The Re-Emergence of Seller Financing; Problems Modifying 2nd Liens; More Flood Insurance Updates;

If you are ever feeling down about yourself, or that you're just not performing at the top of your game and need a boost, you can WATCH THIS for 90 seconds and compare yourself to this $174,000 a year employee: 

And then there's some development in yet another well-known mortgage fraud case in Sacramento involving properties in six states: READ MORE

CitiMortgage weighed in on the flood insurance issue by telling correspondent clients that, "Despite the NFIP suspension, CitiMortgage continues to require flood insurance coverage prior to the purchase of loans secured by real property located in areas covered by the applicable flood hazard area map. The purchase of any such loans will be suspended pending receipt of proof of flood insurance coverage, if coverage was not already obtained prior to the suspension."

US Bank's National Wholesale Sales Division gave borrowers another option in addition to buying insurance from a private carrier or postponing the loan closing until NFIP insurance can be obtained. "The borrower may complete a flood application form and provide evidence of payment of the premium, with the processing of the flood application held until Congressional reauthorization of NFIP insurance."

SunTrust "will not purchase any loan where the structure resides in a Special Food Hazard Area without proof of flood insurance coverage in the loan file. Unless the borrower has obtained "private" flood insurance, the closing must be delayed until a declaration page is received for the required amount of insurance and the correct flood zone, or until such time funding for the NFIP is restored and SunTrust announces it will accept a copy of the application for national flood insurance along with a copy of the check for the premium."

Any broker will typically recommend seller financing when other lending avenues are exhausted. In fact, in the last 5-10 years, investors have offered programs that usually didn't require the buyer to obtain a loan from the seller, and one has to go back to the 80's, when rates were very high, to see just how popular the practice was. But now the industry is seeing a reemergence of seller financing. The terms are usually different than a conventional loan, but the loans are usually straightforward. An owner typically agrees to transfer title to the home in exchange for a note and a security interest in the property. The note is paid off like a conventional mortgage, though to the seller instead of a bank. Closing costs may be slightly lower: there's no need for an appraisal, for instance, because the seller already knows a property's value. Also, prospective buyers typically cannot qualify for traditional financing unless 70 percent of the building is sold, if it's a new development, according to Fannie & Freddie Mac.

An article in the American Banker by Kate Berry illustrates the problems with the latest government program to modify 2nds. The top four holders of 2nds (Wells, Citi, Chase, Bank of America, owning more than $400 billion of these loans) have agreed to go along with the program, details yet to be released, but there are issues. Home equity loans typically are not originated or tracked through the same platforms that banks use for servicing a first mortgage. Even though the Treasury has instructed mortgage companies to rely on internal mechanisms to track it, a bank that holds the first lien may not even know internally that it also holds a second lien! Folks in the industry know that modifications that reduce the payment on a first mortgage without addressing the second can fail because the consumer's overall debt burden remains too heavy. And holders of the first mortgages are reluctant to take losses unless the second-lien holders do too.

Fannie Mae issued the results of its Home Ownership survey, indicating that despite the recent downturn in the housing sector Americans continue to value homeownership and think about their homes in ways that go much deeper than the financial investment. "The survey also found that the public strongly believes in the importance of upholding the financial commitment involved in buying and owning a home, even during these challenging times when home values have fallen." 

As expected, rates this year have moved up. Did anyone think that they weren't? In a cocktail party discussion, it is a quick and easy statement to make: "Well, the economy is doing well, which can be somewhat inflationary and lead to higher rates, and our government keeps auctioning off more debt to finance our spending deficit." Of course you can go into the details about higher oil and gold prices, the stock market rally, etc. if you like. The yield on the 10-yr hit its highest level since the summer of 2008, and the job numbers are showing some strength. And we all know that the government plans on hiring more census workers in the coming months.

But the economy is still too weak to handle high rates. As Paul Jacob from the Banc of Manhattan noted, this expansion may be different from the last expansion, "which was marked by relatively low rates, low volatility, low inflation and low spreads." This time around the US deficit situation is much worse, adding supply pressures & some long-term inflation fears, and the economy is worse, with negligible current inflation.

All rates have been going up, but what have spreads between MBS's and Treasuries been doing since April 1? Fortunately for originators, spreads haven't done much, and in some cases actually improved. So even though all rates have been going up, mortgage rates, even without the Fed, have not done much on a relative basis - it seems that bank and money manager demand as picked up. It helps, in a convoluted way, that mortgage origination appears to be down, which tends to work in our favor for mortgage rates. No one wants to catch a falling knife, but there is plenty of cash out there waiting to be put to work in buying securities.

Yesterday we had the Pending Home Sales Index, a forward-looking indicator based on contracts signed in February, go up 8.2% in February. This measure stands about 17% above where it was a year ago. This data measures contracts signed, not closings, and a lot can happen in the month or two it takes to process a loan. As mentioned, the 10-year note traded through the psychological 4.00% level, although the market liked the strong 10-yr TIPS (Treasury Inflation Protected Security) auction coming at 1.709%, 4bps through the 1PM levels, a record 3.43 bid to cover. Today, however, is another day, and we have $40 billion in 3-year securities to buy. (Tomorrow we have $21 billion in 10's, and on Thursday $13 billion 30-yr bonds.) And we are seeing a bounce this morning: the 10-yr is down to 3.95% and mortgage prices are better between .250-.50.

A police officer pulls over a speeding car.

The officer says, "I clocked you at 80 miles per hour, sir."

The driver says, "Geez, officer, I had it on cruise control at 60, perhaps your radar gun needs calibrating."

Not looking up from her knitting the wife says, "Now don't be silly dear, you know that this car doesn't have cruise control."

As the officer writes out the ticket, the driver looks over at his wife and growls, "Can't you please keep your mouth shut for once?"

The wife smiles demurely and says, "You should be thankful your radar detector went off when it did."

As the officer makes out the second ticket for the illegal radar detector unit, the man glowers at his wife and says through clenched teeth,"Damn it, woman, can't you keep your mouth shut?"

The officer frowns and says, "And I notice that you're not wearing your seat belt, sir. That's an automatic $75 fine."

The driver says, "Yeah, well, you see officer, I had it on, but took it off when you pulled me over so that I could get my license out of my back pocket."

The wife says, "Now, dear, you know very well that you didn't have your seat belt on. You never wear your seat belt when you're driving."

And as the police officer is writing out the third ticket the driver turns to his wife and barks, "WHY DON'T you shut the *&^ up??"

The officer looks over at the woman and asks, "Does your husband always talk to you this way, Ma'am?"

"Only when he's been drinking."