Buy vs. Rent Analysis, Good Economy Equals Bad Rates

Obviously the Mortgage Banker’s conference hasn’t hit Disneyland quite yet.

Good Economy Equals Bad Rates
You just can’t make this stuff up! Eugenio J. Aleman, senior economist at Wells Fargo stated that “The Biggest Risk Today is an Economic Recovery”. Once again, anyone in the mortgage business wonders which evil they’d rather have: a stalled economy and low rates, or a strong economy with higher rates. Either way, I am sure that a renewal of programs that promoted lending to self-employed borrowers would help, regardless. Wells’ economist said, “The job of the Federal Reserve is going to become more difficult if this ‘recovery’ is for real, because it will have to start ‘mopping away’ all the excess liquidity in the market. Furthermore, because the fiscal expenditure package is back-loaded, that is, it is going to take effect starting in 2010, then that ‘mopping away’ may have to be larger than what otherwise it would have been.”

Buy vs. Rent Analysis
Should a broker always advice a potential client to buy rather than rent? Perhaps not, especially if they want a long-term client. Generally speaking, fixed payments over a long period of time don’t maintain their purchasing power: their “real rate of return” is calculated by subtracting the rate of inflation from the yield. But houses and stocks have prices and earnings that tend to maintain their purchasing power over long periods. Any client wondering about buying versus renting should be made aware that renting tends to make the most sense in weak real estate markets. And what have most areas of the US had for the last year or two? Last year housing prices fell about 20% nationwide, and many experts expect it to fall farther in 2009.

Non-FHA Mortgage Insurance Update
PMI Group Inc. lost $115 million in the first-quarter of 2009, compared with a loss of $274 million in the first quarter of 2008. It was better than expected. Revenue increased, although net premiums written fell. PMI, like most mortgage insurers, are increasingly focused on claims rather than writing new business especially since credit-rating downgrades have limited their ability to write new business.

MGIC launched its “New Insured/Servicer RTM Program” for June 1st. This new program is available only to lenders that are not the current insured/servicer. The new program’s parameters match their original RTM program, but with a few additions: MGIC will charge a 50 basis point modification premium to continue coverage on the Refinance Loan at the original premium rate and waive enforcement of the representations and other policy terms associated with origination and servicing of the Original Loan. The maximum DTI allowed will be 45%. Income Documentation Income must be documented per MGIC’s Underwriting Guide, regardless of AUS recommendations or findings, and the refinance loan’s LTV cannot exceed 105%.

Stress Test Results
U.S. Bancorp, Capital One Financial, and BB&T, deemed by the government to have sufficient capital, announced large common stock offerings to repay TARP money. They were among the 19 lenders to undergo government “stress tests” of their ability to weather a long and deep economic downturn, were among the nine found not to need more capital. Other banks have “made noise” about paying the money back, since they view TARP as imposing too many restrictions and controls, but aside from these three and possibly KeyCorp, little has come of it.

Warehouse Lending Update
Warehouse lenders carefully watch the financial health of their mortgage banker customers. Hopefully mortgage banks do the same, although some are pleased just to have a line. Should the fact that Gateway Bank, a source of funding for some mortgage banks, is under a Cease and Desist order from the Office of Thrift Supervision be of concern? Gateway’s deal requires them to preserve and maintain sufficient capital, as you would expect, and puts a limit on unchecked growth along with submitting a revised plan to maintain sufficient capital within 30 days. For anyone looking for a warehouse line, it would appear that Gateway’s “full up” based on their equity position (total assets in relation to net worth). Their application fee was raised to $10,000 and the process can take 3-4 months for approval, so that may limit things. Their stated goal, however, is to offer as many high quality approvals as possible – a good thing for mortgage banks.

Rates Up on Positive Economic News
Rates have been creeping up lately, as the bond market is sensing that the economy may be bottoming up and perhaps heading into stronger times in addition to the Treasury flooding the market with new debt. The economic news last week came in better than expected: Initial jobless claims fell, manufacturing and services contracted at a slower rate, consumer sentiment improved, pending home sales rose for the second straight month, construction spending rose for the first time in six months and the ADP report showed job losses eased in April. Thank goodness for mortgage rates the Federal Reserve Bank of New York Agency Mortgage-Backed Securities Purchase Program is in buying: they had net purchases to $25.4 billion, and the gross purchase total is the second largest ever at $73.9 billion.

Economic Preview For Week
What’s in store this week? No economic news today. Tomorrow we have the Trade Balance figures, and on Wednesday Import and Export prices, along with Retail Sales and Business Inventories. On Thursday things heat up with the Producer Price Index, expected -1.2% and the Core PPI expected at unchanged. We also have Jobless Claims. We finish the week on Friday with the Consumer Price Index, expected -.1%, and the Core CPI +.2%. We also have Empire Manufacturing, Industrial Production, and Capacity Utilization, along with the University of Michigan Consumer Sentiment Survey. Rates have moved a little lower, as you’d expect with the big run-up lately: the 10-yr is back down to 3.22% and the 5-yr Treasury and mortgage prices are better by between .125-.250.

Daily Humor
An elderly man in Louisiana had owned a large farm for several years. He had a large pond in the back. It was properly shaped for swimming, so he fixed it up nice with picnic tables, horseshoe courts, and some apple and peach trees.
One evening the old farmer decided to go down to the pond since he hadn’t been there for a while and look it over. He grabbed a five-gallon bucket to bring back some fruit. As he neared the pond, he heard voices shouting and laughing with glee. As he came closer, he saw it was a bunch of young women skinny-dipping in his pond! He made the women aware of his presence and they all went to the deep end.
One of the women shouted to him, “We’re not coming out until you leave!”
The old man frowned, “I didn’t come down here to watch you ladies swim naked or make you get out of the pond naked.”
Holding the bucket up he said, “I’m here to feed the alligator.”