WeeklyBasis 7/22/09: Fed Outlines Rate Strategy, Fine-Tuning Appraisal Process

Rates on conforming loans up to $417k and super-conforming loans up to $729k continue to trade up and down as much as .5% per week but as of today we’re net even on lows we touched 10 days ago. Rates on Jumbos from $729k to $3.5m are competitive for borrowers with strong down payments, income and credit profiles, but borrower scrutiny—even for the most stable borrowers— and property scrutiny is still growing. More on property appraisals in next section.

Ten days ago, markets were reeling from the jobs report which showed 467k jobs lost in June, then last week consumer and producer inflation data came in hotter than expected and pushed rates higher by as much as .375%. Then today Fed chairman Ben Bernanke said that there are “limited inflation pressures” which caused a rally in bond markets, pushing rates lower again—when bond prices rise in a rally, yields (or rates) drop. Bernanke also laid out how the Fed would bring rates up after an “extended period” of “highly accommodative monetary policy.”

The main point Bernanke made was that they don’t have to rely solely on hikes to Fed Funds and Discount Rates like many think, but they can also adjust interest levels on bank reserves held with the Fed, and engage in open market activities like selling mortgage bonds to hike rates (remember they’re making $1.25 trillion in net purchases this year to hold rates down). That said, it looks like the Fed won’t actively engage in rate hike activities for the rest of this year, at least. Also to watch this week is the seemingly imminent bankruptcy of business lender CIT which doesn’t look like it’s getting a bailout from government, bigger banks, nor bondholders. The ripple effects of a failure will rattle markets but mortgage bonds could benefit.

Appraisal Update
Since May 1, the Home Valuation Code of Conduct (HVCC) mandated that mortgage loan officers can’t order appraisals; instead, their order request gets assigned by the bank to an appraiser. The biggest issues seen so far are appraisers taking an extra conservative stance on values and there’s no process for disputing that stance, and appraisers who don’t know a local area being assigned to value assets in that area—and especially large problem in a place like San Francisco where values can change materially block to block.

Banks are realizing these issues, but some banks are able to fine-tune their HVCC-compliant appraisal processes more quickly and effectively than others. Under HVCC, banks either have created internal appraisal divisions that run a stable of approved appraisers or contract with outside Appraisal Management Companies (AMC) where they have to work through the AMC for all orders and changes to process.

A bank with an appraisal division can fine tune more quickly than a bank using one or more AMCs. As HVCC rolls on, the two issues that most need fine-tuning are: (1) the ability for a borrower or Realtor to dispute an appraisal, and (2) the ability for the bank to assign appraisers with local expertise to a specific appraisal order.

RPM Mortgage has its own appraisal division and already has an HVCC-compliant dispute process in place. RPM is also in the process of categorizing approved appraisers by region so orders can be assigned to local appraisers.

Borrowers and Realtors can bring recently sold comp data—usually the same comps used to set a bid or asking price for the home—when they meet an appraiser for an inspection, though appraisers have no obligation to take the data (and they have access to the same data). As borrowers shop for home loans, it’s critical to ask specific questions about the bank’s appraisal process. If the bank doesn’t have a dispute process, transactions and budgets could be at risk—appraisals must be paid in advance with the majority of banks.

CONFORMING RATES ($200,000 – $417,000) – 1 POINT
30 Year: 5.0% (5.18% APR)
FHA 30 Year: 5.0% (5.18% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 1 POINT
30 Year: 5.375% (5.55% APR)
FHA 30 Year: 5.25% (5.43% APR)

JUMBO RATES ($625,500 – $3,500,000) – 1 POINT
30 Year: 6.375 % (6.55% APR)
10/1 ARM: 6.25% (6.39% APR)
5/1 ARM: 5.25 % (5.43% APR)