Refinance Free Credit

The Mortgage Bankers Association on Wednesday reported a sharp jump in application activity for the week ended May 2 –- a 15.6 percent rise in the seasonally-adjusted market composite, 19.1 percent in refinancings and 12.1 percent in purchases.

In stark contrast, the market’s other application index, published by Mortgage Maxx AFS on Monday, reported that applications actually fell by 7.1 percent over the same week. The difference, according to the publisher of what industry types call simply “The MAX,” is that their report filters out duplicate applications on the same address.

Long time critics of the MBA index have argued that inclusion of multiple applications make it more volatile than true underlying market activity; in particular, they say it leads to an overstatement of increases in loan demand.

The MBA survey was designed in 1990, and had its last significant overhaul in the mid-1990s (some statistical techniques were altered and the universe of respondents was expanded; before the industry’s implosion it covered about 50 percent of originations). The problem with multiple applications became more obvious as the 90s wore on, with the rising importance of the mortgage broker origination channel. Further problems arose with lenders’ leap onto the Internet, where borrowers can now shop for the lowest rates from multiple lenders. The result is that repeat applications are thought to have a particularly strong effect in good times, when lenders compete for business and rate shopping pays off.

The flip side — being seen now, perhaps for the first time — is that tightening credit conditions should also generate multiple applications. As traditional mortgages become more costly, borrowers (or their brokers) shop more extensively for the most affordable product, or for a program that the borrower can qualify for.

Given current credit conditions, jumbo and weaker credit borrowers are well-advised to apply “all over town” if they want to get a loan at all. Layoffs must have lengthened time “in the queue” for GSE-eligible borrowers – that and a “fear factor” would encourage even borrowers with pristine credit to apply to more than one lender. Moreover, selection of an appraiser is different depending on whether a bank or a broker is ordering the appraisal –- yet another reason for borrowers not to put all their eggs in one basket.

Traders and investors –- who translate application activity into expectations of prepayments and supply trends over a short run of one to three months –- have traditionally used Mortgage Maxx application data. The service acknowledges that its data may not be quite as geographically diverse as the MBA, but it does capture every lender in a jurisdiction, thus weeding out duplicates.

The Maxx index is actually an adjunct to the company’s paid subscription service, which provides monthly prepayment projections over the short-term, and is based on title searches, the applications survey and other data sources. Insight into how many applications close, and when, over forward months is crucial to traders and investors with short-term horizons.

Put another way, three months is roughly the window in which a successful, bona fide application moves to closing, generates a prepayment, and the loan emerges in a new pool, but standard prepayment models tend to be “far sighted” and blind to the short run — which is what makes application data critical for most traders and investors.

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The market for residential mortgage securities is now essentially two markets: distressed assets that new funds are popping up to feast on, and a traditional agency/GSE MBS market performing “on mission” – that is, funneling funds from institutional investors back to housing markets. This traditional market has also served an “off mission” function – one not really anticipated by the law and policy makers who designed Ginnie, Fannie and Freddie – by providing liquidity to a range of investors and other market participants as the subprime meltdown drained liquidity from much of the structured products market.

Indeed, it was the supply absorbed by MBS markets doing business-as-usual that forced pass-throughs to cheapen dramatically between summer 2007 and mid-March of this year. For instance, the yield spread between swaps and the 30-year Fannie Mae current coupon (a theoretical par-priced security commonly used to benchmark mortgage yields) actually TRIPLED between June 2007 and the peak in mid-March 2008.

In general, these are spread levels not observed since the mid-80s, when the first prepayment/new supply assault swamped fledgling MBS markets. The widening in the face of supply explains why mortgage rates, which reflect where loans trade in MBS market, have generally failed to keep pace with declining Treasury yields.

Some commentators have not understood that the widening reflected market technicals, and not investors’ view of the GSE guarantee. If it did, Ginnie-backed MBS – guaranteed by a true government agency – would outperform, which is not the case. In fact, it is likely that GSE pass-through spreads would widen on any regulatory oversight that would reduce GSE portfolio purchases.

Instead, the widening is largely a response to the technical forces generated by the subprime crisis: waves of new originations sold into pools as “conforming” and FHA/VA mortgages have become, for all practical purposes, the only mortgages available to borrowers. In addition, the market has seen spurts of heavy supply on sales by various MBS holders to raise cash and meet margin calls.

As a matter of fact, the shut-down of subprime and Alt-A loan markets has returned the agency/GSEs to their traditional preeminence. From about half of RMBS issuance before subprime hit the fan, the GSEs now account for well over 90 percent of securitized mortgages.

But the traditional MBS market is more important than most realize. A fact often overlooked in the brouhaha is the sheer size and liquidity of the traditional MBS market. For example, the US Treasury market is larger – $4.9 trillion of securities outstanding versus $4.3 trillion in MBS at the end of 2007, according to the Federal Reserve Flow of Funds – but coupons in mainstay programs exceed the size of any Treasury issue.

For example, the largest Treasury issue currently outstanding is probably the last 2-year note, which came in at $30 billion. By contrast, the tradeable amount of 30-year Fannie 5.5s is $472.2 billion – a number of other 30-year coupons are outstanding in smaller, but still comparable, amounts. Although specific characteristics (such as seasoning, indicators at the loan level of credit-related impediments to refinancing or of greater incentives to refinance, etc.) could give a specific pool extra value, any pool with sufficient remaining principal could be delivered in a TBA trade.

In addition to liquidity implied by the amount of outstandings, TBAs trade with a bid-ask spread similar to that of Treasuries, and that bid-ask spread has been reasonably stable throughout the market turmoil.

Admittedly, losses, write-downs and financing squeezes have taken their toll upon Street dealers. It’s well known that one very large dealer, Bear Stearns (BSC: 10.27, -5.26%), has left the mix, but sales and trading personnel have been sharply reduced at a number of other shops as well. Sources in the market generally agree that of 12 or 13 “full service” RMBS shops before the crisis, only six or seven are still fully active. (The other side of the coin is that regional dealers, unmarked by the mayhem in big investment bank structured products, are in a position to acquire market share. For example, market insiders point out that Jeffries Securites, a New York firm, has pulled a group of seasoned mortgage salespeople from RBS, while RBS has replaced them with a group of Bear Stearns pros.)

Bottom line, crisis or not, the dealer community has not lost the ability to make markets in traditional MBS. Trading volumes and dealer positions bear witness to the resilience of the traditional agency/GSE MBS market. Total clearing par value of trade settlements are up year over year, according to the Depository Trust & Clearing Corporation. MBS transactions have oscillated in the same range for the last year, according to the Federal Reserve Bank of New York (not all transactions result in settled trades – for instance, originators use forward TBA sales to hedge their pipelines).

Likewise, the FRBNY reports that dealer positions have swelled from levels posted last August, reflecting supply from originators and sellers. In mid-March, dealer MBS positions surpassed the previous peak seen in 2003, when historic lows in mortgage rates were accompanied by massive new supply.

Signs that the market’s tone – and investor appetites – have improved abound everywhere, but one of the earliest signs that recovery was imminent in “spread” product was the sharp tightening of pass-through spreads from the mid-March historic wides. Versus swaps, for instance, the current coupon 30-year Fannie has retraced about 60 basis points – or half of its previous widening.

Whether credit spreads (and equities) are as attractive as the markets have implied in the last week or so of trading remains to be seen. But with a firmer tone in the market, MBS investors have come back to the basic strategies of mortgage investment, many of which are explicitly prepayment plays.

With that in mind, the short list of trading strategies that make sense in the current environment:

• Premium-priced pass-throughs and CMOs as well as Interest-Only strips that would benefit from the slower-than-normal prepayments in a tighter credit environment. The data underlying prepayment models reflects relaxation of credit standards and risk-based pricing, not the current tightening trend. Finer-tuned trades will use loan level disclosures to distinguish better values from TBA trades within any given coupon.
• Discount-priced pass-throughs with underlying loan characteristics that suggest prepayments can keep pace with historical norms. For example, pools with concentrations of loans on owner-occupied properties with low loan balances, high FICOs, and geographical locations outside of “distressed markets.”
• Equal duration trades, to take advantage of inconsistent pricing of risks across MBS sector to another. For example, CMOs versus “collateral” (underlying pass-through as a TBA) or otherwise comparable pass-through sectors such as hybrid ARMs or 15-year TBAs. As the market firms, investors will become increasingly sensitive to relative value opportunities across comparable “sets” of mortgage cash flows.
• Trading of outstanding agency/GSE CMO bonds implies, ultimately, a willingness to trade private-issue CMOs and other marginalized paper. Not a lot of paper is trading yet, but color from market players suggests bids for super-senior jumbo and Alt-A paper have begun to come in from the stratosphere.

Editor’s note: Linda Lowell is a mortgage market veteran, and principal of Offstreet Research LLC.

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Foreclosure rates in Massachusetts continued to hit new record levels during the first quarter, a report from statewide foreclosure data provider ForeclosuresMass.com said on Wednesday. More than 9,000 properties entered into foreclosure during the quarter, a 37.6 percent increase over one year earlier, and the third consecutive record-breaking quarter.

“Despite all of the attention being given to the foreclosure issue, nothing has changed,” said Jeremy Shapiro, president and co-founder of ForeclosuresMass.com. “In fact, things have gotten worse.”

Foreclosures are up in 271 of the state’s 351 communities, the company said, with 73 communities experiencing at least a 75 percent jump in foreclosure filings during the past 12 months. Overall, 32,349 homeowners faced foreclosure in the past 12 months, a statewide increase of nearly 45 percent.

Q1 2008 saw 9,114 new foreclosure filings, the single highest quarter on record; the previous high was Q4 2007 with 8,579.

For more details, visit http://www.foreclosuresmass.com.

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A hotly-contested bill at the center of a proposed housing aid package, scheduled to begin debate in the House of Representatives on Wednesday, won’t get the support of President Bush, the White House said late Tuesday. The president issued a clear a veto threat to legislation proposed by House Financial Services Committee Chairman Barney Frank (D-MA) that would seek to significantly expand the scope of insured mortgages offered via the Federal Housing Administration.

“I will veto the bill that’s moving through the House today if it makes it to my desk,” President Bush said Tuesday, “and I urge members on both sides of the aisle to focus on a good piece of legislation that is being sponsored by Republican members.”

Frank’s bill, H.R. 5830, the FHA Housing and Homeowner Retention Act, would allow the government to guarantee up to $300 billion in refinancing activity tied to distressed mortgages over the next two years. The Massachusetts Democrat has said earlier this week at a Mortgage Bankers Association conference that he expected the legislation to move through Congress to the President’s desk by June.

“We are committed to a good housing bill that will help folks stay in their house, as opposed to a housing bill that will reward speculators and lenders,” Bush said. The administration has said it prefers competing proposals under consideration by Congressional leaders to modernize the FHA and reform regulation of Fannie Mae and Freddie Mac, as well as a proposal that would allow states to issue tax-exempt bonds for refinancing subprime mortgages.

These are complicated times politically, as Republican opposition to the housing measures being pushed by Congressional Democrats has been anything but united thus far.

Treasury secretary Henry Paulson signaled last week that he supported much of the bill, and remarks by Federal Reserve chairman Ben Bernanke on Monday evening implicitly backed Frank’s proposal as well. HW’s sources informed us also that Republican House and Senate members from hard-hit states, including California and others, may be willing to back Frank’s proposal out of a sense of desperation over the effect of housing in the markets they represent.

House Democrats Tuesday unveiled broad housing package — scheduled to begin debate today on the House floor — that includes some of the proposals backed by the administration, in an effort to secure passage for Frank’s more controversial measure. A similar measure has been proposed in the Senate by Banking, Housing and Urban Affairs Chairman Chris Dodd (D-CT), although Dodd tabled a scheduled committee debate late last week.

Federal Housing Commissioner Brian Montgomery told attendees at a Mortgage Bankers Association meeting in Boston on Tuesday that the Barney/Dodd plan to expand FHA insurance was akin to “throwing the barn doors open” and asking taxpayers to shoulder the bail-out of troubled borrowers. Montgomery, along with other administration officials, have argued that existing programs already in place — such as FHASecure — can be successfully augmented with less risk to taxpayers.

Frank has said that the current housing package taking shape in Congress represents the industry’s “last chance” to solve the mortgage crisis on a voluntary basis. Monday, Frank said that if servicers did not adopt the measures — and in particular, refinance troubled borrowers into the FHA loans his bill proposes — that “much tougher, more intrusive regulation will be on the way.”

The bill, however, faces an uncertain future at this point.

“This is going to be a dog fight,” said one source, a lobbyist that asked not to be identified by name. “Killing this bill may be too high a price to pay, with elections looming.”

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Is now the time to buy investment properties?

Although it appears that there are great deals to be had, my advice for the average person is to stay on the sidelines and leave investments in the real estate market to the professionals. My reason for this cautionary approach is that I do not believe we are close to a bottom in the market. Second, I also believe that today’s real estate market is reminiscent of the early 90’s. People who bought houses in 1989 and 1990 thinking they got a bargain that they could turn in a year or two were surprised. Then, real estate values did not come back for about five years and I predict a similar story today.

Today’s market is a little more complex then it was then because inflation is becoming a bigger concern and that means that interest rates will rise. This coupled with the recession we are in (yes I believe we are in one and it will be long and hard for the average American) and the flood of properties coming on from foreclosures will keep the values down for some time to come. Unless you have a significant cash reserve to carry you through three to seven years I would stay away from purchasing investment properties. If however, you are looking to buy a primary residence or even a vacation home then yes it could be a good time to buy?

While as stated above I believe the market will further decline, you will find yourself in a Catch-22. If you wait you may not have the same programs available that are currently offered due to guidelines changing weekly as well as pending legislation that will make getting loans more difficult. In addition as pointed out above, I believe that interest rates will not improve much and if inflation rises so too will interest rates and there in lies the conundrum.

Moral of the story, if you want to buy a new home for yourself I would go for it; sellers are anxious and will bite at any reasonable offer. Even if the market declines you are not going to be selling any time soon and you need a place to live so you might as well enjoy the tax benefits of home ownership. If however you want to get into the real estate investment game I would leave that one for the pros.

Dave Muti author of mortgages what you need to know

He may be “Vindicated” but Jose Canseco is letting his Encino, California mansion go in to foreclosure as the housing market has tanked. He doesn’t see any point in making the payments any more. The $7.7 million house makes for some expensive jingle mail. What happens when the wealthy start walking away? When does preserving your credit score not matter? Where is that line? When is that decision made? Will it become easier for people as we get in to this mess? Will this generation be defined by subprime, bad credit and the shirking of all financial responsibility?

Housing Wire has the amusing/scary tale via the AP:

Canseco told the syndicated TV show “Inside Edition” that he walked away from his $2.5 million, 7,300-square foot home in suburban Encino because it didn’t make sense to continue making payments …

“What about other families that we’re hearing on TV, that they’re saying, `We have nowhere else to go,’” he said. “I mean, that is amazing. I’ve got books (he’s put out two expose-type books on drug use in baseball), we’re now trying to produce the movie to both.

“Like I said, my situation was a little more different than most. I decided to just let it (the house) go, but in most cases and most families, they have nowhere else to go.”

For the eternal optimists your boy David Lereah, your ace-in-the-hole, your go-to expert who predicted a “soft-landing” and wrote the book “Why the Real Estate Boom Will Not Bust” is saying that we’re in for a lot worse. So stop looking for a bottom. It must be tough when your hero, your clutch hitter finally gives up the fight. Who do you turn to? Lawrence Yun? He doesn’t have the panache, the swagger, the publishing credits!

Quick, somebody, find me someone with a pulse who thinks we’re in better shape now than we were 3, 6, 9 months ago. Please. The pumpers are defecting like crazy. David freaking Lereah is seeing the light?!?!

David Lereah for President. A man that can flip-flop this effectively deserves a sacred seat in Washington.

Pardon my rather churlish response to his whole mea culpa. I just find it rather fascinating. Any way. Dr. Housing Bubble did a great write-up on this very phenomenon. So here is a taste and be sure to check out the rest of his commentary.

“We’re not at the bottom,” he says. “[People] want it to be near the bottom, but we’re not there yet. The leading indicators are still very bad. Pending home sales are still in bad shape. Mortgage applications are low … There’s still supply out there in abundance … This thing is going to get worse before it gets better.”

That’s quite a turnabout from the view he articulated in his book, first published in 2005. There he argued that the solid economy, strong demographics (including immigration and aging boomers), and a lean supply of homes should lead prices to continue rising for years to come. “Today’s real estate market is the result of rational decision making based on supply and demand conditions,” he wrote. “With today’s economy, home owners are in no danger of experiencing a widespread fallout of home prices.”

“[I] just didn’t realize the scope, the extent, the magnitude of the loose underwriting-not looking at incomes and wages, just providing so many mortgage loans based on [expected] future price appreciation rather than the creditworthiness of the borrower,” Lereah says. “That got so out of hand, and none of us realized the magnitude of it until it was too late.”

We’re taking nominees for the new poster boy. Feel free to suggest your write-ins in the comments.

Zillow posted some interesting analysis today in which they claim that 50% of all home buyers who purchased a home in 2006 are now in a negative equity situation - underwater. That’s a mind-boggling stat don’t you think? It’s a coin flip really if you’re ahead or buried. Well probably not a coin flip as it is most likely self-selecting for the folks that stretched on financing in bubblesque territory.

To wit from Inman News on the 90% of the 2006 crop of Las Vegas home buyers who are upside down:

In the Las Vegas metro, about nine out of 10 homeowners who purchased in 2006 owe more than their home is worth.

From Zillow and their take on the housing market:

Conditions continued to worsen in Q1 as U.S. home values continued their slide down with the Zindex posting a 7.7% year-over-year decline, the sharpest decline we’ve ever seen in our data, which extends back to 1996. Not surprisingly, the market decline brought with it increasing rates of negative equity, with one out of two homeowners who purchased during the national market peak in 2006 currently “underwater” on their mortgage, or owing more on their mortgage than the home is currently worth. Even more alarming is the finding that almost 45% of homeowners who purchased last year (2007) are already underwater on their mortgages, a fact that drives home the rapidity of the market depreciation.

Here’s a great graph that represents the percentage of negative equity home owners by year purchased. 2007 was the wrong year to be buying as well.

Of course, the analysis is based on the Zestimates so you have to take it with a grain of salt; but nevertheless it does point to some interesting insight for those folks looking to time the market.

From the looks of the graph it seems clear to me that we are way to early in to this thing to be calling bottom and for pointing out bargains. Nearly a third of buyers from this year (!!) are already underwater which doesn’t inspire a ton of confidence to run out there and try to find a “bargain.” Let’s duly trot out the all real estate is local refrain to placate the glass half-fuller’s but still is it an astonishing reality to anyone else that half of all home owners are underwater who purchased in 2006/2007?

And what does that mean to those markets? How long are the folks who stretched at the top of the market who are now upside down going to stick it out? How many more foreclosures are we going to see out of that ‘vintage’ of home owners? It does not portend a speedy recovery.

As I’ve said in the past don’t worry about missing this real estate bottom. As long as you’re not dead you’ll be able to spot it and take advantage of it. If you’re shopping for a home take your time if you value your money.

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In a proposal that was probably a foregone conclusion when the Economic Stimulus Act of 2008 was signed into law this past February by President Bush, two California lawmakers on Monday introduced legislation that would make a loan limit increase tied to the measure permanent, according to a press statement.

Reps. Gary Miller (CA-R) and Jerry McNerney (CA-D) on Monday introduced legislation in the House of Representatives that would permanently increase the loan limits for Fannie Mae (FNM: 30.81, +8.91%), Freddie Mac (FRE: 27.33, +7.09%), and the Federal Housing Administration (FHA). Introduction of H.R. 5958, the Homeowner Opportunity Act, comes as the House prepares to debate a number of proposals later this week to stimulate the housing market.

The economic stimulus package passed earlier this year by Congress temporarily boosts conforming and FHA lending limits to as much as $729,500 in certain high-costs areas identified by pricing indexes maintained by the U.S. Department of Housing an Urban Development — a temporary boost that California lawmakers say isn’t enough.

“We are currently in the midst of the most serious downturn in the housing market that I have seen in more than thirty years,” Miller said. “The impact of allowing loan limits to return to their previous levels would be disastrous.”

It’s not clear what disastrous consequences Miller fears, however — very few of the newly-certified jumbo conforming loans have been moving via either GSE or the FHA as of yet, according a review of most available market data sources.

Fannie Mae execs told conference goers at the MBA Secondary Markets conference in Boston on Tuesday that the GSE intends to “more aggressively price” its jumbo conforming product, but as of yet, neither GSE has seen significant movement in the newly-conforming mortgage market.

The National Association of Realtors has been lobbying strongly for such a permanent increase since early March, but also argued in testimony before the Senate Committee on Banking, Housing and Urban Affairs that the GSE loan limit should be raised to $625,000 across the board as well.

“It’s pretty likely that major consumer-facing housing groups won’t want to let go of the gains they get from Congress,” said one source, a lobbyist who asked not to be identified by name. “Anything housing-related that is passed on a temporary basis will likely become permanent at some point, as a result.”

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

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