Feb. 15, 2011: FHA jacks MIP; another MERS ruling; impact of oil & food prices on mortgage biz; not-so-good employment news
Rob Chrisman

Ops folks everywhere know that next Monday is a Federal holiday, and are calculating rescission days accordingly.
 
There is an old joke about, "Why is a man like a zero coupon bond? (They pay little interest, and have no maturity.) Roughly 85% of bank deposits have a maturity of 3 months or less. Given that, banks should take care to monitor the amount of fixed rate loans and fixed rate securities going onto the books to limit the risk to rising interest rates. When I speak to various groups, I often mention that this spread income (e.g., the difference between what a bank pays its depositors - about 0% - and what it earns its money, let's say a 5% mortgage) is a huge part of a bank's income. But it was not enough to overcome difficulties for four more banks last week, as the FDIC shut them down. In Florida Sunshine State Community Bank was sold to Premier American Bank. Peoples State Bank was sold to First Michigan Bank up in Michigan, in Wisconsin Badger State Bank is now part of Royal Bank, and out in California Canyon National Bank was sold to Pacific Premier Bank.
 
Around financial circles, some companies are expanding while others are not. Wells Fargo has been laying off temporary employees. Bank of America announced that will close an undisclosed number of branches and seek to boost revenue on the remaining locations by offering investment advice by videoconference. At the end of 2010 BofA had over 5,800 branches, which is down about 5% from its peak 4 years ago. Kondaur Capital laid off 39% of its employees (155 out of 398). Kondaur is a nonperforming loan investor. The layoffs don’t happen until mid-April, so things may change, but at this point Kondaur is having trouble finding banks to free up nonperforming loans at the right price.
 
Huh? MERS is not allowed to transfer mortgages, and cannot act as an agent of the banks that own mortgages? So ruled a judge in New York, who added that, "it is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices." The decision does not jive with a Kansas ruling last year.
http://www.reuters.com/article/2011/02/15/mers-mortgage-ruling-idUSN1411338420110215
 
“As part of ongoing efforts to strengthen the FHA capital reserves,” and to help push private money back into mortgages, the FHA came out with a new premium structure for FHA-insured mortgage loans increasing its annual mortgage insurance premium (MIP) by a quarter of a percentage point (.25) on all 30- and 15-year loans starting in mid-April. (The upfront MIP will remain unchanged at 1.0 percent.) The increase adds $30 to the average borrower’s payment and in total is estimated to add $3 billion annually to the FHA’s Mutual Mortgage Insurance Fund. It is the second increase since October.
 
From an investor’s viewpoint, any investor holding Ginnie Mae securities just became much more comfortable with their holdings and with the odds of FHA-to-FHA refinancing going down. Those familiar with FHA loans realize that before October a 95% LTV 30-yr loan paid a 225 basis points up-front MIP with a 50 bps annual MIP.  Now, that loan pays 100 bps up-front -- but 110 bps annually. Investors believe that this change, given current rates, effectively removes any 5% and 5.5% FHA loans from being refinanced into new FHA loans.
 
Higher rates combined with more investor changes are not always a good thing. Bank of America updated its Conforming, Government, and Non-conforming product lines. Affiliated Mortgage tweaked its Conforming Fixed/ARMS product lines, and Wells Fargo updated its Non-Conforming product lines.
 
Wells Fargo's wholesale group got the word out to its brokers about some FHA transactions that are impacted by agency changes. (HECM’s and reverse mortgages were not impacted.)
 
Fifth Third announced a pricing adjustment – a bump for its “FX20 HASP/DU Refi Plus” program starting today. The hit is now 1.5 points for the Freddie Mac HASP/Open Access and Fannie Mae DU Refi Plus programs when the LTV is greater than 105%.
 
PHH announced that starting Friday the recommended minimum credit score will be increased to 740 for purchase and rate and term refinance transactions with LTV between 95.01 and 97.00% (applicable when either PHH or the correspondent is ordering the MI commitment). It also reminded its clients of the amount of interest that can be used in the “Maximum Mortgage Calculation for Conventional and FHA No Cash Out and Streamline Refinance transactions” (it cannot include more than 30 days’ worth of interest, etc.). PHH’s recent updates also addressed the validity of credit scores (“must be established based on a sufficient amount of trade lines”), MI requirements for loans receiving an AUS Score of Approve or Accept from DU or LP (“the borrower’s credit reputation is deemed to be acceptable for credit that is evaluated on the credit report. However if verification by any other means, such as directly from a creditor or a credit supplement is needed…and so forth.) PHH also stated that it has begun ordering non-refundable mortgage insurance premiums from its MI providers, and changed its policy on USDA Idaho loans regarding non-qualifying spouses. As always, clients are advised to read the bulletins thoroughly.
 
In the appraisal arena, Got Appraisals created an “Emergency Inspection Team (E.I.T,)” to better service lenders and investors within 24 hours when a natural or domestic disaster occurs. The release noted that the team is comprised of “experienced appraisers and inspectors who are available to be immediately dispatched to any area affected by a disaster. They will be able to assist you with assessing the impact the disaster may have had on any homes in the lending process, or currently in your portfolio.”  Got Appraisals is looking for appraisers or firms “interested in being on our Ready List of local appraisers we can count on in the event of a local emergency” – e-mail eit@gotappraisals.com.
 
Oil prices are in the mid-$80 per barrel range, and gasoline in many parts of the nation is sitting at or above $3 per gallon for regular unleaded. This is bad news for anyone who uses transportation, or buys goods that are transported. (Did I leave anyone out?) What do higher oil prices mean for folks in the loan biz? At this time higher oil prices appear to be indicative of higher demand caused by a recovering economy, which in theory will also eventually help the real estate market. In this sense, a strong market for oil is good news for the fortunes of real estate. Many will argue, however, that a) we still have the foreclosure and inventory overhand keeping a lid on values, and b) the higher oil prices will have a negative impact on consumer spending on other goods & services. So higher energy prices may be a result a stronger economy, but they can also slow an economy down, and in fact can contribute to higher inflation which can then cause higher rates, causing another drag upon economic growth.
 
This past weekend I heard Alan Greenspan speak in Southern California. One of his big fears, in the current economic climate, is the price of food around the world. As nations develop, they move from grain-based foods toward eating more meat, and meat uses more grain per calorie and therefore is more expensive. Food prices have risen markedly lately and, in some cases, are near 2008 highs. This worldwide increase in food prices will likely not have major inflationary implications in most advanced economies where food has a relatively low weight in CPI baskets and where slack in labor markets makes a wage-price spiral unlikely. In contrast, however, food price inflation poses a significant downside risk to economic growth in many developing economies where food accounts for more of the consumption basket. Central banks in some important developing economies could end up tightening monetary policy too aggressively.
 
The recent move up in interest rates wasn't unexpected, as the rate markets have been technically bearish since Halloween. But what was not expected was the magnitude of the run-up. So, interestingly, many analysts believe that we have already seen the big move for rates (unless the world stops buying our debt, of course), so although rates are gradually expected to increase for much of 2011, don’t look for any big moves higher. Yesterday, on no real news, 10-year note prices drifted higher on the day and closed up 9/32s to yield 3.61%. It was a quiet session in mortgages as well, with supply around half the recent normal and MBS prices finishing the day about .125-.250 better.
 
But, after a data-less session yesterday and a light week just past, we have had several reports today. Import Prices were +1.5% month-over-month, Export Prices +1.2%, Retail Sales were +.3%, ex-auto & gas it was +.2%, light but positive, and the Empire State Index came in at “15.43” – jump from the previous month’s. We have some minor news still to go, but after this early news we find the 10-yr at 3.63% and MBS prices worse by about .125.


(True story.)
A middle age guy was walking to his car in a Target parking lot. A young lady in her early 20s is banging on her car key clicker. As he gets closer she is getting more and more frantic. The man walks to his car and looks over his shoulder. Now the girl is in a full panic.
The man walks over and asks, "What’s wrong?"
The young lady explains her key will not let her into her car and she’s late for a job interview.
Dumbfounded he asks why she doesn't just use the key to open the car.
The young lady looks insulted and says, "I’m using the key but it will not work."
The man takes the key an inserts it into the key slot on the door and opens the car.
The young lady says, "Is that what that’s for?"