The Markets | Bay Area Real Estate Finance

OFHEO’s Four Quarter Price Change By State For US Housing

Interesting graphic. With all the news about house price declines, and expectations of declines in the current marketplace, there are some interesting take-aways from this chart, published last week by OFHEO. You can read the full report here. OFHEO says the decline in values is accelerating. I like the pictures, and this one is telling. Most markets appear flat, and Utah and Wyoming are showing above-average gains year-over-year. Worst performance is in California. Easy come, easy go? Housing prices, like all asset value cycles, are showing characteristics of “Mean Reversion“.

Two Great Market Articles

From the WSJ, “Bernanke’s Bubble Laboratory“. Within this, a great quote from famed economist John Maynard Keynes “the market can remain irrational for longer than you can remain solvent.” This quote conjures up memory of a former roommate who was an analyst with a major Wall Street firm, and his frustration over the 1999-2000 apex of the NADAQ. He simply didn’t believe it, and went short on an NASDAQ index security. He held out and held out, and finally was forced to cover about a month before the market turned and dumped. He knew better, but the market still rules…

From BBC News, “The US Sub-Prime Crisis in Graphics“. Loaded with visual aids.

Jumbo & Conforming Loan Limits – More Market Chatter 5/12/08

Last week Fannie Mae made an announcement about a new “keys to recovery initiative”. Below is an overview as forwarded by a colleague. We are expecting more to follow this week, but at the origination level, we are already seeing the effects of this in the Jumbo-Conforming sector pricing for the new high balance conforming sized transactions. If you have questions about this, email me.

KEYS TO RECOVERY INITIATIVES

Fannie Mae’s Keys to Recovery™ initiatives are geared toward providing liquidity, stability, and affordability to the housing and mortgage markets for the long term, and include steps to keep struggling borrowers in their homes, assist prospective homebuyers with home purchases, and stabilize communities impacted by the
mortgage market downturn. The initiatives include
1) a new refinancing option for Fannie Mae “underwater” borrowers that will allow for
refinancing up to 120% of a property’s current value;
2) a renewal and expansion of the company’s partnership
with the state Housing Finance Agencies (HFAs) to provide $10 billion in financing for qualified, first-time
homebuyers;
3) in partnership with Self-Help Credit Union, a new initiative that allows families in hard-hit
communities to reside in foreclosed properties on a rent-to-own basis; and
4) pricing for new jumbo-conforming
loans that will be flat to conforming for portfolio asset acquisition through the end of the year.

Refinancing “Underwater” Borrowers
With home prices declining in many areas of the country and lending standards tightening as a result of the
ongoing turmoil in the housing finance system, many borrowers find themselves with mortgages that exceed
the value of their homes and are locked out of refinancing into safer loans that would allow them to sustain
their mortgage payments.
In order to assist borrowers whose home equity is “underwater,” reduce foreclosures and support sustained
homeownership, Fannie Mae will purchase refinanced loans the company owns for up to 120% of the current
property value provided the borrower is current with their mortgage payments.

HFA Investment
HFAs exist to provide affordable homeownership and rental housing opportunities within their states. The
majority of HFA single-family business is for first-time homebuyers who have received borrower counseling
and down payment and/or closing cost assistance from the government.
Fannie Mae has maintained a long-term agreement with the National Council of State Housing Agencies
(NCSHA) to purchase loans generated by the HFAs. The company is renewing and expanding its agreement
with NCHSA to purchase up to $10 billion in HFA loans by the end of 2009. In addition, the company will
provide preferred pricing on HFA business to lower borrower costs for first-time homebuyers.

Neighborhood Stabilization
In order to minimize the neighborhood impact of foreclosed properties, Fannie Mae will support an initiative
with Self-Help Credit Union in partnership with local non-profits to purchase Fannie Mae-owned, foreclosed
homes in hard-hit neighborhoods. The nonprofits would acquire and rehab the properties, and then sell them to qualified borrowers or enter into a customized lease-purchase agreement. The initiative will be geared toward borrowers who have the income to qualify for the home purchase, but need additional time to improve creditworthiness. Participants choosing the rent-to-own option would be granted up to five years to qualify for the mortgage and receive extensive credit counseling during the lease period.

Jumbo-Conforming Loans
Following passage of the Economic Stimulus Act of 2008, Fannie Mae is temporarily able to purchase loans
greater than the conventional-conforming loan limit of $417,000. In certain high cost-areas as designated by
HUD, the company is able to purchase jumbo-conforming loans up to $729,750 in the continental U.S. The
company is now accepting deliveries of 15-year and 30-year fixed-rate (FRM), and certain adjustable-rate
(ARM), jumbo-conforming mortgages.

In order to bolster liquidity in the jumbo-conforming market and help reduce rates for jumbo-conforming
mortgages in high-cost areas, the company will now:
• Price new jumbo-conforming loans flat to conforming for portfolio asset acquisition through the end
of the year. This means that although jumbos are not TBA-eligible, we will be pricing them as if
they were.
• Allow for cash-out, jumbo-conforming loan refinancings.
• Expand loan-to-value (LTV) criteria for jumbo-conforming purchase loans and limited cash-out
refinancings.
• Offer expanded jumbo-conforming FRM and ARM options.

HomeStay
The company’s Keys to Recovery™ efforts build on Fannie Mae’s HomeStay™ initiative announced last year.
The company is working with lenders, loan servicing companies and policymakers to respond to the housing
and mortgage market crisis with a goal to minimize the impact on families and communities by preventing
foreclosures, supporting counseling efforts, and providing market stability. Through HomeStay™, since the
beginning of 2007, the company has:
• Helped more than 200,000 at-risk homeowners refinance into safer loans or work out their loans,
including nearly $28 billion in refinancings for subprime borrowers.
• Provided more than $10 million in grants – and hundreds of employee volunteer hours – to support
foreclosure prevention counseling and workshops since the housing crisis deepened last year.
• Worked with loan servicers to emphasize work-outs for delinquent loans, instituted attorney incentive
fees for workouts, provided HomeSaver Advance™ loans that allow borrowers to catch up on their
delinquent mortgage payments, deployed staff to work on-site with our largest servicers, and made
dozens of operational changes and enhanced servicer authorities to allow for easier modifications and
work-outs.
• Supported HOPE NOW initiatives and public policies to give at-risk and delinquent borrowers a better
chance to afford their mortgages.

Jumbo & Conforming Loan Limits – More Market Chatter 5/8/08

A big wet blanket got thrown on the whole idea of the new conforming loan limits when we realized that the banks were going to take advantage of the new limits to off-load some frozen pipeline to Fannie Mae and Freddie Mac, but not turn around and extend the offer to the consumer. As a result, we saw a new market form between Conforming and Jumbo sized loans – the new “Agency Jumbo”, “Conforming-Jumbo”, “High Limit Conforming”, or whatever you want to call it – the names are all over the place. But banks priced these much closer to the currently-dysfunctional Jumbo market rates – with 30 year loans pricing at 7% and higher.
But not any more! Here is some fresh news from a colleague:

Fannie Mae threw some chum into the water for loan agents in high balance areas, saying that it will buy jumbo mortgages for the same prices as smaller loans. Some random notes:

Fannie is expecting the benefits of the price improvement to be passed along to the consumer. The intention and spirit of the price change is to improve the rate for the borrower, not to present an arbitrage opportunity. Fannie’s policy is that for loans already in pipeline lenders can float the borrower’s rate lower or sell already closed loans at the originated market level – they will not buy closed loans at flat to conforming. Other investors have yet to announce firm guidelines regarding those loans already locked in.

Credit pricing is unaffected, and all adjustments still apply, including the 25bp for fixed rate, 75bp for ARMs, and the 25bp adverse market delivery charge.

Fannie Mae approved seller/servicers should see approximately a 37bp yield improvement for the jumbo-conforming fixed rate and a 20bp yield improvement for the jumbo-conforming 5/1 adjustable rate whole loan postings.

Fannie Mae Trading Desk will buy jumbo-conforming adjustable rate securities at levels flat to where they are bidding conforming ARM securities.

Fannie also announced that they will handle refinancings of non-delinquent mortgages for as much as 120 percent of property values when it owns the existing loans.

Some investors made the change effective immediately and reduced the spread from 150 basis points down to 50 bps, of which 25 bps is a direct fee to Fannie Mae.

Manual u/w is still required, DU can be run but it must meet the product overlays.

Questions about what any of this means TO YOU? Email me here! This appears to be legitimate, real positive news. For the first time since the crisis began back in August, we are seeing 30 year rates near or even below 6% at the new conforming limits in high cost areas!

Interest Rate Spreads And Why The 10 Year Treasury Is Not The Best Indicator Of Mortgage Rates

One of the topics that comes up on a daily basis with my clients is the relationship between mortgage rates and the headline-grabbing interest rate reference points like the 10 Year TreasuryNote, or the Federal Funds Rate.

A very common misconception is that mortgage rates are based on the 10 Year Treasury Note. I am not exactly sure what the logic there is, but I have heard people say that the average 30 year mortgage lasts only10 years. Seems like a pretty loosey-goosey way for a bank to call out a price for lending their money out on a 30 year term. Do mortgage rates correlate to the 10 Year Treasury at all? Over time, mortgage rates and the 10 Year Treasury do trend in the same direction, but on a day by day basis, they often go in different directions, or at least at a different pace. There are separate specific implications for each, and they react to a different set of data points in different ways – at times, the differences can be significant.

The other question I get rather frequently is how the Federal Reserve will impact rates with their recent string of cuts to the Fed Funds rate. People continuously expect that its best to wait until after the cut to take advantage of lower rates. Again, not the correlation you are looking for. The Fed has cut 7 times in the recent cycle, and on the first 6, mortgage rates spiked in response. On the last one, rates went down a little. Do mortgage rates react to the Federal Reserve actions? Absolutely, but its the greater economic context that matters at the time, and dictates the type of reaction.

So what’s the best metric for determining mortgage rates? MBS, or mortgage-backed securities, aka mortgage bonds. Read a definition of these here. When mortgage bonds trade at higher prices, the associated interest rates drop. This tells lenders for new mortgage issues what the current value and rate of return is on long-term bond money, and helps them set their rates.

Each of the first 6 cuts this time around have brought on a perceived increase to the threat of inflation. Long term fixed-income securities, like bonds, Treasury Notes, etc, HATE inflation. If you were a bank, and committed to lend 100 dollars to somebody for 30 years, and then inflation doubled, your 100 dollars would be worth far less than you had expected it would be when you loaned it out. So you would loan your next 100 dollars at a higher interest rate to compensate. Accordingly, rates on mortgages jumped at each time.

Then on the most recent cut, the Federal Reserve hinted at the idea that this would end the cycle. It gave the bond market confidence that no further inflation pressure would be invited, and the bonds rallied on the news. Rates went lower.

The bottom line when it comes to trying to predict mortgage rates, is that you need to know where MBS are trading, and what the climate is for them amidst the constant inflow of economic data points. They react very strongly to things like the Unemployment data, GDP, CPI, PCE, PPI, Home Starts and Sales, and a bunch of other metrics. Depending on the mood, different indicators have different impacts. If inflation is a hot button, the inflation barometers like the CPI and PCE will have heavy influence. If we are looking for indicators of recession, MBS will be sensitive to GDP, Consumer Confidence, Retail Sales, etc.

The Cleveland Federal Reserve has an article out discussing the increasing spread between Treasury and mortgage rates. With the current credit crisis, money has rushed into bonds as usual. But mortgage bonds have been relatively less appealing, as the whole mortgage marketplace is at the epicenter of the crisis. Last time we had a recession, money flooded into all bonds, Treasury and especially MBS because the housing economy was strong, and MBS values were thus very secure. This is why we are seeing a lack of correlated movement between these two instruments.

If you are entrusting a mortgage professional with the management of your debt, you need to align with one who understands interest rates. They need to specifically understand the market for mortgage-backed securities, and the economics behind the current credit and liquidity crisis. If the person you are speaking with tells you that mortgage rates are based on the 10 Year Treasury, or especially if they call the 10 Year Treasury Note a Treasury Bond, there’s a risk they are going to mishandle your business. And if they say they ‘can’t see into the crystal ball’, its likely a sign that they don’t have a clue what upcoming events might be influencing rates.

Investor Emotion Cycle: Is Now Time To Buy?

We are seeing a classic asset bubble cycle in the housing market (as well as the credit market, etc). Many investors feel that the best time to buy is when the general public is selling, and financial market history is full of retrospective examples that validate this philosophy. The chart below provides a walk-through of the cyclical nature of asset markets, often characterized by irrational (exuberance) on the way up, and irrational (panic) on the way down.
The curve may not always look this symmetrical, but the general idea is clear. And so where are we with housing in this cycle? I’d say we are somewhere between “Panic” and “Despondency”. And there is no doubt that great deals are out there today, and will continue to show up on the market. Today’s home seller is motivated by fear or necessity; they are not selling because they think its the best time – they just think today is better than tomorrow.

I think the real test is how long this lower part of the curve drifts on before we see “Hope” take over. We are seeing seasoned investors out poking around again, and looking for the ‘right’ deal. I get the sense that many do not believe we have seen the optimal entry point back in the market. Could be a slow rise back to optimism, but it will eventually get there…

Social And Economic Problems With The US Housing Market; Would You Rent Your Home To Jose Canseco?

First things first. Jose Canseco, who I will always remember for bouncing a ball off his head and over the home run wall, and getting pulled over in my hometown a few times cruising in a convertible and a gun in his lap, is in foreclosure. Unless he owns another home to move into, he’s looking for a place to rent. Are you looking for a renter to that investment home you speculated on and can’t refinance because of the credit crisis?

A new report from the Center for Economic and Policy Research, and the National Low Income Housing Coalition presents some of the current trends in the relationship between home renting and ownership. They present a good outline of some of the challenges lawmakers are facing when trying to figure out how to regulate us out of the current mess we are in. Worth a read, at least of the executive summary. Definitely read it if you are thinking of renting your house to Jose Canseco.

What Happens When Savings Is Already Negative, And Then Credit Shrivels Up?

You cut spending, or cash in assets. Or you steal.

I have to give credit to Paul Kasriel, who has been beating this drum for months – or years. He has done several walk-through essays, loaded with charts and visuals, which basically show the following:

We spend more than we earn. (negative savings rate – or very close to it, depending on when you look).

This is possible because we have been liquidating our home’s equity via Lines of Credit (HELOC).

Now that home values are falling, we are losing the equity before we can spend it.

Furthermore, banks are less likely to allow access to equity, even if it is there.

Bottom line: we have to cut back, sell other assets, or steal to keep things going. So if we have not yet cut spending, we are still living off of increased borrowing, or we are liquidating other savings. None of these are good trends for the long-term. This is why our economy is due for a slowdown, recession, etc. We’ve been on an unsustainable path. Check out some of his recent write-ups. Including the most recent one, which is a re-issue of a 2005 essay.

What Does A Credit Crisis Look Like?

It’s no secret: The ‘credit crunch’ is not contained to the subprime sector. Subprime, depending on who you listen to, was about 10-15% of the overall mortgage market up until the point when things started to crumble in January of 2007, and then really fell apart in August of 2007. For a while, the Fed, other economists, and certainly the mortgage industry was defiant about the idea that this little fire would be put out before catching the whole forest ablaze.

If 15% of the market is in peril, why are 75% of the banks “tightening” their guidelines, or in other words, making it harder to qualify for borrowing?

See evidence of this in the chart below.

CMPS Proposal For Housing Crisis Reversal

I recently wrote about the negative feedback loop this credit crisis is causing, and how it causes a downward spiral in home values. You can read about it and the study referenced right here. Many economists are discussing ways that the government or the banking institutions can put up a backstop to help break this cycle. It’s a complicated issue.

The CMPS Institute has issued a proposal designed to offer some ideas from the perspective of the mortgage industry. It’s an interesting argument against some of Washington’s proposals, which include a tight ratcheting down on the lending industry. This feels very threatening to mortgage professionals who know how to run an ethical business and use flexibility in creative ways for their clients. Read the proposal for more insight.