Refinancing Apps Rise on Record Low Rates

Mortgage
rates broke another set of records during the week ended February 3,
establishing several new historic lows. 
In response, the seasonally adjusted Mortgage Bankers Association’s (MBA)
Market Composite Index, a measure of mortgage application volume, rose 7.5
percent and 8.7 percent on an unadjusted basis. 
  

The increases were
driven solely by refinancing which represented 80.5 percent of total applications for the week,
up from 80.0 percent the previous week. 
The Index measuring applications for refinancing increased 9.4 percent over
that of the week ended January 27 but the seasonally adjusted basis the
Purchase Index ticked up only 0.1 percent. The unadjusted Purchase Index was 6
percent higher than in the previous week and 4.1 percent lower than during the
same week in 2011. 

The four-week
moving averages for the seasonally adjusted Market and Purchase Indices were up 4.88 percent and 0.65 percent respectively and
the moving average for the Refinance Index rose 5.72 percent. 

Statistics for the
month of January indicate that investors played a slightly smaller part in the
purchase mortgage market than in December with the investor share of applications
for home purchase at 6.4 percent compared to 6.9 percent in December.  In
addition, the share of purchase mortgages for second homes increased to 5.9
percent in January from 5.4 percent in December.  The investor share of applications declined
in the West and East North Central regions. 

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

Both the average
contract interest rate and the effective rate for all types of mortgages with
loan-to-value ratios of 80 percent declined for the week and all fixed-rate
mortgages (FRM) reached new lows. 

  • Rates for 30-year FRM with onforming loan balances of $417,500
    or less
    decreased to 4.05 percent from 4.09 percent, with points increasing to 0.44 from 0.41 including the
    origination fee. 
  • Jumbo 30-year FRM, those with loan
    balances greater
    than $417,500,
    had averages
    rates of 4.29 percent with .43 point compared to 4.33
    percent with 0.41 point.
  • The rate for 30-year fixed-rate mortgages backed by the
    FHA decreased to 3.89 percent from 3.96 percent, with points increasing to 0.78
    from 0.61. 
  • Fifteen-year FRM had an average
    rate of 3.33 percent, down 3 basis points from the previous week and points decreased to
    0.37 from 0.41. 
  • The rate for 5/1 adjustable-rate mortgages (ARM) decreased to
    2.91 percent from 2.94 percent, with points increasing
    to 0.40 from 0.39. The ARM share of mortgage
    applications was up to 6.0 percent from 5.6
    percent the previous week.

MBA’s Weekly
Mortgage Applications Survey covers over 75 percent of all U.S. retail
residential mortgage applications, and has been conducted weekly 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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GSE Profitability to Test Conviction of Lawmakers

Yesterday
Freddie Mac announced net income
of $676 million for the quarter ended March 31, 2011, compared to a net loss of
$113 million for the quarter ended December 31, 2010. The company release
states Freddie had a positive net worth of $1.2 billion on March 31, 2011. As a
result, no additional funding from Treasury was required for the first quarter
of 2011.

Up
until now the notion that either GSE could be profitable in this housing market
and canoe-shaped recovery seemed unimaginable to even the most informed and
astute industry veterans. The likelihood was further hamstrung by required 10% dividend
payments which must be paid by the GSEs to Treasury each quarter.

Then
again, one has to remember that Fannie Mae and Freddie Mac can produce $35B+ a
year in net interest margin alone, standing on their head…

Both
firms now have substantial credit loss reserves thanks to Treasury infusions
during conservatorship.  Both organizations are also working diligently at
slashing their operational expenses through a combination of outsourcing,
system enhancements, and cutbacks. From that perspective, with positive
progress in motion,  the inevitable
question becomes – “how loud will
the cries from Capitol Hill be after the second or third quarter of
profitability by these organizations?”

One
thing I do know is that while it might take half a lifetime for the GSEs to pay
the Treasury back in full on their current course – wound down institutions
don’t write checks at all.

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MERS, Banks Sued by New York State; MERSCORP Responds

Three major banks and Virginia-based
MERSCORP, Inc. and its subsidiary Mortgage Electronic Registrations Systems
(MERS) were sued Friday by the state of New York.  The suit, filed by the state’s Attorney
General Eric T. Schneiderman
, charges that the creation and use of a privately
national electronic registration system, MERS, “has resulted in a wide range of deceptive and fraudulent foreclosure
filings in New York state and federal courts, harming homeowners and
undermining the integrity of the judicial foreclosure process.”  Further, the lawsuit charges that the
employees and agents of the three banks, Bank of America, J.P. Morgan Chase,
and Wells Fargo
, acting as “MERS certifying officers,” have
repeatedly submitted court documents containing false and misleading information
that made it appear that the foreclosing party had the authority to bring a
case when in fact it may not have.  The
suit also names additional defendants for some of the charges including loan
servicing subsidiaries of the three banks.

The
lawsuit, filed in the Supreme Court of the State of New York, Kings County levies
the following charges:   

  • MERS was created to allow financial
    institutions to evade country recording fees, avoid the need to publicly record
    mortgage transfers and facilitate the rapid sale and securitization of
    mortgages. MERS members log all of their
    transfers in a private electronic registry rather than in the local county
    clerk’s office.
     
  • MERS is a shell company with no
    economic interest in any mortgage loan.
    It is the nominal “mortgagee” of the loan in the public records and
    remains as such regardless of how often the loan is sold or transferred among
    its members.
     
  • MERS has few or no employees but
    serves as the mortgagee for tens of millions of mortgages. It has indiscriminately designated over
    20,000 MERS member employees as MERS “certifying officers” expressly
    authorizing them to assign MERS mortgages and execute paperwork to foreclose on
    properties and submit claims in bankruptcy proceedings while failing to
    adequately screen, train, or monitor their activities. Assignments were often automatically
    generated and “robo-signed” by individuals who did not review the
    underlying property ownership records, confirm the documents’ accuracy, or even
    read the documents. MERS certifying
    officers have regularly executed and submitted in court mortgage assignments
    and other legal documents on behalf of MERS without disclosing that they are
    not MERS employees, but instead are employed by other entities, such as the
    mortgage servicer filing the case or its counsel.
     
  • Use of the private database to
    record property transfers has eliminated homeowners’ and the public’s ability
    to track them through the traditional public records system. This data base is plagued with inaccuracies
    and errors which make it difficult to verify the chain of title or the current
    note-holder. In addition, as a result of these
    inaccuracies, MERS has filed mortgage satisfactions against the wrong property.
     
  • This “bizarre and complex end-around
    of the traditional recording system” has saved banks more than $2 billion in
    recording fees and allowed the banks to securitize and sell millions of loans, “often
    misrepresenting the quality and nature of the mortgages being transferred.”
     
  • The creation and use of the MERS
    System by the Defendant Servicers and other financial institutions has resulted
    in a wide range of deceptive and illegal practices, particularly with respect
    to the filing of New York foreclosure proceedings in state courts and federal
    bankruptcy proceedings.

The lawsuit estimates that MERS
members have brought over 13,000 foreclosures against New York homeowners
naming MERS as the foreclosing property when in many cases MERS lacks the
standing to foreclosure.  Even when
foreclosures were not initiated in MERS name, proceedings related to their
registered loans often included deceptive information.

The lawsuit seeks a declaration that
the alleged practices violate the law, as well as injunctive relief, damages
for harmed homeowners, and civil penalties. The lawsuit also seeks a court
order requiring defendants to take all actions necessary to cure any title
defects and clear any improper liens resulting from their fraudulent and
deceptive acts and practices.

On January 24 the U.S. Court of
Appeals for the 11th Judicial Court upheld an appeal from MERS that
contended a lower court had erred in finding that a homeowner had been
improperly foreclosed on by MERS 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.

The New York suit differs slightly from
the facts in Smith V. Saxon Mortgage,
but if Schneiderman wins his case, it could be that the legitimacy of MERS will
ultimately have to be decided by the U.S. Supreme Court.

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Homeowners Continue Shift Away from Cash-Out Refinancing

Homeowners who refinanced their homes during the fourth
quarter of 2011
either refinanced for about the same amount or actually brought
cash to the table according Freddie Mac. 
Fewer than 15 percent of those who refinanced during the quarter
increased their loan amount by 5 percent or more.  This is the lowest percentage of “cash-out”
borrowers in the 26 years that Freddie has been tracking the statistics.  During those 26 years covering 1985 to 2010
the average percentage of cash-out borrowers was 46 percent.

Thirty-seven percent of refinancing homeowners took out new
loans of approximately the same size as the old loan but nearly half (49
percent) actually brought cash to the table, reducing the amount of the new
loan to a median ratio of .74 of the old loan. 
The percentage of “cash-in” borrowers is also a 26-year record.

The fourth quarter figures are a stark contrast to the
pattern of refinancing during the last years of the housing boom.   During
eight consecutive quarters (Q4 of 2005 to Q3 of 2007) cash-out loans exceeded
80 percent of all refinancing and in none of those quarters did more than 8
percent of homeowners reduce the size of their mortgages when refinancing.

Borrowers who refinanced achieved a new interest rate about
1.4 percentage points lower than their old mortgage, a 26 percent improvement.  These borrowers will save a median of $2,700
during the first year if they have a $200,000 loan.

The 15 percent who did cash out took an estimated $5.5
billion in net equity out of their homes, representing 3.0 percent of the total
refinanced.  This was down from $5.6
billion and 3.7 percent in the third quarter. 
Adjusted for inflation this was the lowest level since the third quarter
of 1995.  During the peak period for
cash-out refinancing, the second quarter of 2006, homeowners cashed out $83.7
billion through refinancing, 31.1 percent of the total value of all transactions.   

Freddie Mac said that the mortgages refinanced had been in
place for a median of four years and the underlying collateral had decreased in
value by a median of 4 percent during that time.  The Freddie Mac House Price Index shows about
a 23 percent decline in its U.S. series during that four year period.  Thus, Freddie Mac says, “Borrowers who refinanced in
the fourth quarter owned homes that had held their value better than the
average home, or may reflect value-enhancing improvements that owners had made
to their homes during the intervening years.” 
This statement does not seem to recognize the possibility these
borrowers had been able to refinance solely because their homes had held value
and thus self-selected their loans for analysis.   

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Housing Assistance 2012: Another Herculean Task for the FHA

Beginning the 37th month of his presidency, the Obama Administration today announced a laundry list of new programs to help struggling homeowners, crack down on abusive lending practices, make mortgage documents easier to read, convert REO to rental, and other assorted initiatives.  Some require Congressional approval; others are a work in progress, and a couple can begin quickly.
 
At the heart of the announcement is a broad new refinance program with the venerable FHA stepping in (once again) to help save the mortgage market by offering current but underwater non-FHA borrowers another lifeline.
 
Concurrently, the Administration appears to be on the verge of a broad-based “REO-to-Rental” initiative by announcing a pilot project to be led by FHFA, HUD, and Treasury.  I think the Administration is smart to move this initiative forward as they certainly have the political cover through last year’s RFI process.  They asked for comments and suggestions and reportedly received thousands of responses.  They can now say we are implementing what America said they wanted.   Of course, we do not yet know exactly how it will work.
 
Lawmakers and mortgage industry professionals have previously questioned whether or not FHA can handle yet another herculean task.  Recall in 2007 when the mortgage market sputtered and into 2008 when new higher loan limits were unveiled, FHA saw its share of the mortgage market jump exponentially in a matter of months. What was a $350 billion book of business in 2005 has today mushroomed to $1 trillion with more than 7.4 million homes with FHA insurance.
 
Since presumably these would be riskier borrowers (higher LTVs and underwater) it remains to be seen:

  1. If Congress will give FHA the authority to increase its current LTV caps.
  2. How OMB will “score” the proposal thus dictating the mortgage insurance pricing?
  3. Will proposed new bank fees and presumably higher premium revenue off-set the expected “cost” to FHA?

FHA is reportedly considering placing these loans in an insurance fund separate from its current Single Family books of business, but could ultimately require the FHA to invoke its “permanent indefinite” budget authority to keep it afloat (as opposed to the self-sustaining Mutual Mortgage Insurance fund).
 
That said, the Administration indicated the cost of these programs will “not add a dime to the deficit” and will be off-set by a fee on the “Largest Financial Institutions.”  (Note: Congress might have an opinion here.)
 
Since FHA has not in recent memory refinanced borrowers with LTVs in the 120-140 range (presumably one of the groups targeted by the Administration), I think it will be difficult to estimate the performance of these loans over time and thus their impact on FHA’s actuarial foundation regardless of which fund they place them in.  While the FHA “short re-finance” program announced in 2010 allowed a 115% CLTV, it has had very little participation thus making it difficult to gauge performance relative to what could be even higher LTV participants.
 
It should be noted that the Administration is targeting borrowers who have made 12 consecutive payments so one could argue that despite the fact they are underwater they have been able to afford their mortgage payments – presumably in some cases for several years.  So does that mitigate some of the potential risk meaning that they will certainly be able to afford reduced monthly payments?  But again, given FHA’s limited experience with borrowers outside their established guidelines and requirements predicting their performance with any degree of certainty is difficult at best.
 
And assuming those previously non-FHA borrowers default on their new FHA loan, who do you think will now be at-risk with an underwater property?  Again, the Administration stated these programs “will not add a dime to the deficit” – I hope they are right.
 
FHA’s actuarial soundness has been rocked by the on-going erosion of house prices nationwide which has led to three consecutive years of declines in their capital reserve ratio.  The best medicine for FHA is house price appreciation and the positive ripple effect of increased value to their housing portfolio.  But they have been waiting three years for that to happen.
 
Welcomed news as part of this new refinance program is they would be removed from an FHA lender’s compare ratio within Neighborhood Watch (FHA’s public database of lender’s default rates compared to its peers in a given geographic region).  That said, I suspect FHA will establish a separate category of compare ratios for this book of business, as it did for Negative Equity Refinances and the Hope For Homeowner (H4H) program.
 
So while this action will remove a potential barrier to participation, lenders should be cautioned that performance will still matter and they should stand ready for increased scrutiny especially by the HUD OIG.
 
I give the Administration credit for launching another round of housing assistance as too many homeowners continue to struggle.  Putting politics aside on the surface it appears to be the right and proper thing to do, however it remains to be seen the level of participation (and degree of Congressional acceptance) and ultimately what cost, if any, to the taxpayers – most of which have grown weary of the nagging housing crisis.
 
Note: We will continue to follow this initiative with keen interest as it makes its way through Congress and will offer periodic updates as developments warrant.

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