Refinancing Continues to Drive Application Volume

The
Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey
reported that mortgage applications as measured by its Market Composite Index
were down 2.9 percent on a seasonally adjusted basis during the week ended
January 27 but increased 9.0 percent from the previous week on an unadjusted
basis.

The
seasonally adjusted Purchase Index was down 1.7 percent while it increased 17.1
percent on an unadjusted basis from the week ended January 20 and was 4.3
percent lower than during the same week in 2011.  The Refinance Index decreased 3.6 percent
from the previous week.

All
of the four week moving averages were higher for the week.  The seasonally adjusted Market Index rose
4.11 percent, the seasonally adjusted Purchase Index was up 2.48 percent and
the Refinance Index increased 4.22 percent.

Applications for
refinancing represented 80.0 percent of all applications, down from 81.3
percent the previous week.  Applications
for adjustable-rate mortgages (ARMs) had a 5.6 percent market share compared to
5.3 percent a week earlier.

Refinancing
applications in December increased in every U.S. state according to MBA and,
despite multiple holidays only 12 states had fewer purchase applications than
in November.  In Connecticut refinancing
applications increased 80.1 percent from November and Maine saw a 30.8 percent
increase in applications for home purchase mortgages.

Purchase Index vs 30 Yr Fixed

Click Here to View the Purchase Applications Chart

Refinance Index vs 30 Yr Fixed

Click Here to View the Refinance Applications Chart

Rates fell for all
fixed rate mortgages (FRM) compared to the previous week.  The average contract interest rate for
30-year conforming FRM (balances under $417,500) decreased to 4.09 percent with
0.41 point from 4.11 with 0.47 point. Rates for jumbo mortgages (those with
balances over $417,500) decreased from 4.39 percent to 4.33 percent while
points increased from 0.40 to 0.41.  This
is the lowest rate for the 30-year jumbo mortgages since MBA started tracking
them one year ago. 

FHA backed 30-year
FRM rates decreased one basis point to 3.96 percent with points increasing to
0.61 from 0.57.  Rates for the 15-year
FRM were down from 3.40 percent with 0.40 point to 3.36 percent with 0.41
point.  The effective rate of all of the
mortgage products listed above also decreased.

The sole rate increase was for the 5/1 ARM which increased on average to 2.94 percent with 0.39 point
from 2.91 percent with 0.41 point.  The
effective rate also increased. 

Follow what drives changes in mortgage rate each day with Mortgage Rate Watch from MND.

All rates quoted
are for 80 percent loan to value loans and points include the origination fee.

Michael
Fratantoni, MBA’s Vice President of Research and Economics said of the week’s
results, “The Federal Reserve surprised the market last week by indicating
that short-term rates were likely to stay at their current low-levels until the
end of 2014.  Longer-term treasury rates dropped in response, and mortgage
rates for the week were down slightly as a result.  Although total application volume dropped on
an adjusted basis relative to last week, refinance volume remains high, with
survey participants reporting that the expanded Home Affordable Refinance
Program (HARP) contributed to roughly 10 percent of their refinance
activity.”

MBA’s weekly
survey covers over 75 percent of all U.S. retail residential mortgage
applications, and has been conducted since 1990.  Respondents include
mortgage bankers, commercial banks and thrifts.  Base period and value for
all indexes is March 16, 1990=100.

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FHFA Answers Conflict of Interest Charges against Freddie Mac

The
Federal Housing Finance Agency (FHFA) issued a statement late Monday refuting a
story
from ProPublic and NPR
that a complicated investment strategy utilized by Freddie Mac had influenced
it to discourage refinancing of some of its mortgages.  FHFA confirmed that the investments using
Collateralized Mortgage Obligations (CMOs) exist but said they did not impact
refinancing decisions and that their use has ended. (the NPR Story)

Freddie Mac’s charter calls for
it to make home loans more accessible, both to purchase and refinance their
homes but the ProPublica story, written by Jesse
Eisinger (ProPublica) and Chris Arnold (NPR) charged that the CMO trades “give Freddie a powerful incentive to do
the opposite
, highlighting a conflict of interest at the heart of the company.
In addition to being an instrument of government policy dedicated to making
home loans more accessible, Freddie also has giant investment portfolios and
could lose substantial amounts of money if too many borrowers refinance.”

Here,
in a nutshell, is what the story (we are quoting from an “updated” version)
says Freddie has been doing.  

Freddie
creates a security (MBS) backed by mortgages it guarantees which was divided
into two parts.  The larger portion, backed
by principal, was fairly low risk, paid a low return and was sold to investors.  The smaller portion, backed by interest
payments on the mortgages, was riskier, and paid a higher return determined by
the interest rates on the underlying loans. 
This portion, called an inverse floater, was retained by Freddie Mac.

In
2010 and 2011 Freddie Mac’s purchase (retention) of these inverse floaters rose
dramatically, from a total of 12 purchased in 2008 and 2009 to 29.  Most of the mortgages backing these floaters had
interest rates of 6.5 to 7 percent.

In
structuring these transactions, Freddie Mac sells off most of the value of the
MBS but does not reduce its risk because it still guarantees the underlying
mortgages and must pay the entire value in the case of default.  The floaters, stripped of the real value of
the underlying principal, are also now harder and possibly more expensive to
sell, and as Freddie gets paid the difference between the interest rates on the
loans and the current interest rate, if rates rise, the value of the floaters
falls. 

While
Freddie, under its agreement with the Treasury Department, has reduced the size
of its portfolio by 6 percent between 2010 and 2011, “that $43 billion drop in
the portfolio overstates the risk reduction because the company retained risk
through the inverse floaters
.”

Since
the real value of the floater is the high rate of interest being paid by the
mortgagee, if large numbers pay off their loans the floater loses value.  Thus, the article charges, Freddie has tried
to deter prospective refinancers by tightening its underwriting guidelines and
raising prices.  It cites, as its sole
example of tightened standards that in October 2010 the company changed a rule
that had prohibited financing for persons who had engaged in some short sales
to prohibiting financing for persons who had engaged in any short sale, but it
also quotes critics who charge that the Home Affordable Refinance Program
(HARP) could be reaching “millions more people if Fannie (Mae) and Freddie
implemented the program more effectively.”

It
has discouraged refinancing by raising fees. 
During Thanksgiving week in 2010, the article contends, Freddie quietly
announced it was raising post-settlement delivery fees.  In November 2011, FHFA announced that the
GSEs were eliminating or reducing some fees but the Federal Reserve said that “more
might be done.”

If
Freddie Mac has limited refinancing, the article says, it also affected the whole
economy which might benefit from billions of dollars of discretionary income generated
through lower mortgage payments.  Refinancing
might also reduce foreclosures and limit the losses the GSEs suffer through defaults
of their guaranteed loans.

The
authors say there is no evidence that decisions about trades and decisions
about refinancing were coordinated.  “The
company is a key gatekeeper for home loans but says its traders are “walled
off” from the officials who have restricted homeowners from taking advantage of
historically low interest rates by imposing higher fees and new rules.”

ProPublica/NPR says that the
floater trades “raise questions about the FHFA’s oversight of Fannie and
Freddie” as a regulator but, as conservator it also acts as the board of
directors and shareholders and has emphasized that its main goal is to limit
taxpayer losses.  This has frustrated the
administration because FHFA has made preserving the companies’ assets a
priority over helping homeowners.  The
President tried to replace acting director Edward J. DeMarco, but Congress
refused to confirm his nominee. 

The
authors conclude by saying that FHFA knew about the inverse floater trades
before they were approached about the story but officials declined to comment on whether the
FHFA knew about them as Freddie was conducting them or whether the FHFA had
explicitly approved them.”

The
FHFA statement
said that Freddie Mac has historically used CMOs as a tool to
manage its retained portfolio and to address issues associated with security
performance.  The inverse floaters were
used to finance mortgages sold to Freddie through its cash window and to sell
mortgages out of its portfolio “in response to market demand and to shrink its
own portfolio.”  The inverse floater
essentially leaves Freddie with a portion of the risk exposure it would have
had if it had kept the entire mortgage on its balance sheet and also results in
a more complex financing structure that requires specialized risk management
processes.  (Full FHFA Statement)

The
agency said that for several reasons Freddie’s retention of inverse floaters ended in
2011 and only $5 billion is held in the company’s $650 billion retained
portfolio.  Later that year FHFA staff
identified concerns about the floaters and the company agreed that these
transactions would not resume pending completing of the agency examination.

These
investments FHFA said did not have any impact on the recent changes to
HARP.  In evaluating changes, FHFA
specifically directed both Freddie and Fannie not to consider changes in their
own investment income in the HARP evaluation process and now that the HARP
changes are in place the refinance process is between borrowers and loan
originators and servicers, not Freddie Mac.

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DeMarco: Principal Write-Downs Expensive, Benefits Uncertain

Getty Images
Edward DeMarco, acting director of the Federal Housing Finance Agency

How far should the federal government go to stabilize the housing market?

Many Democrats say more should be done. That’s why there have been a series of calls of late from Democratic lawmakers on Capitol Hill and Federal Reserve officials to have government-controlled mortgage finance companies Fannie Mae and Freddie Mac reduce the value of borrowers’ mortgages for homeowners who are “underwater,” meaning that they owe more on their properties than their homes are worth.

Fannie and Freddie and their regulator, however, have resisted doing so, despite pressure from the highest levels of government.

Last week, the acting director of the Federal Housing Finance Agency, which regulates Fannie and Freddie, sent lawmakers a detailed analysis of why cutting loan balances doesn’t make sense from a financial standpoint, given the regulator’s mandate to “preserve and conserve” Fannie and Freddie’s assets.

The letter was requested by Rep. Elijah Cummings, the top Democrat on the House Oversight Committee.

Edward DeMarco, acting director of the FHFA, argued that doing so would cause taxpayers to spend more money on the mortgage giants’ rescue than other foreclosure-prevention strategies. Fannie and Freddie have been propped up by taxpayer support for more than three years, a rescue that’s cost taxpayers about $151 billion

“Any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action,” DeMarco wrote in the letter.

About 3 million borrowers with loans backed by Fannie and Freddie owed more on their homes than their properties were worth as of last summer. That’s about 10% of the loans they own or guarantee. A write-down of all 3 million of those mortgages would cost taxpayers $100 billion, Mr. DeMarco estimated.

Fannie and Freddie do offer forbearance plans, in which lenders don’t require any payments on a portion of the loan for up to 12 months. What they don’t offer is forgiveness, where that portion of the loan is wiped out.

Mr. Demarco, in his letter to lawmakers, said FHFA’s analysis concluded that “forbearance achieves marginally lower losses for the taxpayer than forgiveness, although both forgiveness and forbearance reduce the borrower’s payment to the same affordable level.”

In addition, Mr. DeMarco noted that Fannie and Freddie would face significant up-front technology and training costs to launch a principal write-down program.

“Unless there is an expectation that principal forgiveness will reduce losses, we cannot justify the expense of investing in major systems upgrades,” he wrote.

This position has put Mr. DeMarco at odds with many Democrats and some Federal Reserve officials. In a paper earlier this month, the Fed noted that, “Some actions that cause greater losses to be sustained by the [companies] in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery.”

However, Mr. DeMarco’s letter noted that “our determination has been based on projected economic costs to taxpayers, not short-term accounting considerations.”

Fannie and Freddie would also risk giving up money if they reduced loan balances because they could no longer recover money from mortgage insurers, which cover some losses for borrowers who have a down payment of less than 20%.

Think Tank Measures FHA Progress

The American Enterprise Institute’s
(AEI) FHA Watch, a monthly on-line
publication tracking operations of the housing agency, just released its sixth
edition which makes clear the agenda of the conservative think tank.

Watch starts out by
quoting a Federal Reserve estimate that about one-third of the 11.1 million
underwater mortgages in the U.S. are FHA insured, a number which would account
for nearly half of FHA’s 7.4 million outstanding loans.  The Institute concludes that, since about 72
percent of outstanding FHA loans are of post 2009 vintage, about 1.5 million
recent loans must be underwater. 

“This comes as no surprise,” Watch
says, “since the FHA continues to combine minimal down payments (average of 4
percent) with slowly amortizing thirty-year loan terms. As a result, earned
homeowner equity (the combination of down payment and scheduled loan amortization)
amounts to less than 10 percent after four years, or about enough to sell a
home at the break-even point if home prices stay steady. However, prices have
declined nationally about 7 percent since mid-2009, with lower-priced homes
declining even more. When combined with borrowers’ low FICO scores and high
debt-to-income (DTI) ratios, the result is a continuation of the FHA’s
destructive lending-lending that has resulted in 20-25 percent of recent
borrowers facing a 10 percent or greater likelihood of foreclosure.”

In addition to the opening statement, Watch spotlights the following topics:

  • Insolvency: FHA’s Position Worsened in May, with an
    Estimated Current Net Worth of $22.11 Billion and a Capital Shortfall of $41-61
    Billion.
  • Delinquency: Total Delinquency Rate Increased in May to
    16.23 Percent Because of Increase in Both Thirty- and Sixty-Day Delinquencies;
    Serious Delinquency Rate Ticked Up to 9.43 Percent.
  • Underwater
    Loans: FHA Is Responsible for 1.5
    Million New Underwater Loans.
  • Best Price Execution:
    The Government Mortgage Complex’s Ginnie Brands Demonstrate Continued
    Pricing Dominance over Fannie Mae.
  • The Road Map to FHA Reform: Specific Steps to Reform and the Status
    of Each

The last category sets forth AEI’s goals
for program reform and fiscal reform, steps for accomplishing each, and a
report card on the progress made by FHA and Congress toward the goals.  AEI’s goals for Program Reform are:

  1. Stepping back from markets that the private
    sector can serve to gradually return to a “traditional”10 percent home purchase
    market share.
  2. Stop
    knowingly lending to people who cannot repay their loans.
  3. Help
    homeowners establish meaningful equity.
  4. Concentrate
    on homebuyers who truly need help purchasing their first home.

The only recent improvement acknowledged
by AEI in this area occurred in February with a proposed rule that limits
seller concessions to the greater of 3 percent of the loan or $6,000.  More than a dozen other steps have not been
acted on by the agency.

The Institute has set the following
goals for FHA to achieve in the area of fiscal reform:

  1. Utilize generally accepted accounting
    principles and set rigorous disclosure standards;
  2. Establish and maintain loan loss and unearned
    premium reserves;
  3. Establish and maintain a minimum capital
    requirement of 4 percent of amortized risk in force;
  4. Fund a countercyclical premium reserve.

AEI found that FHA had made a small
amount of progress in this area by requiring application of SEC disclosure
standards to the FHA’s insurance programs and funds and by taking steps toward
retaining an independent third party to conduct a safety and soundness review
under generally accepted accounting standards. 
There was no acceptable progress on the six remaining steps.

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Mortgage Rates Edge Slightly Deeper Into All Time Lows

Mortgage Rates were slightly lower again today after hitting new all-time lows on Friday.  It continues to be the case that different lenders are adjusting rate sheets in different ways in the current environment.  Because of this, an individual lender may not be priced at their all-time lows today, but the average across all the rate sheets we assess fell another 0.01 today, more firmly establishing 3.625% as the current Best-Execution rate for Conventional 30yr Fixed loans.

(Read More:What is A Best-Execution Mortgage Rate?)

The key event for the first half of the week was Sunday’s elections in Greece, which have already mostly played out.  At this point, we’re just waiting for Greece to go ahead and “form a government,” which is something they try to do after elections are held.  Failure to form a government after the last round of elections is one of the key factors that helped rates get to their current levels domestically.

We don’t know how much it might affect rates over the next 2.5 days if Greece is resoundingly successful in this endeavor, but given that officials from the prevailing party have already announced that they will ask the Eurogroup to lessen Greece’s austerity burden, we can’t imagine the formation of a unity government in Greece to take rates anywhere remotely close to “it never happened” levels from April.

Moreover, we’d be expecting the market’s focus to shift toward Wednesday’s official policy announcement from the Fed as well as FOMC member forecasts and Bernanke’s press conference.  There’s much less consensus out there vs last time as to whether or how the FOMC might go about addressing the topic of further fiscal stimulus.  Many believe the Fed will stay on hold until next meeting, while others think they might meet markets half-way and simply extend existing Operation Twist policies.

Long Term Guidance: We’d continue to advocate not trying to “get ahead” of current market movements as a high degree of uncertainty is pervasive.  While it’s a reasonably safe assumption that European concerns will generally help rates stay lower than they otherwise would be, that “otherwise would be” part is very much a moving target.  Best bet is to focus on the fact that rates are at their all time lows, and can change quickly based on events that aren’t “scheduled” or able to be forecast.  Risk vs reward for floating vs locking looks a bit larger than we’d like, but not out of the question for those who understand the risks and have an exit strategy if things don’t go their way.

Loan Originator Perspectives

Aaron Meyer, Mortgage Officer First Bank Financial Centre

Rates haven’t been much lower especially with the uncertainty of a Federal Reserve meeting this week and Greece’s election last night. Lock now and be happy because mortgage capacity is filling up quickly.

Victor Burek, Benchmark Mortgage

Most lenders rate sheets are as good as they have ever been today. With rates at record lows it is difficult to not advise locking; however, I continue to believe the lowest rates are ahead of us.

Ted Rood, Senior Mortgage Consultant,  Wintrust Mortgage

Last week, buzz was that Greek election on Sunday was the big unknown. After the fact today, rate sheets still better as focus swings to rising Spanish debt issues. Bottom line: Europe has more problems than US, and that will keep our rates low. Bigger concern than rates may be lenders fleeing risk. Wells Fargo announced last week they are not participating in the FHA streamline program for non Wells clients, other lenders soon followed.

Today’s BEST-EXECUTION Rates 

  • 30YR FIXED –  3.625%
  • FHA/VA -3.5% – 3.75%
  • 15 YEAR FIXED –  3.00%
  • 5 YEAR ARMS –  2.625-3. 25% depending on the lender

Ongoing Lock/Float Considerations 

  • Rates and costs continue to operate near all time best levels
  • Current levels have experienced increasing resistance in improving much from here
  • Rates could easily move higher or lower, but given the nearness to all time lows, there’s generally more risk than reward regarding floating
  • But that will always be the case when rates operate near all-time levels, and as 2011 showed us, it doesn’t always mean they’re done improving.
  • (As always, please keep in mind that our talk of Best-Execution always pertains to a completely ideal scenario.  There can be all sorts of reasons that your quoted rate would not be the same as our average rates, and in those cases, assuming you’re following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).

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