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Yesterday was another less-than-normal volume day for MBS's: $1.8 billion, again with the lion's share being 3.5% securities. These securities contain 3.75%-4.125% loans. What does this mean? Well, it is a sign that volumes are easing up a little, and companies, still hungry for volume, and lowering profit margins in order to keep market share. Rate sheet rates slide down from 4.375% or 4.25%, and when current production hits 4.125% or lower, the production is destined to be put into 3.5% securities.
In a related issue, the MBA reported that U.S. mortgage applications fell for a fourth straight week, and were down about 1% last week. (The 4-week moving average is down about 3 %.) At least purchases were up 2.4%. As we all know, it doesn't matter how low mortgage interest rates go - if a potential borrower does not have a job, or thinks the market will continue to soften, they are not going to borrow or buy a home.
The odds of this happening are slim, and certainly would not help folks in the business or mortgage investors, but, "as many as 30 million U.S. homeowners would be able to refinance their mortgage at record low interest rates regardless of their income, credit history or loan-to-value ratio" under a plan unveiled yesterday. The legislation, viewed primarily as a pre-election issue, would allow for blanket 30-year, fixed-rate mortgages at the prevailing market rate, now around 4.3%, for anyone seeking to refinance a government-backed loan. Serious analysts' initial belief is that this should not be taken seriously, but it did cause investor and originator concern. The Home act described by Cordoza appears to be very similar that was proposed in Jan 2009.
Analysts wonder if we have done enough to ensure that financial and housing markets will work properly and lead us to recovery. The answer is pretty much "no". Anyone in the biz can tell you that in a normally functioning mortgage market almost all homeowners would have refinanced their mortgages to take advantage of low rates. This has not happened with this wave of low rates. Borrowers are nervous about their jobs, local housing markets in many areas are still slow, and some lenders don't want to lend.
Some in the industry feel that the companies servicing higher-than-market-interest-rate loans should be directed by the agencies to send a short application to all eligible borrowers promising to allow them to refinance with minimal paperwork. Servicers would receive a fixed fee for each mortgage they refinanced, which would be rolled into the mortgage to eliminate costs to taxpayers. Proponents say that this would not only help homeowners through the current crisis, but would be the equivalent of a 26-year tax cut given the current average housing expense of about 30% of income. With roughly 37 million mortgages now guaranteed by the federal government, this adds up to about $50 billion a year of savings, some percentage of which is pumped back into the economy, and lowering foreclosure rates and the number of borrowers walking away from their house.
Unfortunately, of course, it eliminates any originator who does not work for a servicing company from earning fees from refinancing a borrower. It also hits holders of MBS's, who were counting on a certain revenue stream at a certain rate of return. (Of course, those investors are hit anyway every time a loan refinances, but do they really mind if a 6% borrower, who is making their payments, can't refi?)
HARP tried to do this, with very limited success. What about HARP's failings, with LTV's up to 125%? First, the program was not widely publicized relative to the federal government's efforts to help with more modest loan modifications. Second, the refinancing requires substantial upfront costs for borrowers. Third, many borrowers - those with second liens or shaky incomes - were locked out. (About 20 percent of all borrowers with federally backed mortgages have a second lien.) Last, many borrowers do not know the current value of their homes, and are reluctant to pay to get an appraisal only to be turned down for a refinancing. The odds of this happening are slim, but it has been thrown out there.
An executive from a large mortgage investor publicly spoke out about the future of the industry, particularly Freddie & Fannie, which is a little unusual. Mike Heid, co-president of co-president of Wells Fargo Home Mortgage: "Heid said the so-called mortgage securities insurance companies could eventually take over that function from Fannie and Freddie. But the government would still backstop the mortgage industry by guaranteeing the principal and interest on securities for investors...Heid said at least four, but not more than eight, such companies would be needed to serve the market. Groups of banks are seen as potential investors in the mortgage securities insurance companies."
Few, if any, investors "go out on the street" with programs that exactly mimic the underwriting and procedure guidelines agencies set forth. In fact, those that do will often use that as an advertising tactic. Conversely, most investors and servicers have overlays. For example, CitiMortgage set out its credit overlays, which effect rent schedules (deleted), maximum CLTV for FHA R&T refi's (deleted), and credit inquiries (modified). Citi added overlays in the areas of installment/revolving debt, judgments, and non-arms length transactions.
On the mortgage insurance front, PMI will be increasing its maximum LTV to 97% effective October 8. It is a good sign for many in the industry, and loans must have a minimum 720 credit score, be in non-distressed markets, owner-occupied, conforming, originated only through a retail channel, etc.
How 'bout these markets? No wonder people are buying gold: putting money into a savings account gets you nowhere, smart folks out there say the stock market is over-valued, bonds only yield 2-3 percent, and the list goes on. Yesterday we learned that confidence among U.S. consumers fell in September to the lowest level in seven months, mostly due to the employment situation. If unemployment stays near 10% for an extended period, folks aren't going to go out and spend a lot of money in the economy. On the flip side, the S&P/Case-Shiller Home Price Indexes were up 4.1% in July versus a year earlier in 10 metro areas, while the 20-city index climbed 3.2%. Month-over-month numbers were up slightly.
After this news traders reported that "flows were quiet" as the market prepared for the $35 billion 5-yr note auction, which ended up going well. There is a $29 billion 7-yr auction today, but no news. In mortgage-land, yesterday the mortgage security markets ended the day pretty much unchanged and price changes were minimal. Investors are roiled, however, about this refi plan, as unlikely as it is to be carried out. There was a limited knee-jerk reaction in the higher coupons to this news, but lower coupon rates improved. The 10-yr ended at 2.47%, and this morning we find it at, uh, 2.48%. Mortgage prices are roughly unchanged so far.
