Dec. 10, 2008: apps fall, RMIC & CW issue clarifications, investors pay for the 3-month bill, even Citigroup’s train display being cut

Dec. 10, 2008: apps fall, RMIC & CW issue clarifications, investors pay for the 3-month bill, even Citigroup’s train display being cut Rob Chrisman

“Shoot yourself in the foot” means to do or say something stupid which causes problems for you. Are mortgage rates really going to be pegged at 4.5%, as the press seems to believe? You’ll notice that stories about this rumor have died down, perhaps because it isn’t true? Unfortunately it froze many potential buyers in their tracks, waiting. Many believe that this is precisely the wrong solution to the housing crisis – are rates the problem, or are underwriting guidelines? The plan would have supposedly required Fannie Mae and Freddie Mac to lower rates to 4.5%, and then require the Fed to directly buy the loans after they were made, and hopefully new buyers will be more likely to qualify for larger loans. But artificially suppressing mortgage rates will encourage risk taking and debt assumption, which got us into this mess to begin with. By setting rates below market levels, and buying mortgages that no private funder wants, the government would be creating an even large mortgage entitlement program.

Wouldn’t it be better to adjust underwriting guidelines to help the self-employed borrower, or to work on helping existing borrowers? As one industry expert suggested, “Money should not be spent on loans already bad, since the damage is done.  Money should be spent on making sure no more loans go bad. Sure, sub-5.0% mortgage rates for purchases and refi’s, along with down payment programs for purchases and a government agency program for seconds on refi’s where the LTV is above 100%.”

Speaking of rates, at least we had a nice improvement yesterday as stocks got worse. The 10-yr Treasury was up almost 1 point in price, although mortgages lagged. Pending Home Sales fell less than expected in October, -0.7% m/m versus an expected -3.0%, so perhaps things are improving slightly. This morning we had the Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan falling 7.1% after that astounding number the week before. The group’s refinance index was -.9% while the purchase index plunged 17%. Other than that number, stocks appear to be rallying this morning as the auto bailout take shape. And Treasury prices are down (worse) ahead of today’s $28 billion 3-year T-note auction, with the 10-yr up to 2.74% and mortgages giving back yesterday afternoon’s gains.

An interesting occurrence happened yesterday. The Treasury sold $27 billion of three-month bills at a discount rate of 0.005%, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills Tuesday at 0% for the first time since it began selling the debt in 2001. Therefore, if one invested $1 million in three-month bills at today’s negative discount rate of 0.01 percent, for a price of 100.002556, at maturity you would receive the par value for a loss of $25.56. So you are, in effect, paying the government to hold your money for three months!

RMIC sent out a notice with advance notice of changes to geographic market classifications based on the Federal Housing Finance Agency (FHFA) Home Price Index (formerly the OFHEO Index) for the third quarter of 2008. The new classifications will be effective for all mortgage insurance applications submitted on or after December 19, 2008. In addition, they announced their loan limit guidelines for 2009. The loan limit guidelines below are effective for all mortgage insurance applications submitted on or after January 1, 2009.  

Countrywide clarified their 4506-T Requirement, which originally came out December 1st. Countrywide is requiring a completed and signed IRS Form 4506-T for all borrowers on all loan programs closed after December 8, 2008. Note the following clarifications to this policy: “Non-income qualifying FHA transactions, such as FHA streamline refinances, are exempt from this requirement. The 4506-T form must be completed and signed by the borrower, but does not need to be executed (validated) by the IRS unless required by the specific loan program guidelines. This policy continues to apply to conventional and government loans regardless of income source or AUS findings.”

Today the Treasury is likely to report a budget deficit of about $170 billion, bringing the two-month total to $408 billion. Many economists believe that the deficit will increase to over $1 trillion dollars. Trillion with a “t”. Will it improve, given the various bailouts being discussed, the Troubled Asset Relief Program (TARP), the outlays related to the government’s takeover of Fannie Mae and Freddie Mac, etc.? Not likely, especially since on top of those headline grabbing items are things like a decrease in personal income taxes, corporate income taxes, and property tax receipts at the local levels. What a quagmire. Things are grim when Citigroup, which is trying to cut $50 billion of expenses next year, has decided to stop leasing the elaborate display that for two decades has run in the bank’s headquarters building in midtown Manhattan during the holiday season. The savings for Citigroup will be about $240,000 in 2009.

A fleeing Taliban, desperate for water, was trudging through the Afghanistan desert when he saw something far off in the distance. Hoping to find water, he hurried towards it, only to find a little old Jewish man at a small stand selling ties.

The Taliban asked, “Do you have water?”

The Jewish man replied, “I have no water.  Would you like to buy a tie? They are only $5.”

The Taliban shouted, “Infidel!  I do not need an over-priced tie!  I need water!  I should kill you, but I must find water first!”

“OK, OK,” said the old Jewish man, “It does not matter that you do not want to buy a tie and that you hate me.  I will show you that I am bigger than that.  If you continue over that hill to the east for about two miles, you will find a lovely restaurant.  It has all the ice cold water you need.  Shalom.”

Muttering, the Taliban staggered away over the hill.

Several hours later he staggered back, almost dead, shouting, “Your darn brother won’t let me in without a tie!”