THE BASIS POINT

Can Foreclosed Borrowers Get New Loans?, Update On Financial Reform Bill

Short Sales Take 6-13 Months
A study put out by Deutsche Bank ranked GMAC ranked as the top servicer among all prime mortgage servicers based on short sale timelines – six months! The investment bank’s survey showed that a short sale generated a higher recovery than an REO sale. For “prime” short sales, GMAC was the fastest, followed by CitiMortgage (7.5 months) and Wells (8 months). DB’s study showed that BofA was the slowest with a 13 month short sale timeline. For “subprime” Wells came in first (15 months), followed by HomEq and then Saxon. Option ARM short sale speedsters were EMC, Aurora, and GMAC.

Can Foreclosed Borrowers Get New Loans?
Fannie Mae issued a bulletin on Underwriting Borrowers with a Prior Foreclosure, to modify the waiting period that must elapse before a borrower is eligible for a new mortgage loan after a foreclosure. Originally a seven-year waiting period after a prior foreclosure will apply for all borrowers, unless the foreclosure was the result of documented extenuating circumstances, which requires a three-year waiting period with additional eligibility requirements. Fannie also includes a maximum LTV ratio of the lesser of 90% or the LTV ratio per the Eligibility Matrix for all transactions – best to check their grid.

Government Handouts To Troubled Homeowners
I don’t like thinking about where it is “finding” the money, but the Federal government plans on doling out $1.5 billion to five states (AZ, CA, FL, MI, NV) and another $600 million to another 5 (NC, SC, RI, OH, and OR) to help the unemployed and the underwater who owe more than their homes are worth. The Treasury Department okayed the money to subsidize homeowners’ monthly mortgage payments and to reduce their principal. Some of the funds will also go to paying off second liens or facilitating short sales in coming months. Stable housing prices versus moral hazard? Critics are quick to point out that in spite of the billions spent by the Federal government to prop up the housing market, it hasn’t worked. This latest batch of funds will be administered by state housing finance agencies, not mortgage companies, and involve the use of matching funds from loan servicers (details TBA). But servicers are not anxious to write down principal, and Freddie & Fannie generally don’t allow principal reduction on their loans.

Update On Financial Reform Bill
The financial reform bill continues to proceed through reconciliation. Critics are claiming that the bill has more to do with “civil rights” than consumer protection. Apparently the bill gives Treasury the power to liquidate banks that pose a threat to financial stability, but it essentially exempts minority-owned banks and those approved by Acorn-style urban organizers. Of course one doesn’t want to deny qualified minorities access to credit. In its current form the bill mandates placement of a diversity czar in each federal financial agency – including the Fed and its 12 regional banks, and establishing an “Office of Minority and Women Inclusion” within each agency.

More On New Home Sales Declines
Yesterday the New Home Sales number surprised everyone, plunging (in this case, that word applies) almost 33% in May to the lowest level since 1963. Of course, it followed two strong months where buyers rushed into the market due to the tax credit, but there is certainly no big rebound going on in the housing market. Year-over-year, the median price for a new home decreased by 9.6% from $222k to $201k. Regionally, new-home sales plunged 23.9% in the Midwest, 53.2% in the West, 25.4% in the South, and 33.3% in the Northeast. (A monthly report by MacroMarkets LLC found that 56% of the 106 economists and other analysts surveyed expect home prices to decline this year.)

After this data rates dropped, prices improved, and the trend continued overnight with the yield on the 10-yr down to 3.07% before the 5:30AM PST numbers. Tuesday’s $40 billion two-year note sale was stellar, but the $38 billion 5-yr sale did not go well – $30 billion in 7-yr notes will be sold today. The supply of mortgages being sold was about average, and there is still strong demand, so mortgage prices have done well. Just imagine how much profit is in the $1.25 trillion of MBS’s purchased by the Fed! Eventually they will begin to sell them… Of course, higher coupons seem immune to prepayment risk due to their credit impairment and high LTVs amidst the tight underwriting conditions.

Other Economic Stats
Today we’ve had the standard weekly Initial Jobless Claims number. Initial Jobless Claims dropped to 457,000, down from last week’s revised number of 476,000. (As a quick aside, a majority of states (37) saw their unemployment rates drop in May, mostly attributed to people giving up looking for work and therefore no longer being counted. Six states’ unemployment had increases, and seven had no change. Nevada beat out Michigan for the first time in 4 years, and now has the highest jobless rate in the country (14%).)

We also found out the May Durable Goods number: -1.1%, ex-Transportation +.9%, both as expected. Always a volatile number, last month’s advance orders for durable goods rose 2.9%, mostly due to a large surge in nondefense aircraft orders. Durable Goods are a key input into estimating capital spending which has been moving up recently. This spending won’t cause a total economic recovery, but it has certainly helped. For the last year capital spending has grown at almost an 11% annual rate. It helps corporations have a record amount of free cash flow (cash flow minus private nonresidential fixed investment) on their balance sheet, and that by some measures the economy’s capital stock is shrinking, which means firms’ capital will depreciate if they do not invest in new products, equipment, buildings etc. Economists believe that at some point the increase in capital spending will lead to more hiring. For now, the 10-yr yield is at 3.09% and mortgages are about .125 better in price.

Daily Humor
The kids filed back into class Monday morning. They were very excited – their weekend assignment was to sell something, then give a talk on productive salesmanship.

Little Sally led off: “I sold girl scout cookies and I made $30,” she said proudly, “My sales approach was to appeal to the customer’s civil spirit and I credit that approach for my obvious success.”

“Very good,” said the teacher.

Little Jenny was next: “I sold magazines,” she said, “I made $45 and I explained to everyone that magazines would keep them up on current events.”

“Very good, Jenny,” said the teacher.

Eventually, it was Little Johnny’s turn. The teacher held her breath.

Little Johnny walked to the front of the classroom and dumped a box full of cash on the teacher’s desk. “$2,467” he said.

“$2,467!” cried the teacher, “What in the world were you selling?”

“Toothbrushes,” said Little Johnny.

“Toothbrushes,” echoed the teacher, “How could you possibly sell enough tooth brushes to make that much money?”

“I found the busiest corner in town,” said Little Johnny, “I set up a Dip & Chip stand, I gave everybody who walked by a sample. They all said the same thing, ‘Hey, this tastes like ‘sewage’!”

“Then I would say, ‘It is. Wanna buy a toothbrush?'”