Marc's Mortgage Matter's

At the last company Christmas party the loan agents lined up on one side of the room and the underwriters on the other side. The loan agents throw fire cracker at the underwriters...and the underwriters lit them and threw them back.

I am going to go out on a limb here, which is rare for me, and suggest that the consultants, market gurus, bloggers, paid services, etc., who firmly believe that mortgage rates are going to go up 50 basis points after March 31st are wrong. If NASA told you that it was certain a meteorite was going to hit the US next Tuesday, would that change your behavior now? You bet it would. Yet dealers are not seeing companies sell their entire pipelines and/or expected production (currently estimated at less than $1 billion a day) for April and May. If speculators are stocking up on puts on MBS's, they are keeping it well hidden. (Of course, the option market for mortgage securities is practically nil.) Mortgages have been getting tighter and tighter to treasuries, which one wouldn't expect if mortgage rates were going to skyrocket, and last week current coupons were the tightest they'd ever been. And why would any mortgage investor (currently hedge funds and money managers) want to own pools at these price levels if they were going to be two points lower in three weeks? Of course, no one wants to sell something that they don't own in this market. I don't think that the supply is there, no one wants to sell what they don't have (exposing them to some extremely volatile swap and role markets), and with Fannie & Freddie buying back delinquent loans, I think mortgages will hang in there with other rates.

Anyone who has tried to refinance a 1st mortgage while having the 2nd subordinated knows what a nightmare that can be. Apparently modifications are not much smoother, and last week House Financial Services Committee Chairman Barney Frank called on the CEOs of four major investors/banks (WellFargo, Bank Of America, Citi and Chase) to work with the Treasury Department and banking regulators to deal with second mortgages that have become an obstacle to modifying troubled first liens. These four have $452 billion of 2nds on their books, and writing them down is supposedly fraught with problems - especially since a lot of them are worthless. Gulp. The issue is that banks have not acknowledged these losses under the accounting rules and will adversely affect their capital ratios. 

Neither strategy worked for four more banks, as the FDIC shut them down last Friday (without finding buyers for two of them leading to losses for depositors who had balances exceeding the agency's insurance limits). Sun American's (FL) deposits and assets were acquired by First-Citizens Bank (NC) at a cost to the FDIC of $103 million. The Bank of Illinois was "absorbed" by Heartland Bank (IL) at a cost to the FDIC of about $54 million. Waterfield Bank (MD), at a cost to the FDIC $51 million, and Utah's Centennial Bank are now being run by the FDIC, with the help of Zion's Bank, at a cost of about $96 million. This past Thursday they closed up LibertyPointe in Brooklyn and Manhattan, and the two branches became Valley National Bancorp.

After coming out with new investor's policies on the FHA flipping waiver, especially concerning the amount of profit a seller can make, I received some mail. One wrote, "Telling some guy who is putting his money at risk how much he can make is bull. So some guy who buys a house in Detroit for $10,000 can only sell it for $12,000? Give me a break."

Another industry veteran wrote, "It is amazing how many creative ways the banks can find to sabotage the credit markets. Risk-takers all over the country sit on county court steps fronting their own cash to buy their troubled assets. They take on these risks in the pursuit of profit which can be realized after they clean up and stage the property...this so-called flip is a viable investment strategy that serves the bank's interests. In many cases the investor's markup on the flip is offset by the amount of rehabilitation put into the property or the rehabilitation itself is what inspires the buyer to pay that higher price."

"I can see it now. The listing sign will read, 'For Sale. The most we'll take is $250,000 and not one dollar more!' So if you're one of these investors you have a few options: accept the artificial markup caps because the reward is still worth the risk, stop rehabbing properties so you can keep the little markup they will allow, invest and hold your properties longer, or take your money elsewhere."

Fair Isaac Company, known as FICO, reported that credit score trends indicate that mortgage default risk for consumers with high FICO scores is now moving toward exceeding their credit card default risk, in spite of the fact that credit cards are generally unsecured and mortgages are secured by real estate. In 2005 bankcard accounts were more than three times more likely to become 90 days delinquent, but in the last few years this has dropped to only 1.6 times more likely. And FICO reports for borrowers scoring high on the FICO score's range (300-850) the level of repayment risk actually has become greater for real estate loans than for bankcards! And for more fun with numbers, in 2005, 46% of consumers who opened a new mortgage had a FICO score less than 700. In 2008 this percentage had dropped to 25% of the newly booked mortgage population. Fair Isaac reports that borrowers in the Northeast continue to present the least amount of default risk nationally for real estate loans. (Yes!, Northeast includes NY and NJ!)

Rate Stuff: Before too long, we're going to start to find out what "normal" mortgage markets may look like for the first time in a long time. There are only about two weeks remaining until the Federal Reserve's program of purchasing Mortgage-Backed Securities comes to a finale, and if one thing is clear, it's that there's not a great amount of clarity into what comes after.

The Fed meets on Tuesday next week for a one-day meeting, the shortest such event in over a year. Its more than likely that there will be discussions of contingency plans for mortgages should market conditions turn adverse in the months ahead, imperiling the relative stability forming in the housing market. Rate we a tad better this past week which is weird but this coming week should say something too! Personally, if you've got a mortgage running I would lock it in especially if your closing within the next 30 days.

NEW UNDERWRITING UPDATES

All borrowers' birth certificates will be required with pictures taken in the hospital with medical staff. Birth certificate with a live home delivery will not be eligible for first time home buyers.
Marriage certificate with bridal dress will be required if both husband and wife are required to qualify for the loan.
Bank Attorney will not require signature, but will require blood sampling from a recognized institution within three days of application.

DNA test will be performed at closing to avoid any non-arms length transactions. Loan funding will be contingent upon satisfactory receipt of DNA results.
Seven witnesses from the neighborhood will be required as proof of primary residence in case borrower owns more than 1 property.
All appraisers will be required to use masks and ear plugs at the time of inspection to avoid any personal influence by the borrower or broker for the appraised value. 
Closing will not occur without loan officer presence at settlement and loan officer picture will be taken at the closing in a mug shot format with loan number. Picture should meet standard guideline of 2 X 2 inch in color format with one facing and one side view.
Loan officer picture will be attached to the Deed and note and will be made available for general public and security agencies in case borrower defaults on the loan.