Nov. 13, 2007: Mortgage chatter: Lesson 2 of 5 on MI, and yet more company changes

Nov. 13, 2007: Mortgage chatter: Lesson 2 of 5 on MI, and yet more company changes Rob Chrisman

Speaking of mortgage insurance, the news came out late last week that Old Republic bought a stake in PMI & MGIC. The parent company of Republic Mortgage Insurance Co., Old Republic International, disclosed the acquisition of 15% in two of its rivals in the mortgage insurance business.

At this point, 2nds are “few and far between”, enforced by recent studies that show piggyback loans with FICO scores of 660 or below were 43% – 50% more likely to go into default. This alone would cause investors to switch their focus from buying 2nds to buying larger first mortgages with mortgage insurance, and sure enough loans with MI tend to receive more Accept/Approve recommendations and are a credit enhancement. Mortgage insurance companies tout the “simpler financing”: one loan to close, one interest rate, one set of underwriting guidelines, and they state that this typically results in competitive monthly payment & lower life-of-loan costs.

MI can generally be cancelled (based on loan servicer’s requirements) which will lower the monthly payment, but in the mean time there are two annual premium types: annual (level or declining) and split-premiums. Annuals are the old way of MI: MI is collected annually (included in PITI), it is cancellable, it is refundable (prorated), it is tax-deductible, and the first year premium could be paid as an NRCC. Splits are a hybrid of One-Time MI and Monthlies: an upfront premium is paid by the builder/seller/borrower (there are limitations on concessions), there is a significantly reduced monthly policy that the borrower is then responsible for (through PITI), it is cancellable, it is refundable, it is tax deductible, and it is also available on Alt-A products. There’s also One-Time MI, where the MI is collected upfront in a single premium… it offers some advantages, but is expensive. Most people opt for LPMI. From a pricing standpoint, MI companies say that the splits are good because of pricing to the borrower once the up-front portion is paid. They are limited by investors, though. Annuals are widely accepted but are more costly to the borrower over the long-run, even if the first year is paid.

On to the market – rates on 30-year mortgages fell for the third straight week, dropping to the lowest level in five months. Analysts attributed the decreases to mounting evidence that the economy is starting to slow. Thirty-year fixed-rate mortgages, 15-year fixed-rate mortgages, five-year adjustable-rate mortgages, and one-year ARMs all dropped. If you’ve locked in a loan with any wholesale lender prior to last week, you should check out moving it to the Bank!!

• Wells Fargo wholesale announced to their broker clients that SIVA 2nds are “Going Away” next week, which impacts standalone and piggyback transactions.
• Fannie Mae said its third-quarter loss widened to $1.52 billion. For the first nine months of the year, Fannie Mae’s net income plummeted to $1.5 billion from $3.0 billion in the same period in 2006.
• Wachovia Corp said the pretax value of collateralized debt obligations (CDOs) invested in asset-backed securities declined by $1.1 billion last month. That’s on top of a $1.3 billion write-down during the third quarter.
• Fitch Ratings downgraded the ratings on $37.2 billion in collateralized debt obligations that were part of 84 transactions. Fitch also affirmed ratings on $6.9 billion worth of CDOs.
• E*Trade Financial (not ELoan!) saw its stock price crumble 55% Monday morning after an analyst at Citigroup said there’s a 15% chance the depository could go bankrupt.

The first two important pieces of data will come tomorrow morning with the release of October’s Producer Price Index (PPI) and Retail Sales figures. The PPI measures inflationary pressures at the producer level of the economy, and is expected +.2%. There are two portions of the index that are used- the overall reading and the core data reading. The core data is the more important of the two because it excludes more volatile food and energy prices. Since consumer spending makes up two-thirds of the U.S. economy, Retail Sales is watched closely. Current forecasts are calling for an increase in sales of approximately 0.2%. Thursday we will have the Consumer Price Index (CPI), expected +.3%, and on Friday we have October’s Industrial Production. The 10-yr stands at 4.24% and A-paper prices are slightly better.

An atheist was walking through the woods, thinking, “’What majestic trees! What powerful rivers! What beautiful animals!” As he was walking alongside the river, he heard a rustling in the bushes behind him. He turned to look. He saw a 7-foot grizzly bear charge towards him. He ran as fast as he could up the path. He looked over his shoulder & saw that the bear was closing in on him. He looked over his shoulder again, & the bear was even closer. He tripped & fell on the ground, rolled over to pick himself up but saw that the bear was right on top of him, reaching for him with his left paw & raising his right paw to strike him.

At that instant the Atheist cried out, “Oh my God!” Time Stopped. The bear froze. The forest was silent. As a bright light shone upon the man, a voice came out of the sky. “You deny my existence for all these years, teach others I don’t exist and even credit creation to cosmic accident. Do you expect me to help you out of this predicament? Am I to count you as a believer?” The atheist looked directly into the light, “It would be hypocritical of me to suddenly ask you to treat me as a Christian now, but perhaps you could make the BEAR a Christian?” “Very well,” said the voice. The light went out. The sounds of the forest resumed. And the bear dropped his right paw, brought both paws together, bowed his head & spoke: “Lord bless this food, which I am about to receive from thy bounty through Christ our Lord, Amen.”