Archive for February, 2009

“Stimulus” Tax Credit Update

Most of you know there has been, for about 9 months, a $7500 tax credit for first-time homebuyers for anyone that buys a house from April 2008 to July 2009.  The new “stimulus” package currently wending its way through Congress contains a modification of that credit.

The Senate version of the bill had an increase in the credit to $15,000, made it for ALL homebuyers, and removed the payback provision of the original.  The conference committtee, however, has downsized that credit to $8000, rolled it back to just first-time homebuyers, and protected only the 2009 January to August purchasers from repaying.  If you bought last year, in other words, you get another $500 but you still have to pay the credit back over 15 years.

Personally, I hate it when Congress does most anything, but this back-and-forth, you get the credit but you don’t silliness is not going to help the markets at all.

The credit is targeted at the wrong people, timed incorrectly, is a tax-accounting nightmare and overall one of the stupidest non-ideas I can remember.  And I like tax credits.

More here.

More Details on New FNMA Rules

Thanks to BrokerOutpost, we have the following:

DU Version 7.1 April 09 Update:

Starting April 4, 2009, the DU Refi Plus will take effect
with some of the new enhanced features:

LTV of 80% or less will not be subject to a minimum FICO of 580.

For high balance mortage, of 80% or less, not subject to min 680.

O/O 3-4 units will go up to 80% LTV/CLTV/HCLTV.

O/O 2 units will also go up to 80% LTV/CLTV/HCLTV.

2nd homes and co-ops will go up to 80% LTV (no seconds allowed)

Investment properties will go up to 80% LTV/CLTV/HCLTV.


Salary/bonus/overtime for wage earners: 1 current paystub plus
a verbal VOE.

Commissions/Self-emplohed: One-year federal income tax return.


DU will accept the value submitted as the market value for the
subject property on limited cash-out refi transactions where
the existing loan is owned by Fannie Mae. No appraisal or
even drive-by appraisal is required if the DU Refi Plus
Property Fieldwork Waiver is exercised by the lender.

So this is very interesting.  I would likely qualify to refinance under these new provisions (where I currently cannot), if there were a lender that would do a loan under these requirements. [Note: just because FNMA says it will accept these loans, no lender is required to make them.]

Jury is still out on whether this will be a huge boost, but it should make a positive difference.  Color me tentatively encouraged.

This Just In…

A letter distributed by FNMA says that it will be modifying its loan standards come April 4.  These modifications will reduce credit standards, waive appraisals in some cases, and allow less documentation for income.  It’s a bit light on specifics at this point, but those are the highlights.

This is welcome news for those that need that kind of help – self-employed people – but I cannot help but think that this is exactly the sort of behavior that got us in trouble in the first place.  I suppose it’s possible that this letter is in response to banks’ pressure to ease FNMA restrictions, because they have money to lend but can’t lend it if the loan is outside the currently draconian FNMA rules.  It’s possible.  I really hope it’s the case.

But I wonder.  FNMA is now entirely owned by the government, and this government has already shown itself to be exceptionally willing to throw vast sums at problems that money by itself is not likely to solve.  This could go the way of the Help for Homeowners FHA loans, instated by the government to help people who are behind on their mortgages.  Unfortunately, banks looked at those loans and refused to make them.  So the program is gathering dust on the shelf.  This relaxation of FNMA rules may be a similar thing.

We’ll see.

RateWatch Friday Feb 6

Here’s the thing.  Markets have displayed a huge amount of volatility over the past several months.  Where once mortgage-backed securities (those things that actually control mortgage rates) would trade in a 35bp range on an average day in 2006, today we have 100 bp days all the time, and it’s not all that unusual.  At least, that was true until the last three weeks.  For the last three weeks, we’ve been trading sideways in very narrow ranges, almost always slightly down.  It’s maddening, frankly.  Rates are being ground higher a bit at a time, just a hair here and a hair there, until where once we quoted 4.75%, today we’re talking about 5.375%, and that’s only for those with 740 credit.
So the big question is: what’s going to happen next?  Up or down?
And the answer is: who could possibly know?  There are two wild cards here.  One is Fed buying, which is still going on, but is probably being muted in its effect by Treasury selling of bonds, and the other is the “stimulus” package being argued over in Congress.  Nobody knows what provisions that will contain, and until we do, no bank is going to be interested in lending money.  Why bet your company in a game where the rules might change from one day to the next?
I’ll make a prediction, because you’d be disappointed if I didn’t.  I predict that the stimulus package will pass by the end of next week, and give us a boost to the downside on rates for mortgages that will be powerful but brief, like two or three days brief.  To take advantage of it, you’ll need someone with his finger on the trigger who can lock immediately, but who also can get the loan closed before the lock blows.  Broker underwriting is averaging over 30 days right now.  Our underwriting is 48 hours.  We can – and do – close loans from application to fund in less than two weeks.  The rally we get will be followed by more slow upward grinding, until the middle of this year, when rates will spike as the Fed runs out of buying power.
That’s the call.  Put on your booties ’cause it’s cold out there today.  It’s cold out there every day.

Deep Thoughts on Mortgages

Those of you on RateWatch probably like the fact that the regular RateWatch is only a couple of paragraphs, but some like a deeper technical analysis, and that’s what this is.  No requirement that you read this, but if you find it interesting, great.  We like everybody.

When the Fed buys mortgage-backed securities, it increases the price of those securities and decreases their yields, exactly the same way bonds work.  Now, this affects the market for mortgage rates, because when banks take in locks, they allocate money to fund the loans they have locks for.  This allocation requires the raising of capital, meaning that they must sell on the secondary market – usually through Fannie Mae – the mortgages they’ve already done.  The higher the price they can get for those loans, the more money the make.  The more money they make, and the lower the yield on the securities they have to pay out on, the lower the rates they can offer.  This is why having the Fed supplement the mortgage-backed-securities market by purchasing has been such a boon to interest rates.

It should be noted here that a lot of the buying in that market is being made because the Fed is purchasing as well.  This effect might be even more important than the actual buying; frequently in markets it is the psyche of the buyers, not the quality of the goods, that has the greatest impact on buying.  The fact that the Fed is buying is confidence-inspiring, and that helps keep the buyers in the market.

Right now, as you may have noticed, the economy is doing relatively poorly.  I say “relatively”, because 1) most places are worse and 2) we’ve had such a spectacular economic run the last few years that it makes things seems worse than perhaps they are.  Where the economy actually is right now is anyone’s guess, that is, where it is in relation to production and the supply of goods and labor (raw materials) that make that production possible.  It is certainly the case that we have just as much of raw materials now as we did two years ago.  We have MORE available labor.  So the malaise we’re in right now has nothing to do with a rapid decline in population or with the sudden scarcity of material, both economic problems of a most intractable nature.

No, our downturn is due to two things, both of them highly fixable (though one is much more easily fixed than the other): 1) we owe too much money and 2) we’re scared.  Let’s deal with them in order.

Americans – but not exclusively Americans – have too much debt.  We like to borrow for things, because we like to have them now, and pay for them later.  This can make a great deal of sense.  For instance, if you want to get into a house, it is a good thing to be able to do it right now, instead of having to save $300,000 before you can purchase.   Being able to leverage future income, as mortgage lending allows one to do, means that the economic benefits of home ownership are available to a wider group of people.  One could argue that the rise of mortgage lending, especially high-LTV lending, is one of the greatest levelers in American society.  [Note: those that talk about how "greedy banks" and "Wall Street gangbangers" raped and pillaged their way across the country might want to think for a second about what the previous sentence means.  Fact is, many of those people who are now being foreclosed on were only able to buy a house in the first place because of those risky lending practices, without which they would still be renting and we'd be hearing that "the American Dream" has to be extended to a greater number of people, because somehow a mortgage and a lawn is a basic human right.  Some of those people that got those "risky mortgages" - yours truly, for instance - are sincerely grateful they were available (With the destruction of bank-statement and stated-income loans, I certainly couldn't buy a house NOW, thank you very much, nor refinance the one I'm in, and most of us self-employed people are in the same boat).  We could still have a banking system that required 50% down payments, and the housing collapse would never have happened.  But would it be better if only 20% of the population could own a house?  On the other hand, would we not be better off if young people knew they were going to have to save their money if they wanted to buy something?  See how it's not so easy to just put a black hat on someone here?] But it’s not such a good thing that people can finance a $3000 washer/dryer combo.  You need a place to live; you do not need a front-loading high-capacity washer with automatic fabric-sensing agitation. I washed my clothes in the bathtub for a couple of years.  I know what I’m talking about.

Credit artificially inflates the prices of things, making them easier to buy but the burden of buying them greater.  It also takes advantage of the human inability to see farther ahead than the next good meal, which means it’s easy to get people into trouble by extending them credit and allowing them to pay over time.  Lest you think this is a problem unique to – or even primarily characteristic of – American society, consider that Jesus Christ referenced this same problem in a parable 2000 years ago, and nobody seemed confused about the point he was making.

The solution to the credit crisis is simple, if hard: pay off your debt.  Don’t get into any more.  Don’t borrow any more.  Pay down what you have and live on cash or cash equivalent.  That will fix it, and yes, it will take a while to get used to doing that and it will require a level of fiscal discipline that Generation X is largely unfamiliar with (because their parents, the Baby Boomers, were very busy tring to buy German luxury automobiles and forgetting to save for retirement.  But that’s another column).  It will be hard.  But it isn’t complicated.

The second problem is much more complicated, but not as difficult: we just have to stop being afraid.  How one goes about rejecting fear and worry and replacing them with optimism and confidence I can’t take the time to discuss in this post, though I have dealt with them before and will do so again.  Happiness, confidence, faith are hard to define and practically impossible to measure, but one simple tip is to embrace the worst-case scenario.  As Gerret VanWagoner, my boss, is fond of saying, “money is a coward”.  It’s not the guy that’s flat broke that is afraid to go out and try something (my favorite example is a friend of mine that once was so broke that he went out and picked a basket of avocados to sell on the street corner [he was in Puerto Rico].  Being a gringo, he didn’t know they were a long ways from ripe.  Nobody would buy any.  Finally, a man came along and took pity on him and bought the whole basket, and he survived.  That story always gave me confidence that if things really got bad, I could find something to do), but the guy that is afraid he’s going to lose his Lexus.  People have lost their homes before, and survived.  People have lost their jobs before, and survived.  No one actually starves to death in this country.  Whatever happens – whatever happens – you can survive it and it can make you better.  Believe it.

It’s a long way from the technical stuff at the top to the mushy stuff at the bottom, but the two things are so closely related that there’s no separating them, in my opinion.  Right now, rates are great but it’s very difficult to get a loan.  It’s difficult because people are scared.  Companies are laying off employees because people are selling their stock because they’re scared.  Fear is the mind killer, the little death (first one to email me the reference there wins lunch on me).  Until we beat that, nothing else we do will help very much.  Once we beat that, most of what we’re doing now (especially in Washington) will become moot.