Feb. 26, 2008: Locks down & extensions up, Wells makes some ARM index changes

Feb. 26, 2008: Locks down & extensions up, Wells makes some ARM index changes Rob Chrisman

“A rising tide lifts all boats.” So goes the old adage, which applies to many segments of the economy, including mortgage bankers. Generally speaking, companies saw applications and locks ramping up in January and early February. Now, unfortunately, locks appear to be down, while extensions and renegotiations are consuming locks desks around the country. Loan agents are getting a “triple whammy”: not only have rates shot up, and a good portion of borrowers still not able to meet guideline or equity requirements, but the long-awaited maximum loan limit changes seem to have disappointed many. Originators have watched OFHEO and HUD taking their time in determining how best to implement the bill signed earlier this month, and in the interim watched some large investors begin to adjust their pricing to accommodate the jumbo conforming loans.

Stagflation? Yesterday it was reported that Existing Home Sales slipped 0.4% in January, and that the inventory of homes for sale edged higher, reflecting a growing imbalance between housing supply and demand. Good for buyers, not for sellers: sales of existing homes are now down 32% from the peak in autumn 2005 (New Home sales are -55% from the peak). This morning the Producer Price Index jumped 1.0% in January on rising energy costs and posted the biggest 12-month gain in more than 26 years. Core PPI, which strips out volatile energy and food costs, was +0.4 percent, the sharpest increase since February. They were expected +.4% and +.2% respectively, so worries about inflation seem to be real – producer prices were up 7.4 percent from January of last year, the steepest climb since October 1981! Later this morning we’ll see Consumer Confidence, Fed Governor Kohn speaking in New York, and the markets preparing for a $24 billion 2-yr auction tomorrow and a $14 billion 5-yr auction Thursday.

Mortgage prices were roughly unchanged before these numbers, and are currently…about unchanged! This is surprising, although there is some feeling that a) the market is “over-done” on the side of higher rates, and b) the continued housing weakness is bound to have more impact on the economy as time goes on. Yesterday the markets got some good news when S&P did not downgrade bond insurers MBIA or Ambac. If they had been downgraded, they would have had trouble guaranteeing debt and strip the AAA label from $1.2 trillion of insured municipal and asset-backed debt.

Wells Fargo announced that they will no longer offer conventional (not including government) ARM products with a Treasury (CMT) index. To be eligible for purchase by Wells Fargo Funding, Treasury-indexed ARM loans must be locked by Friday; after that all conforming and non-conforming ARM products will be LIBOR-based. Market conditions continue to require increased consideration before maximum financing can be deemed appropriate. In addition, Wells’ “At Risk Markets policy” will be revised for their conforming and jumbo loan programs, specifically for loans receiving maximum financing. This appears to put them in line with many other lenders regarding, “If a subject property is located in an area identified by Wells Fargo as Soft, Distressed or Severely Distressed, the maximum LTV/TLTV/CLTV must be restricted to at least 5% less than the maximum allowed for the transaction,” not in addition to any LTV/TLTV/CLTV reduction based on Desktop Underwriter (DU) messaging. Wells does mention that, “Regardless of the strength of the appraisal, maximum financing is not permitted if the subject property is located in an area identified by Wells Fargo as Soft, Distressed or Severely Distressed.”

As time passes, more and more critics of the conforming loan level changes are voicing their opinions. As everyone, and their brother, knows, the conforming loan limit will temporarily rise to 125% of an MSA’s median price with a cap of $729,750 and a floor of $417K, retroactive to loans originated on or after July 1, 2007 through December 31, 2008. This will aid liquidity in the jumbo market, but the help will be temporary, and critics say it will only perpetuate the problem of asset-overvaluation in parts of this country. Upon expiration, analysts feel that there will be another round of dislocation in markets highly exposed to jumbo mortgages. Critics also say that the plan is largely aimed at stabilizing coastal markets – the same markets that have appreciated more than others, partly due to lax credit policies and investor speculation. States in the middle part of the country, which aren’t impacted by the loan limit changes, are seeing foreclosures based on economic hardship versus leverage and speculation.

Speaking of folks losing their homes, according to a recent story in Bloomberg judges in five states have stopped foreclosure proceedings because the banks that pool mortgages into securities and the companies that collect monthly payments haven’t been able to prove they own the mortgages! According to Inside Mortgage Finance, $2.1 trillion of the roughly $11 trillion of outstanding mortgages have been bundled into securities by private banks, and those loans may be sold several times before they land in a security. Mortgage servicers, who collect monthly payments and distribute them to securities investors, can buy and sell the home loans many times, and each time the mortgages change hands the sellers are required to sign over the mortgage notes to the buyers. Sometimes this was completed, sometimes not…

There once was a blind man who decided to visit Texas.

When he arrived on the plane, he felt the seats and said, "Wow, these seats are big!" The person next to him answered, "Everything is big in Texas."

When he finally arrived in Texas, he decided to visit a bar. Upon arriving in the bar, he ordered a beer and got a mug placed between his hands. He exclaimed, "Wow these mugs are big!" The bartender replied, "Everything is big in Texas."

After a couple of beers, the blind man asked the bartender where the bathroom was located. The bartender replied, "Second door to the right." The blind man headed for the bathroom, but accidentally stumbled and skipped the second door. Instead, he entered the third door, which lead to the swimming pool and fell into the pool by accident.

Scared to death, the blind man started shouting, "Don’t flush, don’t flush!"

Rob