Of Course the Borrower is Paying for Higher Lending Costs – Did Our Gov’t Think Lenders Would?

Want some good news? My grades did not qualify me for admittance to Harvard
(that is not the good news), but that institution put out good research
material that is
positive for housing this year. (Read: Harvard’s State of Housing Report Says Home Construction Now Adding to GDP) Here is some on
housing for 2012. If you have ADD, like me, at least click on “Signs of a
Turnaround in the U.S. Housing Market: 2012 State of the Nation’s Housing
Report Released” and peruse the Executive Summary: jchs.harvard.edu. It is
great for presentations and for selling anyone interested in investing in a
mortgage bank or real estate firm.

Want some different good news? Yesterday oil declined below $80/barrel
for the first time in about 8 months
, and we find the major commodity index
down 22% from its peak earlier in the year. So it should cost less to fill up
that tank, or ge.t that gold “grill” at the cosmetic dentist.

Angela Merkel arrives at the Passport Control at the Charles de Gaulle airport.
“Nationality?” asks the immigration officer.

“German,” she replies.

“Occupation?”

“No, just here for a few days…”

World War II humor aside, do we want Greece, and Europe, to overcome its
current hurdles? Of course we do – but be careful what you wish for, as stability
in Europe would tend to move our rates higher
. (And they would, if it weren’t
for the fact that our economy is only limping along.) For example, this
trader’s note came across Wednesday: “The 10-year yield is 4 basis points
higher this morning at 1.66% on news that Greece has formed a coalition
government.” Sure enough, Greece has formed a coalition government of New
Democracy, PASOK, and Democratic Left, with Samaras to be the Prime Minister. I
don’t know all the specifics, but the “Troika” is expected to
disburse within days the 1 billion euros from the March review that they have
been holding waiting for the election outcome, and this should keep the
government alive for about 1-2 months. If all goes well, Greece should receive the
next tranche by late July or early August. However, the negotiations will be
challenging, as growth is well below the program projections, fiscal
consolidation is already off track, and reforms have been delayed during the
long pre-election period.

And in Canada, Europe is hitting hard: Finance Minister Jim Flaherty and Mark
Carney, the central bank governor, went public in a joint campaign to head off
runaway inflation in the overheated housing sector. So the Harper government is
trying to offset the negative impact of the central bank’s pro-growth
low-interest rate policy by making it harder for Canadians to take out
mortgages
. Flaherty said he acted to toughen mortgage rules for the fourth
time in six years to slow the growth of a real estate bubble. He noted that the
bursting of the U.S. housing bubble caused long-term damage to the American
economy. He singled out the condominium market in Toronto as the most troubling
hot spot. Buyers should conduct themselves prudently he said. “Some calming of
the market is desirable.” The government is tightening mortgages by
reducing the maximum amortization for a government-insured mortgage to 25 years
from 30 years. It is also lowering the maximum amount Canadians can borrow when
refinancing a property to 80 per cent from 85 per cent of the value of their
homes. Flaherty has complained in the past about people using their homes at
ATM machines. And government-backed mortgage insurance will no longer be
available for homes with a purchase price of more than $1 million.

The adage, “Don’t put all your eggs in one basket” is being carried
out by the OCC and Dodd Frank. Evaluating and limiting counterparty risk is a
big deal, whether you’re a mortgage company, a bank, a vendor, or a Realtor, so
although this update applies to banks (a rule limiting the amount of lending
exposure financial institutions can have to a single counterparty), watch for
similar moves for everyone.

The average loan to value ratio of closed loans broke through 80% in May,
the highest level since Ellie Mae began tracking these details in August of
last year. (Read: Ellie Mae: Origination Insight Report for May)  The average LTV was 81%, up from 80% in April and driven by an
easing of LTVs on conventional refinances. Before MI companies pop the
champagne, most believe that it is a sign that HARP 2.0 is helping more
borrowers. The LTV of both closed and denied loans has risen steadily from 82%
in August to 88% in May while debt to income ratios (DTI) and FICO scores have
remained relatively unchanged.  Many underwater borrowers have been
attracted by the rate changes in HARP but have not successfully refinanced.
Refinancing represented 54 percent of closed loans in May, down 2 percentage
points from April.  As might be expected, there were substantial
differences in the profiles of loans accepted and denied by FHA and
conventional lenders.  What was surprising was the additional leeway FHA
lenders appear to grant to purchasers over those refinancing.

I received a distressing/distressed note from a “governmentally aware”
reader who was in a hearing yesterday with the CFPB. It would seem that
a lack of knowledge of how a mortgage is originated, and how borrowers are
helped by the mortgage industry in general, is still a big stumbling block. “The
CFPB seems so out of control it is frightening. The brokers and bankers were
again in full agreement. For almost 30 years I thought they would never agree
on the color of the sun, but watching the CFPB deflect answers has brought them
together. One person brought up that the issue was disclosures, and the CFPB
responded with confusing answers that made it seem it was more concerned with
deadlines than with doing what was right for borrowers and the health of the
housing market. January 21st is looming! The CFPB seems to be micromanaging
the issues from LO comp that a company might pay a 175% year-end bonus if you
help engage in steering to what percentage can be placed into a 401k. Forget
ERISA or the IRS – the CFPB spent more time figuring out pat answers and
deflection strategies than anything else. It sounded like 100% of the feedback
opposed the Flat Fee and they have no alternative.”

The reader went on. “On one topic the CFPB claims unfettered exemption
authority while on another claiming extremely limited. Then they claimed they
had undertaken studies but when one member asked what study, suddenly it was ‘life
experience and observations of human nature.’ Where is Barney Frank? He’s the
only one smart enough who can fix this mess. Dodd is off with his
contributors in the motion picture industry. Barney broke it, then he can fix
it – the CFPB doesn’t seem to understand every ‘hair brain’ idea is going to cost
the consumer more
.”

This certainly leads right into the next topic, reported by the Financial
Times, that, “Most US homeowners are paying above-market mortgage rates,
new data show, indicating that government efforts to spur refinancings have yet
to fully benefit households despite ultra-low headline borrowing costs. ‘Many
Americans are able to take advantage of lower interest rates. Many people have
refinanced or bought homes,’ Ben Bernanke, Federal Reserve chairman, said on
Wednesday at a news conference. But he added: ‘Mortgage access is much tighter
than it’s been in a long time.’ But figures from CoreLogic, a housing data
provider, show 20.5 million of 39 million creditworthy “prime” borrowers are
paying rates of more than 5% while just 5.7 million households are enjoying
rates of less than 4%. The data speak of a credit divide that the Fed and
Barack Obama’s administration have struggled to close despite numerous schemes
to enable borrowers to refinance into cheaper mortgages. That gap is having an
impact on consumer spending, which makes up roughly 70 per cent of US economic
activity, as a greater share of borrowers’ cash than necessary is being spent
on housing.
The impact is also being felt in the White House, where Barack Obama faces a
November election and has recently pushed Congress to pass new legislation
designed to further increase mortgage refinancings. Experts argue that
borrowers generally should be refinancing when their mortgage rates are at
least 1 per cent higher than the market rate for a new home loan. In theory,
more than 20 million borrowers should be refinancing. But many of these
borrowers are ‘trapped’, according to Senator Robert Menendez, who has
introduced legislation to ease access to refinancings for borrowers for whom
the fall in house prices have left them with insufficient equity to refinance.”

Those in the biz know that one can chalk this up to borrower lethargy,
worries about losing a job, not wanting to pay the upfront financing fees, the
thought that rates will go lower. (Of course, investors in the high coupon MBS’s,
such as the Fed, money managers, pension funds, and insurance companies, don’t
mind the feet dragging while they’re earning the high yields.) But most “in the
know” say that one big hindrance is the uncertainty in the market place (will
housing prices drop, will I lose my job, how long it will it take to pay for
the fees, maybe I won’t qualify now, 
etc.). And lenders are so worried about making a simple mistake,
which could result in a buyback years down the road, that the cost of
processing, underwriting, and verifying loans has skyrocketed, in addition to
the regulatory and compliance costs that are heaped onto the borrower. The
government didn’t expect lenders to absorb those costs, did they?

The Philly Fed collapsing in May to its lowest level since August, and is
consistent with a weak Empire State Survey in June and soft Chicago PMI in May.
Jobless claims decreased by 2,000 to 387,000 in the week ended June 16, as the
four-week average climbed to 386,250, the highest of the year. Existing
Home Sales dropped 1.5% to 4.55 million in May, but constrained by
tight supply, prices continue to gain. (Inventory slipped 0.4% to
2.49 million existing homes available for sale, which represents a 6.6-month
supply at the current sales pace.  Listed inventory is 20.4% below a year
ago when there was a 9.1-month supply.) Lastly on Thursday we learned that the
Conference Board Leading Indicator Economic Index increased 0.3% in May to
95.8, after a decline of 0.1% in April, and a 0.2% increase in March.

After all that, stocks took it on the chin Thursday. There are those that
believe money is a zero sum game, and every move in stocks results in a
corresponding opposite move in bonds. That is incorrect, and although bond
prices improved, they certainly didn’t do so as much as equities sold off: the
10-yr improved by only about .250 and closed at 1.61%. (Agency MBS prices
improved by less than .250.) Much of this was attributed to the reasons above.

These are from a book called Disorder in the American Courts, and are things
people actually said in court, word for word, taken down and now published by
court reporters who had the torment of staying calm while these exchanges were
actually taking place. (Part 2 of 3)

ATTORNEY: Were you present when your picture was taken?
WITNESS: Are you kidding me?
_________________________________________

ATTORNEY: So the date of conception (of the baby) was August 8th?
WITNESS: Yes.
ATTORNEY: And what were you doing at that time?
WITNESS: What do you think?
____________________________________________

ATTORNEY: She had three children, right?
WITNESS: Yes.
ATTORNEY: How many were boys?
WITNESS: None.
ATTORNEY: Were there any girls?
WITNESS: Your Honor, I think I need a different attorney. Can I get a new
attorney?
____________________________________________

ATTORNEY: How was your first marriage terminated?
WITNESS: By death.
ATTORNEY: And by whose death was it terminated?
WITNESS: Take a guess.

…(read more)

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