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Bad News for Consumers and the Mortgage Industry
The stay on the LO Comp rule going into affect was lifted late yesterday and we are now under the watchful eye of Big Brother. Ultimately this will shrink the mortgage industry and present fewer financing options for home owners and home buyers. Get ready for rising rates and higher costs for financing in the future. Click on the link below to see and hear more!
Important Information on the LO Compensation Rule
Thursday Trivia
Yesterday the US Federal District Court denied the request for an injunction and restriaining order on the implementation on the Loan Offcier Compensation rule. This is not just a mortgage industry issue as who is to say another industry will not be targeted in the future and our government will take a stab at legislating that industry out of business? Housing led us into the economic crisis and housing will be the catalyst for a true recovery. All of our governments “well intentioned” actions have done nothing but to further bog down the mortgage industry, increase costs, confuse the consumer, and slow down a very slow moving recovery. Thank you Washington DC. To read the courts opinion you can follow this LINK.
Treasuries and mortgages doing better early this morning. At 8:30 weekly jobless claims saw a decline of 6K filings from last week, however last week’s claims were revised from 282K to 394K. Continuing claims were down 51K to 3.714 mil but as with the claims continuing claims were revised from 3.721 mil last week to 4.22 mil in the revision. The 4 wk average also increased to 394,250 frm 391.000 based on the revisions. The claims report today is data collected after the BLS gathered the data for tomorrow’s monthly employment report.
Next up this morning, the March Chicago purchasing managers index, expected at 70.0 frm 71.2 in Feb, was 70.6. The new orders component at 74.5 frm 75.9, the employment index at 65.6 frm 59.8 the highest read since Dec 1983 and the prices pd for materials at 83.4 frm 81.2, the highest since July 2008. Employment and prices are more evidence that the economy is improving along with inflation concerns. However, there was little reaction to the report, treasuries and mortgages held steady with small price gains and the stock market unchanged.
Finally today, Feb factory orders were expected to be up 0.4%, were down 0.1% and Jan revised to +3.3% frm 3.1%.
In Europe inflation data was stronger than expected; in the 17-nation euro region inflation increased to 2.6% in March from 2.4% in February, European Union estimates showed today. That’s the fastest pace since October 2008, and exceeds the ECB’s 2.0% limit for a fourth month. Economists had forecast inflation to hold steady. Next week the ECB will meet to discuss increasing its base lending rate, the inflation data today further increases the chance ECB will increase rates. Following moves in China, Brazil, Russia and India base lending rates are moving higher. In the US so far, the Fed still holds that inflation is not an immediate problem and plans to continue the easing move of buying $600B of treasuries. Whether or not inflation is about to click in, the bond market will face a huge hill to climb keeping long term rates including mortgages at or below the present levels. Fed officials are increasingly more divided on ending QE 2 sooner and less buying than originally intended; Bernanke however appears to be holding with completing the entire $600B buying that will conclude at the end of June.
After all the data this morning the rate markets holding better than we would have thought given the strong Chicago PM index and inflation increase out of Europe. The stock market holding unchanged. Technically the 10 yr held 3.50% on Tuesday giving traders a little opportunity but overall the bond market still holds a bearish outlook for rates. The rest of the session will be setting up for tomorrow’s employment report with estimates still for an increase of 200K jobs and the unemployment rate unchanged at 8.9%. If floating stay close today; normally we do not like having a market position into employment as it is too volatile.
What’s On Tap For Wednesday
Mortgage markets starting better this morning after price declines again yesterday; the 10 yr note at 9:00 was up slightly (2/32) while mtg prices were +4/32 (.12 bp). At 8:15 the March ADP non-farm private jobs report came in at +201K; small businesses +102K, medium businesses +82K and large businesses +17K. ADP reported the service sector jobs increased 164K the 15th consecutive increase in service producing sector; goods producing up 37K the 5th consecutive increase and manufacturing increased 37K the 6th consecutive increase. According to ADP the US private sector has averaged 175K jobs a month for the past six months. Projections of the 34 economists polled by Bloomberg ranged from gains of 171,000 to 295,000.
According to Chicago-based Challenger, Gray & Christmas Inc., another employment data point this morning, employers announced fewer job cuts in March than the same month last year, even as government payroll cutbacks climbed to the highest level in a year. Public employees accounted for almost half of all job cuts as states continue to cut fat with most state budgets in some kind of deficit.
Earlier this morning at 7:00 am the MBA released its weekly mortgage applications; they decreased 7.5% from one week earlier. The Refinance Index decreased 10.1% from the previous week. The seasonally adjusted Purchase Index decreased 1.7% from one week earlier. The unadjusted Purchase Index was 21.9% lower than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is up 2.0%. The four week moving average is up 2.1% for the seasonally adjusted Purchase Index, while this average is up 2.0% for the Refinance Index. The refinance share of mortgage activity decreased to 64.3% of total applications from 66.4% the previous week. This is the second lowest refinance share reported since May 2010. The adjustable-rate mortgage (ARM) share of activity decreased to 5.7% from 5.9% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.92% from 4.80%, with points decreasing to 0.83 from 0.96 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 4.16% from 4.02%, with points increasing to 0.99 from 0.90 (including the origination fee) for 80% loans.
Later today, at 1:00 pm Treasury will auction $29B of 7 yr notes. So far the 2 yr and 5 yr auctions were marginal at best. Today’s auction closer to the long end of the curve will be closely watched by traders, another soft auction will likely add conviction that interest rates are on the way higher.
At 9:30 the DJIA opened +46, the 10 yr note traded +1/32, mortgage prices +4/32 (.12 bp) frm yesterday’s close. Although the ADP report and the open in the equity markets would pressure to rate markets, interest rate markets have been in a slow free-fall for the past eight sessions and are now momentarily technically oversold. The potential for some improvement is high but in the wider perspective any rebound in rates will be seen as a selling opportunity by traders. The ECB about to increase rates along with many of the economies of the world, inflation concerns increasing albeit slowly, and as the calendar ticks off we get closer to the end of all of the Fed’s easing moves with QE 2 ending in June. Markets will not wait to the end and will have to consider how markets will absorb the shortfall when the Fed stops buying treasuries.
Should be quiet the rest of the morning until the 7 yr note auction is completed at 1:00. Oversold momentum oscillators likely to keep traders still until another shoe drops (i.e., a poor 7 yr auction or stronger economic data when the official employment report for March hits Friday morning). Although some rebound can’t be ignored, the rate markets will not likely loose their bearish outlook.
Important Information On Fed Comp Rule
Please take the 6 minutes necessary to watch this video and then please forward it along. This is government at its’ best in America!!
Thinking of Applying for a Home Loan
Watch this short movie for a primer on what to expect with today’s credit ctieria and tighter guidelines!!
A Small History Lesson
How Did The Interest Deduction Come About?
The First Income Tax: In 1984 Congress passed the first income tax, which was challenged and later struck down by the Supreme Court. So the government got into gear and in 1913 the Sixteenth Amendment was ratified granting Congress the power “to lay and collect taxes on incomes, from whatever source derived”.
The Second Income Tax: Congress quickly imposed and income tax starting at 1% and rising to 7% on incomes over $500,000. This resulted with less than 1% of the US population paying any income taxes. This was the beginning of the graduated income tax.
Enter The Tax Deduction: The tax was offset with a deduction of any interest paid. Rental income was offset by the interest paid to finance the rental property and interest bacame a tax deduction.
Prior to WWI, home owners typically owned their homes outright. With the exception of financed or leased farm land, homes were purchased with cash. So at first, mortgage interest deduction did not benefit homeownership.
Soon, local Thift & Loans (Savings and Loans) were created to provide access to home financing. Subsequently, programs through FHA, VA, and latter Fannie Mae and Freddie Mac facilitated broader homeownership. Finally, the creation of the conventional loan and the mortgage backed security market brought financing to the masses. Along with homeownership came the morthahe interest deduction.
The Bottom Line: The home mortgage interest deduction is a carryover from the original income tax and business intterest rate deduction of a century ago. It was not intended to encourage home ownership or considered a public policy. Today, Washington is eyeing the hoome mortgage interest deduction (the removel of the exemption) as a possible source of revenue. As always, the government giveth and the govenment taketh away!
A Loan For The “Out of the Box” Borrower?
Since the beginning of the housing meltdown and the collapse of the mortgage market, credit and underwriting has continued to get tighter and tighter. The mortgage market has gone from “exotic” to “vanilla” and borrowers with excellent credit, strong equity positions, and significant reserves have been locked out of the market if they did not show adequate income and fit “in the box”. In the good ole days, these were the borrowers that the stated income programs were intended to serve. Instead, the market morphed into an ugly animal that allowed anyone to utilize stated programs and gave the borrowering public carte blanche to lie in order to but too much home.
So what if you are a borrower with great credit, significant equity, and strong reserves? Well if you protect your wealth by filing a creative tax return and minimize your tax liability – you really have no where to go – until now.
Say hello to the Homeownership Accelerator! This loan is a first lien line of credit that allows for a make sense approach when analyzing a borrowers qualifications. The Fed’s would probably say it is a “exotic” mortgage but when you analyze the features and the intention of the program it is a great alternative for many borrowers. The program works like this:
The starting rate (currently) is 3.50% with interest only payments. The program is tied to the 1 Month LIBOR plus (in this case) a 3.250 margin. The premise of the program is that you use it as your household operating account and put all your income against the balance, thereby reducing your interest costs on your mortgage. As the month goes on you utilize the account with checks or a Visa card to buy groceries, pay bills, dine out, go to the movies, etc. etc. etc.. The program works to accelerate the amortization and pay off of your mortgage as long as your cash in flow exceeds your monthly outflow. For a detailed look at the program youu can view a movie that outlines details at http://homeownershipaccelerator.net/.
The creative aspect of the program is that the underwriting is purely make sense and allows credit worthy borrowers who are otherwise locked out of the market to get a home loan. One “creative” aspect is the allowance of asset depletion to establish an income stream for a borrower. For instance, if we have a borrower with $1,000,000 in reserves (yes they do exist) then you simply divied the total of reserves by 120 months to establish a qualifying income stream of $8,333 per month. There is more as the focus is a view of the entire borrower profile rather than the conventional market where we are forced to cram everyone into a box or send them away unhappy and without a loan.
Believe it or not – Credit Criteria Can (and will) Get Tighter
Yes it is possible and it is coming to your friendly neighborhood lender! Fannie Mae’s Loan Quality Initiative (LQI) launches on June 1st and we in the industry are waiting to see how much more difficult underwriting and lending can become. For an introduction and overview of this initiative, you can follow this LINK to read the Fannie Mae announcement.
When a borrower applies for a refinance or purchase loan, we get to ask them to supply every piece of paper possible in order to document their identity, income, assets, and expenses. Mosat importantly, we need to be diligent in counseling those seeking financing on what NOT to do during the course of the loan process. What not to do:
- DO NOT apply for any additional credit of any kind! (This creates an inquiry on the crdit report which must be researched to establish that no new debt has been incurred).
- DO NOT get all excited about moving into your new house and go out and charge a new coauch, chair, matress, barbeque, or ANYTHING on any of your revolving accounts!
- DO NOT go out and purchase a shiny new vehicle to park in your garage!
So why is all of this important? Because under Fannie Mae’s LQI, we will have to perform a final credit pull at funding in order to determine that no new debts have been incurred over the course of our processing the loan application. We, the lender, must warrant that the debt used in analyzing the credit worthiness of the borrower is all the debt that our borrower has. In the past, we would pull a credit report and as long as we closed within 90 days all was good and their was no additional scrutiny.
The final credit pull will be used to determine if their have been any inquiries (applications for new accounts) or if any revolving account balances have gone up. Changes will cause delays in the closing of loans and could jeopordize the loan approval at the 11th hour of a transaction. It is unclear what Fannie’s stance will be in regards to changes in credit scores. Take an example:
The borrowers credit score is 720 on a $500,000 purchase with 20% down. On the closing credit pull let’s say the score goes down one point to 719. The price hit for a 719 vs a 720 score is .75 points! On this $400,000 loan that means the overall cost for that 1 point credit score drop would be an increase in closing costs of $3,000! Once again, we do not have information as to how this type of situation will be dealt with by Fannie in the implementation of the LQI.
Credit is tight and getting tighter. The message to perspective borrowers applying for a purchase loan or a refinance is to take a deep breath and stay motionless until the procedure is complete! Cash and carry and any and all purchases while your loan is in process and do not authorize anyone to pull your credit (other than the mortgage lender) for any reason whatsoever! Other than that, just sit back and relax during the loan process because we all know how simple it has become!
The Skinny on Rates!
Wow – what a difference Greece makes! Not just Greece but the entire European market bringing on fears of a financial collapse overseas coupled with concerns of a renewed global recession and you end up with a nice little flight to quality. This could leads to some great opportunities for embattled homeowners in need of refinancing as well as persepctive home buyers looking to jump into the market. Keep an eye on Europe and the stock market for signs of the future of mortgage rates.
It loooks like bigger government and financial reform are on the horizon for all of us. The Senate passed their version of the Financial Reform Bill which must now be reconciled with the House version before moving on to the President’s desk. I understand the need for some changes and regulation but it just seems that we are heading down the road to “Big Brother” and a government that is too big with too much control. Follow this LINK for details on the Senate bill.
Part of the bill sets forth standards for underwriting and guidelines for lenders to follow in regards to the borrowers ability to repay. The exact language used is:
“A determination under this subsection of a consumer’s ability to repay a loan described in paragraph (1) shall include consideration of the consumer’s credit history, current income, expected income the consumer is reasonably assured of receiving, current obligations, debt-to-income ratio or the residual income the consumer will have after paying non-mortgage debt and mortgage-related obligations, employment status, and other financial resources other than the consumer’s equity in the dwelling or real property that secures repayment of the loan.”
This effectively rules out any return to equity based lending (stated income) regardless of down payment for any government insured or regulated loans. If “make sense” guidelines are to ever come back into play it will have to be through the private sector. I am not advocating a return to the guidelines that got us here but I do feel there is a need and a place for stated income loans when the borrower is self employed or retired and has established an asset base comensurate with the income stated. Stated income loans for salaried and hourly wage earners was simply an invite to overstate income for qualifying purposes.
So we are going down the road of more regulations that will ultimately lead to tighter credit standards. Not a good end to the week and certainly not a good way for us to improve work flow and service levels in the mortgage industry! Thanks and have a great weekend.
It’s Time To Re-Approve Your Pre-Approval
As the federal home buyer tax credit nears its April 30 end-date, there’s a lot of would-be home buyers still working to get under contract.
A piece of advice for all of them : If your pre-qualification and/or pre-approval letter is more than 8 weeks old, it would be prudent to have your lender “re-pre-approve” you. Mortgage guidelines have been in flux and your original lender letter may now be invalid.
For example, over the past half-dozen months, the majority of mortgage lenders have reduced their risk tolerance with respect to:
- Maximum debt-to-income ratios
- Minimum allowable credit scores
- Calculation of “assets in reserve”
For buyers of condominiums and co-ops, even the subject property itself is coming under tougher scrutiny.
Today’s mortgage applicants need to be a complete package. It takes more than just good income and credit to get approved anymore and today’s buyers should revisit their qualifications. What passed underwriting in January may not pass in May.
Being pro-active brings other advantages, too. If a mortgage re-pre-approval does unearth an issue, it’ll be easier for every party to the transaction to address and correct it up-front versus trying to clean up a mess once a home’s already under contract.
Talk to your agent and your loan officer about your pre-qualification/pre-approval letter before you bid on a home.