Nov. 14, 2007: Mortgages: Lesson 3 of 5 on MI, CW volume plunge, HR 3915, and why aren’t mortgage prices improving?

Nov. 14, 2007: Mortgages: Lesson 3 of 5 on MI, CW volume plunge, HR 3915, and why aren’t mortgage prices improving? Rob Chrisman

PMI announced that effective December 1st they will no longer insure loans for borrowers with FICO scores below 575, regardless of the LTV or AUS (automated underwriting system) decision.

Can the seller of a house get involved in MI? Below 90% LTV seller concessions can be up to 6%, or 3% above 90%LTV, and usually these are a one-time payment. Split premium product takes a seller concession to buy-down the monthly MI, and it needs to be in an escrow account – the problem with a split premium is not many investors will buy it, thus making it unpopular among lenders. What are the benefits of Single Premium MI? It is generally considered less expensive, there is no monthly MI payment, no need for a 2nd, payment stability (Loan/MI does not adjust), it can provide single monthly savings, it is tax deductible, and if the borrower sells the home, any unused portion of the premium is refunded.

What mortgage insurance might apply to a high-cost area? Most believe that lender-paid MI is “the way to go”. Since the single premium (“OneTime”) MI is refundable the borrower would likely be eligible for a significant refund depending on when the borrower plans on refinancing. Lender-paid MI is not refundable, but the interest is tax deductible regardless of AGI, and is often a less expensive option. Agents should run a comparison: both are options with different benefits.

• Bill Beckman, the president of CitiMortgage, sent out a letter stating that “…at CitiMortgage we continue to focus on growing profitable share through a balanced sourcing model via Correspondent, Wholesale and Retail channels….We continue to be a leader and supporter of the mortgage banking community by supporting and promoting the long-term health and viability of the mortgage lending community….Our acquisition of ABN AMRO Mortgage Group/InterFirst earlier this year, year-to-date Citi maintains its #3 market share in both originations and servicing, our continued support of non-conforming and non-prime products…”
• From the LA Times: Countrywide said its monthly mortgage volume fell 48% in October from a year earlier as it all but stopped making sub-prime loans and sharply cut back on home equity lines of credit. Meanwhile, delinquencies on the mortgages for which Calabasas-based Countrywide handles the billing and other services continued to mount, and their stock is down 68% this year. CW funded $22 billion in home loans last month, down from $41.9 billion a year earlier but up 4% from September’s $21.2 billion. Countrywide funded just $3.2 billion in mortgages through loan brokers last month, a startling 57% decline from the level of a year earlier.
• In addition, CW’s Home Equity group eliminated the reduced doc option above 80% CLTV, entirely eliminated CLTV’s above 90%, and disbanded all ARM subprime lending.

What is the update on HR 3915? The legislation that would place new restrictions on the origination and securitization of mortgages is likely to pass the House later this week. The bill clearly has enough support to pass this chamber, especially after several provisions were modified in order to build broader support. That said, such legislation is likely to meet resistance in the Senate when it comes up sometime next year. “First, provisions to make securitizers liable for abusive loans in their pools may still face resistance in the Senate despite recent modifications. Second, strict loan criteria are likely to create friction as well. Given that foreclosures are likely to continue rising into 2008 as subprime ARM resets continue, we see a fair chance that political pressure will build to enact new lending restrictions, but once the House passes its bill this week, we may not see much further movement for a while.” Interestingly, many banks and lenders want to see the yield spread premium eliminated and have been lobbying legislators to get rid of it for years. That would harm the mortgage brokerage industry, to say the least. Expect lawsuits to be swift and plentiful, should it pass the House, then the Senate, and then be signed into law. Obviously mortgage brokers are not entirely to blame for this crisis – how about the rating agencies, investors, etc.?

Treasury rates have dropped dramatically, but mortgage prices have not followed. Today the 10-yr is at 4.29% yet conforming rates are still in the low 6’s (unchanged so far today). Something similar happened 5 years ago, when the Fed began lowering rates in spite of no one having a good sense for where rates were heading. When uncertainty is present, investors require a greater relative yield to compensate for prepayment risk. “Is the loan I buy now for 102 going to pay off in 4 months?” Until there is better consensus about rates, or things stabilize, expect the same issue to exist. Our flat yield curve has certainly gone away: the spread between a 2-yr and a 10-yr Treasury security is over .75%, whereas a year ago it was less than .12%. Today’s economic news pushed Treasury rates slightly higher: the Producer Price Index was +.1%, better than expected, but year-over-year it was +6.1%. Retail Sales were +.2%, ex-auto +.2%.

A man in South Carolina had a flat tire, pulled off on the side of the road, and proceeded to put a bouquet of flowers in front of the car and one behind it. Then he got back in the car to wait. A passerby studied the scene as he drove by and was so curious he turned around and went back. He asked the fellow what the problem was. The man replied, “I have a flat tire.” The passerby asked, “But what’s with the flowers?” The man responded, “When you break down they tell you to put flares in the front and flares in the back! I never did understand it neither.”