Marc's Mortgage Matter's

According to the police, a Texas woman lived in an apartment with her dead boyfriend for a week. Know why he didn't marry her? Cold feet.

To the benefit of Treasuries and mortgages, stock markets continued to crater amid less-than-stellar earnings reports, with the downturn exacerbated by new rounds of populist bank-bashing, this time via a unique taxation proposal from the Obama Administration.

The Administration unveiled a proposed tax this week to penalize large banks, particularly those who accepted (or were required to accept) TARP funds, even though it would also ensnare those large banks who eschewed the "offer of assistance" from Uncle Sam. The levy would apply even to those firms which have already paid back TARP funds with interest, and is supposed to rake in some $9 billion per year. The fact that some firms which got plenty of TARP money -- such as auto makers and insurance firms -- are exempted from the tax makes one wonder whether banks are being unfairly targeted. That being the case, and without getting into the specifics of how the fee is levied, we are simply left to wonder: Does anyone really believe that any such new costs won't ultimately be borne by businesses and consumers? Will there be no effect on lending? We'll need to see where this all goes, but can't imagine that it'll provide any economic help.

Perhaps any proposed fee might be dedicated instead of sinking into the black hole of spending which is Washington. Nine billion dollars per year would modify a lot of mortgages -- allowing for the principal balances of thousands of mortgages to be written down, for example. It'll still cost new borrowers more, but maybe this would be better way to chastise banks.

Mortgage borrowers might be forgiven for sometimes feeling like victims of a bait-and-switch scheme.

For the last year or so, news has been trumpeted about historically low interest rates on 30-year fixed-rate loans; the rates tilted near 4.5 percent late last year and are now hovering above 5 percent. But when a borrower calls a mortgage broker to secure such a rate, he or she often fails.

That’s because many borrowers have a credit score below what is considered “prime,” according to Experian, one of the major credit-reporting agencies. On a scale of 501 to 990, Experian puts the average score at 771. (FICO, which developed the most widely used scores for assessing credit risk, doesn’t publish an average figure but says the median credit score is 720, on a scale of 300 to 850.)

And under current guidelines from Freddie Mac and Fannie Mae, the government agencies that set lending standards for most mortgages sold in the United States, only those borrowers with credit scores of 740 or more, and a down payment of at least 20 percent, can avoid extra loan charges that could effectively raise the mortgage rate.

Borrowers with credit scores of 700 to 740 typically face additional charges of one-quarter to three-quarters of a percentage point of the loan amount. On a $200,000 loan, that amounts to $500 to $1,500, which can be paid up front or converted into a marginally higher interest rate.

But for borrowers with credit scores of 680 to 700, the charge is 1.5 percentage points, and for those between 660 and 680, the charge is 2.5 percentage points. On a $200,000 loan, the extra 2.5 percentage point fee can add roughly half a percentage point to the interest rate.

Fannie and Freddie started aggressively increasing prices on loans to higher-risk borrowers in 2008, said Guy Cecala, the publisher of Inside Mortgage Finance, an industry trade publication. In August 2008, for instance, borrowers with credit scores of 680 to 700 incurred a charge of one percentage point of the loan amount, when making a down payment of 20 to 25 percent.

Brad German, a spokesman for Freddie Mac, said this so-called risk-based pricing approach was necessary to protect the agency and the investors buying the mortgage securities against losses from foreclosures. Mortgage lenders, meanwhile, complain that these pricing formulas place too much emphasis on credit scores, which, the brokers argue, don’t accurately reflect a borrower’s likelihood of defaulting on a mortgage.

Michele Raab-Francis, the chief executive of the Safe Harbor Capital Group in Bellport, N.Y., says credit scores of 680 are common among people who have taken on several credit cards with high spending limits — even if the borrowers carry low revolving balances. “If you have 20 percent for a down payment and 10 years of solid employment and savings and a 401(k) but a credit score of 680,” she said, “it’s not right to penalize you based on that alone.”

Mr. Cecala of Inside Mortgage Finance said, “We’re getting to the point where the mortgage market is really for people with the best credit, not the average person.”

Still, there may be hope for borrowers. Last year Fannie Mae and Freddie Mac considerably slowed the pace at which they imposed more penalties on those with lower credit scores. Mr. Cecala noted, too, that in the final quarter of 2009, the average credit score for a Fannie or Freddie loan was 758, down from roughly 761 in the third quarter.

“It seems to suggest the pendulum swung too far, and there are some adjustments being made,” Mr. Cecala said. “They’re also addressing the fact that they won’t have a business if they leave the standards where they were.”

Two blonde girls were working for the city public works department.
One would dig a hole and the other would follow behind her and fill the hole in. They worked up one side of the street, then down the other, then moved on to the next street, working furiously all day without rest, one girl digging a hole, the other girl filling it in again.
An onlooker was amazed at their hard work, but couldn't understand what they were doing. So he asked the hole digger, “I'm impressed by the effort you two are putting in to your work, but I don't get it - why do you dig a hole, only to have your partner follow behind and fill it up again?”
The hole digger wiped her brow and sighed, "Well, I suppose it probably looks odd because we're normally a three-person team. But today the girl who plants the trees called in sick.”

Friday I went into the men's room in an office building. There was a sign that said, "TOILET OUT OF ORDER. PLEASE USE FLOOR BELOW." Go figure...

In the current environment, the government giveth, and the government taketh away. Barney Frank once again made headlines last week with the statement that the House Financial Services Committee will recommend doing away with Fannie Mae and Freddie Mac and “rebuilding the U.S. housing-finance system from scratch”. “A whole new system of housing finance," although most analysts feel that there will be continued government involvement. Given that they set the standards for the mortgage industry, own or guarantee half of the $11 trillion in outstanding home mortgages, and attract huge amounts of capital, it is hard to imagine replacing them with several private investors whose cost of capital would be much higher. No one expects much to happen for a very long time on this issue.

"Two small banks in Florida and Missouri folded shop this past Friday night, making them the fifth and sixth banks to close in 2010." These "small banks" will cost the FDIC approximately $93 million. Gone are the four branches of Premier American Bank in Miami and the single branch of Bank of Leeton in Leeton, Mo., taken over by "Premier American Bank, National Association" and Sunflower Bank, respectively. I wonder if small banker's heart rate has been scientifically proven to go up on Friday's... Then three more were taken over in New Mexico, Oregon and Washington, bringing the total cost to $532 million. Charter Bank (NM) went to Beal Financial Corp., but will re-open today with the same name. Evergreen Bank (WA) went to Umpqua Bank, and Columbia River Bank (OR) went to Columbia State Bank. Who comes up with these cool names?

As expected, the FOMC left overnight rates unchanged on Wednsday. Some of the language contained in the release, however, caused rates to move up slightly, and the stock market to improve. "Economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. While bank lending continues to contract, financial market conditions remain supportive of economic growth." They believe that inflation is likely to be subdued for some time, and therefore expect to leave Fed Funds near 0% for "an extended period".

More importantly to mortgage folks, once analysts picked apart every word of the announcement, is that the FOMC announced that its $1.25 trillion agency mortgage-backed security purchase program will be slowing down as the end of March nears, and ending March 30th. So it is now official. Personally, I believe that the sun will come up again this morning, my car will start, and life will be close to normal. But anticipation is running high for a steepening of the yield curve as long term rates move higher and the short end remains low. In a related story on mortgage production, an annual report on the ARM market published by Freddie Mac shows adjustable-rate mortgages accounted for just 3 percent of all conventional home purchase loans in 2009. That's the smallest percentage for ARMs since at least 1982.

President Obama gave his first State of the Union address this week. One item which stood out in our mind was his promise that "This year, we'll step up refinancings so that homeowners can move into more affordable mortgages." Given that a sizable number of folks already refinanced this year into mortgage rates at near-50-year lows, and that mortgage rates are both expected and likely to rise as support programs wane and the economy strengthens, we wonder just how this is to be accomplished. Perhaps we were slightly off the mark when we suggested that the debt and loss limits removed from Fannie Mae and Freddie Mac were to promote more loan modifications. Is there some form of new GSE-led refinance program in the works? We'll have to see what develops.

Rates stayed about the same this past week overall. A pile of data out next week will reveal lending conditions, employment prospects, auto sales, productivity reports and lots more. We expect another slight increase in rates for next week, with the collective tenor of the reports a positive one.

The awesome power of a wife's love…

A very old man lay dying in his bed. In death's doorway, he suddenly smelled the aroma of his favorite chocolate chip cookie wafting up the stairs.
He gathered his remaining strength and lifted himself from the bed. Leaning against the wall, he slowly made his way out of the bedroom, and with even greater effort forced himself down the stairs, gripping the railing with both hands.
With labored breath, he leaned against the door frame, gazing into the kitchen. Were it not for death's agony, he would have thought himself already in heaven. There, spread out on newspapers on the kitchen table were literally hundreds of his favorite chocolate chip cookies.
Was this heaven, or was it one final act of heroic love from his devoted wife, seeing to it that he left this world a happy man?
Mustering one great final effort, he threw himself toward the table. The aged and withered hand, shaking, made its way to a cookie at the edge of the table, when he was suddenly smacked with a spatula by his wife.

"Stay out of those," she said. "They're for the funeral."

The FBI is investigating a possible cyber attack on Citigroup. This is a serious issue, because next time the hackers might target a bank that actually has money. (Just kidding!)

But seriously folks, JPMorgan Chase & Co., the second-largest U.S. bank by assets, announced last week that its fourth-quarter profit more than quadrupled. Net income increased to $3.28 billion. JPMorgan was the #1 underwriter of stocks and bonds in the US last year, and income from that more than helped offset loan losses in consumer banking and credit cards. And we all know the impact that they’ve had on mortgage lending. Jamie Dimon told investors last month that the credit-card unit could lose about $1 billion a quarter in the first half of 2010, since defaults typically track unemployment. 

So what are brighter minds than mine saying about the economy? Well, private payrolls are still contracting, the Fed has not changed its stance too much in several months, manufacturing is picking up a little as opposed to construction spending which is not, and auto sales are picking up a little, as is service sector activity. Most believe that rates will move up, but not much, in the first part of 2010! Last week rates were a tad lower at best but still tough as stellar credit is needed for best rates or a no point mortgage. Loans locked/closed this past week averaged 5.50% nationwide after the dust settled.

As mentioned last week, everyone is chewing on that unemployment data. We have over 15 million unemployed here in the US, and the length of time of unemployment continues to climb – it is now up to 20.5 weeks. Would you hire an underwriter who had been out of work for the last 5 months? (Well, maybe they could use the break…). The longer a worker is unemployed, the less relevance their skills have to employers looking to hire, and this can become a big problem.

Right now, the futures market is pricing in an 85% chance that the Fed keeps rates somewhere between 0% and .25% through the end of April. With all of the deficit spending going on, not to mention the flood of money that the Federal Reserve has put into the economy, why isn’t inflation (and interest rates) out of control? The deficit spending money has primarily gone into counteracting the sharp decline in consumer and business activity. Our government is borrowing more, but folks like you and me, and businesses, are borrowing less. Besides, many banks are holding on to the money rather than releasing it into the economy in the form of loans. On top of that, productivity is high, wages are stagnant, and overall there is slack in the economy – so sky-high inflation and rates are a long way off. And, if you think about it, in almost the last 100 years here in the United States, inflation has only been a big issue in the 1970’s.

ESPN has announced that they are launching a 3D sports network. Industry analysts say this will absolutely revolutionize the way Americans don't watch soccer.

After being interviewed by the school administration, the prospective teacher said, “Let me see if I've got this right.
“You want me to go into that room with all those kids, correct their disruptive behavior, observe them for signs of abuse, monitor their dress habits, censor their T-shirt messages, and instill in them a love for learning.
“You want me to check their backpacks for weapons, wage war on drugs and sexually transmitted diseases, and raise their sense of self esteem and personal pride.
“You want me to teach them patriotism and good citizenship, sportsmanship and fair play, and how to register to vote, balance a checkbook, and apply for a job.
“You want me to check their heads for lice, recognize signs of antisocial behavior, and make sure that they all pass the final exams.
“You also want me to provide them with an equal education regardless of their handicaps, and communicate regularly with their parents in English, Spanish or any other language, by letter, telephone, newsletter, and report card.
“You want me to do all this with a piece of chalk, a blackboard, a bulletin board, a few books, a big smile, and a starting salary that qualifies me for food stamps.
“You want me to do all this and then you tell me. . . I CAN'T PRAY?”

Did you hear about the two blondes who froze to death in a drive-in movie? They had gone to see, “Closed for the Winter.”

All of us could take a lesson from the weather. It pays no attention to criticism, right? Critics are still blasting the TSA for allowing an alleged Nigerian terrorist to board a plane headed to Detroit on Christmas day. Experts say screeners missed several suspicious behaviors, especially the fact that someone was willingly going to Detroit.

Why should anyone in mortgage banking care about the value of the dollar? Doesn’t a falling dollar only hurt foreign exporters, foreign holders of US securities (like the Chinese with over $1 trillion), or American tourists? Unfortunately, a falling dollar only benefits American exporters so far – it can hurt in the long run if manufacturing companies can reap rewards without improving products or productivity. And when the dollar rallies back, they will suffer. Interesting, toward the end of 2009, the value of the dollar was inversely related to stocks but in the past, the dollar and stocks usually moved together. (With the global financial crisis the dollar rallied as a safe haven for investors, and stocks plunged.) With regard to interest rates, a falling dollar (or any currency) usually leads to higher inflation and higher interest rates on loans of all types.

The “word for today” is “herding”. What is herding, and why should anyone in the financial arena and normal folks care about it? In conditions of uncertainty, humans, like lemmings and any other animal, herd together for protection. In unstable markets (bonds, stocks, whatever) this leads to trend-following: buy when others buy, sell when others sell. “The trend is your friend.” Fancy money managers do it constantly so their performance won’t diverge too much from the norm, or so that they can piggyback on the knowledge of their competitors’ research. So if a stock, or interest rates, starts to move in one direction, traders assume that there must be a good reason, and they don’t want to miss out. So everyone piles in, and at the end of the day commentators and capital markets folks are left trying to explain why rates went up or down a lot when there is no real reason. 

Here attached below is this weeks read on current mortgage interest rates. Its probably the closest to actual rates being locked/given during these last few days. Unlike so many other "reports and claims" from a horde of obnoxious sources stating interest rates rose to....drum roll....5.12 last week. Huh?, I'll take 150 of those sight unseen!  Those that want to know the real deal can look it up every Sunday in the Real Estate section of the New York Times. However, If you want to be in lala land or in denial stick to your favorite source of information, and please DON'T call me!

The fresh economic news which starts the year is, of course, reflective of the end of 2009. As we wander into 2010, perhaps the biggest factor is what the Fed decides to do with all its various support programs and how they will affect the functioning of markets. In that regard, we were a little surprised that the minutes from the mid-December Fed meeting revealed some dissent about how or when to wind down the program for purchasing Mortgage-Backed Securities (MBS). That MBS program is the key factor keeping conforming interest rates at near-record low levels, and is technically slated to expire in March (and that date having been already extended from a 12/31/09 termination).

While it's indisputable that the Fed's involvement has produced benefits, what is not as clear is whether or not the private market will be ready to absorb as much as $15 to $20 billion of new MBS per week. If not, too much supply amid too little demand will cause a spike in interest rates, and that will imperil the housing market recovery. There are two Fed meetings before the expiry comes: the first is in late January, and another is just two weeks before the deadline. Some announcement may or may not come this month, and if the Fed doesn't resolve the uncertainty, markets may start to become increasingly jittery as we roll into March. We'll see what happens before too long.

One report that is always reliable (if always revised) is the monthly employment report. While it was hoped that there would be perhaps no loss of jobs in December, another 85,000 folks disappeared from payrolls during the month. However, the November and October figures were revised, too, and while the net effect found little change for the two-month period in aggregate, the November number was upgraded to a gain of 4,000 for the months, the first such increase in two years. It's also worth noting that the job losses have improved markedly in recent months and we should expect to start to see mild improvements on a more regular basis before too long. However, if growth is too mild, we might still see slight job losses even as GDP growth remains positive.

As the economy slowly heals, there will be a little clarity from time to time about which direction we are headed, and plenty of fits and starts along the way. Interest rates have firmed from late-fall bottoms, but there's insufficient economic heat to suggest that they can push too much higher. In that regard, we do seem to be establishing a new range, with a higher "bottom" than the upper four-percent one we've seen at times. Better news will serve to firm rates, or keep them steady.

I was walking past the mental hospital the other day and all the patients were shouting, “13....13....13.”
The fence was too high to see over, but I saw a little gap in the planks. I looked through to see what was going on, and someone poked me in the eye with a stick!
Then they all started shouting, “14....14....14…”

Goodbye, 2009. Typing "2009" is so much easier than typing "2010", but such is life. And folks who are better at using words than I am ("than me"?) say 2010 is pronounced "twenty-ten", not "two-thousand ten". Speaking of “2’s” and “1’s”, The U.S. Treasury had a record year of debt sales last year, selling more than $2.1 trillion in bonds and notes, a record and more than the amount in the previous two years combined!

Why are rates (higher) where they are? The answer is stronger-than-expected economic news. Well, Thursday morning we learned that Jobless Claims unexpectedly fell by 22,000 to 432,000, which is their lowest level in almost a year and a half. Continuing Claims fell by 57,000. So the thinking goes that “if fewer people are filing jobless claims, the employment picture is starting to look a little rosier, which means that the economy must be doing better…”

As 2009 has been a difficult year for far too many people, plenty of folks are probably not sorry to see it go. Whether that's the case or not for you, we'd like to wish our clients and friends a happy, healthy and prosperous 2010.

A client bought a new home and the broker wanted to send flowers for the occasion.
The flowers arrived at the home and the owner read the card; it said "Rest in Peace".
The owner was angry and called the florist to complain.
After he had told the florist of the obvious mistake and how angry he was, the florist said, "Sir, I'm really sorry for the mistake, but rather than getting angry you should imagine this: somewhere there is a funeral taking place today, and they have flowers with a note saying, "Congratulations on your new home".