Refinance Free Credit

The US economy is showing signs of panic as mortgage rates have been very unstable throughout the week.

Earlier in the week the Federal Reserve announced that it was going to pump $200 billion into the US mortgage lending industry to free up equity for lenders. Mortgage rates took a slight tumble in response to the news but have since begun to climb.

An overall look of the economy shows oil prices reaching record highs, unemployment still rising and overall inflation beginning to slowly creep up on the economy. All are signs that the mortgage industry does not take well to as far as mortgage rates are concerned.

There is a bit of good news on the horizon though. Next Tuesday, March 18th the Federal Reserve is expected to cut interest rates once again. The Feds are expected to cut interest rates by 0.75 percentage points with a possibility of a full point cut. This would bring the Fed rate down between 2 percent and 2.25 percent.

If mortgage rates do decline after the Fed rate cut, don’t expect mortgage rates to decline for long. There may be a short window of opportunity for homeowners and homebuyers to take advantage of mortgage rates following the rate cut. With a gloomy outlook for the economy mortgage rates are expected to continue to rise unless the government takes drastic measures to magically turn the economy around overnight.

House Financial Services Committee Chairman Barney Frank on Thursday announced new legislation that represents Capitol Hill’s latest attempt to stem a significant rise in mortgage foreclosures. Under the proposed plan, the Federal Housing Administration would receive $300 billion — $150 billion over each of the next two years — to insure and guarantee refinanced mortgages that have been significantly written down by mortgage holders and lenders.

The bill establishes terms for what it calls “homeownership retention mortgages,” otherwise called short-refis by most in the industry. Lenders and investors would be required to write off principal for first mortgages while second lienholders would likely be extinguished entirely under the terms of Frank’s plan.

The tentative bill outlines a very complex set of requirements surrounding who can get a “retention mortgage” and who can not.

In general, however, borrowers must be underwater enough that a write-down in principal to a first mortgage is required, and must also qualify for the FHA-insured short-refi under traditional circumstances — that is, at market rate, full doc, fixed-rate only, debt-to-income under 40 percent. Further, the monthly payment borrowers would receive under the “retention mortgage” would need to be less than their existing mortgage payment.

Borrowers obtaining a “retention mortgage” would also see the government put a soft second lien on the property, in order to establish a 3 percent “exit fee” if the borrower sells or refinances the home. Further, the second lien would establish a scaled “shared profits” model if the borrower manages to sell or refinance within five years.

Under the terms outlined by the bill, existing lenders would receive no more than 85 percent of a property’s currently-appraised value as payment in full for their existing lien position.

But it’s second liens that would appear to be the most pressing issue here, in spite of the fact that many lenders have begun reserving for losses on seconds at 100 percent. Tanta at the Calculated Risk blog opines:

The draft bill says that “The Secretary (of HUD) may take such actions as may be necessary and appropriate to facilitate coordination between the holders of the existing senior mortgage and any existing subordinate mortgage to comply with the requirements.” It doesn’t say what necessary actions might be needed to force second lien holders to roll over and die–threats? bullying? shunning at cocktail parties?–but that’s likely to be a sticking point given current second lien holder behavior.

Industry sources that scanned the proposal have said that while the bill makes a good effort, there are likely to be issues with borrowers qualifying. And one source wondered if borrowers would go for it.

“We’re already seeing borrowers walk away,” said one source, who manages a loss mitigation department at a national lender. “Would borrowers choose to stay in exchange for giving up much of the potential for future profits off of their investment, based on what could end up being only a nominal decrease in monthly cash outlay? I don’t know.”

The waiting game between northern California’s Bay Area buyers, sellers and lending institutions continued last month as sales dipped below 4,000 for the second month in a row, a real estate information service reported Thursday.

A total of 3,989 new and resale houses and condos sold in the nine-county Bay Area in February. That was up 11.2 percent from 3,586 in January, and down 36.7 percent from 6,305 for February 2007, DataQuick Information Systems said.

January and February are the two slowest months in DataQuick’s statistics, which go back to 1988. They are the only months with sales below 4,000.

“The lending system has been in lockdown mode the last half year, especially when it comes to so-called jumbo mortgages which have traditionally been the majority of Bay Area loans,” said Marshall Prentice, president at DataQuick.

“With the Federal Reserve trying to pour Draino into the lending system, it will be interesting to see how things play out if jumbo financing does come back online. Theoretically, there could be enough pent up demand, enough catch-up activity at the high end, to result in a statistically bizarre record median home price,” he said.

The median price paid for a Bay Area home was $548,000 last month, down 0.4 percent from $550,000 in January, and down 11.6 percent from $620,000 in February last year. Last month’s median was 17.6 percent lower than the peak median of $665,000 reached last June and July.

Last month’s median price would have been closer to $600,000 if the availability of jumbo home loans had remained stable, DataQuick said. A year ago, jumbos accounted for 59.8 percent of all Bay Area home loans; last month they represented just 28.9 percent.

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

So much for the end of mortgage-related write downs.  Bear Stearns stock is down almost 50% today after news hit that the Wall Street firm is short on capital.  Many fear that Bear, who was one of the heaviest players in subprime mortgages, didn’t get out of the way soon enough as the wave of defaults started rolling through the system.

From the Market Watch story on Bear Stearns liquidity crisis:

 J.P. Morgan said it’s providing Bear with secured funding for up to 28 days, in conjunction with the Federal Reserve Bank of New York.

J.P. Morgan also said it’s working with Bear to secure permanent financing or “other alternatives” for the brokerage firm.

“Our liquidity position in the last 24 hours had significantly deteriorated,” Alan Schwartz, chief executive at Bear, said in a statement. “We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.

Bear Stearns said Friday that it had obtained short-term financing from the Federal Reserve Bank of New York and JPMorgan Chase & Co. after the firm’s liquidity “significantly deteriorated” on Thursday. Market rumors that Wall Street’s mortgage giant was facing problems came to a head earlier in the week, although at the time the firm denied it was facing any liquidity problems.

JPMorgan Chase provided Bear Stearns with a 28-day secured loan facility, Bear Stearns said in a press statement, which will allow the Wall Street firm to “access liquidity as needed.” Bear Stearns also said it is exploring more permenant financing as well as “other alternatives” with JPMorgan.

Bear CEO Alan Schwartz said that market rumors of a cash crunch had become a self-fulfilling prophecy.

“Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity,” he said. “We have tried to confront and dispel these rumors and parse fact from fiction.

“Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.”

In a press statement, JPMorgan said that it “does not believe this transaction exposes its shareholders to any material risk.”

Shares in Bear Stearns fell nearly 50 percent on the news, dropping to $30.12 on the New York Stock Exchange, while JP Morgan saw its shares fall only slightly.

Disclosure: The author owned no positions in BSC when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

Troubled bond insurer Security Capital Assurance, hit hard by the downturn in the residential mortgage-backed securities market, said late Thursday that it probably won’t receive a “going concern” opinion from its auditors when it files its annual report later this month. Such an opinion is usually interpreted as a precursor to insolvency, and the company had warned in late February that its auditors were considering such language.

The shift comes as a bit of good news for a company that said it lost $1.2 billion — or $18.67/ share — during the fourth quarter of 2007. The fourth quarter loss compares to net income of $35.8 million in the year-ago period.

SCA, along with MBIA and Ambac, have been reeling as the U.S. mortgage crisis has unfolded. Unlike its larger competitors, however, SCA has sought additional capital and has seen its former AAA credit rating vanish as a result.

Insurers like SCA provided the top-rated portions of RMBS and related CDO deals with a guarantee that essentially is designed to serve as a private-party proxy for the government guarantee that exists on Fannie/Freddie/Ginnie bond issues. But the strength of that guarantee is only as good as the rating of the firm that provides it, which means that downgrades to bond insurers have wreaked havoc on an already unsteady mortgage-backed bond market.

CEO Paul Giordano hinted that Security Capital, however, may be looking to raise capital in the weeks ahead.

“The extraordinary and rapid deterioration in U.S. residential mortgage-related credits led us to incur record levels of case reserves in the fourth quarter of last year,” said Paul S. Giordano, SCA’s president and chief executive officer. “We are continuing to explore our strategic options to generate or raise capital and improve our ratings.”

The company said it had ceased writing new business for an unspecified time period as it looks to preserve capital, a move that Giordana said likely staved off a potential “going concern” opinion from auditors.

Driving the fourth quarter loss at the insurer was a $651.5 million loss provision tied to CDOs backed by subprime mortgage securities, a $37.2 million loss provision tied to its insurance of various HELOC transactions, and a $9.5 million provision tied to existing reinsurance contracts.

News that SCA has staved off a possible bankruptcy sent the company’s shares upward sharply. Shares were up more than 70 percent in early Friday trading on the New York Stock Exchange.

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

Disclosure: The author owned no position in SCA when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

While most analysts and economists are predicting a shallow recession in 2008 and a housing downturn that will last into 2010, a report released on Friday said that the housing bubble “has now fully deflated.”

That’s according to SMR Research Corp., who is predicting a mild housing recovery this year. The recovery is likely to be gradual, according to a report published by the company, with housing prices merely firming up or increasing slightly during 2008.

“Our prior forecasts were accurate, but widely disbelieved when issued,” said SMR president Stuart A. Feldstein. “We similarly expect a skeptical reaction now to a recovery forecast, which is not the common view. But the numbers are what they are.”

The company said it had first identified a so-called “housing bubble” back in 2002, and that it warned of a pending credit crisis in 2004.

The study, part of a report published yearly by SMR since 1986, used home price and consumer income data from several sources in an attempt to illustrate how the housing bubble grew from 2002 to 2006. The same data, however, now suggest that a housing recovery is — or will soon be — underway.

“Homes are now affordable again,” Feldstein said. “Consumer psychology is the biggest remaining hurdle to recovery.”

Prospective home buyers, still hearing predictions that prices will fall further, keep waiting to buy, the report argues. This becomes a self-fulfilling prophecy, Feldstein contended, as scant demand pushes home prices lower.

“The stage is set for recovery, but the play won’t go on if no one buys a ticket,” Feldstein said. “Consumers must believe prices have bottomed out, or nearly so, before they will buy in larger numbers.”

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

The home builders aren’t happy with Freddie Mac’s “refusal to raise more capital,” as they see it. Earlier this week, concern surfaced among investors and analysts, who suggested that both Fannie Mae and Freddie Mac may need to raise significant additional capital in order to weather the current downturn in the mortgage and housing markets.

Freddie Mac has steadfastly maintained that additional capital is not needed beyond the $7 billion it raised last December.

“As a congressionally chartered enterprise, Freddie Mac has two significant and equal responsibilities – that of serving its housing mission and its shareholders,” said Jerry Howard, CEO of the National Association of Home Builders, in remarks Thursday. “It is now painfully obvious that the company has strayed light years away from its other vitally important congressionally mandated mission of ensuring an adequate flow of credit for housing and home buyers.”

Howard suggested that Freddie Mac was partly to blame for the liquidity problems plaguing the secondary market, and called for passage of a Congressional bill to reform the GSEs. The NAHB, along with the National Association of Realtors, have been actively lobbying for passage of H.R. 1427, the Federal Housing Finance Reform Act of 2007, during the past few weeks.

“It is deeply discouraging that a company that should be doing everything within its power to restore liquidity to the marketplace has instead decided to neglect that responsibility,” he said.

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

Troubled Alt-A mortgage lender Impac Mortgage Holdings Inc. said Friday morning that it would delay filing its fourth quarter results as it negotiates settlement of outstanding repurchase liabilities and looks to refinance its remaining warehouse borrowings. In a filing with the Securities and Exchange Commission, the company said it expects “additional disclosures in the 2007 financial statements” to result from its efforts, although it didn’t provide further details.

Impac has been the subject of speculation that it may not survive the crunch pushing many independent mortgage lenders out of business, having posted a net loss of $1.3 billion during the third quarter. The loss pushed the company’s net worth into negative territory, it said at the time.

The Irvine, Calif.-based lender also said that two key executives will depart at the end of this month, including Chief Investment Officer Andrew McCormick and Chief Operating Officer Richard Johnson. Neither positions will be filled upon the executives’ departures, with Impac citing “changes to the company’s business plan.”

Impac CEO Joseph Tomkinson has been in the news recently for his involvement in a lawsuit between two REO auction companies, in which he was allegedly duped by investors looking to steal the business secrets of an auction firm his company had backed.

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

An eye-opening report by T2 Partners LLC shows the scale of the upcoming mortgage losses and the severity of the current mortgage and credit mess we’re in. (PDF) From the impending wave of foreclosures, to the loss of borrowing power, to the problems with mortgage-backed securities this report runs the gamut of the mortgage mess. I looked for a confidential notice but could not find one on this report so I am publishing it. If I am requested to remove it I will do so immediately, so enjoy it while it is still available.

From the report:

In summary, today we are only seeing the tip of the iceberg: an enormous wave of defaults, foreclosures and auctions is just beginning to hit the United States. We believe it will get so bad that large-scale federal government intervention is likely.

Like the title of the post says - we’re just getting warmed up.