Dec. 13, 2007: Mortgage droning: should everyone be entitled to a government loan?

Dec. 13, 2007: Mortgage droning: should everyone be entitled to a government loan? Rob Chrisman

Everyone has heard this one: What Do You Call Santa’s Helpers? (Sub ordinate Clauses.)

HSBC has come out with their response to the changes made at FNMA and FHLMC. They’ve notified brokers that “Charges for Non-traditional or Missing FICOS scores with an LTV of <p% or 70.01-75.00 will be increased. All other AAP overlay charges will remain unchanged at this time.”

How can FNMA (and FHLMC) lose money? Over 25% of Fannie Mae’s credit losses in the third quarter came from its book of guaranteed alternative-A mortgages, according to the company’s president and chief executive officer, Daniel Mudd.

Should everyone be able to receive a loan from the government? Or should FHA lenders say “no” to borrowers with FICO’s less than 580? Mortgage originators who only did subprime and Alt-A are now taking the same type of subprime/Alt-A borrower and sending them to investors who allow manual underwrites (LP/DU often won’t approve this type of borrower), with no minimum FICO requirements. These loans then flow up into government-guaranteed GNMA securities while the broker or agent collects their points. Some feel that this new crop of government production will not perform like traditional FHA/VA mortgage-backed securities, which may in turn impact HUD. Some investors, however, such as Citi, are setting up price adjustments (overlays) to compensate for borrowers with low credit scores.

Yesterday, rates rose and prices worsened with the news that the Fed would be sponsoring a term auction facility to ease year-end inter-bank funding pressures. This is good news for the economy, they hope, and mildly helped the stock market. The Federal Reserve, with four other central banks, will add cash to the financial system to help ease stressed conditions in credit markets, in an effort to ensure that banks have adequate access to capital through the year end, when demand is typically the greatest. They plan to hold a series of auctions, starting with $40 billion next week that would provide term funds to banks against a wide variety of collateral to secure loans at the discount window. Many predict that the Fed Funds rate may fall below 3% in order to keep the US economy from falling into recession (Merrill Lynch predicts 2% by next year), and a survey of economists finds the number forecasting a recession has doubled recently (rising to 18% of the group). About 67% of the group said the chance of recession was at least 25%.

This morning we had quite a bit of news. The Producer Price Index (+3.2%, twice expectations, +.4% core), Jobless Claims (-7k to 333k), and Retail Sales (+1.2%, ex-transportation +1.8%) were all relatively strong. As one would expect, rates have moved up (10-yr is 4.15%) and mortgage prices have worsened (currently by .125-.250). Tomorrow we will close out the week with the Consumer Price Index number, but the numbers from this morning are causing some economists to revise GDP growth higher!