THE BASIS POINT

Will Private Mortgage Insurance Return As Alternative To FHA For Homebuyers With Less Than 20% Down?

Largest Mortgage Lenders & Investors
Who were, and probably still are, the largest mortgage lenders/investors in 2009? There were no real surprises.

Private Mortgage Insurance Making A Comeback?
PMI gave its clients some good news by reducing the minimum FICO score from 720 to 700 for CA, AZ, NV, DE, HA, NJ, and FL and other “sand” states. PMI is also offering 90% LTV on high balance loan amounts (with 740 score), so PMI believes that conditions have improved in certain areas of the country to the degree that it can now adopt a simpler Distressed Markets Policy with a single set of criteria and remove 19 MSA/MSADs from the PMI Distressed Markets List. So, for PMI, properties subject to its Distressed Markets Policy will now be subject to one set of eligibility criteria.

There is also a rumor (I don’t have anything in print) that Radian is rolling out a new 1.25% upfront MI program – up to 95% LTV’s for borrowers with a FICO score above 720 – April.

These program updates are interestingly timed as FHA is set to increase mortgage fees insurance in April, and FHA has also made it very difficult to get FHA condo loans because instead of lenders being allowed to approve specific condo units, HUD now has to approve the condo buildings and they simply don’t have the resources to get it done (lenders can also approve a whole building but lender uptake on that option has been slim because lenders have to take on liability for the whole building). This is a big disservice to homebuyers with less than 20% down who, if they have to use an FHA loan, have big limitations on their condo choices in most markets. So these developments in the private mortgage market are encouraging.

Update on Fed MBS Buying
Let’s talk about the government buying mortgages. Last week the Fed purchased $10 billion net in agency MBS’s, hitting the $1.236 trillion mark. Fannie Mae released more details of the delinquent loans it will be purchasing out of pools. Almost all 6.5% and higher coupon delinquent loans will be bought out in March. Almost all 6.0% coupon buyouts will happen in April, leaving 5.0% & 5.5% in May and June. Fannie said that lower coupons can be bought out ahead of this monthly schedule if they’re 24 months delinquent or ready for permanent modification under loss mitigation (per FNMA) FNMA has announced that it will repurchase 220,000 loans in the April report. The Basis Point has covered the Fed’s MBS program in detail since it began in January 2009, and here’s the latest Fed report from today outlining what the program means for consumers.

Mortgage Underwriters Comment On State of Industry
Yesterday I mentioned underwriter compensation and production, and perhaps was somewhat misunderstood. First, let me go on record that I have nothing against underwriters, and in fact believe that as a group they are often under-appreciated, under-paid, over-pressured, and usually taken for granted. I received a few comments that I will certainly pass along.

“I have been underwriting FHA loans for over 15 years and have always been able to pound out 5-7 loans a day. But in the current environment this is just not physically possible. With the investors becoming so anal about the smallest details and everyone thinking the IRS owes them something, and wanting a piece of the Home Buyer pie it’s made an underwriter’s life a living nightmare. I am working twice as hard as I ever have but producing less because those things that you could have let go a year or two ago you no longer can ignore or some investor will use it as a weapon to make you repurchase the loan – even if you have made a sound underwriting decision. I question everything I do – I need to look up guidelines on every loan since no two investors have the same FHA/VA guidelines anymore. So I wouldn’t expect that my employer would pay me less as I am working harder than ever to protect them and make sure that every loan I do is insurable and will be purchased by the investor.”

“When I managed underwriters in 2003 – 2007 they were making as much as 30% more than they are making today. Some of that is a difference in salary and some is a difference in bonus. Underwriting managers are working today for 30-50% less than they did in 2007 and 2008, including possibly being out of a job at some point in the last few years. The company’s today are not absorbing this at all – they are passing it on to the employee. And like the banks, most senior managers are still getting some form of a bonus, albeit less than what they were accustomed to in past years. In today’s environment, a DE /SAR underwriter is making at least 30% less than they did just 3 years ago, and in the past made 10-15% more than a conventional underwriter but are back to compensation levels from the last decade.”

“Loan officers make less because they close fewer loans due to fewer purchases, the disappearance of stated income, and lower values on would-be refis. Underwriters can get fewer loans done per day because the investors are significantly more demanding. Loan officers have not caught up to what is needed, so from an underwriter’s perspective the issue may be that loan officers are not up to date. Having corporate send a message saying ‘make sure loan files are complete’ is insufficient. On top of that we do have what from my perspective are ‘unreasonable conditions’ which may be, for example, the documentation of all significant deposits into an account even if it started and ended with $5,000 and this is a refi and the borrower needs to bring $500 to escrow. The GEFE 2010 is slowing down docs dramatically. This is all about compliance, and is a disaster. Everyone is charging higher processing fees and a longer rate lock period is needed providing a higher cost to the borrowers. Everyone will pay an extra $200 for a $4,000 mistake that happens 5% of the time.”

NCAA Bigger Priority Than Trading
With no news today, aside from many folks watching the results of the NCAA basketball tournament, the trading today may match yesterday’s (and much of the week’s): spreads steady, moderate selling from originators (e.g., moderate locks), buying from the Fed, money managers, hedge funds, servicers. There is some movement of positions from April out to May in order to avoid some volatility due to the Fannie & Freddie buyouts and the end of the Fed purchase plan on the 31st. Some traders believe that volatility will increase substantially when the Fed exits the market as the street’s appetite for risk remains very low.

Leading Economic Indicators Up 11th Straight Month
As opposed to today, which has no scheduled economic news, yesterday we had quite a bit. I had already mentioned the inflation numbers and initial claims. Later in the morning we also saw the Conference Board’s Leading Economic Indicators increase for the 11th straight month – impressive, and consistent with the belief that the economy has bottomed out and is slowly strengthening. The “Philly Fed” came out slightly stronger than expected, which also helped the equity markets but to the detriment of bonds. In fact, stocks have improved for 8 straight days.

Yield Curve Steepening Eases
The yield curve, which has been steepening, recently has gone the other way. In fact, the slope of the curve, measuring the difference between risk-free Treasury 2-yr notes and 30-yr bonds, fell to the narrowest level in two months. At the short end, futures show a 38% chance that the FOMC will increase the Fed Funds’ target by at least a quarter-percentage point by the September meeting, compared with 49% odds a month ago. With no news today, we find the yield on the 10-yr. Treasury note sitting around 3.69% and mortgage prices worse between .125 and .250 depending on coupon.

Daily Humor
Three old ladies were sitting side by side in their retirement home in Ft. Lauderdale, Florida, reminiscing.

The first lady recalled shopping at the green grocers and demonstrated with her hands, the length and thickness of a cucumber she could buy for a penny.

The second old lady nodded, adding that onions used to be much bigger and cheaper also, and demonstrated the size of two big onions she could buy for a penny a piece.

The third old lady remarked, “I can’t hear a word you’re saying, but I remember the guy you’re talking about.”