Refinance Free Credit

A Fed official said yesterday that housing woes are a weight on the U.S. economy that has yet to be resolved, and warned that the Fed may have to contend with a situation where downward market forces feed off of one another. Saying “growth risks as skewed to the downside for the near term,” Janet Yellen, president of the Federal Reserve Bank of San Francisco, suggested that the Federal Reserve may need to take further action to prevent “a negative feedback loop” from gripping the economy.

“In circumstances like these, we can’t rule out the possibility of getting into an adverse feedback loop,” she warned. “That is, the slowing economy weakens financial markets, which induces greater caution by lenders, households, and firms, and which feeds back to even more weakness in economic activity and more caution.”

Saying that consumers “are likely to be pretty hobbled” this year, Yellen said that forward-looking developments in the housing market would be likely to further strain consumer spending in 2008.

“House prices have fallen noticeably and the declines have intensified,” she said. “Moreover, futures markets for house prices indicate furter — and even larger — declines in a number of metropolitan areas this year.”

Attempting to mitigate the effects of the housing slump by lowering the Federal Funds target rate to 3 percent in recent weeks has clearly come with some inflationary cost, however; Yellen said inflation is “somewhat above what I consider to be price stability.” Core inflation has risen 2.2 percent in the past twelve months, and 2.7 percent in the past three months — numbers that were characterized as a disappointment by the FRBSF president.

“My overall assessment is that the turbulence in financial markets is due to some fundamental problems that are not likely to be resolved quickly,” she said.

The Wall Street Journal reported that in remarks made after her speech, Yellen said that the Fed remains focused on the downside risks to the economy — but will move to raise rates to prevent inflationary pressures when “the time comes.”

President Bush signed the $168 billion stimulus package today and gave HUD 30 days to figure out how the loan limit increases will be implemented (h/t Rhonda).

From Bloomberg on the passage of the economic stimulus package:

U.S. economic growth “has clearly slowed,” Bush said in a ceremony at the White House, surrounded by congressional Democrats and Republicans who put aside differences to pass the measure last week. “The bill I’m signing today is large enough to have an impact,” Bush said.

Rebate checks will be sent to more than 130 million Americans beginning in May. Those eligible for payments include 20 million senior citizens and 250,000 disabled veterans.

Economic growth in the fourth quarter slowed to a 0.6 percent annualized pace, and U.S. employers cut jobs in January for the first time in four years, raising concern about a possible recession.

Under the rebate program, people will get a check of up to $600 for individuals and $1,200 for couples, plus $300 for each child. Rebate checks for $300 would be sent to those whose Social Security benefits, veterans’ disability payments and earned income that totaled at least $3,000 last year.

For more on what the increased loan limits mean see my earlier post.  More as it becomes available.

The largest shareholder in Countrywide Financial Corp. said late yesterday that it has upped its stake in the nation’s largest mortgage lender, adding intrigue to a pending acquisition by Bank of America later this year.

In a letter to shareholders, Legg Mason Capital Management’s chief investment officer Bill Miller disclosed that the company has upped its stake in Countrywide from 11.8 percent to 14.9 percent as of January 18, and said he was looking for more.

The Office of Thift Supervision has given permission to Legg Mason to acquire up to 25 percent of outstanding shares, according to chief investment officer Bill Miller. Miller said that Legg Mason was looking for an exception to a so-called “poison pill” provision at Countrywide that essentially prevents it from obtaining more than a 15 percent interest in the lender, as a result.

Miller expressed ’surprise’ at the decision to sell:

We were quite surprised by the decision to sell the company at close to a seven-year low in the stock price, and agreeing to a bid that amounts to only 30% of book value and under 3x consensus earnings for 2009. What makes the decision puzzling is that the company was seeing solid deposit growth, has no apparent capital problems, was not forced by the regulators to seek a merger partner, and is in sufficiently sound condition to have declared its regular quarterly dividend at the end of January.

Miller characterized the purchase agreement as a “put option contract,” characterizing the planned merger as “protection to CFC owners from a worst-case outcome should the housing, mortgage, and economic situation worsen dramatically.” He said that while Countrywide has not published details of the merger, Legg Mason would “support the deal if we believe it is in the best interests of shareholders.”

The Wall Street Journal’s Deal Journal said Wednesday that Miller could be “agitating for a higher price for Countrywide.”

Legg Mason, however, wasn’t the only investor busy acquiring shares of the battered lender. A division of Capital Research and Management Company, which manages the American Funds family of mutual funds, disclosed Monday that it took a 6.1 percent stake in Countrywide at the end of 2007.

But while some investors have been buying, others are still selling. Societe Generale sub TCW Group, Inc. said Monday in a SEC filing that it had divested its previous 5 percent interest in the lender.

The BofA merger values Countrywide stock at just below $8.00 per share. Shares in the lender were trading at $6.92 when this story was published.

Disclosure: The author held no positions in CFC when this story was originally published.

click to see top 50 MSAs

For all of the attention California and Florida have been getting during the recent housing bust — and rightfully so — the nation’s highest foreclosure rate isn’t in either former housing hotspot. It’s in none other that Detroit, Michigan, which has seen its economy decimated by continuing woes in the U.S. automobile industry.

Detroit registered the highest foreclosure rate among the nation’s 100 largest metro areas during 2007, according to a report released Wednesday, with close to 5 percent of its households entering some stage of foreclosure during the year — 4.8 times the national average, and up from about 3 percent in 2006. A total of 72,616 foreclosure filings on 41,273 properties were reported in the Detroit metro area in 2007, up 68 percent from 2006, according to foreclosure listing service RealtyTrac.

Not that California or Florida, however, were all that far behind. Fifteen of the metro areas with the top 20 metro foreclosure rates were located in just four states: California with six, Ohio with four, Florida with three and Michigan with two.

Overall, the rate of foreclosures nationwide increased nearly 80 percent from 2006 levels, according to RealtyTrac.

“As expected, the number of properties entering some stage of foreclosure in 2007 was up in the vast majority of the nation’s 100 largest metro areas, with 86 metros reporting increases from 2006,” said James J. Saccacio, chief executive officer of RealtyTrac. “Most of the metro areas with the highest foreclosure rates were either cities like Stockton and Las Vegas, which experienced meteoric growth and unsustainable price appreciation over the past few years, or cities like Detroit, which are undergoing a more widespread economic downturn along with higher unemployment rates.”

Stockton in particular has been hard hit, with 4.86 percent of its households entering some stage of foreclosure during the year, RealtyTrac said. A total of 22,184 foreclosure filings on 10,608 properties were reported in the metro area in 2007, up 271 percent from 2006.

Other California metros with foreclosure rates in the top 20 were Riverside-San Bernardino at No. 4, Sacramento at No. 5, Bakersfield at No. 7, Fresno at No. 14 and Oakland at No. 16.

Las Vegas posted the third highest metro foreclosure rate among the 100 largest metropolitan areas in 2007, RealtyTrac said, with 4.2 percent of households entering foreclosure in 2007.

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

MGIC Investment Corp. swung to a huge fourth quarter loss, as it pumped $1.2 billion into reserves for future losses — and said there was more to come. The mortgage insurer reported a quarterly net loss of $1.47 billion, $18.17/share, compared to earnings of $121.5 milion, $1.47/share, in the year-ago period.

That loss was nearly triple what analysts had expected, with the Wall Street Journal reporting Wednesday that a Thomson Financial poll had pegged expectations at a loss of $6.77 per share.

The $1.2 billion reserve, called a “pre-tax premium deficiency reserve,” is essentially the insurance equivalent of a loss provision charge recorded by a mortgage lender. It reflects the present value of expected future losses and expenses that exceed current loss reserves — which means that MGIC is now expecting to lose much more money on certain loans that it had originally thought.

Citing low cure rates, greater loss severity and quickly increasing borrower defaults, CEO Curt Culver said that MGIC doesn’t expect to report a profit in 2008, and will look for ways the company can raise capital going forward.

Cure rates are a problem in California and Florida, Culver said, while economic weakness in the Midwest is pushing overall delinquency rates higher as well; HW has been calling attention to low cure rates for the past four months.

As expected, fourth quarter paid losses were $1.35 billion, slightly above the $1.3 billion the company had warned of in late January.

Delinquencies rose to 107,120 insured loans, MGIC said, up from 90,829 at the end of the third quarter and 78,628 one year earlier. A look at the financials, however, underscores that deliquencies are increasing universally: prime loans, where the borrower had a FICO above 620, saw delinquencies rise 47 basis points from 3.86 percent to 4.33 percent between the third and fourth quarters of last year. Reduced doc loans, spanning all credit classes, saw delinquencies jump to 15.48 percent in Q4, compared to 12.14 percent one quarter earlier.

In a new break-out of its bulk insurance business — where a mortgage insurer underwrites policies in bulk for loan pools as a form of credit enhancement for securitization — MGIC said that “Wall-Street-based bulk insurance” in particular was proving to be problematic, for both current and future losses.

As a result, MGIC said it had ceased writing that portion of its bulk business; it will still provide insurance on bulk transactions with the GSEs or where the lender will hold the loans, it said.

That’s not a small decision. To put it into perspective, “Wall Street bulk transactions” represented 41 percent of all new insurance written in 2007, so this exit will be particularly painful for MGIC. The hit to revenue will likely be especially strong when combined with recently-announced policy changes that will see the insurer pull back from its more traditional flow insurance in key states, as well.

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

In a rather erudite memo titled “New conforming loan limits – estimating the benefit” (pdf), SunTrust Mortgage EVP Tuck Reed details some of the potential changes to mortgage rates with the passage of pending economic stimulus package and rise in conforming loan limits. The bottom line - Mr. Reed only sees price improvements if Fannie Mae and Freddie Mac create a new mortgage backed security issuance that separates the jumbo loans from the conforming loans that current make up the GSE issuances. Tanta at Calculated Risk reported on the same with the post Traders: Don’t Put Jumbos in my TBAs.

He argues correctly that if Fannie and Freddie attempt to combine the jumbo loans in to the existing MBS issuances that the spread between jumbo rates and conforming rates will only narrow by the conforming rates RISING due to the increased risk and need for additional yield from investors.

However, even if Fannie and Freddie carve out the jumbo loans from the traditional mortgage backed securities issuances the rates on jumbo loans should drop approximately 40 basis points assuming there is adequate demand from investors of the new MBS class. In the short term though he doesn’t anticipate a drop in the rates surrounding jumbo loans until investors become comfortable with the new issuances.

As for liquidity, things get a little more complicated. (I know what you’re thinking…”Oh Lord, here he goes”…but bear with me a minute.) Today, agency MBS trade with excellent liquidity thanks to very clear and highly controlled rules about what kinds of loans can be used to back “generic” agency MBS. These generic agency MBS are called “TBAs” since the actual loans that will go into the bonds are not known when the bonds are initially sold but are “to be announced” just before the investor takes ownership. These rules allow forward trading in bonds that haven’t even been created yet since investors feel certain they know what they will get once the bonds are made several months later. Certainty around the types of loans they will get in TBA securities also helps investors to get comfortable they can estimate the prepayment behavior of the bonds they’re buying. If anything happens to that certainty and our ability to sell TBA bonds for future delivery, we’ve got big problems.

The industry would seize-up; imagine last year’s liquidity crisis times ten. As you can imagine, no one’s interested in tinkering with something so important to the industry and it’s not clear yet if the larger balances will be allowed in TBAs.

If the securities dealer association that governs MBS decides to allow some or all of these larger balances to go into “TBAs”, we could expect a reduction in the spread between agency and non-agency mortgage rates – but mostly because today’s agency balances would be penalized. In other words, the spread between today’s agency and non-agency note rates would likely decrease, but only because today’s agency rates would increase as investors lose interest in TBAs.

On the other hand, if the bond market association decides to leave today’s TBAs alone and create special MBS for the new agency balances, we should not expect much reduction in the rates for the new conforming balances
right away.

This is a critical point that can’t be overlooked. Even with the GSE backing investors still need to buy the new MBS issuances made up of the larger loan amounts. Obviously the government backing of the GSE’s will help confidence; but Fannie and Freddie must take great care in handling the new debt issuances to ensure that investors don’t get skittish around all GSE issuances. He correctly argues that a scenario in which investors shy away from Fannie and Freddie MBS’s would make the current credit crisis look like child’s play.

Specifics of the Conforming Loan Increases

Now that we have the pricing out of the way let’s talk about specifics around the increases. Mr. Reed does a nice job with this as well.

From his paper:

The bill sets the FHA and conforming (FNMA/FHLMC) loan limits to the lesser of $729,750 or 125% of an area’s median home sales price. If 125% of an area’s median home sales price is below the current conforming loan limit of $417,000, don’t worry; the $417,000 still applies. In other words, you will not be any worse off than you are today. The area median home price is determined by HUD and is based, in part, on the National Association of Realtors data for each MSA.

• The FHA and conforming limit changes are meant to be temporary and are set to expire on Dec 31, 2008 (unless extended, which wouldn’t surprise me).
• The new limits will apply to 30 year and 15 year fixed rate, fully amortizing (sorry, no IO), and owner occupied.
• ARMs are being considered, but if allowed, the increase will likely apply to one ARM type (for example, 5/1s).
• FNMA will have other credit overlays including LTV limitations (probably 90%).
• The limits will be effective as soon as the bill is signed, FNMA determines pricing, and we can update systems.
• OFHEO, which regulates FNMA and FHLMC, is not very pleased that the bill does not include complete “GSE reform” and will most likely have the final say in its implementation schedule.

Who will benefit?

Mr. Reed continues:

Since the new FNMA limits are restricted to 125% of an area’s median home price, it’s estimated that only twenty of the larger MSAs across the country will see an increase in conforming loan limits and only six will see the limit go to $729,750 (see table below). Of the six big winners, five are in California and the other is in Hawaii (like we need another reason to be jealous). However, two MSAs within our footprint should see limited benefit:
Washington DC and Miami-Fort Lauderdale-West Palm Beach FL. However, the DC area limit will only go to approx. $550K while the benefit in FL should be even less - approx. $433K.

So thanks to Mr. Reed. He made my job a lot easier and shows some smart thinking in the process.

No Magic Bullet

This conundrum clearly shows that legislative policy can’t necessarily save the over-priced housing market. As Tanta at Calculated Risk said “Congress didn’t see this coming.”

The former basketball star who was made infamous by choking coach P.J. Carlisemo faces foreclosure after failing to make five months of mortgage payments.  He’s not the only star facing mortgage problems, as we’ve reported on MJ’s (Jackson, not Jordan’s) foreclosure woes.

Sprewell owes about $259k on a $450k Milwaukee home.  He also had his $1.2 million yacht repoed and auctioned after failing to make his monthly payments on the boat.   This from a man who turned down a 3-year $21 million contract to voluntarily retire stating he “has a family to feed.”

From the ESPN story covering the Sprewell foreclosure:

Former NBA star Latrell Sprewell’s home is up for foreclosure and his yacht sold at auction to help pay off the $1.3 million he owes on the boat, according to court filings.

Sprewell, who once turned down a three-year, $21 million contract extension saying, “I’ve got my family to feed,” has apparently fallen on tough times.

RBS Citizens NA, or Citizens Bank, filed a foreclosure suit last week in Milwaukee County for the $405,000 home Sprewell bought in the Milwaukee suburb of River Hills in 1994.

In court documents, the bank said Sprewell owed $295,138 in outstanding payments plus interest.

With an 81 to 16 vote, the Senate passed an amended version of H.R. 5140, a $150 billion plan to jumpstart the economy with temporary tax breaks for consumers and businesses, extended benefits, and most importantly, two provisions designed to assist the housing market.

The bill temporarily increased the size of loans that may be purchased by Fannie Mae and Freddie Mac, raising the current level of $417,000 to reportedly up to $730,000 in the highest cost regions of the housing markets. The bill also increases the size of loans the Federal Housing Administration could insure.

But let's take a reality check. Are we really going to see $730,000 in the Puget Sound region? Here is some local data and speculative forecasts to chew on:

Now can we all just go back to work and sell something?

For weeks now all I have heard is the Feds are meeting at the end of January and I can’t close a loan because rates are going to fall.

So what happens? Loan officers search the Internet for 8 hours a day looking for news and reading rate sheets just to try to save an eighth. They are to busy to prospect or work files because of the big news that is coming.

Then last week surprise cut puts everyone in a spin. I hear “how can I sell my client a mortgage when the rates keep dropping?” We all forget that these are SHORT TERM rate cuts not 30 – 40 year securities. In fact average 30-Yr FIXED rates have risen up to a quarter-point since last Wednesday.

Date line Wednesday, 1/30/08:

Everyone including my 3 year old could have predicated a half-point drop!

Big deal! Rates are the lowest in almost three years. Funny thing, six months ago an objection we heard was “I am not going to refinance unless I can get my rate in the 5’s.” Now we call the same people, give them the great news and guess what? They now tell us they will not do it unless they get into the 4’s.

Folks, we have to stop just trying to sell rate and sell what the rate can do for our clients:

• We can lock in long term loans under 6%
•  We can get them cash to pay down debt
  
• We can help them achieve their long term financial goals
  
•  We can help them get money for their kids education
  
•  We can help them buy vacation homes
  
• We can help them buy investment properties

We can, We can, We can, We can, We can. What ever it is WE CAN!

But we can’t expect a client to just lie down and say “yes” just because the rates have gone down. Yes, rate is important. This is why I post them on the top of my blog but rate does not sell a house or get a mortgage. It is an ice breaker not a deal closer.

Many of us, like me, came to this business to help people. It has been a long hard six months. Let’s not forget why we are here.

Loan Officers, real estate agents, Realtors, we need to go back to work and sell something now! The market has bottomed out. Don’t lose a deal over a couple of dollars or a minor rate change. If you wait chance is that someone else will get it.

The spring market is here. Tax refunds are in the mail or being deposited. Folks, this is the time of the year when prices go up.

Time to dust off all of those tickler files. Get them sold and closed. February looks like it can be the kind of month you dream about; a perfect storm to sell and finance a house.

Remember not since 2001 have we had the opportunity to help so many folks. So go GET’EM before someone else does.

Happy Selling!

Tony Grego – Indiana Mortgage Broker

*The disclaimer. These rates are illustrations of what you might qualify for. Not everyone will be approved. Please contact me for details. While I can’t promise you will be approved I can promise to provide you with a FREE, no obligation, financial analysis to see what you may qualify for.

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