Is FHA The New Subprime?, 1.5m More Subprime Resets, ISM Data

Where should everyone send their loans? Send them here of course!

Is FHA is really the “new subprime”? If so, if a lender gives a 95 or 97% LTV loan and the market declines by 10%, then what? One reason for the overlays that investors are putting on this product is in an attempt to protect them from possible price depreciation. And speaking of FHA loans, there is some interest in the FHASecure program, announced last year. Eligible homeowners will be required to meet strict underwriting guidelines (history of on-time mortgage payments before the borrower’s teaser rates expired and loans reset; Interest rates must have or will reset between June 2005 and December 2008; Three percent cash or equity in the home; A sustained history of employment; and Sufficient income to make the mortgage payment) and pay a mortgage insurance premium. HUD states that “The FHA has never permitted and will not include pre-payment penalties or teaser rates that are common in exotic mortgages and have caused much of the current market troubles.” Many investors, such as GMAC, Wells, Chase, etc. are buying FHASecure loans, typically with a 2 (two) point hit in price.

The Senate is expected to soon vote on more mortgage-related legislation. Given that, according to the story, 1.5 million subprime ARMs are due to reset in 2008, lawmakers are feeling the heat.

Rates were slightly higher yesterday following an ADP jobs report and Bernanke’s testimony in front of Congress. Interestingly, Bernanke’s testimony caused the market to adjust expectations downward toward 0% for a 50 basis point rate cut. And overnight, the second largest German state bank reported $6.7B in write downs, bringing the total to $232 billion. The only news out this morning was the usual Thursday Jobless Claims, but with unusual results: the number of U.S. workers applying for unemployment benefits shot up by 38,000 last week to 407k. This is the highest level since late 2005 and reinforcing fears that the U.S. economy has stalled. So bonds and mortgages have improved this morning based on investors thinking that the ADP number from yesterday, which doesn’t include government jobs and whose history of predicting the actual employment picture has been spotty, may be misleading again.

Later today the ISM non-manufacturing reading is expected to decline by 0.8 to 48.5 (anything below 50 signals “contraction”). Tomorrow we’ll see the unemployment data, with Nonfarm Payrolls for March expected -50k versus last month’s -63k and the Unemployment Rate expected to rise to 5.0%. With all of this going on, mortgage prices are better than yesterday afternoon by roughly .250, and the 10-yr is back into the mid-3.50’s.