Refinance Free Credit

Does the recent lowering of interest rates by the Federal Reserve affect refinancing options? Here are the basics and a few key points to keep in mind:

1. In light of the recent financial turbulence that resulted from sub-prime mortgage lending, the Federal Open Market Committee (FOMC, or Fed) reduced the Fed Funds Rate. The Fed Funds Rate is considered a short-term rate and represents the interest rate at which large banks lend to each other. The Federal Reserve cut its target for the rate in order to provide a counterbalance to the tightening of credit conditions and to address some Continue Reading »

The U.S. Department of Housing and Urban Development said Wednesday afternoon that it had extended the public comment period on the Bush Administration’s proposed reforms to the real estate settlement process, bowing to Congressional as well as industry pressure.

The administration proposed sweeping changes to the Real Estate Settlement and Procedures Act on March 17, including provisions that would expand HUD’s enforcement authority under the Act.

“This critical rule will improve the complicated homebuying process and save families money at the settlement table,” said Deputy Secretary Roy A. Bernardi. “In light of Congressional and industry requests to extend the comment period for the rule, and our desire to develop the best possible rule, we are allowing additional time.”

The public comment period on HUD’s proposed RESPA reforms was set to expire on May 13, 2008 prior to today’s announcement. The announced extension provides an additional 30 days of comment, through June 12, HUD said.

Industry representatives had strongly cautioned that a slow-down was needed, saying that more time was needed to digest the complex reforms proposed in the reform measure.

“A 60-day comment period is too short. We need time to figure out the ramifications,” said Ken Markison of the Mortgage Bankers Association, as a settlement conference in April. “This will need a lot of thought, a lot of work.”

“This is an extraordinarily complex and impactful rule fraught with the potential for unintended consequences,” said Kurt Pfotenhauer, CEO of the American Land Title Association (or ALTA). “It benefits everyone to take the necessary time to assist HUD in meeting its goal of simplifying the closing process for consumers.”

Pfotenhauer said he had hoped for a 60-day extension, but that he was pleased to see HUD provide some extra time nonetheless.

For more information, visit http://www.hud.gov.

Delinquencies and foreclosures rose in 2007 for state housing finance agencies’ single-family loan programs — not surprising, given the current situation in most key housing markets across the nation — but most programs’ rates remained consistent with historical levels, Moody’s Investors Service said Thursday.

Delinquency and foreclosure rates for single family whole loan programs rose to 3.58 percent in 2007 from 3.29 percent in 2006, but remained below the 2005 level of 3.82 percent.

“While some HFAs are experiencing higher rates, we believe that the security provided by the programs’ mortgage insurance and overcollateralization support the existing ratings on the programs and will compensate for the losses that most HFAs would experience due to severe housing price declines and loan foreclosures,” said Moody’s analyst Rachel McDonald.

In 2007, 21 of 34 Moody’s rated HFA programs had foreclosure rates below 1 percent, and 10 of those were below .50 percent. Only two HFAs reported foreclosure rates above 2 percent for 2007, McDonald said.

“Property value declines will cause some stress within the agencies’ portfolios, particularly in states where property value declines and foreclosure rates are most severe,” she said.

So, too, might pending legislation in Congress that wants to expand HFA lending programs, by allowing states to issue tax-free municipal bonds to fund refinancing by troubled and subprime borrowers into fixed-rate mortgages offered by various state-level HFAs. Some sources have suggested to HW recent that such a policy could likely introduce additional risk into various state-level housing finance authorities.

Connecticut is one of many states now looking to its HFA to help troubled borrowers and stabilize local housing markets; HW covered a bill earlier this week now being considered by Connecticut legislators that will provide the state’s HFA with $70 million to refinance troubled mortgages, and give it expanded authority to purchase up to $1.5 billion in non-agency mortgages.

“A subprime borrower in loan A is usually still a subprime borrower in loan B,” said one source, who asked not to be named. “Improving the affordability of the loan is certainly a step forward, but past loss experience even prior to the bubble suggests that there is ultimately good reason for the credit classification.”

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

Continuing a run that led excess returns of MBS over Treasuries to post their best month in over 10 years during April, U.S. mortgage-backed securities continued to tighten against Treasuries on Wednesday — despite news of a large loss by Fannie Mae (FNM: 27.96, -3.75%). The trend is likely to mean better mortgage rates for conforming borrowers, sources told Housing Wire Thursday.

Fannie Mae said Tuesday that it lost $2.2 billion during the first quarter — news that might have otherwise sent agency MBS yields soaring — but news from the Office of Federal Housing Enterprise Oversight that saw it lift a 2006 consent order and announce further reductions to capital constraints at the GSE led investors to continue their bullish run.

Via Reuters:

“The market has reacted very well to the news from OFHEO, and while there has not been one big buyer of mortgage bonds there has been buying from pretty much every investor base,” said Arthur Frank, director and head of MBS research at Deutsche Bank Securities in New York.

“A lot of investors feel that even if Fannie Mae is losing money on its old book of business, it will be making solid profits on its new book of business,” he said.

On Wednesday, the yield premium on Fannie Mae 5.50s relative to the 10-year Treasury note moved to 1.45 percentage points, narrowing the spread by 25 basis points. Bond yields move inversely with bond prices.

Wednesday’s close was the most expensive Fannie’s MBS has been since January, Reuters noted, a sharp contrast from mid-march, when the same yield spread reached as high as 258 basis points — the widest such spread in more than 20 years.

HW’s Linda Lowell covered market technicals yesterday; for those looking to get a sense of what’s trading right now and what strategies investors should be considering, click here.

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

Mortgage rates sat tight last week as economic indicators balanced bad news with good, leaving both equity and fixed-income investors muddling as to the directional tendencies of the broader U.S. economy. Freddie Mac (FRE: 25.14, -3.34%), which released rate data each week, said that the average rate on a 30-year fixed-rate mortgage averaged 6.05 percent for the week ended May 8, down a meager one basis point from one week earlier.

Last year at this time, the traditional 30-year mortgage averaged 6.21 percent.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.67 percent this week, down from last week’s average of 5.73 percent; one year ARMs averaged 5.29 percent, and were unchanged from last week.

Freddie Mac’s Frank Nothaft, chief economist at the GSE, said that market investors held steady as bad economic news tended to cancel itself out with an equal amount of better-than-expected news.

“Despite a weak housing market, mortgage rates remained almost unchanged this week based on better-than-expected economic data releases that indicated the economy still has some staying power,” she said. “Job losses lessened in April and conditions in both the manufacturing and service industry outperformed market forecasts. Worker productivity also rose in the first quarter as increases in labor costs diminished.

“The housing market is still struggling amid falling house prices and stricter lending standards. Coupled with higher delinquency and foreclosure rates, a smaller share of families own their homes this year. The national homeownership rate held at 67.8 percent in the first quarter of 2008, down from its recent peak of 69.0 percent in the third quarter of 2006 and was the lowest rate since 67.6 percent in the second quarter of 2002, according to the Census Bureau.”

In other words, where the economy — and mortgage rates — go next is anyone’s guess.

Disclosure: The author held no positions in FRE 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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State Street Corporation (STT: 73.38, -0.84%), the nation’s largest institutional money manager, could face damages tied to subprime investments that reach as high as $7.8 billion — more than 12 times the $618 million it set aside in January to cover legal costs tied to its subprime mortgage exposure.

A group of institutional investors, led by Prudential Financial Inc. are suing the Boston-based company, alleging that the money manager misled investors and inappropriately placed investor assets into structured investments backed by subprime mortgages. Bloomberg reported Thursday morning that the value of subprime-related assets on its books fell to $6.1 billion at the end of 2007, versus $13.9 billion on June 30 of last year — leaving the upper end of State Street’s exposure at $7.8 billion.

That figure, of course, is the cieling and not necessarily the likely damage award; nonetheless, most expect final legal losses to be above the current reserve set aside at State Street, and Bloomberg’s report suggested damages are likely at least come in at $1 billion.

From Bloomberg’s coverage:

The [current] reserve is a “lowball,” Wagner said. “We are talking very large in terms of damages,” though they’re unlikely to reach as high as the ceiling.

“To the extent plans were misled into purchasing something they were not authorized to purchase, they may have a fiduciary obligation to sue,” said Wagner, who isn’t representing the investment manager or plaintiffs. “It’s sue or be sued.”

Disclosure: The author held no positions in STT 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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Among the key factors driving a historic surge in borrower delinquencies and defaults are a preponderance of second liens among recent Alt-A vintages, Fitch Ratings said Wednesday afternoon. Loans with what the rating agency characterized as “high risk attributes such as simultaneous second liens” — also known more commonly as piggybacks — are defaulting at very high rates relative to other loans and to history, Fitch said.

“There is a substantial performance divide, between loans with a SSL, and those without, with SSL loans exhibiting delinquency levels 71 percent to over 300 percent higher than those without depending on the product,” said senior director Suzanne Mistretta. “Borrowers that have perceived equity in the home, including those underwritten to a low doc program, are exhibiting significantly lower delinquency rates than their SSL counterparts.”

While loans with a SSL comprise a minority portion of the overall volume, they are driving the early poor performance and higher loss expectations, Fitch said — the reason, HW has been told, is because many Alt-A deals were thinly structured to absorb losses.

“There simply isn’t as much overcollateralization on these deals [relative to subprime],” said one source, an ABS trader who asked not to be identified by name. “So the loss experience may be less in absolute terms, but the damage on the bond side is no less traumatic for investors.”

Fitch found that the performance of recent Alt-A vintages varies significantly by product, with hybrid ARMs exhibiting the highest rate of delinquencies and fixed-rate mortgages the lowest. And here’s an interesting tidbit:Fitch found that option ARM performance is comparable to that of FRMs for the first 12 months — but then delinquencies quickly approach hybrid ARM levels by the 18th month.

Fitch said its rated portfolio of Alt-A deals is exhibiting lower absolute delinquency rates relative to the market as a whole. 2007 Alt-A delinquencies for FRM transactions are at 5 percent for Fitch-rated deals, versus 13 percent for non-Fitch rated; and 10 percent for hybrid ARMs, compared to 14 percent for non-Fitch rated ARMs.

“The collateral performance gap is partly attributable to deal selection bias due to Fitch’s conservative views on risk-layering and payment shock,” said Glenn Costello, manging director at the rating agency. “Therefore, Fitch portfolio loss projections may vary markedly from those of other market participants.”

Moody’s Investors Service has said it also faced a similar selection bias in the CMBS market, where its ratings criteria were the most stringent relative to competitors.

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

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If members of the New York State Assembly have their way, lenders and investors with loans in New York state will soon have to contend with a one-year moratorium on foreclosure activity in the state. Members of the state Assembly passed a legislative package of four housing-related measures Wednesday, one of which would force a one year delay between the moment a notice of default is filed through the foreclosure sale itself.

Under Assembly bill A09695B (available here), sponsored by Assemblyman James Brennan (D-Brooklyn), borrowers would be able to assert their right to the moratorium as a positive defense to a foreclosure action, and even prior to a foreclosure, if one is deemed to be forthcoming.

“The foreclosure moratorium provides immediate relief for New York families faced with this crisis and that foreclosure of their homes. This encourages lenders and homeowners to settle cases out of court through modification, refinancing or other means to avoid the devastation of losing a home,” Brennan said.

Under the terms of the bill, lenders would need to certify their complete cost of carry — traditionally, around 1.5 percent of unpaid principal balance per month — which would be paid by the borrowers in lieu of their full mortgage payment during the stay period.

Specifically, the bill says that the “lender must establish to the satisfaction of the court the minimum monthly amount necessary to preserve their relevant financial position so as to prevent an erosion of the mortgagee`s financial position.”

Amusingly, the bill also says that “the purpose is to postpone the mortgagee’s profit and not to cancel or alter the terms of the mortgage agreement.” For one thing, lenders don’t profit from a foreclosure, so the bill is essentially winding up losses for all parties, not postponing some sort of phantom profit; for another, the bill most certainly alters the terms of the borrower’s mortgage agreement — that’s the very textbook definition of a one-year moratorium on payments.

The idea, Brennan said, is to encourage a settlement “outside of the foreclosure process.”

The Assembly passed three other measures as part of its housing package, including a measure that will use state funds to pay up to three months of mortgage payments for borrowers facing foreclosure.

“The federal government was quick to bail out big businesses like Bear Stearns from near-collapse, but seems to have all but forgotten the everyday common household victims of this national crisis,” said Assembly Speaker Sheldon Silver (D-New York City). “Our package is not a bail out. It’s an assistance program to help homeowners in our state keep the American dream from turning into a nightmare.”

The New York legislature’s lower house slants strongly Democratic, while the state Senate majority is very slightly Republican — Democrats only need one additional seat in the New York State Senate to unseat the Republican majority. Nonetheless, the bill heads to current Senate members for consideration next.

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Fewer borrowers entered into contracts to buy existing homes during March, the National Association of Realtors said Wednesday, as tougher underwriting guidelines and falling home prices continued to dampen buyer demand.

The NAR said that its index of pending home sales edged down 1.0 percent in March compared to February levels, and was 20.1 percent lower than in March 2007. March is typically the start of the spring selling season, and pending contracts traditionally begin an upward swing in the month, analysts told HW — meaning that the 2008 selling season is likely to be significantly weaker than any seasonal sales cycle in recent memory.

Bloomberg reported that the 1 percent drop matched economists’ median expectations.

“Things are beginning to improve,” said NAR chief economist Lawrence Yun, “but the availability of affordable mortgages is uneven around the country and sometimes within metropolitan areas.” Yun said he expects to see improvement in pending sales numbers in the back half of this year.

Regionally, three of four regions saw contract volume drop in March, with the Midwest leading the fall at 10.4 off versus February’s numbers; the Northeast saw a 12.5 percent monthly jump, but remains 15.4 percent below year ago levels, the NAR said.

The NAR, somewhat surprisingly given recent history, left its forecast for annual existing home sales largely unchanged, although it significantly revised — downward — its expectations for new home sales. The realtors said they now expect 536,000 new home sales in 2008; one month ago, they forecast 576,000.

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

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A Senate Judiciary subcomittee hearing on Tuesday became the latest example of the scrutiny now being placed on default servicing practices within the mortgage banking industry — with an academic, a U.S. Senator, former owners, and a well-known Chapter 13 Trustee piling it on over alleged abuses of the bankruptcy process by the nation’s largest servicer.

The lone industry representative in the room was Steve Bailey, senior managing director of loan administration for Countrywide Financial Corp. (CFC: 4.94, -7.49%), who characterized media reports of widespread abuse of the bankruptcy process by the nation’s largest loan servicers as “inaccurate” and said that the lender’s error rate was less than one percent for mistakes that “adversely impact a borrower.”

We’re pretty glad we weren’t in Bailey’s shoes yesterday.

Senator Charles Schumer (D-NY), chairman of the Judiciary Subcommittee on Administrative Oversight and the Courts, which held the hearing, took issue with the suggestion that errors were few and far between.

“Indeed, Countrywide today says problems exist in only a small number – maybe 1 percent of their cases, or about 650 of the 65,000 cases Countrywide has in bankruptcy,” Schumer said. “But court records seem to tell a dramatically different story.”

While he didn’t produce evidence of court records showing a more widespread error rate than Countrywide claimed, the New York Senator did blame what he called a “vulture mentality” among mortgage servicers.

“As bankruptcies swell and defaults rise and revenue streams dry up, I fear a vulture mentality is developing in some quarters,” he said. “And that vulture mentality threatens to turn the dream of home ownership into an even worse nightmare than it has been for many already.”

Schumer went so far as to question whether Bank of America should continue with its $4 billion pending purchase of Countrywide.

“I’ve always wondered why Bank of America – a fine institution with a good reputation – was willing to purchase Countrywide, given its recent history, and I understand that there has been encouragement by the financial regulators to make this transaction happen,” Schumer said.

“These latest revelations should make Bank of America think even harder about how they want to proceed with the deal.”

BofA, for the record, has said it will shutter the Countrywide brand upon acquisition.

Debra Miller, a Chapter 13 trustee in the Northern District of Indiana, said in her testimony that “debtors tell us of demand letters for thousands of dollars and accuse us, their attorneys and the bankruptcy system for denying them the fresh start the Bankruptcy Code promises.” Miller said the blame should instead be placed squarely at the feet of servicers, who she said face “systemic problems” in process management and execution.

Countrywide’s Bailey said that while the servicer has made mistakes, it’s working to improve, including conducting an escrow analysis on each loan shortly after a bankruptcy filing date and engaging an independent auditor to review its handling of bankruptcy filings.

Schumer suggested that whatever Countrywide was doing to improve wasn’t enough.

“There are too many horror stories, too many investigations, too many sanctions imposed for us to simply take the word of a company spokesman that ‘mistakes were made’ and that they were few in number,” he said. “We need a thorough and public accounting of industry practices.”

Disclosure: The author was long CFC 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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