Where Should 30yr Rates Be?, Producer Prices Flat, Housing Starts Stronger, FHA Limits Cash-Out
Where Should 30yr Rates Be?
In a “perfect world”, where should 30-yr mortgage rates be? Traditionally, and of course tradition has little to do with the current credit markets, 30-yr fixed mortgage rates are about 1.50% above the 10-yr yield. (Traditionally, servicing companies assumed that they would have the mortgage on their books for 10 years.) With that in mind, and the 10-yr chopping around 3.0%, one might expect mortgage rates to be in the mid-4% area at par. The Fed is doing their best to bring rates down to that level, with some success, and hopefully other investors in mortgage-backed securities will join in – the Fed can’t buy every mortgage-backed security forever, can they? Regardless, in spite of traditionally being 1.5% above, most originators are pretty happy to have the spread at 2% versus the 2.5% which is where it recently was.
Fannie Mae’s Net Worth Requirement For Lenders
As brokers continue to want to become mortgage bankers, it is important to keep in mind investor minimum net worth requirements. Namely Freddie and Fannie’s, since the goal of many a mortgage bank is to be approved to sell directly with them, and then sell the servicing elsewhere. (Of course there are many other conditions for approval, and any originator should contact their Fannie or Freddie rep for details.) Freddie Mac has a net worth requirement of between $2-$5 million, based upon business type. A seller would need a higher net worth if they sell on a servicing released basis rather than a servicing retained basis, and Freddie also looks at whether the company originates loans on a TPO basis or a retail basis.
Fannie Mae has a published minimum “Lender Adjusted Net Worth” of $1.65 million for “approved seller/servicers and $2.5 million for new lenders seeking Fannie Mae approval, plus a dollar amount that represents one-quarter of one percent (.25%) of the outstanding principal balance of its total portfolio of mortgages serviced for Fannie Mae.” Click here for more details.
More Work For Loan Agents
Are brokers and loan agents rolling in business these days? Not really. What one loan agent said, “I am working 10 times as hard for 1/10th as much business, and I am having to leap over the tall buildings of credit scores and appraisal to make things work.” Another told me, “Every deal continues to be difficult – there are few slam-dunk borrowers or properties out there right now.”
Producer Prices Flat, Housing Starts Stronger
We had some economic news out this morning. (Looking back to yesterday, Industrial Production fell 1.4% in February, as did Capacity Utilization which was down to its lowest level ever since records began in 1967. The Empire State’s Business Conditions Index dropped to a new low of -38.23 in March – not that anyone was looking for a big increase.) The Producer Price Index, which measures the prices paid to factories, farmers, and other producers (hence the name) was +.1%, lower than expected. The core rate was +.2%. As one would expect, the recession is forcing sellers to cut prices or hold them steady given the slow demand, giving the Federal Reserve more flexibility to keep interest rates near record-low levels until the economy improves. However, Housing Starts were unexpectedly strong in February, +22.2%, the biggest percentage rise since January 1990. That was also the first increase since April last year. After the numbers the 10-yr yield is 2.94% and mortgage prices are roughly unchanged.
FHA Cash-Out Refis Capped at 85% LTV
The FHA, due to risk issues (and hopefully no one is out there saying, “Risk issues? What risk issues?”), has reduced the maximum LTV for cash-out refinances. Starting April 1, on supposedly a temporary basis, the LTV of any cash-out refinance insured by the FHA may not exceed 85% of the appraiser’s estimate of value. Keep in mind that underwriting and eligibility requirements for cash-out refinances include new subordinate financing. If new subordinate financing is being offered by whomever, the CLTV is limited to 85% when combining the FHA-insured 1st and any new junior liens. The FHA clarified things by saying “existing subordinate financing may remain in place but is subordinate to the FHA-insured first mortgage, regardless of the total indebtedness or CLTV ratio, provided the borrower qualifies for making scheduled payments on all liens.”
Daily Humor
Two Irishmen, Patrick & Michael, were adrift in a lifeboat following a dramatic escape from a burning freighter.
While rummaging through the boat’s provisions, Patrick stumbled across an old lamp. Secretly hoping that a genie would appear, he rubbed the lamp vigorously. To the amazement of Patrick, a genie came forth. This particular genie, however, stated that he could only deliver one wish, not the standard three. Without giving much thought to the matter, Patrick blurted out, “Make the entire ocean into Guinness Beer!”
The genie clapped his hands with a deafening crash, and immediately the entire sea turned into the finest brew ever sampled by mortals. Simultaneously, the genie vanished. Only the gentle lapping of Guinness on the hull broke the stillness as the two men considered their circumstances.
Michael looked disgustedly at Patrick whose wish had been granted. After a long, tension-filled moment, he spoke: “Nice going Patrick! Now we’re going to have to pee in the boat!