Mortgage rates hit another new low

Just one day after President Obama detailed a proposal to enable millions of homeowners to refinance to record-low mortgage rates, those rates notched another record.

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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Citi Exits Broker Biz; Fed Addresses Sticky Second Mortgage Situation

as I was standing in line at Franklin’s BBQ in Austin, Texas, my head began to
spin. Not because of the great smell, or from wondering why all these people
weren’t working at 11AM instead of standing in line, but from trying to keep
track of all the continued government
intervention in the housing market
– not that it hasn’t always been there.
As I tell folks, nothing is going to happen to Freddie and Fannie until 2013,
if at all, and the way Congress and the president keep using the agencies
to try to accomplish policies they certainly are not going away.

2.0 initiative aimed at helping agency homeowners to refinance. Then came HAMP
2.0 (this past Friday), aimed at helping to encourage more modifications.
Yesterday Obama unveiled a separate refinancing program (discussed below) targeted
at non-agency homeowners (making refinancing easier for mortgages not backed by
Fannie or Freddie). Finally, in the coming days/weeks we could get a final
foreclosure settlement as well as a plan to sell foreclosed homes in
bulk.  In aggregate, all these policy moves could help at the margin but
most believe they fall short of some grand Fannie/Freddie automatic refinance
plan for which some investors had hoped. Maybe we’re done with government
initiatives for the year? Perhaps not – don’t forget chatter out there about
the foreclosed properties sitting on the agency’s balance sheets, and large scale
plans of selling them to investors. And we have some type of possible
settlement between the state’s AG’s and large servicers…

Regarding President Obama’s election year housing
, which is probably going to require Congressional approval, and is
therefore highly unlikely…there are fact sheets ranging from 7-10 pages. It
certainly gave investors something to talk about yesterday, even if it will
take many months, if at all, to roll out. There is too much to reproduce here,
check out the original.
Most believe that this plan will not pass through Congress, given the level of
political polarization. And it is difficult to understand why the
Administration thinks it can get this proposal through Congress when it cannot
get the parts that do not need Congressional approval through the GSE’s and
FHFA (a federal agency). If rising pressure on the GSEs does lead to them to
adopt the agency components of this plan, there will be an enormous effect on
agency MBS.

One statement
noted, “… believe these steps are within the existing authority of the
FHFA. However, to date, the GSEs have not acted, so the Administration is
calling on Congress…” Most of the
proposals for the plan do not need Congressional approval but the
Administration is implying that the main reason to send these proposals to
Congress is that the Administration cannot get the GSEs (and presumably FHFA)
to do what needs to be done “in the taxpayer’s interest…”

Consequently, this public proposal seems to be a way to put pressure on the
GSEs and FHFA to do what the Administration wants. I guess this is how modern
government functions…

So please
dig into the fact sheet noted above – that is what the market knows.
Originators should probably not become too enamored or bogged down in the plan,
as it will take, if it happens at all, several months to sort out, digest, and
implement. And who knows which agencies or investors will still be around to
originate or buy those loans, which leads me to…

Broker Mortgage Lending Clients: Over the last four years, the Broker Lending
community has shown great resilience during continued consolidation of this
market segment.  We appreciate your partnership, your willingness and your
ability to adapt to the ever-changing regulatory environment. After careful
consideration, Citibank has decided to
transition away from our Broker lending business
and sharpen our focus on a
customer-centric channel strategy…In an effort to effectively manage the
Broker Mortgage Channel pipeline for you and your customers, we will manage the
transition as follows: We will no longer accept new registrations from our
Broker Mortgage Channel clients after the close of business on Wednesday,
February 8, at 11:59 pm CST. All locked pipelines must be funded and closed by
April 30.”

And with that, Citi exits the wholesale business. Although Citi had scaled back
from its broker channel some time ago, and tended to be more focused on certain
geographic areas than others, it is yet another piece of bad news. Brokers have
to be thinking about the old saying, “Death by a thousand cuts.” Of the major, top 4 or 5 investors who had
wholesale divisions a few years ago, or bought loans from correspondents who
dealt with brokers, who is left?
Uh, Wells Fargo. BofA is gone, Citi is now
gone, GMAC/Ally has scaled back, Chase won’t buy TPO business. SunTrust is
going through a massive retooling. That being said, there are plenty of
investors and lenders willing to step into this arena, and already have. I am
not going to make a list of them here, but brokers
do have many homes for their loans

(Ally’s results came out this morning.
The bank suffered a loss of $250 million for the 4th quarter, and
the mortgage Origination and Servicing segment reported a fourth quarter 2011
pre-tax loss from continuing operations of $237 million. “The fourth quarter
2011 pre-tax loss from continuing operations included $125 million of pre-tax
income from originations, an $81 million pre-tax loss from servicing and a $270
million charge recorded during the quarter for penalties expected to be imposed
by certain regulators and other governmental agencies in connection with
foreclosure-related matters.  In addition to the foreclosure-related
charge, fourth quarter 2011 Origination and Servicing results declined on a
year-over-year basis due to a lower net gain on the sale of mortgage loans,
lower net financing revenue due to a decline in production and higher
noninterest expense.” Refinancing was 80% of volume.)

There is
discussion about, “will the U.S. become a nation of renters?” A decent chunk of
private equity is certainly moving that way, buying up inventory to rent out.

This leads
into whether or not the U.S. is much different from other nations when it comes
to housing and interest rates. Just how does the U.S. stack up? Part II of a
write up on international housing comparisons can be found at

There are
many questions about how 2nd mortgages fit into refinancing plans,
and how institutions should handle the potential losses on the write-downs.
This week the Board of Governors of the Fed, the FDIC, the National Credit
Union Administration, and the OCC “issued supervisory guidance” on allowance
for loan and lease losses (ALLL) estimation
practices associated with loans and lines of credit secured by junior liens on
one- to four-family residential properties.
This serves as a message to
institutions to keep a careful eye on credit quality indicators relevant to
credit portfolios, including junior liens (i.e. second mortgages, home equity
lines of credit).  To view the full release, visit:

And many
mortgage insurance companies know about losses. Standard & Poor’s
downgraded the credit ratings of several U.S. mortgage insurers, and said the
outlook is negative. On Monday Fitch Ratings dropped its ratings on Old
Republic International Corp. (ORI) by three notches, sending the ratings into
junk territory. S&P downgraded MGIC Investment Corp. and its mortgage unit
a notch to B, Radian Group and three of its units, and Genworth Mortgage
Insurance Corp. and Genworth Residential Mortgage Insurance Corp. of North
Carolina by two notches to B.

For market
activity, traders reported that mortgages did exceptionally well despite making
new record highs on lower coupons (Fannie 3.5’s, containing 3.75-4.125%
mortgages are at a four point premium!) and the constant chatter about government
sponsored refi programs. MBS “spreads” (their yields versus Treasury
yields) closed tighter, which is good for mortgage prices in spite of
higher-than-normal selling volumes by originators. Normally the refi plan news
would shock higher coupons (they’re going to refinance!) but the market
believes it to be primarily a re-election ploy since the makeup of Congress
would make it difficult to get legislation passed. For the lower, rate-sheet
production, we saw strong buying from money managers, banks, hedge funds, and
the usual Fed. In terms of numbers, MBS prices Wednesday were basically
unchanged but the 10-yr T-note was worse by about .375, closing at a yield of

is the big unemployment number, but we have today first. We have some testimony
from Ben Bernanke before the House Budget Committee on “The Economic
Outlook and the Federal Budget Situation.” (I think we all know the
story.) We’ve had Initial Jobless Claims for last week (-12k to 367k), along
with the preliminary Q4 reading on Productivity and Unit Labor Costs (+.7% and
+1.2%). This is hardly market moving news, the
10-yr is at 1.82% and mortgage prices are roughly unchanged so far.



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WASHINGTON- The U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of the Treasury today released the December edition of the Obama Administration’s Housing Scorecard – a comprehensive report on the nation’s housing market. Data in the December Housing Scorecard show some subtle improvements in the market over the past year, but underscore fragility as the overall outlook remains mixed. For example, new and existing home sales rose compared to the prior month and remain higher than a year ago, and homes are more affordable than they have been since 1971. Median-income families today have nearly double the funds needed to cover the cost of the average home. However, home prices showed a slight dip from the prior month and remain below year ago levels. The full report is available online at

Mortgage Plan Draws GOP Opposition

Obama is betting his latest proposal to aid the housing market will fare better than earlier efforts, despite congressional opposition.