Mortgage Rates Return To Historic Lows Following FOMC Announcement

Mortgages Rates spent 2 days at 4.0% in terms of rounded average “Best-Execution” rates (for detail on what that means, READ THIS POST from a few days ago).  Today, that rounded average has returned to 3.875%.  Although the underlying average isn’t as low as it’s ever been (3.88 vs 3.82), lenders tend to price loans in 1/8th (.125%) increments, meaning that 3.875% has been the lowest sustainable best-execution rate.  In short, we’re back to the promised land. 

The improvements came on the heels of today’s FOMC Announcement (Federal Open Market Committee or simply “The Fed”) which surprised some market participants with it’s inclusion of new verbiage describing how long the Fed anticipated that it would keep its “Fed Funds Rate” at so-called “exceptionally low levels.”  Until today, this verbiage read “through mid-2013,” but is now changed to “through late-2014.”  Markets weren’t necessarily expecting the inclusion of the word “late,” and although mortgage rates would have likely improved with a simple mention of 2014, the “late” part added fuel to that fire.  

While this indeed breaks the sideways trend at higher rates over the past 2 days, it’s up to the rest of the week to solidify the rebound.  In essence, markets will have an opportunity to respond to the eternal question: “is that your final answer.”  While the data through the end of the week doesn’t possess the gravity of today’s FOMC announcement, it could be enough to nudge the Best-Execution rate back to 4.0% depending on how it’s received.  In that sense, the risk posed by one singular event today is replaced by the risk posed by a group of events tomorrow and Friday.  3.875% is just barely back in the picture today, but it’s too soon to say whether or not the past two days at 4.0% were the exception to a long-term trend, or the beginning of a new one. 

Today’s BEST-EXECUTION Rates

  • 30YR FIXED –  3.875% mostly, with a few lenders at 4.0% still
  • FHA/VA -3.75%
  • 15 YEAR FIXED –  3.375% and more 3.25’s
  • 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
  • There are technical reasons for that as well as fundamental reasons
  • Lenders tend to get busier when rates are in this “high 3’s” level
    and can throttle their inbound volume by raising rates or costs.
  • While we don’t necessarily think rates are destined to go higher,
    given the above facts, there seems to be more risk than reward regarding
    floating
  • But that will always be the case when rates
    operating near historic lows

…(read more)

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FHFA: House Prices Rose 1% in November

The Federal Housing Finance Agency’s (FHFA)
Home Price Index (HPI) rose 1.0 percent from October to November reflecting an
increase in U.S. housing prices on a seasonally adjusted basis. As can be seen
in the figure below, the there is little difference between seasonally adjusted
and unadjusted FHFA figures.  The estimated
figure for October was revised down from a -0.2 change as first reported to -0.7.
 The current index is 183.8 a drop of 1.8
percent from November 2010 when the index was at 187.3. 

The current HPI is 18.8 percent below
the peak it reached in April 2007 and indicates that prices have returned to
roughly the same range as existed in February 2004.

The HPI is calculated using purchase
prices of houses with mortgages that have been sold to or guaranteed by Freddie
Mac or Fannie Mac.  The index is based on
100 representing prices for homes in the first quarter of 1991.

The HPI rose for all regions
except the Middle Atlantic division (New York, New Jersey, Pennsylvania) which
fell 0.2 percent.  The biggest increase
was in the West South Central Division (Oklahoma, Arkansas, Texas, and Louisiana)
which rose 2.1 percent.  West South
Central and West North Central (North Dakota, South Dakota, Minnesota,
Nebraska, Iowa, Kansas, and Missouri) were the only regions to increase on a
year-over-year basis.

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Federal Registers

FR-5156-F-02 Federal
Housing Administration (FHA) Single Family Lender Insurance Process: Eligibility,
Indemnification, and Termination
FR-5603-N-04 Notice
of Submission of Proposed Information Collection to OMB: Study of Public
Housing Agencies’ Engagement With Homeless Households
FR-5603-N-05 Notice
of Submission of Proposed Information Collection to OMB; Office of Hospital
Facilities Transactional Forms for FHA Programs 242, 241, 223(f), 223(a)(7)
FR-5603-N-06 Notice
of Submission of Proposed Information Collection to OMB; Family Unification
Program (FUP)
FR-5415-FA-33 Announcement
of Funding Awards for the Assisted Living Conversion Program; Fiscal Year
2010

District Court Upholds MERS Rights to Assign and Foreclose

Mortgage Electronic Registration
Systems, Inc. better known as MERS won a significant victory in court on
Tuesday as the U.S. Court of Appeals for the 11th Judicial Circuit validated
its rights to assign a security deed and/or foreclose on secured property.  The decision upheld the decision of the U.S.
District Court for the Northern District of Georgia in Smith V. Saxon Mortgage.

The plaintiff in the original case had
contested the foreclosure of her home on the grounds that:

1).   The assignment of the security deed was
invalid because MERS, as nominee of a defunct lender could not assign the documents
of its own volition.

2.
    The “splitting” of the mortgage and
the note rendered the mortgage null and void and therefore notices of
foreclosure were invalid as not coming from a secured creditor.

In the original District Court opinion in March 2011, U.S. Magistrate Judge
Janet F. King pointed to the standard language in the Georgia security deed
signed by all borrowers at closing which grants MERS the power to act on behalf
of the current and future owners of the loan. 
.   “Unless the instrument
creating the power specifically provides to the contrary . . . an assignee
thereof . . . may exercise any power therein contained,” Judge King wrote.
“[T]he Security Deed . . . transfers rights to MERS, and MERS’ assigns may
exercise any power contained therein.”

The 11th District Court which has jurisdiction over federal cases
originating in the states of Alabama, Florida and Georgia, agreed with Judge
King’s recommendation.  “It is not
disputed that plaintiff executed the Security Deed which granted MERS the power
to sell the Property, if plaintiff was not able to comply with the terms of the
Note,” Senior U.S. District Judge William O’Kelley wrote. “Furthermore, the
Security Deed expressly states that it applies to MERS ‘[and] to the . . .
assigns of MERS.’ Pursuant to the terms of the Security Deed, MERS had
authority to assign the Security Deed.”

MERS issued the following statement in response to the District Court
decision. 

“A significant body of clear and specific federal case law is coming
together with this decision from the 11th Circuit Court of Appeals, along with
favorable rulings from the First, Fourth, Fifth, Eighth, Ninth, and Tenth circuit
appellate courts and U.S. District Courts in a number of states,” said Janis L.
Smith, MERSCORP’s vice president of corporate communications. “The 11th
Circuit’s ruling underscores the soundness of MERS’ business model by
solidifying the legality of MERS’ role in the security deed, explaining how
that role came about, and clarifying MERS’ power to act on behalf of the
lender.”

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DeMarco Outlines Justification against GSE Principal Reduction

Acting Federal Housing Finance Agency (FHFA)
Director Edward J. DeMarco responded Friday to a request from 16 House
Democrats to explain the statutory authority that DeMarco has claimed prohibits
FHFA from offering principal reduction as part of loan modifications on loans
it owns or guarantees.  The request was
made last November after DeMarco told the House Committee on Oversight and
Government Reform that his agency had concluded that “the use of principal reduction within the context of a loan
modification is not going to be the least-cost approach for the taxpayer.”  When a committee member pointed out that several
banks are already implementing principal reduction programs in an attempt to
help delinquent or underwater homeowners and citing specific examples, DeMarco said “I believe that the decisions that we’ve made with regard
to principal forgiveness are consistent with our statutory mandate,” and committed
to providing documentation of that statutory authority to the Committee.

In
a letter sent to the Committee’s ranking member Elijah Cummings (D-MD) DeMarco laid
out the statutory requirements as originating in three congressional mandates;
first FHFA’s role as conservator and regulator of the government sponsored
enterprises (GSEs) which requires it to preserve and conserve the assets and
properties of the GSEs; second, maintaining the GSE’s pre-conservatorship missions
and obligations to maintain liquidity in the housing market; and third, under
the Emergency Economic  Stabilization Act
of 2008 (EESA), FHFAs statutory responsibility to maximize assistance to
homeowners to minimize foreclosure while considering the net present value
(NPV) of any action to prevent foreclosures.

The focus of the letter, however, is not
the statutory framework but rather why FHFA has decided that principal
forgiveness does not meet its core responsibility within that framework to
preserve and conserve the assets of the GSEs.

DeMarco’s rationale relies on an internal
analysis provided to him in December 2010 and updated in June 2011 which shows
that the use of principal reduction as a loss mitigation measure for GSE loans
under with the Making Home Affordable (HAMP) program or the FHA Short Refi
program would cost the Enterprises more than the benefits derived and
recommended that, instead the GSEs should more aggressively pursue propriety
loan modifications
that reduce the interest rate, extend the mortgage term, and
provide for substantial principal forbearance and promote HARP refinance
transactions for borrowers who are current on their mortgages but underwater in
respect to their equity. 

The GSEs collectively guarantee or hold
about 30 million loans and, using the FHFA Home Price Index to estimate home
values it appears that less than two million of these loans are secured by
properties valued at less than the outstanding debt; i.e. underwater.  Of these loans, more than half are performing
and about one-half million are severely delinquent or in foreclosure.  The table below clearly shows that high LTV
loans are only a small proportion of the GSE’s loans and that most of the loans
are either current or severely delinquent.

Using the Treasury HAMP NPV model the
FHFA study team compared the economic effectiveness of forgiving principal down
to a mark-to-market LTV (MTMLTV) level of 115 percent versus forbearance of the
same amount of principal for all loans with a MTMLTV greater than 115 percent.  The model suggested no better result from principal
reduction than from forbearance and showed the latter as slightly more
effective in reducing GSE losses.  The
team also evaluated the accounting and operational implications of the
principal reduction to measure those costs against benefits to borrowers.  The costs were found to include, in addition
to the immediate losses, the costs of modifying technology, providing training
to servicers, and the opportunity cost of diverting attention away from other
loss mitigation activities.

Principal forbearance, in
contrast, requires no systems changes and is a common approach in government
credit programs, including FHA. The borrower is offered changes to the loan
term and rate as well as a deferral of principal, which has the same effect on
the borrower’s monthly payment as principal reduction, but provides the investor
with potential recovery. The forborne principal is paid in full or part upon
sale of the property or payoff of the loan. This traditional approach would
minimize the Enterprise losses and treat GSE borrowers in a manner that is
consistent with other government programs.

Given the large portion of the
high LTV borrowers that are current on their mortgages, a principal reduction
program for this segment, such as the FHA Short Refi program, simply transfers
performing GSE borrowers over to FHA, at a cost to the GSEs. A less costly
approach for the Enterprises to assist these borrowers is to provide a GSE
refinance alternative, such as HARP. Clearly, the HARP program has been
underutilized to date, suggesting that the program features should be revisited
to remove barriers to entry wherever possible.

…(read more)

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