Category: The Markets

There has been a ton of attention paid to the recent legislation that passed as part of President Bush’s Economic Stimulus Plan. Especially by people in the mortgage industry. And people with mortgages. Rightly so – the mortgage market has been in a funk since last August, especially for people with “Jumbo” loans. You have a Jumbo loan if you started out owing more than 417k.

Rates on Jumbo loans spiked back in August, as the secondary market essentially shut down. The value of bundled mortgage investments on Wall Street exchanges was called into question after defaults within these bundles started to run at higher levels, causing the bond investments they fed into to underperform. Why did this happen? Because home values started to drop, and homeowners with mortgage balances larger than the value of their homes went into voluntary default. Others had loans with adjusting rates that caused the payments to jump – and they went into semi-involuntary default. I say “semi”, because I think they’d have found a way to pay the bill if the equity in their homes was still there. It was all related. Values coming down, rates going up, payments coming in late, payments not coming in…

if you were looking for a place to invest money, would you buy a bond in which the underlying debt represented somebody’s mortgage, and their motivation to pay back the mortgage was deteriorating as fast as their home equity? Neither did Wall Street. The market shut down, became illiquid, and CNBC began the era of “Liquidity Crisis” and “Credit Crunch” headlines. Banks were stuck holding their latest batch of mortgages, and had no willingness to lend new money. They communicated this by jacking rates up about 1.5-2% over a few days.

Since then, we’ve seen some liquidity come back, and the market has made a few attempts to recover. But nothing has really lasted. Every time a “new shoe drops”, the market freaks out and sticks its head back in the ground. Bear Stearns? Forget it. This bubble burst is a big meal for the markets to digest, and its going to take a while…

But in the non Jumbo market – also known as “conforming” – the market has been much more fluid. Thats because conforming loans have an implied government backing, and they “conform” to the standardization rules set by Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

So when Bush’s Stimulus Package passed, it was seemingly great news that the new conforming loan limits would be set based on a revised county-by-county valuation model. For areas with higher than average cost, this would represent big changes, and help close the gap between average home costs in above-average cost areas. The maximum new limit reaches as high as $729,750. Big change!

At first, many assumed that people with loans between 417k and 729k – who were facing jumbo rates – were going to be able to refinance down to rates 1-1.5% lower. A few steps needed to happen between the legislators, regulatory bodies, and banking institutions before these new rules would take shape. This was a stimulus package, right? A bail-out for consumers who had been recently swindled into bad loans and were facing losing their home, right? The news has been full of these stories.

But a big wet blanket has been thrown on this whole idea – little bit by bit. You see, the banks have started taking the new loans with conforming rules. Except the conforming rules for these arent the same. For example, there’s a price premium on the rates, and for a refinance, you have to have 25% equity… !!! I don’t know many borrowers with 25% equity who are really having a problem. They don’t allow foreclosure, even if their rates are a little high. They’ll find money from family, or sell the home, or something. So in other words, this whole thing was pointless.

But really, what was the point? Well it seems that the “bail-out” was more for the banks than the consumer. The banks are now able to go back and sell all of this stagnant mortgage debt they issued, now backed retroactively by the FNMA/FHLMC guarantees. They get to liquidate, loosen things up, start breathing again. Its kind of like getting an insurance policy after you get in a car wreck – and getting to cash it in!

So thats where we are. The banks are clearly showing that they do not want to take new loans in on the temporary Stimulus Act model. They want to liquidate their books. But that may not be such a bad thing if you are a consumer. Because as they restore their balance sheets, they’ll grow more confident to loan new money out. And they’ll lower rates to attract new business. That may cause the pricing premiums to narrow, and eventually this should make new loans more attractive. But the stimulus act is only applicable until the end of the year. So how long is this going to take? There is no data on thes new conforming loans for performance or prepayment – the statistics that give investors an ability to guage their risk. It doesnt feel like anybody wants to take unknown risk on any type of investment in this climate. Might be a lot of us trying to squeeze through the door before it shuts on Jan 1. Maybe it will never happen…

So now what? Even though this whole thing looks like a bit of an empty promise, there are some other pieces of the Stimulus Act that may allow some people to still get 95% refinances up to that 729k level and at about a 6% interest rate. We are still watching the details unfold, but if you know more or stay updated, email me and ask to be included on new announcements.

Want to know why the new conforming loan limits wont help you? Stay tuned for my next post… In the meantime, I’ll skip right past the final word and show this great new tool for searching the new limits for FHA loans in your area.

This market is moving quickly. The need for guidance and careful planning is greater than it has been for years. Make sure you are getting the help you need. If you have not heard from your broker recently, he/she may have become a casualty of a massive reduction in workforce in the mortgage industry. If you would like to discuss your options or join my management program, please email me.

From OFHEO:

TEMPORARY CONFORMING LOAN LIMITS RELEASED FOR HIGH COST AREAS

Washington, DC – The Office of Federal Housing Enterprise Oversight (OFHEO) today released the maximum conforming loan limits that will be in effect through year-end as a result of The Economic Stimulus Act of 2008. That legislation permits Fannie Mae and Freddie Mac to raise their conforming loan limits in certain high-cost areas. The new jumbo limits are a function of median home prices as estimated by the U.S. Department of Housing and Urban Development (HUD).

The maximum for temporary jumbo conforming loan limits, which apply to loans originated in the period between July 1, 2007 and December 31, 2008, are as high as $729,750 for one-unit homes in the continental United States. Two, three and four-unit homes have higher limits as well. Alaska, Hawaii, Guam and the Virgin Islands also have higher maximum limits.

There are two data sources reflecting the new maximum limits. The first, on OFHEO’s Web site, available at www.ofheo.gov/media/hpi/AREA_LIST.pdf, reports only those counties and Metropolitan Statistical Areas (MSAs) that are affected by the new loan limits. Data for all areas are available on the HUD Web site at https://entp.hud.gov/idapp/html/hicostlook.cfm.

Seventy-one Metropolitan and Micropolitan Statistical Areas are affected including 245 counties and cities not in counties. In addition, there are 21 counties outside of Metropolitan or Micropolitan areas that show increases, plus Guam and four municipalities in the Marianas Islands. The newly increased limits range from $417,500 in Greeley, Colorado to the highest of $793,750 in Honolulu, Hawaii.

In support of HUD’s calculation of county median home prices, OFHEO provided HUD rural house price indexes for 48 states. HUD used these indexes, which reflect price changes for homes outside of Metropolitan Statistical Areas, to estimate median prices in counties for which sales price data were sparse. OFHEO has made these indexes available at: /hpi_download.aspx.

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OFHEO’s mission is to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac.

A little less excitement over jumbo/conforming loan limit changes as the reality drags on. I have heard of buyers trying to delay close of escrow to wait for the new limits, but we still really do not know how its going to look. But I do still expect it to offer some significant help to some people in the 417-729k range, especially where equity is below 20%

From A Colleague:

During a recent teleconference with the U.S. Department of Housing and Urban Development (“HUD”), NAMB learned that HUD plans to publish the new FHA loan limits in a Mortgagee Letter to be issued during the first week of March. HUD will publish separate lists for the FHA program and the GSEs. Additionally, HUD will be recalculating the median home prices which are used to calculate the loan limits. The new loan limits will be based on 125% of the median home price in counties across the country, and will be capped at $729,750. The floor for FHA loans will be raised from $201,060 to $271,050, and originators can begin processing applications now for any loan that was assigned an FHA case number after February 13th (the date the bill was enacted). These changes are a result of the Economic Stimulus Package signed by Pres Bush on February 13th, and will expire after one year. However, HUD officials participating on the teleconference indicated that more comprehensive FHA reform should be moving through Congress in the coming weeks.

Capital Markets Analyst:

HUD has 30 days from the day the President signed the package into law to identify the impacted Metropolitan Statistical Areas, so it may be sometime in mid-March before all lenders receive the official pricing notification. At this point anything else is pure conjecture. Although several mortgage lenders have promoted lists of what they believe the new limits will be, these are only estimates because HUD has yet to determine the higher loan limits. HUD will determine the new loan limits based on the median area sales prices – but which ones? 2007? The fourth quarter of 2007? The third quarter? Median area sales prices may be dramatically different throughout the year, so the timeframe used by HUD to determine the higher loan limits is very important.

Some of this may be tough to follow. If you have questions, email me.

From A Colleague:

The Secretary of HUD, and OMB, have 30 days from the signing the bill to provide suggested guidelines for loan types, units, etc. to OFHEO. After that, OFHEO will make recommendations to FNMA & FHLMC, who in turn will make recommendations to large investors (Citi, Wells, Countrywide, Chase, etc.) regarding the types of loans, fixed or adjustable, number of units, etc. No one is sure of the exact schedule.

Statistical areas are manipulated by various federal agencies, depending on their wants. For example, the EPA may put a county like Sonoma or Napa into the San Francisco Metropolitan Statistical Area, in spite of Napa & Sonoma Counties being their own “micro” statistical area, whereas the OMB may split them out. A combinations of areas is called a “CSA”, or Combined Statistical Area. The National Housing Act provides formulas for HUD to determine maximum mortgage limits for loans insured by FHA. These limits are determined by the county in which the property is located. You can view all local FHA Mortgage Limits at this website. The bill that was signed by the President did not specifically address the areas that will be affected, as mentioned above. You can keep checking the attached website periodically to find out what the increase will be.

READ THIS PART 2X (JG)

The Securities Industry and Financial Markets Association (SIFMA), publishes “Good Delivery Guidelines” for To-Be-Announced (TBA) trading of Mortgage-backed Securities (MBS) pools issued by Government Sponsored Enterprises (GSEs) and Ginnie Mae. The TBA market facilitates the forward trading of MBS issued by GSEs and Ginnie Mae by creating parameters under which mortgage pools can be considered fungible and thus do not need to be explicitly known at the time a trade is initiated – hence the name “To Be Announced.” The TBA market is the most liquid, and consequently the most important secondary market for mortgage loans. SIFMA will keep the maximum TBA eligible original loan balance at current levels and clarify several long standing market practices for good delivery. The current maximum original balance allowable for a loan on a one family property in a TBA eligible Fannie Mae or Freddie Mac pool is $417,000 in most states. However, in Alaska, Hawaii, Guam and the U.S. Virgin Islands the limit rises to $625,500. Higher balance loans which are now temporarily eligible for Federal Housing Authority (FHA) and GSE guarantee programs under H.R. 5140, the Stimulus Package, will not be eligible for inclusion in TBA-eligible pools. They are instead expected to be securitized under unique pool codes for trading on a “specified pool” basis or inclusion in Real Estate Mortgage Investment Conduit (REMIC) transactions.

From A Colleague:

Speaking of different areas of the country, most people think in terms of country, state, county, town, street, even zip code. But “MSA”? The new conforming loan limits discuss Metropolitan Statistical Areas. For the complete list, which also shows the counties included in each MSA, click here. Remember that OFHEO, to the best of my knowledge, has not ruled on whether or not ARM loans are included, nor 2-4 units, nor IO loans. And therefore neither have Freddie Mac or Fannie Mae, and therefore neither have any investors.

“Median”: the middle number in a given sequence of numbers. (4 is the median of 1, 3, 4, 80, 90). Speaking of MSA’s, here in California, the median income (half below, half above) was $64,563 in 2006. The top county – Marin – had a median income of $99,713. So it would appear that, to take advantage of the new limits, loan agents will be focusing on borrowers with much higher incomes than the median. In a full doc scenario, with reasonable debt-to-income levels, a borrower earning $100k per year may not qualify for a $700k loan. Perhaps an income, under the most generic of underwriting & borrower criteria, of something above $125k would be needed to get a DU approval for the new loan amounts.

Doug Duncan, chief economist for the Mortgage Bankers Association, says it will take lenders three to six months to make technical changes so their systems can process the larger loans. And after that, Wall Street investors still must determine the risk of buying these bigger loans. Doesn’t that put us into 2009? So interest rates might not come down as much as some hope, Duncan cautioned. “On balance (the stimulus package) is a plus,” he says, “but I would not expect immediate or dramatic change in the near term.”

What’s the big deal with FHA loans? Currently the FHA program has no declining value adjustments at the government level, has low down payment and loan to values as high as 97%, cash out refinances allowed to 85%, rate and tern refinances to 97%, total down payment can be a gift, no credit score requirements, no income limits or sales price restrictions, FHA loans are assumable, seller concessions may be as high as 6%, no cash reserves required, non-occupying borrowers are allowed with blended ratios (SFR only), non taxable income (including child support) may be grossed up, and bankruptcies allowed after 2 years. We’ll see if investors continue allowing all of these with $729 loan amounts, of if they add “overlays” to restrict underwriting.

Quetions? a me.