Fed Increases TAF to $200b, Home Equity At 1945 Levels
My parents bought their house in 1967, paid off their loan in 1997, and have no interest in this “reverse mortgage stuff.” It is often surprising how many own their homes outright. But last week the Federal Reserve (in their US Flow of Funds Accounts report) announced that Americans’ percentage of equity in their homes fell below 50% for the first time since 1945, which is when they began measuring this. Homeowners’ portion of equity slipped to 49.6% in the second quarter of 2007, and declined further to 47.9% in the fourth quarter – the third straight quarter it was under 50%. That marks the first time homeowners’ debt on their houses exceeds their equity since the Fed started tracking the data in 1945.
WaMu, who still offers 2nds to “select brokers”, is rumored to be ending that product by mid-March.
Macquarie Mortgages USA stopped taking applications, due to the significant increase in the cost of funding new mortgages resulting from the deterioration in global credit markets. They made a point of saying, “While we are ceasing new mortgage applications, the quality of Macquarie’s US mortgage portfolio remains high with no sub-prime exposure and very low default rates. This is not a closure of the business. It is a withdrawal from the writing of new mortgages only.”
It is Bear Stearns turn in the hot seat, although they are sharing the spotlight with Elliot Spitzer. Bear Stearns, the second-biggest underwriter of mortgage- backed bonds, said in a statement that “there is absolutely no truth to the rumors of liquidity problems” and the company’s finances “remain strong.” Yesterday their shares declined 11% on the New York Stock Exchange, the lowest level in 5 years. “There’s an insolvency rumor and concerns on liquidity, that they just have no cash,” said one trader.
Flagstar Bank announced that they have adopted the new increased FHA loan limits that apply to certain high-cost areas. The new loan limits allow loan amounts as high as $729,750 for one-unit properties (as high as $1,094,625 for one-unit properties in Alaska, Hawaii, and the U.S. Virgin Islands), $934,200 for two-unit properties ($1,401,300 in AK, HA, and the U.S. Virgin Islands), $1,129,250 for three-unit properties ($1,693,875), $1,403,400 for four-unit properties ($2,105,100 in AK, etc.). The maximum loan limits vary by geographic area and one should visit https://entp.hud.gov/idapp/html/hicostlook.cfm Flagstar’s FHA loans with a gross loan amount of $500,000 or more will require a minimum credit score of 600. Flagstar reminds us that, “At time of this memo’s release, all necessary changes to fully implement these product updates may not have been completed within Flagstar’s systems. However, this memo takes precedence over system issues. Loans registered and/or locked in contravention of these new guidelines will be deemed invalid.”
Indymac Bank announced the release of increased loan amount limits for Agency Eligible products. The GSE’s (FNMA & FHLMC) have adopted a similar strategy to HUD, and will now be allowing for higher loan amounts based on high-cost areas. Indy is pricing the new products using a separate rate sheet, and that the guidelines changed as a result of the increased loan limits and that the GSE’s have developed specific guidelines for loans that are seeking Agency eligibility under the new loan limits. “Fannie Mae has indicated that loans that receive a DU decision of Approve/Ineligible based on a higher loan limit will NOT be eligible under the new guidelines.” Indy also reminds us that the industry has not yet updated the automated underwriting systems to reflect the new loan limits and so these loans will have to be underwritten and processed manually. At this point Indy will be making changes to their FHA program in early April.
Indymac, however, discontinued some programs effective April 1. Programs include “Agency Eligible Fast Forward”, “Alt- A Preferred Interest Only Products: 3/1, 5/1, 7/1,10/1 LIBOR ARM and 30 Year Fixed.” In addition, Indymac announced that rate lock extensions will be based on “worst case” pricing with no exceptions, and, in order to help their profitability, pricing concessions will no longer be permitted for any reason.
Why are mortgages widening (i.e., losing value) versus other benchmarks like treasuries? There is little interest from buyers, whether they be Wall Street firms (who in past times would securitize the product, but not now), investors wanting to “hunker down” ahead of the end of the quarter, banks concerned with retaining capital to cover potential losses in other sectors and being defensive & preferring to buy debt from AAA rated sectors. According to the FNMA trading desk, Asian buyers have been noticeably absent as well. So when large sellers, such as servicers, come into the market, prices are easily driven down in a thinly traded market.
The Fed came back into the market in dramatic fashion this morning, announcing that they are increasing their Securities Lending Program by $200 billion, which, very basically, allows primary dealers to exchange mortgage-backed securities, and a variety of other instruments, for Treasury securities. This will help increase liquidity. What did this do the market? It certainly helped the stock market, but drove down the odds of a 1% rate cut next week and the 10-yr yield has shot up to 3.60%. Interestingly, mortgage prices, while volatile, are roughly unchanged.