Jul. 17, 2007: Mortgages: FHA foreclosure news

Jul. 17, 2007: Mortgages: FHA foreclosure news Rob Chrisman

Are you a great investor? Good for you! Scientists have found that if you present people with an even chance (coin toss) of winning $150 or losing $100, most will refuse the gamble even though it is to their advantage to accept it. (Multiply $150 by .50, and -$100 by .5, and you come out ahead $25, so if you do this bet 10 times you could expect to gain $250.) However, the typical brain does not like ambiguous situations, and fear overrules logic. Interestingly, people who have had small amounts of damage to either the amygdale, orbit frontal cortex, or right insular cortex portions of their brains (that help control fear) end up accepting bets like this one, and making more money than “normal” people!

We had a nice improvement yesterday on continued speculation that losses on subprime loans will demand for government debt and perhaps force the Fed’s hand in cutting rates: the traditional flight to quality. The 10-yr got down to 5.04%, although it bounced back up this morning to 5.07%. This morning we had June’s Producer Price Index -.2%, but the “core rate”, excluding food & energy, was +.3%.  The core rate was expected to +0.2%, so the number was slightly more inflationary than expected. For over a month the bellwether 10 yr note has swung between 5.00% and 5.20%, and to move below 5.00% will require very soft inflation readings over the next two days.

Ben Bernanke testifies on Wednesday and Thursday – will he discuss the impact of food and energy components effecting inflation forecasts? Until now the Fed and therefore markets have ignored the run up of overall inflation readings that include food and energy, however there are signs that the Fed may be paying more attention to the climb in both sectors as inflationary concerns. And speaking of energy, oil continues to creep up toward $75/barrel.

Borrowers with subprime loans are now ending up in foreclosure twice as often as borrowers with FHA-insured loans, said Brian D. Montgomery, assistant secretary for housing and the federal housing commissioner for HUD. Of the 10 states with the highest percentage of FHA-insured loans, only three (Texas, Indiana and Utah) also rank among the top 10 for foreclosures, new federal data show. The FHA’s current strong position follows a sharp dip in its market share. Between 1996 and 2006, the FHA’s share dropped 25 percentage points, from 32% to 7%, among minority borrowers, the same class of borrower that (according to the Center for Responsible Lending) provided the single-largest rush into the subprime mortgage market. The GAO report linked the drop in FHA’s share of the overall mortgage market to the popularity of adjustable-rate mortgages and other unconventional loan products generally disallowed in the FHA program, and the hassle of filing the paperwork to do an FHA loan. Many originators found the fees on interest-only and zero-down payment loans, which the FHA won’t insure, higher than with government loans. In an interesting footnote, the National Association of Mortgage Brokers told GAO that many of its members couldn’t afford to meet the FHA’s financial requirements for brokers writing FHA-insured loans: a brokerage business must have a minimum net worth of $63,000 and provide annual audited financial statements.

Shaky went to a psychiatrist. “Doc,” he said, “I’ve got trouble. Every time I get into bed, I think there’s somebody under it. I get under the bed, I think there’s somebody on top of it. Top, under, top, under. “You gotta help me, I’m going crazy!” “Just put yourself in my hands for two years,” said the shrink. “Come to me three times a week, and I’ll cure your fears.” “How much do you charge?” “A hundred dollars per visit.” “I’ll sleep on it,” said Shaky. Six months later the doctor met Shaky on the street. “Why didn’t you ever come to see me again?” asked the psychiatrist. “For a hundred buck’s a visit? A bartender cured me for ten dollars.” “Is that so! How?” “He told me to cut the legs off the bed!”