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Quit Being Politically Correct By Calling it a “G” Fee, Say “Hello!” to Our New National Mortgage Tax!
The New Year has dawned and we can all rest peacefully during the months of January and February with the knowledge that HR 3765 is in firmly in place! For those of you that may be unaware, HR 3765 is the all important legislation that was passed to extend the payroll tax cut for 2 months. During these 2 months, our esteemed legislators will figure out a way to extend and finance the extension through the end of the year. Based on past experiences with this type of tactic (read budget deficit reduction) we can only imagine how entertaining the next 2 months will be!! But first, let’s take a look at how they financed the 2 month extension ……………
To make it clear and simple before the longer winded explanation, let me start by saying that our legislators slipped one by you during the holiday season! In essence, they have now implemented a National Mortgage Tax that will be in place in perpetuity as a means to pay for the 2 month extension. That’s right, they slipped one to you and you slept right through it!
This so called National Mortgage Tax (I’ll use NMT going forward) is disguised under the name of Guarantee Fee. You see, the bill mandates that all loans backed by Fannie Mae or Freddie Mac (87% of the conventional loan market in the US) are to be levied a guarantee fee of 10 basis points (.10) and that this fee will be a pass through from Fannie and Freddie to the US Treasury Department. What it means as far as your next mortgage is concerned is an increase of .125% in rate or and increase in .50% in point cost for the same rate you would have received for less. In other words, the before and after looks something like this:
Before the “G” Fee
4.000% @ 0.000 points
After the “G” Fee
4.000% @ 0.5000 points OR
4.125% @ 0.000 points
Either way, from this point forward and forever, the government will be collecting a TAX (they don’t call it that) in the form of this guarantee fee on any person that obtains a purchase or refinance mortgage that is backed by Fannie Mae or Freddie Mac. As I mentioned earlier, this currently represents 87% of all conventional mortgages funded in the US.
The fee is designed to be in place for 10 years (again to finance 2 months!) but rest assured that the check book is now open and this fee is never going away. The fee is already being priced into the market and while we have seen a strong rally on the MBS market it has not translated into lower rates as a result of this new fee. In dollars and sense, for a $400,000 mortgage you can either choose an additional $2,000 in cost or a monthly payment increase of $28.94 compared to the “pre” “g” fee world. That monthly payment difference equates to $10,418.40 out of pocket on a 30 year loan!
The speculation with all of this is that now that the portal for financing government costs or “tax cuts” is open with Fannie and Freddie, we will see more of this type of structure going forward. So a 2 month tax cut is really a permanent tax hike that is disguised by a different name! Lastly, the rumor mill also has it that the monthly MI factor on FHA loans will increase by the same 10 bps so consumers are not incented to choose FHA over conforming and upset the current balance of power between the 2 loan types.
So here is to 2012 and HR 3765! I can’t wait to see what they come up with as a way to finance the payroll tax cut for the remainder of the year!
Monday Minutia – Happy 2011!
This Week; its back to work with a full compliment of investors and traders after two weeks of very low trading volume. The year ended on Friday with an unexpected strong rally in the bond and mortgage markets, the 10 yr note yield fell 9 basis points and mortgage prices increased by .69 basis points; we believe it more short-covering than anything substantial, but we will take every improvement the market provides.
This week there is no Treasury borrowing, there is data everyday ending with the Dec employment report on Friday. The FOMC will release the minutes from the Dec 15th FOMC meeting on Tuesday, should get a lot of attention as always. 2010 ended with the increasingly strong belief that 2011 economic growth will increase, sending the equity market to one of the best years in many years. The situation in Washington will change dramatically with Republicans now in control of the House and more strength in the Senate. One of the first things Republicans want to do is work on Obamacare, making what most believe are necessary changes, the issue is what changes will everyone agree are the right ones.
January and February markets will continue to wrestle over the outlook for the economy; it will likely take into Feb to get a handle on consumer spending. Wall Street for the most part is expecting consumers to increase spending, we don’t believe that will be the case however. Consumers will more likely save than spend, the demographic changes with 10K baby boomers a day turning 65, a trend that will continue for the next 10+ years and spending by the huge population of boomers won’t meet the expectations currently out there. We believe 2011 will disappoint, consumers are more savvy than all those that work east of the Hudson River. Housing is still in dire shape and will continue all through 2011. Inflation fears are probably overdone but still will weigh on the bond and mortgage markets. Monday the 10 yr note yield opens at crucial technical levels, more improvement will change the near term outlook from bearish on rates to one of neutrality. We suggest potential home buyers take advantage of the opportunity if rates improve early this year; it is very unlikely longer term rates will decline much and more likely to increase as the year progresses.
What is RoboSigning and What Does a RoboSigner Look Like?
The RoboSigning scandal goes mainstream and makes national news. The question is, will this latest “crisis” cause the housing market to collapse or pull the economy into a double dip recession? The prospect of title insurers pulling out of the market and refusing to issue title insurance on REO property sales could have a devastating effect on the fragile recovery. In question are REO sales that are owned by GMAC, JP Morgan Chase, and B of A. With REO sales currently accounting for 25% of the market and the lenders on this list representing 75% of the big 4, this could have a potentially huge negative impact on home sales. For more information and an informative report, follow this LINK to get more details.
The Week That Was ……
The chance for additional Treasury purchases by the Fed helped mortgage rates improve early this week. Stronger than expected economic growth data trimmed the gains later in the week. The net result was that mortgage rates ended the week a little lower.
As expected, the Fed made no change in the fed funds rate at Tuesday’s meeting. Its statement was very similar to the last one, but investors focused on one important difference. Fed officials stated that they are “prepared to provide additional accommodation if needed to support the economic recovery.” Investors interpreted this to mean that additional bond purchases by the Fed could take place in coming months. While the Fed is expected to purchase Treasury securities rather than mortgage-backed securities (MBS), increased demand for Treasuries would be favorable mortgage rates. As usual, investors immediately priced in this information, and mortgage rates improved. Of course, if this action by the Fed never becomes necessary, then mortgage rates could give back this week’s gains.
The housing data released during the week generally matched expectations. While there are differences in regional performance, overall the housing market is holding steady above the lows reached during the recent financial crisis or improving modestly. August Existing Home Sales rose 8% from July. Inventories of unsold existing homes declined 1% to an 11.6-month supply. August New Home Sales were unchanged from July. August Housing Starts rose 11%, and Building Permits, a leading indicator, rose 2%. The September NAHB home builder confidence index was unchanged from August.
Next week, Consumer Confidence will be released on Tuesday. The final revision to second quarter GDP will come out on Thursday, along with the Chicago PMI national manufacturing index. GDP is the broadest measure of economic activity. Friday will be the big day with Personal Income, PCE inflation, Construction Spending, ISM manufacturing, and Consumer Sentiment. There will be Treasury auctions on Monday, Tuesday, and Wednesday.
Have Rates Bottomed Out?
Stronger than expected economic data pushed mortgage rates a little higher again this week. Following a string of weekly drops since the middle of June, mortgage rates have now risen for two straight weeks.
Over the summer, mortgage rates have fallen substantially. Weaker than expected economic reports and the debt crisis in smaller European countries caused investors to reduce their forecasts for economic growth and produced a flight to the relative safety of government guaranteed bonds, resulting in the lowest mortgage rates in decades. Now, however, some investors are asking whether they can fall further. Weaker than average economic growth, low inflation, and an “unusually uncertain” economic outlook still make the current environment supportive of low mortgage rates, but some investors feel that these factors have been fully “priced in.” These investors feel that economic growth must falter significantly for mortgage rates to drop much from here.
Also contributing to the fall in rates was the possibility that the government would take action which would push mortgage rates lower. The political climate has turned less favorable for this, though. Growing opposition to fiscal spending of any type has reduced the chances for additional government support for the housing market and mortgage rates.
The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of “intermediate” goods used by companies to produce finished products and will come out on Thursday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Friday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Retail Sales, an important indicator of economic growth, will be released on Tuesday. Retail Sales account for about 70% of economic activity. Industrial Production, another important indicator of economic growth, is scheduled for Wednesday. Empire State, Import Prices, Consumer Sentiment and Philly Fed will round out the week.
FHA Loans May Become More Costly
It is time for a call to action as FHA loans are in danger of becoming more costly thereby pushing persepctive home buyers out of the market. To view a video and get more details on this issue - CLICK HERE!
Please take the time, watch the video and let your representative know how you feel!!
A Word About Condominiums
The economic downturn has created havoc throughout the US economy and changed our credit parkets dramatically. With Fannie and HUD essentially removing themselves from the condo approval business and placing the burden of project warranties on the funding lenders, it is only natural that condominium purchases are becoming more difficult. The reasons are that many lenders do not have the expertise or the stomach to warranty a project and risking a loan re-purchase and the economic crisis has rendered many projects un-approvable.
For a lender to warrant a project, they must have the expertise avaialable to review the project documents such as the CC & R’s, Articles, By Laws, Budget, Articles of Incorporation, and Master Insurance Policy to insure that the project does indeed meet Fannie Mae or HUD standards. If the expertise is not in-house then this process may be outsourced to a thrid party provider but the burden of that warranty will still be on the funding lender. If a loan goes bad and it is determined that the project should not have been approved, the investor is going to expect the loan to be re-purchased by the funding lender. The funding lender can then go back and request the third party provider cover any losses (good luck with that!).
The other challenge is that the guidelines for a project to be approved have also tightened up. The main issue that renders many projects unwarrantable in the current market is the issue of delinquent HOA dues. If 15% or more of the current property owners are 30 days or more delinquent with their HOA dues, then the project is a no go! Given the level of foreclosures, short sales, and cash strapped owners, we have been seeing as delinquency rates in projects as high as 25% to 30% of the unit owners!
When considering a condo purchase or if you are thinking of listing your unit for sale, perform some homework in advance to see where your project stacks up with current lending standards.
More on LQI and What Banks are No More!
Here are links to 2 helpful documents that give some clarification to Fannie Mae’s Loan Quality Initiative (LQI).
The first is a summary of the initiative: CLICK HERE
The second is a FAQ document that further clarifies the program: CLICK HERE
Last Friday’s bank closures were as follows:
- First National Bank (MS)
- The Jefferson Bank (MS)
- Arcola Homestead Savings Bank (IL)
- TierOne Bank (NE)
82 closed banks YTD and counting!!
A Switch From The Norm With An Improtant Message
I do not get political on this blog but felt this was a very appropriate message:
“I’m 63 and I’m Tired”
by Robert A. Hall
I’m 63. Except for one semester in college when jobs were scarce and a
six-month period when I was between jobs, but job-hunting every day, I’ve
worked, hard, since I was 18. Despite some health challenges, I still put in
50-hour weeks, and haven’t called in sick in seven or eight years. I make a
good salary, but I didn’t inherit my job or my income, and I worked to get
where I am. Given the economy, there’s no retirement in sight, and I’m
tired. Very tired.
I’m tired of being told that I have to “spread the wealth” to people who
don’t have my work ethic. I’m tired of being told the government will take
the money I earned, by force if necessary, and give it to people too lazy to
earn it.
I’m tired of being told that I have to pay more taxes to “keep people in
their homes.” Sure, if they lost their jobs or got sick, I’m willing to
help. But if they bought McMansions at three times the price of our
paid-off, $250,000 condo, on one-third of my salary, then let the left-wing
Congress-critters who passed Fannie and Freddie and the Community
Reinvestment Act that created the bubble help them with their own money.
I’m tired of being told how bad America is by left-wing millionaires like
Michael Moore, George Soros and Hollywood Entertainers who live in luxury
because of the opportunities America offers. In thirty years, if they get
their way, the United States will have the economy of Zimbabwe , the
freedom of the press of China , the crime and violence of Mexico , the
tolerance for Christian people of Iran , and the freedom of speech of
Venezuela .
I’m tired of being told that Islam is a “Religion of Peace,” when every day
I can read dozens of stories of Muslim men killing their sisters, wives and
daughters for their family “honor”; of Muslims rioting over some slight
offense; of Muslims murdering Christian and Jews because they aren’t
“believers”; of Muslims burning schools for girls; of Muslims stoning
teenage rape victims to death for “adultery”; of Muslims mutilating the
genitals of little girls; all in the name of Allah, because the Qur’an and
Shari’a law tells them to.
I’m tired of being told that “race doesn’t matter” in the post-racial world
of Obama, when it’s all that matters in affirmative action jobs, lower
college admission and graduation standards for minorities (harming them the
most), government contract set-asides, tolerance for the ghetto culture of
violence and fatherless children that hurts minorities more than anyone, and
in the appointment of U.S. Senators from Illinois.
I think it’s very cool that we have a black president and that a black child
is doing her homework at the desk where Lincoln wrote the Emancipation
Proclamation. I just wish the black president was Condi Rice, or someone who
believes more in freedom and the individual and less arrogantly of an
all-knowing government.
I’m tired of a news media that thinks Bush’s fundraising and inaugural
expenses were obscene, but that think Obama’s, at triple the cost, were
wonderful; that thinks Bush exercising daily was a waste of presidential
time, but Obama exercising is a great example for the public to control
weight and stress; that picked over every line of Bush’s military records,
but never demanded that Kerry release his; that slammed Palin, with two
years as governor, for being too inexperienced for VP, but touted Obama with
three years as senator as potentially the best president ever. Wonder why
people are dropping their subscriptions or switching to Fox News? Get a
clue. I didn’t vote for Bush in 2000, but the media and Kerry drove me to
his camp in 2004.
I’m tired of being told that out of “tolerance for other cultures” we must
let Saudi Arabia use our oil money to fund mosques and madrassa Islamic
schools to preach hate in America , while no American group is allowed to
fund a church, synagogue or religious school in Saudi Arabia to teach love
and tolerance.
I’m tired of being told I must lower my living standard to fight global
warming, which no one is allowed to debate. My wife and I live in a
two-bedroom apartment and carpool together five miles to our jobs. We also
own a three-bedroom condo where our daughter and granddaughter live. Our
carbon footprint is about 5% of Al Gore’s, and if you’re greener than Gore,
you’re green enough.
I’m tired of being told that drug addicts have a disease, and I must help
support and treat them, and pay for the damage they do. Did a giant germ
rush out of a dark alley, grab them, and stuff white powder up their noses
while they tried to fight it off? I don’t think Gay people choose to be Gay,
but I damn sure think druggies chose to take drugs. And I’m tired of
harassment from cool people treating me like a freak when I tell them I
never tried marijuana.
I’m tired of illegal aliens being called “undocumented workers,” especially
the ones who aren’t working, but are living on welfare or crime. What’s
next? Calling drug dealers, “Undocumented Pharmacists”? And, no, I’m not
against Hispanics. Most of them are Catholic, and it’s been a few hundred
years since Catholics wanted to kill me for my religion. I’m willing to
fast track for citizenship any Hispanic person, who can speak English,
doesn’t have a criminal record and who is self-supporting without family on
welfare, or who serves honorably for three years in our military…. Those
are the citizens we need.
I’m tired of latte liberals and journalists, who would never wear the
uniform of the Republic themselves, or let their entitlement-handicapped
kids near a recruiting station, trashing our military. They and their kids
can sit at home, never having to make split-second decisions under life and
death circumstances, and bad mouth better people than themselves. Do bad
things happen in war? You bet. Do our troops sometimes misbehave? Sure.
Does this compare with the atrocities that were the policy of our enemies
for the last fifty years and still are? Not even close. So here’s the
deal. I’ll let myself be subjected to all the humiliation and abuse that was
heaped on terrorists at Abu Ghraib or Gitmo, and the critics can let
themselves be subject to captivity by the Muslims, who tortured and beheaded
Daniel Pearl in Pakistan, or the Muslims who tortured and murdered Marine
Lt. Col. William Higgins in Lebanon, or the Muslims who ran the
blood-spattered Al Qaeda torture rooms our troops found in Iraq, or the
Muslims who cut off the heads of schoolgirls in Indonesia, because the girls
were Christian. Then we’ll compare notes. British and American soldiers are
the only troops in history that civilians came to for help and handouts,
instead of hiding from in fear.
I’m tired of people telling me that their party has a corner on virtue and
the other party has a corner on corruption. Read the papers; bums are
bipartisan. And I’m tired of people telling me we need bipartisanship. I
live in Illinois , where the “Illinois Combine” of Democrats has worked to
loot the public for years. Not to mention the tax cheats in Obama’s cabinet.
I’m tired of hearing wealthy athletes, entertainers and politicians of both
parties talking about innocent mistakes, stupid mistakes or youthful
mistakes, when we all know they think their only mistake was getting caught.
I’m tired of people with a sense of entitlement, rich or poor.
Speaking of poor, I’m tired of hearing people with air-conditioned homes,
color TVs and two cars called poor. The majority of Americans didn’t have
that in 1970, but we didn’t know we were “poor.” The poverty pimps have to
keep changing the definition of poor to keep the dollars flowing.
I’m real tired of people who don’t take responsibility for their lives and
actions. I’m tired of hearing them blame the government, or discrimination
or big-whatever for their problems.
Yes, I’m damn tired. But I’m also glad to be 63. Because, mostly, I’m not
going to have to see the world these people are making. I’m just sorry for
my granddaughter.
Robert A. Hall is a Marine Vietnam veteran who served five terms in the
Massachusetts State Senate.
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.