Feb. 29, 2008: Happy Leap Year. CalHFA sets FICO minimums, and so is loan servicing a good thing?

Feb. 29, 2008: Happy Leap Year. CalHFA sets FICO minimums, and so is loan servicing a good thing? Rob Chrisman

To make it into the ranks of the top 40 servicers, according to Inside Mortgage Finance, a company needed $20 billion of servicing on their books. Countrywide and Wells each have about $1.5 trillion (Bank of America has about $520 billion). These servicers will continue to face a high volume of ARM resets through most of 2008, and many of these resetting loans are of weak credit quality originated during a period of very aggressive underwriting in 2006. Many expect delinquencies to continue higher due to expectations of continued problems in the housing and credit markets and challenges posed by the portfolio of ARM loans due to reset. Lower rates may help, as will Fannie & Freddie & FHA changes. Servicers are likely to respond with additional loss mitigation efforts, but foreclosures, REOs and losses will nevertheless rise as many borrowers will not qualify for loss mitigation options and even some who do will not be able to continue paying under the new terms. If there is a “good” side, prepayment rates are likely to remain low. But servicing loans is becoming more expensive. Servicers continue to increase staffing levels in loss mitigation, foreclosure, and REO management. Servicers with smaller portfolios may be unwilling or unable to make the necessary investments and may therefore be at a competitive disadvantage, and the large may become larger. Expect more consolidation in the mortgage servicing industry in 2008.

The California Housing Finance Agency, known as CalHFA, announced that for conventional loan reservations done after March 7th, for loans with a LTV greater than 95%, CalHFA will require the borrowers to have a minimum FICO score of 680. Loans with an LTV equal to or less than 95% will require a minimum credit score of 620.

“The spread between mortgage and Treasury yields is on everyone’s watch list: why is the 10-yr doing ___ and mortgage prices aren’t doing anything? Last week 30-year mortgages were almost 3.00% higher than Treasuries! Normally in the mid-1% range, are today’s borrowers really 3% “riskier”? Some of this is due to lack of investor demand, while some analysts feel that when volatility declines, mortgage rates are likely to improve on a relative basis. Wall Street is seeing the volume of ARM production rise relative to fixed-rate production. Who can blame borrowers when the yield curve is this steep? FNMA reported that 5/1 adjustables accounted for 2/3 of the sales, given that they’re up to 1% lower in rate.

In an article for the New York Times, Alan Binder brought up a drastic measure that the federal government may resort to in order to resolve the huge number of foreclosures: the Home Owners’ Loan Corporation, which ran from 1933 to 1951. Established to help distressed families avert foreclosures by replacing mortgages that were in or near default with new ones that homeowners could afford, the HOLC did so by buying old mortgages from banks in exchange for US government bonds and giving the homeowners new loans.  The HOLC financed itself by borrowing from capital markets and the Treasury. Back then, almost 20% mortgages in America became owned by the HOLC! The primary targets were owner-occupied, primary residences, free of fraud.

The march toward lower rates continued yesterday, and again today (mortgages are .125 better in price, and the 10-yr is down to 3.60%). U.S. Personal Income and Personal Consumption in January rose more than expected, but inflation ate up a bigger portion of these as a key price index also rose. The Commerce Department reported that PI was +.3% and PC was +.4%, both higher than the +.2% that was expected. The “personal consumption expenditure price index”, a key measure of inflation, was +.4% in January after an upwardly revised increase of 0.3 percent in December. Excluding volatile food and energy costs, the personal consumption expenditure index rose 0.3 percent – in line with analysts’ expectations and the steepest monthly rise since September 2007. The personal saving rate, meanwhile, stood at negative 0.1 percent, marking the third straight month in negative territory.

A man walks in a bank, gets in line and when it is his turn he pulls out a gun…and robs the bank!  Just to make sure he leaves no witnesses. He Turns around and asks the next customer in line. "Did you see me rob this bank?" The customer replies, "Yes!" The bank robber raises his gun, points it to the customer’s head and BANG!!!

He quickly moves to the next customer in line and says to the man, "Did you see me rob this bank?"

The man calmly responds … "No, but my wife did!"

Rob