As I have noted for some time, many experts believe that FNMA & FHLMC being able to buy higher loan balances won’t cause a total reversal of the mortgage-banking slump. The higher loans could have fee adjustments, it may expire at the end of the year, and it won’t correct the guideline changes or cause their property value to increase, giving many much-needed equity. The Department of Housing and Urban Development will calculate the new loan ceilings and determine the geographic areas impacted, although most likely they will be based on MSA (Metropolitan Statistical Area). And investors still don’t know what to charge for the higher loan balances, which will be based on whether or not the loans can go into mortgage-backed securities. Regardless, yesterday’s vote was a shot of perceived good news for an industry that hasn’t had much to crow about in the last year.

James Lockhart, the Director of the Office of Federal Housing Enterprise Oversight (who oversees FHLMC & FNMA, government-sponsored enterprises) stated “any increase in the conforming loan limit should be coupled with quick enactment of comprehensive GSE reform…the loan limit provision…would increase the Enterprises risks by allowing them to enter the ‘jumbo’ loan market. It would increase the maximum size loan those GSEs could purchase or guarantee from $417,000, to the lower of 125 percent of median area prices or $730,000, for mortgages originated between July 1, 2007 and December 31, 2008. This change should help lower interest rates on some jumbo mortgages, but other potential implications deserve attention. Jumbo loans would present new risks to the already challenged GSEs. The prepayment and credit risks are different than those of conforming loans. The provision also pushes the GSEs to increase their geographic concentration in some of the riskiest real estate markets. Roughly half of all jumbos are in California.”

Yesterday’s market got seriously hit by some combination of a mediocre 30-yr auction, the European Central Bank’s policy meeting leaving their rates unchanged (suggesting the economy there might be stable or rebounding), a Fed governor’s speech noting signs of possible inflation, and a UBS research report that addressed jumbo loans being eligible for securitization with conforming loans. Today's economic calendar is light, with the focus pretty much on if two Fed speakers later today echo the inflation concerns. The 10-yr, which yesterday jumped from 3.60% up into the mid 3.70’s, is back at 3.68%, and mortgage prices are better by .125-.250.

The $146 billion economic stimulus package approved by the House contains an important provision for homeowners: a one-year increase to $625,000 nationwide and up to $729,000 in high-cost areas such as the San Francisco area in the conforming loan limit for loans that government-sponsored enterprises Fannie Mae and Freddie Mac can purchase. The current limit is $417,000. The house bill seems to indicate that conventional loans will use the same MSAs as FHA loans do and thus have different limits for each MSA. Here is what seems to be floating out there: “Determination of Limits- The areas and area median prices used for purposes of the determinations under subsection (a) shall be the areas and area median prices used by the Secretary of Housing and Urban Development in determining the applicable limits under section 202 (FHA section) of this title,” which suggests that both FHA and conventional loan limits will be 125% of median area home price as set by HUD. Moving quickly to get the economic package to President George W. Bush, the House of Representatives passed the bill by 380-34, just hours after the Senate cleared the measure on a vote of 81-16. Bush is expected to sign the bill next week.

• Flagstar advised clients that mortgage insurance is no longer available on stated income cash out refinance transactions, and any pipeline loans must already have a Mortgage Insurance Certification issued in order to close. They will be changing the manufactured housing price adjustment for FHA/VA loans.
• Is the jumbo market looking attractive? In writing about Thornburg, Jeffries Securities said that, “We believe there is an extraordinary opportunity to invest in high-quality mortgages at the moment driven by several fundamental factors…lower funding costs and favorable asset yields will provide significant margin expansion in the first quarter as the company looks to ramp capital deployment…asset yields will likely compress as mortgage products regain favor in the market. However, as this occurs, asset pricing will rise to reflect the increased liquidity, driving up the value of TMA's securities as well as book value.”
• MGIC announced underwriting guideline changes of their own: A-paper guideline changes include “LTVs greater than 95% require a minimum credit score of 680, LTVs 95% or less require a minimum credit score of 620, etc.” Expanded Criteria (A-) guideline changes include “the maximum LTV is 95%, the minimum credit score is 660, and primary residence cash-out refinances require a minimum credit score of 680. (The current maximum LTV of 90% remains.” Reduced Documentation (Alt-A) guideline changes include “the maximum LTV is 90%, the minimum credit score is 660, and at least 50% of qualifying income must come from self-employment (already in place).”

Thank you Marci W.:

Three men were hiking through a forest when they came upon a large raging, violent river. Needing to get to the other side, the first man prayed:
"God, please give me the strength to cross the river."
Poof! God gave him big arms and strong legs and he was able to swim across in about 2 hours, having almost drowned twice.
After witnessing that, the second man prayed: "God, please give me strength and the tools to cross the river!"
Poof! God gave him a rowboat and strong arms and strong legs and he was able to row across in about an hour after almost capsizing once.
Seeing what happened to the first two men, the third man prayed: "God, please give me the strength, the tools and the intelligence to cross the river!"
Poof! He was turned into a woman. She checked the map, hiked one hundred yards up stream and walked across the bridge.

Rob