Nov. 16, 2007: Mortgages: big WAMU changes, improving mortgage prices, and lesson 5 of 5 on MI

Nov. 16, 2007: Mortgages: big WAMU changes, improving mortgage prices, and lesson 5 of 5 on MI Rob Chrisman

Yesterday I passed a conference room and someone was saying, “This project is so important we can’t let things that are more important interfere with it.”  

Where do things stand on the future tax-deductibility of MI? This is the latest news story:

“The U.S. House of Representatives approved a bill that provides an estimated $1.4 billion in tax relief over the next five years. Lawmakers voted 386-27 in favor of the bill, which had been approved by the Ways and Means Committee. Though the Senate has not started work on similar legislation, a key Senate Democrat said Thursday his party’s leaders back the House measure. The bill would alter current tax law to allow a homeowner to exclude from income the value of debt forgiven if the owner reworks the terms of a mortgage with a lender. Currently, debt that is forgiven is treated as income and subject to tax. Currently the tax write off for MI applies to eligible borrowers with adjusted gross incomes of $109,000 or less who purchased or refinanced a home between January 1 and December 31, 2007.  As of today, the tax write-off is just for 2007.  However, this bill is being reviewed to extend tax deductibility for another 7 years, and we should know by the end of this month if it does pass.”

What does the future hold for mortgage insurance? Generally speaking, these companies have lost much of their value in the last 6 months and loss ratios are very high (e.g., companies are paying out more in losses than they are earning in premiums). Many in the mortgage insurance field are optimistic that profitability will return, of course, and that mortgage insurance penetration may be as high as 20% next year.  Whether or not any MI companies will be downgraded or fail remains to be seen, although a few are close to being downgraded from AA to A.  Any many feel that we are not done with the mortgage problems that are plaguing the industry.

WAMU dropped a bombshell yesterday on their broker customers. Although they will keep open their retail and wholesale channels, they are eliminating their “retail broker” channel. And product-wise, “Jumbo Option ARMs (including Flex and No Introductory) and  all WaMu MultiPay Home Loan products will only be available as Full Doc, Purchase Transactions with a minimum FICO Score of 680. In addition, the following products will no longer be available: Flex 3 Lot Loans, and Alternative-A (Alt-A) Products.” Regarding their “retail broker” channel, within the retail origination group they had a limited number of originators that had approved brokers that could submit loans through the Retail channel (without true expertise in auditing brokered transaction). It was always considered a conflict with the Wholesale channel.

According to a news story in Bloomberg, the risk of Residential Capital (parent of GMAC and RFC) defaulting on its debt soared on concern the biggest privately held U.S. mortgage lender may violate bank loan agreements, trading in credit-default swaps show. Will they fall into bankruptcy?  One analyst said, “As we continue to see conditions get worse and worse, the company clearly at some point has to reevaluate…ResCap has an awful lot of secured debt, which raises the issue of `is it worth it?’.”

We had a nice improvement in prices yesterday, at least in Treasury securities. More credit fears on CDO’s, SIV’s , subprime write-downs, Muni bond insurers being downgraded… stocks dropped significantly as the flight to quality hit with concerns over the financial system and weak consumer spending contributed to the rally. Although 30-yr A-paper mortgage prices lagged, as has been their recent history, ARM prices relative to 30-yr mortgage prices improved since the yield curve is at its steepest level in over 2 years: the spread between 2 and 10 yr treasury was 81 bps. This morning, with only Industrial Production and Capacity Utilization out (-.5% and 81.7% respectively), the 10-yr stand at 4.17% (after hitting a 2-yr low yesterday) and mortgage prices are slightly worse.

A frog goes into a bank and hops up on the desk of the loan officer. “Hi,” he croaks.  “What’s your name?” 

The loan officer says, “My name is Patty Whack.  May I help you?”

“Yeah,” says the frog. “I’d like to borrow some money.” 

The loan officer finds this a little odd, but gets out a form. “Okay, what’s your name?” The frog replies, “Kermit Jagger.” “Really?” says the loan officer. “Any relation to Mick Jagger?”

“Yeah, he’s my dad.”

“Hmm,” says the loan officer. “Do you have any collateral?”

The frog hands over a pink ceramic elephant and asks, “Will this do?”  The loan officer says, “Um, I’m not sure. Let me go check with the bank manager.” 

“Oh, tell him I said hi,” adds the frog. “He knows me.”

The loan officer goes back to the manager and says, “Excuse me, sir, but there’s a frog out there named Kermit Jagger who wants to borrow some money. All he has for collateral is this pink elephant thing; I’m not even sure what it is other than a knickknack.”

The manager says, “That’s from the 17th century, it’s worth tons of money”.  He walks over to Patty and says “That’s no knickknack Patty Whack give the frog a loan. His old man’s a Rolling Stone.”

(Sure, I get some of these from the kids, but you’re singing it, aren’t you?)