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Mortgage Industry Update: Rates, News & More

***Smart Financial Weekly Mortgage & Business Update FVebruary 5, 2010***

Fannie Mae HomePath Update: On January 28^th Fannie Mae announced 3.5% seller assistance to cover closing costs on Fannie Mae’s HomePath properties. The program is good for HomePath purchases that close by May 1, 2010.  For more information go to www.homepath.com.

 

Jobs Report Headlines: The jobs report for January showed a loss of 20,000 compared to forecast of a 15,000 gain. The unemployment rate was 9.7% (aka U-3) down from 10.0%. However, among other important data in the report were in 2009 the economy lost 4.8 million jobs or 600,000 more than previously thought, 8.4 million jobs have been lost since the recession began in December 2007 or 1.4 million more than previously thought and the under employed number (aka U-6) declined from 17.3% to 16.5%. Note the unemployment rate (U-3) only reports those who are receiving benefits for 26 weeks. As we know many are on extended unemployment benefits or are working part time but looking for full time work (U-6). These people are what makes the under employed number so big and perhaps a better measure of the real unemployment rate.

 

Interest Rates

One impact from our large national budget is that the government has to sell Treasury notes and bonds to fund the spending. If the number of buyers goes down (say China is not interested or buys less than expected) then the rate of return has to increase to attract buyers which results in increased rates. Speaking of rates the President of the Boston Federal Reserve has said that he believes that when the Fed stops buying MBS mortgage rates could increase to almost 6% pretty quickly.

The Australian Central Bank in a surprising move kept its key lending rate at 3.75% (ours is zero to .25%), the ECB kept its key rate at 1.00% and the Bank of England followed suit by keeping its key rate at .5%. The Australian bank said in its statement that it wanted to see how the three previous increases were working before taking any further action. It also said that if the economy continues to improve it was likely that further increases would be needed.

For the week retail mortgage rates moved lower to 5.00% or slightly lower as the stock market experienced a sharp decline late in the week. The decline was driven by worldwide concerns about sovereign debt that could slow down or stop the economic recovery. Finally, along those lines, the Congress approved increasing our national debt limit to a staggering $14.294 TRILLION.

 

When	Rate
This week	5.01
1 Month Ago	5.09
1 Year Ago	5.25
2 Years Ago	5.67

Note that actual market rates vary geographically and by lender, credit score and Loan to Value.

Source: Federal Reserve Statistical H.15.

 

Mortgage Industry Update

·         In the new national budget the President proposes to increase FHA’s annual mortgage insurance premium from the current .55% to at least .90%. This rate is applied to the loan amount and is then paid monthly with the mortgage payment. If Congress agrees to the increase then the Up Front Mortgage Insurance Premium (paid up front and included in the loan amount) would be reduced from the previously proposed increase of 2.25% down to 1.00%.

 

Good News

·         In the fourth quarter 2009 non-farm productivity rose 6.2% the quickest pace in six years and above forecast of 6.0% according to the Labor Department.

·         The ISM Manufacturing Index increased to 58.4 in January from 54.9 in December.

·         Construction spending fell 1.2% in December to the lowest level since 2003. For all of 2009 spending was down a record 12.4%.

·         Pending home sales were up 1.0% in December and up 10.9% for all of 2009 compared to 2008.

 

Statistics of Interest/Concern

·         Consumer spending rose .2% in December slightly below forecast. For all of 2009 spending was down .4% the sharpest decline since 1938.

·         In December defaults by small and medium size businesses on loans, leases and lines of credit fell for the first time in two years according to PayNet. However, moderate delinquency while declining from 4.26% in November to 4.22% in December was still more than double what it would be in more normal times.

·         Consumers borrowed less for a record 11^th consecutive month in December according to the Federal Reserve.

 

Foreclosure Headlines

·         New research suggests that when a home value falls below 75% of what the homeowner owes they start seriously considering walking away (Strategic Default). For the third quarter 2009 it was estimated that 4.5 million homeowners were at or below the 75% threshold. Data released last week suggested that the latest number could be as high as 5.1 million homes or 10% of all homes in the U.S. with mortgages. It has also been estimated that in 2008 588,000 or 17% of mortgage defaults were homeowners who were capable of making the payment on their mortgage but simply decided to walk away. Finally, according to First American Core Logic it would cost about $745 Billion to restore upside down homeowners to breakeven on debt to value or roughly what the 2008 Economic Stimulus package cost.

·         According to Tom  Farley, CEO of the Arizona Association of Realtors while Arizona’s anti deficiency laws protect a large number of property owners in foreclosure there is no statute that provides this protection to any property owner in case of a short sale. The bottom line is short sellers need to seek advice of legal counsel.

 

Job Market Headlines

·         Initial weekly jobless claims were up by 8,000 to 480,000 higher than forecast of 455,000.

·         The four week moving average for weekly jobless claims was up by 11,750 to 468,750.

·         Continuing claims were 4.6 million up 2,000 from the previous week.

·         Challenger, Gray & Christmas reported planned layoffs in January increased to 71,482 from December’s 45,094. The January number is much better than a year ago when reported layoffs reached 271,749.

 

 

Commentary/Observations

The big question these days for the housing industry is what is going to happen to Fannie Mae and Freddie Mac? Will they or should they become official agencies or departments of the government? The Congressional Budget Office (CBO) says yes. It estimates that it will cost $291 Billion to bail them out and at least another $99 Billion over the next decade. The Administration has not made a decision yet but is showing only what cash it injects into the two entities which so far is $112 Billion. The agencies have a combined $3.9 TRILLION of debt. Interestingly enough Fannie and Freddie got their start in the late 1930’s as government agencies but in 1968 President Johnson privatized them to keep their debt off the books as the cost of the Vietnam War increased.

 

The FHA continues to struggle as it reported 90 day plus delinquency was at 9.1% in December up from 6.5% just a year earlier. In addition, loans in foreclosure were up 26% from a year ago. It projects that it will have to pay claims on one in four of its 2007 loans which is the highest rate in three decades. Also it expects to lose $10.5 Billion from those popular down payment assistance programs. All the news is not bad however as buyer credit quality has increased. The average credit score in the two years prior to 2009 was 630 but in 2009 the average increased to 690. The increase in scores is due in part to many lenders who do FHA loans increasing their minimum scores.

 

S & P believes that U.S. banks will lose $800 Billion between 2008 and 2010 and estimates banks are only one third of the way through mortgage losses in their portfolio’s. They also said that they see no big bank ($100 Billion in assets) failure this year. In a related story Market Watch said that the big banks (Chase, Bank of America & Wells Fargo) may have to repurchase up to $10 Billion in bad loans from investors and Fannie Mae and Freddie Mac.

If you have any mortgage or related questions I can be reached at (602) 803-9660 or by e-mail at burt@gosfm.com.