CPI Up Again, FHA Fine Tuning, Remembering Rate Lows
RATE HISTORY FROM 2003 TO PRESENT
From one top agent, on June 13, 2003, when the 10-yr hit its low, “as I was preparing to go to Friday night horse racing at Hollywood Park in Los Angeles, the 10-year note was at 3.07% during the day. Then Monday morning it started to climb, but in the process, I was able to lock my loan in on a 15-year conforming at 4.25% with a (.625) rebate to cover closing costs, then lock my parents in on a 10-year jumbo ARM at 4.5% with a (.375) rebate to cover closing cost, and ‘my brat of a sister’ I locked in at 4.875% on a 30-year fixed with (.500) back to cover her closing cost.”
After the stock market crash of 2001 and 2002, the Fed worried that inflation was so low it might turn into deflation. So it cut short-term rates even further, reducing them to 1% in 2003, which the yield on the 10-yr hit its lows. This certainly contributed toward helping real estate, since it made houses affordable at even higher prices. In 2004, the Fed moved overnight rates up slightly, but longer term rates stayed low as foreign investment in our debt kept their savings in this country. Speaking of the Fed, Barclays changed their forecast for the fed funds rate: they expect the FOMC to raise the fed funds rate 25bp at the September FOMC meeting, and another 25bp at the October meeting, ending the year at 2.50%. The two rate hikes we expect are fairly unique in that we do not think they will be based mainly on changes in the data or the growth outlook, but by deterioration in the inflation outlook and evidence of rising inflation expectations.
Congratulations to our construction lending partner Kevin Daum, who has an article in this month’s Mortgage Originator. “Successfully Originating in the Custom Home Construction Niche” is worth a look (subscription required).
HOW VIABLE IS FHA?
A Tuesday New York Times article stated that the Federal Housing Administration expects to lose $4.6 billion because of unexpectedly high default rates on home loans. The FHA commissioner attributed the unanticipated losses primarily to the agency’s seller-financed down payment mortgage program, which has suffered from high delinquency and foreclosure rates in recent years. The projected loss is the highest in the home loan program since 2004, and officials said the FHA had to withdraw $4.6 billion from its $21 billion capital reserve fund in May to cover the costs. They said the agency, which is self-sustaining, would not need appropriations from Congress to remain solvent. But the FHA is renewing its efforts to end the seller-financed down payment program, which accounted for 35% of its loans in 2007 and had foreclosure rates three times those of traditional loans.
MARKET AND MORTGAGE INDUSTRY ROUNDUP
CitiMortgage announced their new Agency Declining Market Policy, aligning them with Fannie Mae and Freddie Mac (not FHA!). Effective tomorrow, the 5% reduction to maximum LTV/CLTV for property in Declining Markets has been removed for agency conforming loans, including Conventional Economic Stimulus, MyCommunityMortgage, Fannie Flexible Mortgage, and HomePossible. (This does not apply to FHA/VA, Expanded Lending or Non-Agency loans.) In addition, a few weeks ago Citi added the 5/1 LIBOR Interest Only ARM with 10-year I/O period to the line-up of existing products already available.
The market? Energy prices being up 4.4% for May helped drive up U.S. consumer prices by the fastest rate since November. CPI was +.6%, more than the 0.5 percent gain expected. For those that don’t eat or use energy, so-called core prices were up 0.2 percent as expected, the Labor Department report showed. Year-over-year consumer prices rose a larger-than-expected 4.2%, the biggest rise since January – that will help my Dad’s social security check. At 7AM PST we’ll have the early June University of Michigan Confidence report. If the confidence index drops the 0.8 points to 59.3 as forecast, this would be a new 28-year low. The result of the CPI number, after yesterday’s worsening, is that mortgage prices are roughly unchanged and the 10-yr is chopping around the 4.20% mark.
JOKE OF THE DAY (thanks Greg E.):
On my 65th birthday, I got a gift certificate from my wife. The certificate paid for a visit to a shaman living on a nearby reservation who was rumored to have a wonderful cure for “dysfunction”. After being persuaded, I drove to the reservation, handed my ticket to the shaman, and wondered what was next.
The old man slowly, methodically produced a potion, handed it to me, and with a grip on my shoulder, warned, “This is powerful medicine and it must be respected. You take only a teaspoonful and then say ‘1-2-3’.
When you do that, you will be the manliest of men and you can perform as long as you want.”
I was encouraged. As he walked away, I turned and asked, “How do I stop the medicine from working?”
“Your partner must say ‘1-2-3-4’”, the shaman responded. “But when she does, the medicine will not work again until the next full moon.”
I was eager to see if it worked and went home, showered, shaved, took a spoonful of the medicine, and then invited my wife to join me in the bedroom. When she came in, I took off my clothes and said, “1-2-3.”
Immediately, I was the manliest of men.
My wife was excited and began throwing off her clothes. And then she asked, “What was the ‘1-2-3’ for?”
And that, boys and girls, is why we should never end our sentences with a preposition.