Refinance Free Credit

Citing a weakening economic environment the Federal Reserve cut interest rates 50 basis points in an attempt to soften the impending economic crash landing.  In other news the dollar was seen shooting glares of jealousy at its friend the Euro.

From the Fed statement:

 ”Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” according to the central bank. “Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.”

Clearly the path chosen is one of an attempt to sustain the unsustainable.  Lower borrowing costs do not fix the problem of solvency that is rampant in America.  On the other hand grab the  low rates while you can - while we may see further easing the Fed has removed some of the stronger language that points to guaranteed future rate cuts.

From the Market Watch article on the Fed rate cut:

Economists detected some effort by the Fed to cool expectations that the Fed would slash interest rates in coming months.

They noted that the Fed removed language saying that downside risks were “appreciable.” In addition, the Fed said that the rate cuts taken to date should promote “moderate growth over time.”

Shepherdson said he was not surprised the Fed would hint at slower easing.

“They were probably nervous expectations would run away,” and wanted to maintain some degree of flexibility, he said.

What do you think?

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As largely expected, the Fed cut the Federal Funds target rate 50 bps on Wednesday — just days after a 75 bp emergency cut. The cut comes as the U.S. grapples with the specter of a looming recession, the first to be led by a historic slump in housing and mortgage banking.

The target rate now stands at 3 percent, the lowest since June 2005.

“Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” the Fed said in a prepared statement. “Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.”

The FOMC’s decision wasn’t unanimous, however, with Richard Fisher, president of the Federal Reserve Bank of Dallas, serving as the lone vote against an increase.

The Fed also unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 percent.

Stocks rallied immediately after the news, with the Dow jumping up more than half of a percent in the minutes following the rate cut.

Click here to read the full statement by the FOMC.

The House of Representatives yesterday voted overwhelmingly to pass a modified version of a $146 billion economic stimulus bill.

Legislators voted 385-35 in favor of the bill, H.R. 5140, although it’s unclear what sort of sailing lay ahead in the Senate. Bloomberg reported that various senators are pushing to make changes to the House bill, although both the Bush administration and House representatives want the Senate to push the House’s version of the bill through quickly.

“We need to get this bill out of the Senate and on my desk so the checks can get in the hands of our consumers and our business can be assured of the incentives necessary to make investments,” Bloomberg quoted President Bush as saying.

Conforming, FHA limits boosted
The House package, while leaving out core reform measures for FHA mortgage lending, would still temporarily boost both the FHA and GSE lending limits to perhaps as much as $729,750, through the end of this year.

For both Fannie Mae and Freddie Mac, the bill calls for loan limits to be boosted to 125 percent of median home prices in a given area, with a hard cap at 175 percent of the current $417,000 conforming loan limit.

The House bill also boosts FHA’s maximum lending limits from $362,790 to 125 percent of a local areas median price, to a maximum limit of $729,750. In addition, HUD secretary Alphonso Jackson would have the discretion to increase FHA-eligible loan limits beyond the 125 percent price level for a given local area by as much as an additional $100,000, assuming there was room under the high-end cap to do so.

(Click here to read H.R. 5140 in the final form passed by the House).

Fannie Mae CEO Daniel Mudd went on Bloomberg television Tuesday to support boosting the conforming loan limit, and expressed his confidence that the GSEs could provide additional liquidity to the mortgage market, while also suggesting that Fannie would look to securitize any jumbo loans it purchases.

The NAR on Tuesday also hailed the House bill as much-needed help for the housing market.

“Our research highlights that increasing FHA loan limits will help an additional 138,000 Americans achieve the dream of home ownership and will allow nearly 200,000 homeowners to refinance and potentially keep their home,” according to president Richard Gaylord.

Senate still looking at housing
A lot will ride on the Senate as to whether or not the temporary — for now — loan limit increases become law; Inman News reported late Monday that Sen. Richard Shelby (R-Ala) has expressed opposition to raising GSE lending limits in the absence of a more complete reform effort — a view shared by OFHEO director William Lockhart.

An op-ed Wednesday in the Washington Post called on lawmakers to carve out the loan limit legislation from the final economic package:

Yes, $417,000 doesn’t buy much house in San Francisco. But isn’t at least part of the answer to let house prices moderate, so that you no longer have to be a plutocrat to live in Beacon Hill or Manhattan? We are told that the increased loan limit would lapse in a year or so. Don’t be too sure: What politician will want to take away this lucrative benefit a year from now? Steamroller or not, someone in the Senate needs to stop it.

Whether or not GSE and FHA loan limits are part of the Senate proposal or not, Charles Schumer (D-NY) said today in a Wall Street Journal story that the Senate is looking further to raise the limits on tax-exempt municipal mortgage revenue bonds as a way to ease refinancing concerns — and that this measure may yet be pushed into the final stimulus bill sent to the President:

Sen. Charles Schumer, a senior Democrat from New York, said the concept could show up as part of the stimulus package working its way through Congress.

“We may be able to get it in the stimulus, but if not, it will bode well in the near future,” he said. “There will be a housing package beyond the stimulus, and it will be in one of the two.”

Majority leader Harry Reid (D-Nev.) has said he wants the Senate to complete legislation by the end of this week.

Underscoring the effect lower rates have had on the primary mortgage market, the Mortgage Bankers Association said Wednesday morning that application activity surged to near a four-year high as borrowers made a beeline for refinancing applications in the past week.

The MBA’s Market Composite Index, which measures overall mortgage application activity, was 1054.9 for the week ended January 25, 2008 — an increase of 7.5 percent on a seasonally-adjusted basis from one week earlier. Total activity increased 70.7 percent compared with the same week one year ago, the MBA reported.

The application index is calibrated to March 16, 1990; a reading of 1054.9 means that application activity is more than 10 times greater than when the index was first established.

Driving that bounce was a surge in refinance applications, which jumped 22.1 percent and was more than enough to offset a corresponding sharp drop in purchase application activity. Refinacing interest has been high to start the year, as mortgage rates have touched four-year lows in recent weeks.

Those rates, however, have been extremely volatile during the past week.

“Mortgage rates on Wednesday morning early rate sheets were 5 percent with zero points,” said Andrew Horowitz, president of Huntingdon Valley, Penn.-based LMS Funding, in an email to HW. “[By Friday, that was] all the way back up to either 5.625 and possibly 5.75 for the same deal.”

Nonetheless, the MBA reported that refinance share of application activity reached 73 percent of all applications, up from 66 percent one week earlier; ARM share decreased to 8.6 percent from 9.3 percent of total applications.

For more information, visit http://www.mortgagebankers.org.

Flagstar Bancorp, Inc. said Wednesday that it lost $30.1 million, or $(.50) per share, during the fourth quarter as mortgage woes took their toll on the Michigan-based bank. The fourth quarter loss compares to net earnings of $6.9 million, $.11 per share, one year earlier.

In spite of the loss, the bank continued to see strong growth in origination activity. Fourth quarter 2007 mortgage loan production was $6.7 billion, including $6.5 billion of residential loans; Q4 originations one year earlier equalled $5.4 billion, including $5.1 billion of residential loans.

Flagstar’s servicing portfolio also continued to grow during the fourth quarter, reaching $32.5 billion versus $26.7 billion at the end of Q3.

Delinquencies skyrocketing
Non-performing loans — also known as severe delinquencies, an representing loans 90+ days in arrears — rose by an eye-opening 55 percent during the fourth quarter, to $197.1 million from $127.5 just one quarter earlier. NPLs represented 2.42 percent of loans held for investment at the end of the year, Flagstar said.

Delinquencies under 60 days in arrears rose 10.5 percent during the fourth quarter as well, hitting $130.5 million versus $117.9 million in the third quarter.

Allowance for loan losses was ratcheted up to $104 million during Q4, as a result, up from $77.8 million at the end of the third quarter. Flagstar took a $38.3 million loss provision charge against net charge off activity of $12.2 million.

Total non-performing assets, including REO, were $316.2 million, an increase of 43 percent between the third and fourth quarter alone. It’s worth nothing that current allowance for loan losses stands at just one-third the amount of current NPAs.

For more information, visit http://www.flagstar.com.

Disclosure: The author held no positions in FBC when this post was originally published.

UBS said late Tuesday that it faced a record loss of roughly $11.5 billion as write-downs tied to the U.S. mortgage market continued to exact a toll on Switzerland’s largest bank. In pre-announcing its fourth quarter earnings, UBS said it lost $12 billion on subprime-related positions, and another $2 billion in other mortgage positions.

The write-down total was larger than originally advertised; the bank had originally said in mid-December that it expected to record a $10 billion charge for the fourth quarter. Earlier this month, UBS said it would pull out of fixed-income proprietary trading in the U.S. as it looks to restructure ABS operations.

The additional $2 billion in write-downs outside of subprime mortgages was a major source of concern for the financial markets, according to coverage by Bloomberg:

“The damage is enormous,” said Dominique Biedermann, director of Ethos Foundation in Geneva that holds UBS shares worth about 80 million francs and has called for an independent audit of the bank’s controls. “It wipes out profit and shows that an inquiry is needed to make sure it doesn’t happen again, and eventually whose responsibility this is.” …

“Value declines have extended beyond just subprime-related exposures, to new areas, for which we do not yet have disclosure on exposure size,” Jeremy Sigee, an analyst at Citigroup, said in a note to clients. “The recently bolstered capital base remains vulnerable to further erosion.”

UBS was not a large player in terms of mortgage securitization, so these losses end up being particularly troubling; and they certainly don’t bode well for investment banks’ earnings going forward.

Market Watch is reporting that the FBI is scrutinizing 14 companies related to the mortgage industry at all levels of the securitization process as part of their investigation in to the mortgage meltdown.

 Agents are looking into allegations of fraud in several stages of the mortgage securitization process, in which home loans are packaged up by investment banks and sold as securities to institutional investors, Brian Hale, an FBI spokesman explained. He declined to name the companies being investigated.

Housing Wire has some additional information on the FBI’s mortgage company investigation which has yet to name any company names.

The FBI is the latest to get in to the investigation act and I would suspect that we will see many more of these over the next year and a half.  Housing Wire notes that bankrupt firms are not exempt from the investigation which means that executives that ran the companies that made an early exit may still be on the hook for activity at the now-defunct lenders.

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Fannie Mae CEO Daniel Mudd went on Bloomberg TV today to discuss the proposal being floated in Congress to temporarily boost the GSE conforming loan limit from its current level of $417,000. In his interview, he suggests that Fannie would be able to provide much-needed liquidity to the jumbo market — which he says represent “working class” mortgages for many borrowers.

The full interview is below:

When the Federal Reserve lowered the Fed Funds Rate by 0.75% yesterday, it was in response to economic weakness that mounted since its last meeting December 11, 2007.

By contrast, the mortgage markets meet every day. 

Because of this, mortgage rates had already "priced in" the weakness to which the Fed was reacting. 

This is why mortgage rates did not fall by the same 0.75% yesterday -- they only fell slightly.

Two important rates that did fall, though, were the 6-month LIBOR and the 1-year constant maturity treasury (CMT). 

These are two popular interest rates used in adjustable-rate mortgages.

When an ARM adjusts, it adjusts according to a simple math formula:

(New Interest Rate) = (Index) + (Margin)

Where:

Index: A variable, usually 6-month LIBOR or the 1-year CMT.
Margin: A constant, usually ranging from 1.500% to 6.999%

So, if the indices move lower -- as we saw yesterday -- the adjusted interest rate on a mortgage is going be lower, too.

As an example, LIBOR fell  percentage point over the last month from 4.83% to 3.83%.  This means that mortgage rates tied to LIBOR will adjust 1 percent lower than they would have in December 2007.

For every $100,000 in a principal + interest loan, this yields $65 per month in savings.

Of course, each mortgage has unique index, margin and rate characteristics so talk to your loan officer about how your ARM operates.

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