In the 1990’s it was hard to lose money in the stock market. “Don’t confuse brains with a bull market” was a popular slogan, and in fact was printed on a shirt that we wore on the trading desk at Tuttle & Co. Late in the decade, however, stocks did not look so great. When stocks were running out of steam, and in 2000 when the equity market really fell, people looked around and said, “Hey, how about we invest in real estate? Accounting scandals, like Enron, couldn’t happen in real estate, right?” Suddenly, instead of homes, more and more people began viewing real estate as a way to make a quick buck: “flipping”, “no money down”, etc. gained in popularity. The US government cut taxes, and the Fed cut the discount rate from 6% to less than 1% by late 2002. And although this was not the only cause of some of the mess that we’re find ourselves in, it is a contributing factor.
So now we have things like this clip. To end the week, this YouTube clip is making the rounds among the non-depository mortgage banks out there. If you have sound on your computer, check it out. If not, and maybe he was misunderstood, but it seems Barney Frank wants to completely shut down any non-bank financial institutions. Wake me up when this is over!
Fed MBS Purchase Program Update
To their credit, the Fed is holding up their end of the bargain. In the latest figures for the last week, the Fed bought another $23 billion, or about $4 billion a day: “The Federal Reserve Bank of New York Agency Mortgage-Backed Securities Purchase Program comes within .3 billion of the weekly program net purchase average at $23 billion ($23.3 on average).” Keep in mind the FOMC statement, “To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.” They have been buying mostly Fannie 5.5% securities, which are comprised of 5.75% to 6.125% 30-yr mortgages. This security represents 52% of this period’s net purchases.
How Much Mortgage Banks Make
And according to the MBAA, mortgage banks have been making more money on the loans that they’ve originated. According to them, “mortgage bankers made an average profit of over $1,088 (over a half a point) on each loan they originated in the first quarter of 2009.” This is a big improvement over the 4th quarter of 2008 where average profits were $148 per loan! Of course, current numbers may be different. The MBA’s Annual Mortgage Bankers Performance Report looks at 319 companies that reported production data, 71% of which were independent companies. The “net cost to originate” fell to $1,725 per loan in the first quarter 2009, compared to $2,324 per loan in the fourth quarter 2008. The “net cost to originate” includes all production operating expenses and commissions minus all fee income, but excludes secondary marketing gains, capitalized servicing, servicing released premiums and warehouse interest spread. The average number of retail loans originated per retail sales employee was over 10 loans per month.
FHA Appraisal Update
Anyone doing FHA loans out there should know that next week, starting October 1, HUD has mandated that all FHA-approved lenders must use state-certified appraisers for FHA-insured mortgages!
FEMA Disaster Area
The flooding in Georgia and other states, along with the wild fires in the West, have caused investors to remind clients that they are responsible for being aware of the localities that have been impacted by a natural disaster, severe weather, or are in a FEMA declared disaster area. And any loans on properties located in certain counties must be closely reviewed. SunTrust, for example, requires correspondents to “make sure the property is still in existence using a full appraisal on the appropriate form. The client must represent and warrant the condition of the subject property at time of sale. The following reduced appraisals and appraisal alternatives are NOT acceptable when the property is located in a disaster area: Property Fieldwork Waiver (PFW), Property Inspection Waiver (PIW), Property Inspection Alternative (PIA), Desktop Underwriter Property Inspection Report (2075), or Exterior-Only Inspection Residential Appraisal Report (2055).” Their clients are required to complete “Borrower Property Condition Certificate (COR 0006) for any properties located in the Georgia counties above and any other area locality impacted by a disaster event, with appraisals completed on or after September 20, 2009. Clients should also refer to the specific product description for additional guideline requirements.”
Durable Goods and Existing Home Sales Down
Back to the economics of the housing market. Yesterday we learned that Existing Home Sales fell by 2.7% in August, which was unexpected and broke the string of four increases. Anything can be sold at a certain price, right? (Like my ’89 Datsun hatchback…. Well, never mind.) The median price (half above, half below) was $177,000, which is down 12.5% from a year ago, although sales were up 3.4% versus a year ago. There’s about an 8-9 month supply on the market. This news helped bonds (a weak economy supposedly leading to lower rates) and hurt stocks, which had their second straight down day. It also helped rates that the $29 billion 7-yr note auction went well after a mediocre 5-yr auction the day before. This morning we’ve already seen Durable Goods, and will see New Home Sales at 9AM CST. Orders for Durable Goods (items lasting longer than 3 years) were down 2.4%, the biggest drop since January. Not good for stocks, but good for bonds: the yield on the 10-yr is down to 3.36%, and mortgage prices have improved.
A plane was taking off from Kennedy Airport. After it reached a comfortable cruising altitude, the captain made an announcement over the intercom, “Ladies and gentlemen, this is your captain speaking. Welcome to Flight Number 293, non-stop from New York to Los Angeles. The weather ahead is good and, therefore, we should have a smooth and uneventful flight. Now sit back and relax… OH, MY GOD!”
Silence followed, and after a few minutes, the captain came back on the intercom and said, “Ladies and Gentlemen, I am so sorry if I scared you earlier. While I was talking to you, the flight attendant accidentally spilled a cup of hot coffee in my lap. You should see the front of my pants!”
A passenger in Coach yelled, “That’s nothing. You should see the back of mine!”