THE BASIS POINT

Who Will Do Government-Backed Refis, How A Mortgage Is Approved, Recession Ending?

In late breaking (true) news, my kids brought home their Redwood High School year books yesterday. It turns out that a member of the yearbook staff who designed the cover, in artsy fashion, put in writing that, when viewed in the mirror, reads “Redwood Sucks [male body part]”. It doesn’t help that I believe that he deserves a prize for creativeness – he was expelled days before finals.

Who Will Do Government-Backed Refis?
In addition to my DU Plus High-Balance Conforming refi notes from yesterday, here are some additional investor updates:
Fannie Mae, of course, will buy the loans with no overlays whatsoever from approved sellers.
CitiMortgage correspondent told me that these loans are indeed acceptable for purchase.
Taylor, Bean & Whitaker is buying this product.
US Bank Home Mortgage is offering the DU Refi Plus program. There are a few overlays such as “Existing Fannie Mae loan cannot have MI and needs a minimum FICO of 620. The maximum LTV is 105%.

Speaking of helping borrowers, Freddie Mac announced several changes to its Relief Refinance Mortgage program. Under the program, borrowers can continue to work with their existing servicer to refinance their mortgage. If the borrower chooses to work with another Freddie Mac-affiliated lender, the mortgage will need to be re-underwritten. Freddie will allow the lesser of 4% of the new refinance mortgage amount or $5,000 of closing costs, financing costs and prepaid monies to be rolled into the new refinance mortgage. Freddie Mac’s standard post-settlement delivery fees, up to a maximum of 2%, will apply to the Relief Refinance Mortgage program.

Lender Guideline Updates
Wells’ wholesale group reminded their customers that they will be charged, in most states, $19 in addition to our underwriting/commitment and tax service fees for a flood certification fee must be charged on every loan when ordered by Wells Fargo.

Flagstar is going the way of Citi in dividing customers up into “Star Ratings”, based on pull through, quality, volume, etc. Starting in early August, Flagstar will begin to use their customer profile reports to reward those customers that consistently outperform their peers. Look for a price bump, or hit, of up to .250 commencing in early August versus standard rate sheet pricing. Flagstar also announced that long-time officer Mark Hammond has decided to step down as President and CEO on or before January 29, 2010 (although he will continue to serve as Vice-Chairman and advisor). If you’re interested in the job, the Board is accepting resumes – a desire to live in Michigan from November through April is a plus.

CitiMortgage, starting in less than a month, and regardless of income type or documentation method to be used in connection with the loan, will require each correspondent to have a signed and processed IRS Form 4506-T. This gives Citi the option to obtain the borrower(s)’s tax return transcripts for the two years prior to the loan application date and verify the information provided by the IRS in response to the Form 4506-T as part of each correspondent’s borrower underwriting process. Additionally, each correspondent must provide a properly completed Form 4506-T for tax return transcript for the same period signed by the borrower at the closing for all conventional and government loans (except non-credit qualifying FHA Streamline Refinance and VA IRRRL). It is required for all wage earner, self-employed, commission and all other non-employment income types, all underwriting methods, and whether or not the loan are originated through retail or TPO channels.

How Is a Loan Approved?
I ain’t no underwriter, but some investors are taking a keen interest in the way their customers are treating DTI, or “Debt-to-Income” ratios which are the key determinant of loan approvals. Some underwriters apparently exclude certain types of debt, or carry out the calculation of income or assets in interesting ways. One thing to keep in mind is that automated underwriting systems making conventional loan decisions exclude installment debt with less than 10 monthly payments remaining. When an FHA loan is run through DU or LP, debts less than 10 months remaining are excluded from the debt-to-income (DTI) calculation. Some investors, however, would prefer that when the standard DTI is exceeded consideration should be given to debts that were not considered in the calculation of the ratios, and for underwriters to consider past credit performance (the most useful guide in determining future payment habits) They advise sellers to consider whether the borrower’s assets show sufficient reserves to help them cover debts that have been excluded, and to analyze credit card activity within the credit report to determine if the borrower is relying on credit to support their lifestyle. This would suggest they’re likely to increase their credit debt again even if it is paid off at closing.

Market Update
Back to the markets! Yesterday the Fed was in buying their usual $5-6 billion, but it didn’t seem to help mortgage rates which hit a 7-month high. There just doesn’t seem to be any demand for lower coupon mortgages, and even 5% securities (which include 5.25-5.625% note rates) are near par (100). A late-day rally in stocks didn’t help the bond market after Paul Krugman (the Nobel prize-winning economist) commented that “we may look back and find that this recession ended this summer”. Fortunately prices improved a bit overnight, but we still have a $35 billion 3-yr auction to wade through today. With no solid economic news, the 10-yr is at 3.85% and both the 5-yr Treasury and mortgage prices are better by nearly .250.

Daily Humor
A man feared his wife wasn’t hearing as well as she used to and he thought she might need a hearing aid. Not quite sure how to approach her, he called the family doctor to discuss the problem.
The Doctor told him there is a simple informal test the husband could perform to give the doctor a better idea about her hearing loss.
“Here’s what you do,” said the Doctor, “stand about 40 feet away from her, and in a normal conversational speaking tone see if she hears you. If not, go to 30 feet, then 20 feet, and so on until you get a response.”
That evening, the wife is in the kitchen cooking dinner, and he was in the den. He says to himself, “I’m about 40 feet away, let’s see what happens.” Then in a normal tone he asks, ‘Honey, what’s for dinner?”
No response.
So the husband moves closer to the kitchen, about 30 feet from his wife and repeats, “Honey, what’s for dinner?”
Still no response.
Next he moves into the dining room where he is about 20 feet from his wife and asks, “Honey, what’s for dinner?”
Again he gets no response.
So, he walks up to the kitchen door, about 10 feet away. “Honey, what’s for dinner?”
Again there is no response.
So he walks right up behind her. “Honey, what’s for dinner?”
“BOB, for the FIFTH time, CHICKEN!”