Further tightening of credit guidelines

For those of us who have been hoping for the credit markets to show signs of stabilization we can keep on waiting.

Freddie Mac announced last week that they would no longer issue or accept underwriting approvals knows as “accept plus” approvals.  These approvals, which were mostly earned by borrowers with high credit scores and large down payments, featured little to no income documentation requirements.  In essence, these were almost like “stated income” loans because the borrower would not have to provide any income documents to confirm the income they listed on their application.

For example, we would expect that an applicant buying a primary residence with a credit score> 740 and >30% down would likely receive an “accept plus” approval.

Freddie Mac’s move to eliminate “accept plus” approvals is another sign that lenders are acting with extreme caution.  Unfortunately this move will also negatively impact many more applicants ability to buy.  However, I would expect that this will also create a niche for a private institution to

You can read the announcement at this link.

Mortgage rates should benefit from Bernanke’s comments

On Friday Fed Chairman Ben Bernanke announced that he endorses the concept of the federal government guarantying mortgage-backed securities (MBS’s) issued by Fannie Mae and Freddie Mac.  These comments should help mortgage rates move lower.

The reason that a government guarantee helps mortgage rates move lower is because it reduces the risk of default on MBS’s for investors and therefore they are willing to accept a lower yield.

To learn more click these links-

Washington Post article

Wall Street Journal article

Blog posting on the role that Fannie & Freddie play in mortgage market

Kudos to Barron’s part II

After reading and blogging about one article in Barron’s this weekend I came to another outstading one.  Here is a link.  Nice work Barron’s.

Among the points that I found interesting:

* If Fannie Mae [ticker: FNM] and Freddie Mac [FRE] stopped all of their activity — for a moment, forget about shutting them down and being insolvent — in order to sell off mortgages as normal loans without this guarantee, the interest rate would have to be around 9% or 10%.

* Q: What other negatives do you see?

A: Inflation risk down the line. [The federal government is] going to probably overstimulate and over support in an attempt to stem these deflationary forces. We are looking at a longer-term inflationary force that is pretty substantial. This has been my view for a long time. Interest rates went into a very long decline from the late ’70s and early ’80s until earlier this decade, when first we saw rates bottom out. Then rates went up a couple of times.

Basically, we are getting back down toward those low levels again. The multiyear bottom in interest rates that started around 2002 will probably last into 2009. Then we are going to see the inflationary aftermath of these government policies, and you might be surprised at how high interest rates go.

* Q: How much more pain are we going to feel in the housing market before things start to stabilize?

A: I think we are about half way through. There is high momentum in terms of home-price declines, so it is pretty clear they are going lower. It always looks a lot like the hills on a roller coaster. It starts out with a flattish period. Then it starts to go down, and then it really starts to drop, and we are clearly in that period. That period is going to be with us for about another year before it flattens out and bumps along in 2010.

The S&P/Case-Shiller Index is down a little more than 15% from its peak in 2006, and I’ve believed for some time that the index will have dropped 30% from its peak. That means some markets are going to drop by 50%. That includes Miami, Las Vegas and Phoenix, all of which were fueled by subprime lending. The foreclosure overhang is so big in those areas.

Rate Update September 10, 2008

Mortgage rates are essentially unchanged from yesterday although pricing on 30 year fixed loans are modestly worse.

We still believe that over the next few weeks mortgage rates will improve. Now that the federal government has assumed the guarantees of Fannie Mae & Freddie Mac’s mortgage-backed bonds investors will view these securities on par with US treasuries.

30-year treasury bonds are currently yielding 4.19% while 30-year mortgage backed bonds yield between 4.85%-5.15%. We would expect the spread between these yields to converge over the next few weeks. Although, it’s not likely that rates will move in a straight line so we still need to be careful on timing.

Watch today’s you tube video for information on two new blog postings featuring important information that real estate professionals should be aware of.

Post #1- What the bailout means for you

Post #2- Mortgage guidelines continue to be tightened

Current Outlook: neutral short-term, floating long-term

What the bailout means for you

Unless you live in a cave you are probably very familiar with the fact that the federal government recently announced that they would assume control of mortgage industry behemoths Fannie Mae & Freddie Mac. The move has created overwhelming media coverage and speculation with mixed messages on the potential outcomes.

However, very little of the media’s coverage has focused its message on educating the reader on why these two entities are so crucial to the US economy and what practical implications the move will have on the general public.

For more information on why these two institutions play such an important role in our economy please visit this link which I wrote back on July 15th.

The bottom line is that government intervention of this magnitude into the financial markets is unprecedented and therefore accurately predicting the potential ramifications is next to impossible. However, there are 4 main points which I think the general public should be aware of.

→ Mortgage Rates: By stepping in and assuming the guarantees and obligations of Fannie Mae & Freddie Mac the federal government has provided additional confidence into the mortgage-backed bonds which ultimately determine mortgage rates. Furthermore, as a part of the plan the federal government announced that they would invest $5 billion into the mortgage-backed bond market.

These two measures have caused mortgage rates to drop and some analysts believe that mortgage rates will continue to drop into the near future (For a more detailed explanation of this impact please visit my blog posting on September 8, 2008 @ http://www.swansonhomeloans.com/?p=698).

→ Future Underwriting Standards: What is not commonly understood by the general public is that Fannie Mae & Freddie Mac ultimately set or heavily influence the guidelines to determine what loans will be approved and not approved for virtually all loans in the mortgage industry.

Some have speculated that the federal government may begin to loosen underwriting standards in the near term to help prop up the housing market. However, in the long-term underwriting standards may become influenced by who sits in the oval office & Capitol Hill.

→ Loan modifications: For those who find themselves in trouble with their existing mortgages this move may prove to make a loan modification easier to negotiate. This is because most analysts agree that the government will be more willing to work with troubled homeowners than public corporations who have to answer to stockholders.

→ Future taxes/ inflation: Unfortunately whether you do or don’t stand to benefit from any of the previous three points everyone you will get stuck with the bill in the form of higher taxes and/ or higher inflation.

By assuming control of Fannie Mae & Freddie Mac the government is now guaranteeing the interest payments on the $5 trillion that each of these entities has in their combined loan portfolios. If 5% of these loans go bad then the US taxpayers are on the hook for $250 billion.  Although it should be noted that the alternative of not bailing these institutions would likely cost our economy a lot more in terms of financial disaster.

The bottom line is that the government takeover of Fannie Mae & Freddie Mac will impact different people in different ways. For now the only sure thing is that mortgage rates have dipped lower on the news. If you’d like to discuss how this could impact your individual situation we’re always happy to review it with you. Please call or email us!

If you found this posting informative and useful please feel free to leave a comment below and pass it along to others who can enjoy it!

Rate Update September 8, 2008/ Fannie Mae & Freddie Mac bail out

The big news this morning is the government take-over of mortgage giants Fannie Mae & Freddie Mac. The announcement which was leaked on Saturday and made yesterday is likely to become the largest government intervention into the financial markets in US History.

Because of the unprecedented nature of the event it is very difficult to predict the practical implications. However, in the near term watch this morning’s you tube video to understand why the announcement will help mortgage rates in the near term.

Expect a more detailed summary of this announcement in the coming days. For a detailed review of why Fannie Mae and Freddie Mac are so integral into our economy please visit this link.

Current Outlook: neutral

Mortgage-backed bonds still attract investors

I often reference “mortgage-backed bonds” (AKA MBS’s) in my daily rate updates.  If you follow rate update consistently then you know that when MBS prices fall interest rates rise and vice versa. 

The WSJ published a story today regarding investor confidence in high-quality MBS’s and how they remain attractive for bond investor guru Bill Gross & PIMCO. 

Here are a few good takeaways and what it may mean for interest rates in the near term:

* “Freddie’s mortgage bonds were trading at a risk premium of around 2.64 percentage points over the 10-year Treasury note’s yield, which was quoted late Thursday at 3.837%.” -A ‘risk premium’ is the spread that an investment earns above and beyond the 10-year US Treasury note (considered to be an extremely safe investment).  The idea is that the larger the spread the more risky the market perceives that investment.  The current spread between MBS’s & 10-year Treasury notes is relatively high compared to historical standards.  The good news is that in all likelihood we will see the spreads shrink in the future which means mortgage rates will have to come down or Treasury yields will have to move higher (or some combination of the two). 

* “Even though Congress passed legislation last month allowing the Treasury Department to provide liquidity to Fannie and Freddie, the Treasury has stopped short of announcing any immediate bailout plans. The uncertainty about the government’s plans have fueled sharp price swings in the companies’ stocks, bonds and mortgage bonds” -This helps to explain why mortgage rates have been as volatile as they have been over the past couple weeks.  This will likely persist for a few months.

* “Fannie and Freddie guarantee or own nearly half of the total $12 trillion U.S. mortgages outstanding. They have long been the mortgage-bond market’s backstop, stepping in to buy when other investors have failed to materialize. With their finances under pressure, however — both companies have reported losses as the housing market has weakened sharply — they have been curtailing their mortgage purchases.” -This is not terribly encouraging.  The housing market needs the two GSE’s to stabilize the secondary market for mortgages.

Fannie & Freddie insolvent?

Back on July 15th I posted this blog entry regarding Fannie Mae & Freddie Mac in which I outlined the crucial role they play in our nation’s housing industry.  Here is an update to this saga:

This weekend Barron’s is reporting that the two mortgage giants are essentially insolvent and that government intervention is inevitable.  The main concern surrounding Fannie & Freddie has been their capitalization ratios.  This measure of liquid capital relative to obligations outstanding was as low as 1.58% when reported back on July 15th.

However, the author of the Barron’s story took a deeper look into Fannie & Freddie’s balance sheet and determined that instead of having positive capitalization of $84 billion they are actually more like $50 billion upside down which is why government intervention is inevitable.

According to the author government intervention is certain to mean that the two companies will be nationalized and gradually sold off in pieces to the private sector.  Depending on who is in the oval office at the time of this procedure the outcomes will likely differ.

However, one thing is for certain, a nationalized Fannie & Freddie is not likely to operate as aggressively as the private entities have over the past decade and therefore mortgage funding will likely become more expensive and difficult to obtain.

The nationalization of Fannie & Freddie will also create opportunities for new forms of mortgage funding to hit the marketplace such as the covered-bond solution which I reported on July 30th.

Summary of the housing bill expected to be signed into law…..

On Saturday the Senate passed the Housing Bill. This 700-page law brings a variety of new rules and provisions that will impact the housing industry in a variety of ways.  The President is expected to sign the bill into law early this week.  Here are some summary points that any real estate professional should be aware of:
*Elimination of Down Payment Assistance (effective Oct. 1, 2008): The bill will eliminate the use of seller-financed down payment assistance programs (DPA) in conjunction with FHA loans.  This loophole which effectively allowed the seller to give a buyer a 3% down payment so they could buy a home with a FHA loan putting $0 down grew in popularity over the past 6 months with the collapse of 0% down mortgage options.
*First Time Home Buyer Tax Credit: The bill calls for a tax refund for first time home buyers worth up to 10% of the sales price not to exceed $7,500.  However, according to the cnn.money.com artilce, “The refund…serves more as an interest-free loan, since it would have to be paid back over 15 years in equal installments.”
*Support for Fannie Mae & Freddie Mac:  For follower’s of this blog you may remember the posting I wrote back on July 15th.  This article explained the concern over the two mortgage giants’ capital structure and what their failure could mean for the real estate market in the US (here is a link to that article). 

This bill moves to address the worries over the two mortgage companies by allowing the Federal Government to support the stock price as well as share the risk on a portion of their loan portfolios. 

*Permanent increase to “conforming” loan limits:  The bill would permanently increase the loan limits for Fannie Mae & Freddie Mac to buy and securitize from $417,000 up to $625,500.  However, these new loan limits will only impact high-cost areas and will have little to no impact on the Portland-Metro Area. 

*Greater Regulation?:  In exchange for the government’s support the bill will create greater oversight of Fannie Mae & Freddie Mac by Federal regulators.

*FHA down payment increase?: According to the cnn.money.com article the bill will also increase the minimum down-payment for FHA loans to 3.5% from the current level of 3.0%. 

*FHA loans for struggling homeowners: The bill also allows the FHA to insure up to $300 billion in new mortgages to refinance existing loans for homeowners who are “trapped”.  There are a variety of provisions that a homeowner and lender must agree to in order to qualify for one of these mortgages.  For a complete summary of the provisions of this section of the bill check this article.