comparison (Yes, I know they’re so much better than anywhere else.  But they serve well for purposes of illustration ;-).

On Tuesday, last week before the Wednesday rate cut.  You could call us in the morning, and if you and your property would’ve qualified, I could’ve done a conventional 30-year fixed rate mortgage for 5.5% for 1 point (Just so there’s no trouble of anyone considering this an advertisement, I’ll quote the APR in parenthesis.  In this case, it is 5.622).  Friday, the day after Mr. Bernanke and his international pen pals cut their short-term rates, that same mortgage had jumped to 5.75 for 1 point (5.873 APR).

Now this morning, the first full trading day of the week as many banks were closed for Columbus Day, you would’ve gotten the same mortgage for 6% with 1.125 points (6.137 APR).  You can’t even get that rate this afternoon, as we had a price increase during the day.

Why the increases from the decrease?  I think the best answer is fears of inflation.

The significant problem presently choking credit markets remains liquidity.  The U.S. Treasury and world central banks have responded by pumping in hundreds of billions, if not trillions of dollars.

This may get the banks trusting one another and lure investors hoarding cash on the sidelines back into the equity markets.  But what happens once the arteries of commerce start flowing again?

New astronomical amounts of dollars will still be in bank accounts and ledger sheets.  They aren’t going to just disappear.   All these new dollars and their older cousins will be chasing the relatively same amount of goods. 

Equilibrium only returns to the marketplace when all the new dollars are worth significantly less than what they are today.  That’s inflation in a nutshell.

Savvy investors don’t want to see their present money locked in ten-year bonds at lower rates.  Not when that rate might not even keep up with the annual inflation rate.  That's losing money.

The more investors see inflation as a problem, the greater return they’ll demand from mortgage bonds to lock their capital in.  That means mortgage rates will go up, not down like that dancing lady promises.  

C'ville Bubble Blog Interviews The Mortgage Buzz

Charlottesville - Albemarle Real Estate Market
Q: Are Mortgage Still Available? A: Yes!

"With all the blaring headlines about the world-wide credit crisis and financial institutions holding on to their cash, we wondered if the mortgage industry had ground to a halt. So we emailed Jason."

Thanks Real C'ville Bubble Blog for allowing me to opine.