First American CoreLogic reports that there are about 600,000 option ARMs scheduled to reset in the next four years. Normally this would be ok, but this year default and foreclosure rates on option ARMs have passed those of subprime mortgages. Option ARMs, which helped so many originators increase their fundings and profits, accounted for $750 billion in mortgages made from 2004 to 2007. Roughly a third are already in default, according to analysts. Of course borrowers enjoyed the option of paying less than the interest, which increases the balance every month; just the interest; the equivalent of a 30-year fixed-rate mortgage; and the equivalent of a 15-year fixed, and apparently 75% of borrowers take the minimum option, which usually expires after five years or when the balance reaches a cap, generally 110 percent to 125 percent of the original loan.

How about that New Home Sales number for July – and I bet that none of the sales involved financing with an option ARM! New Homes Sales were up almost 10% in July, the biggest jump since early 2005. The June numbers were also revised upward, and July was the fifth increase in seven months. Two other statistics to note: the number of houses on the market dropped to its lowest level in 16 years, but median prices are down 12% from a year ago.

The Treasury auctions continue today. (In a related side-note, Warren Buffet published a letter last week reminding us that “An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money...With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap…Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes…”)

Yesterday’s sale of $39 billion of 5-yr Treasury notes went pretty well, as did Tuesday’s auction. “Indirect bids came in 56.4%, which was strong and suggests that the demand is still out there. But can rates really drop much with this continued supply? That is doubtful. On the positive side, Wall Street dealers report that banks, which are flush with cash, are in buying mortgage-backed securities when prices drop.

In addition to the $28 billion 7-yr sale today, we’ve already had the GDP numbers for the 2^nd quarter, along with Jobless Claims. Jobless Claims fell last week to 570,000, which is about as expected and still a large number, and those collecting long-term unemployment benefits dropped to the lowest level since April. And the Commerce Department said GDP (total goods and services output) fell at a 1 percent annual rate, unchanged from last month's estimate, slightly better than expected and certainly better than the -6.4% in the first quarter. After the news we find the 10-yr at 3.48%, and both the 5-yr Treasury and mortgage prices worse by about .125.

Do you buy or sell loans? You may want to take a gander at the MBAA’s website, where they are looking for feedback (until September 8) regarding a draft model whole loan purchase and sale agreement. It is part “of an MBA initiative to help increase liquidity and efficiency in the non-conforming residential mortgage market.” The MBAA hopes that it becomes the standard for the industry. http://www.mbaa.org/MBAModelLoanPurchaseAgreementProposal.htm

Franklin American came out with credit requirement clarifications. Your best bet is to check their bulletin, but their topics included VVOE’s (“FAMC requires the correspondent to provide a Verbal Verification of Employment completed no more than 10 calendar days prior to closing for all hourly, salary, and commission income borrowers, and not more than 30 calendar days prior to closing for all self-employed borrowers”), 4506T’s (“loan files must be delivered with two signed IRS 4506T forms—one signed at the time of application and one signed at the time of closing”), the age of docs (“the maximum age for credit documents is changed from 120 days to 90 days for existing property and from 180 days to 120 days for new construction”), funds (“for conventional loans stocks, bonds, and mutual as assets to count toward reserves, 70% of the value may be used versus 100%. When using retirement accounts, 60% of the vested value may be used versus 70%.), a reduction in DTI ratios and maximum LTV (“All conventional loans less than or equal to 80% LTV will require a maximum DTI ratio of 55% regardless of AUS Findings. With the exception of DU Refi Plus loans, LTV’s greater than 80% will continue to follow MI Company guidelines which generally limit the DTI to 41%. DU Refi Plus loans greater than 80% will have a maximum DTI of 45%. FAMC is limiting the maximum LTV to 95%
for Conventional loans. This policy change will affect the My Community/Home Possible/Flex 97
programs which are temporarily being suspended.”)

Toll Brothers is in the news again, reporting another loss in their 3^rd quarter which ended in July. Their loss of over $472 million was worse than expected and compares to their loss from a year earlier of “only” $29 million. For good news, however, the cancellation rate for Toll’s homes in the quarter fell to the lowest since the recession began, which suggests that the housing market is stabilizing.

Reverend Boudreaux was the part-time pastor of the local Cajun Baptist Church and Pastor Thibodaux was the minister of the Covenant Church across the road. They were both standing by the road, pounding a sign into the ground that read:

"Da End is Near. Turn Yo Sef 'Roun Now fore It Be Too Late!"

As a car sped past them, the driver leaned out his window and yelled, “You religious nuts!”

From the curve they heard screeching tires, a big splash and then silence....
Boudreaux turn to Thibodaux and axk,

“Do ya tink maybe da sign should jussay.....'Bridge Out?'”

Rob

(For archived commentaries, check www.robchrisman.com, or to subscribe/unsubscibe write to rchrisman@robchrisman.com. The commentary is produced every business day, but there always seem to be vague e-mail “issues”, so if you don’t receive it, let me know.)