What is a Credit Spread?, Payday Lending, Down Payment Assistance

Credit Spreads
What is a “credit spread”? It is a yield difference, usually compared to a US Treasury security with a similar maturity, which reflects the issuer’s credit quality. One indicator that the bank could be in trouble is the widening of its credit spreads, evidence that investors believe the debt is riskier. Washington Mutual’s spreads are much wider than Lehman’s, which are already wider than Bear Stearns were shortly before it was taken over by JP Morgan Chase in March. WaMu’s stock is also at its lowest point in seventeen years, and has fallen 92% since July of last year. A buyer might be interested in their depositor base…

Payday Lending
If originators are tired of the recent rate volatility, they can always turn to “Payday” lending. This is typically a small, short-term, high interest loan that is intended to bridge the borrower’s cash flow gap between pay periods, and has grown tremendously in the last 20 years. Payday loans are secured by access to the individual’s checking account, typically through a postdated check or an automated authorization, usually through retail outlets or the Internet. Most are only two week loans. In Texas, for example, the payday business is nearly a $3 billion industry – much of it relatively unregulated compared to mortgage lending. (It is like that in most states.) It is said that Payday loan outlets have more storefronts than McDonald’s and Whataburger combined! Just like bottled water does not have to conform to as many health regulations as tap water, payday lenders largely operate outside any state regulatory system, whereas the products and activities of banks and other financial institutions must meet public standards and safeguards. Interest rates and loan fees vary among states, and lenders usually charge the maximum allowed by state law. The national average hovers around $16 per $100 borrowed for fees and interest.

Down Payment Assistance Programs
At this point the ban on the use of seller-funded down-payment assistance with FHA-backed loans takes affect October 1st. But a compromise may be in the works. HR 6694, which would allow home builders to continue funneling down-payment assistance through nonprofit groups to home buyers using FHA loans, may pass. HR 6694 would automatically allow qualified borrowers with credit scores of 680 or above to use seller-funded down-payment assistance on FHA-backed loans. Borrowers with scores between 620-680, who relied on seller-funded gifts, might be subject to higher insurance premium fees. Borrowers with scores below 620 would be excluded from using down-payment assistance until mid-2009, when HUD would be permitted to expand the program to include them if the Secretary of Housing determined it could be done without putting a dent in FHA’s insurance requiring taxpayer subsidies. Chairman Barney Frank said, “The FHA loved the ban on down-payment assistance (but) hated the ban on risk-based pricing…That seemed to me to offer an opportunity. So (HR 6694) will replace both bans with middle ground.”

Industry News
Union Bank of California (UBOC) reminded their brokers about “GETTING YOUR LOANS MOVED FASTER THROUGH OUR SYSTEM”. “We need a complete file at time of submission. If your file is missing even one item then it won’t be looked at again for 7 days, then it will take the additional days (listed on cycle time) for assignment of file before even getting to U/W.” “Make sure your appraisal is dated within 30 days of the date you submit your loan. If it isn’t then you need to submit a NEW Appraisal with your loan, so again wait until you receive this before submitting your loan.” “It is imperative that the MBFD is uploaded prior to submitting your loan. You will not be able to submit your loan without a mortgage fee disclosure any longer. Prior to submitting a loan to Union Bank, review the fees on the Platform to be sure they agree with the MBFD. Union Bank sends a Good Faith Estimate to the customer using the fees provided on the Platform. Those fees must agree with the MBFD!”

Market news
The markets had some news this morning upon which to chew. The U.S. trade deficit widened much more than expected in July, due to the cost of imported oil. The monthly trade gap swelled to $62.2 billion, the largest since March 2007, from an upwardly revised estimate of $58.84 billion in June. As oil prices shot up in July, the volume of oil imports jumped 15% to 342 million barrels, the highest since June 2004 even though prices were almost double the average of last July. Jobless Claims declined by 6,000 last week according to the Labor Department. And lastly, Import Prices dropped in August due to the cheaper price of you-know-what. And we have $12 billion of 10-yr Treasury Notes to auction. What has all of this done to rates? Treasury rates have been pushed down, with the 10-yr currently in the mid 3.50’s, but mortgage rates are unchanged, and seem to be recovering from their price volatility from earlier this week. There is also some nervousness about tomorrow’s numbers (Retail Sales, expected: +0.3%, Retail Sales, Ex-Autos, expected: -0.2%, Producer Price Index, expected: -0.4%, PPI, ex-food & energy, expected: +0.2%)