Rapid Refinance Program: Don't Bet On It

The economy is so bad, I bought a toaster oven and my free gift with purchase was a bank...If the bank returns your check marked "Insufficient Funds," you call them and ask if they meant you or them...Angelina Jolie adopted a child from America...My cousin had an exorcism but couldn't afford to pay for it, and they re-possessed her..When Bill and Hillary travel together, they now have to share a room.

The economy is indeed slow, generally speaking. So slow that conjecture is being openly discussed regarding yet another massive government-sponsored refinance/modification plan. I ignored them for a day or two, but figured I'd mention it anyway.

Morgan Stanley put out a research piece suggesting a "change" to mortgage refinancing requirements: "The Fed and market forces have pushed mortgage rates to historic lows, yet many homeowners are unable to take advantage because they are blocked from refinancing. This problem could be addressed if the Government merely recognized its existing guarantee on the principal value of a large part of the mortgage market - the mortgages that are backed by Fannie, Freddie and Ginnie - and acted to streamline the refi process. There are 37 million mortgages outstanding whose principal value is backed by the Federal government. When these homeowners apply for a refinancing, the application is subject to a standard underwriting process that involves an LTV test (requiring a property appraisal), an analysis of the borrower's FICO score, and income verification. We estimate a potential average rate reduction of 125 bp on 50% of the outstanding volume of agency-backed mortgages. In the aggregate, the savings amounts to $46 billion per year."

It sounds good, although both Credit Suisse and Bank of Manhattan analysts and traders quickly offered counter arguments, saying that although lowering rates would be helpful, logistically it is near impossible, and would cause more problems than it would solve.

CS retorted, "(A huge refi effort) faces significant logistical challenges and potentially disruptive market impact including the need to call on the Fed's balance sheet as a nuclear option. A government-induced refinancing wave will come with ample forewarning in the unlikely case it materializes. We note that all government steps so far have provided ample notice - several months. Simply removing loan level pricing adjustments (LLPAs) is not a panacea. There are additional barriers to refinancing by showing significant differences in prepay speeds across different LTV/FICO ranges that are least affected by LLPAs. These barriers include debt-to-income constraints, documentation constraints, cash constraints (inability to pay for refinancing costs), and originator imposed constraints (for example, restrictive underwriting to mitigate put back risk.) The program would have to be structured as a refinancing program rather than a modification program because the former would cost investors and the latter hits the Agencies."

Bank of Manhattan research reads:  "Rumors of an impending refi wave by U.S. gov't fiat, we've been scratching around for the last few days to try to figure out how real this is.  We're simply not seeing any credible leaks from DC or inside-the-Beltway chatter on the topic.  So we've come to the conclusion that this story has been driven by a few Wall St editorials, trying to stir things up mid-summer.  Of course, the gov't could always get around to something like this -- but we need to keep a few things in mind: 

1. Anything that would require congressional approval simply won't happen between now and the Nov election.  Period. 
2. The Obama administration has been relatively cautious in how it's drawn its various programs, generally erring on the side of restriction in order to avoid being accused of too much "giveaways" to undeserving borrowers.  The result has been disappointing volumes on programs like HAMP.
3. Fannie and Freddie are caught in a push-pull between the need to be seen as helping housing and the need to show that they can get back to making high-quality loans again.  Not clear that the FHFA wants to open the floodgates to refi ever

On the investor side, yesterday I noted some overlays that large investors have. One wrote, "We all want solutions but until there is no fear of buybacks, private companies will have their own overlays to limit their exposure. A streamline refinance of any type of loan with no income, no assets, no job, no credit, no appraisal and no risk to the investor/lender would do the trick.  Charge them an up-front MIP of 3 points out of the pocket of the borrower and write the loan only if the borrower is current."

Another wrote, "Just because FHA or VA says something is ok doesn't mean investors will follow - we simply have too much financial liability at stake."

EverBank, which has been known to do a loan or two, now has its name on the National Football League's Jacksonville Jaguars' stadium ("EverBank Field") for at least the next five years. The stadium address is being changed to One EverBank Field Drive - as it turns out, EverBank has had its headquarters in Jacksonville for 50 years.

The mortgage insurance unit of Genworth Financial lost $40 million in the second quarter, still a loss but better than the same period last year when it lost $134 million. The PMI Group's second quarter loss of about $151 million is their 12th straight quarterly loss. It is better than the same period in 2009 when PMI lost $222 million.

CitiMortgage told its brokers, "As a result of successfully demonstrating our commitment to overall quality in the Broker Referral business our Mortgage Insurance providers have agreed to expand their MI eligibility guidelines for CitiMortgage."  CitiMortgage  enhanced several credit criteria to make it easier to do business with it for loans requiring MI, such as raising the LTV from 90% to 95%, lowering the minimum FICO from 720 to 680, removing CA, FL, AZ, and NV from its excluded list, etc.

Wells Fargo's wholesale channel told its brokers that incomplete GFE's will no longer be accepted - period - starting August 16h, and that starting this Monday electronic signatures on purchase agreements will be allowed. Wells also gave brokers some guidance for determining when a termite inspection is necessary for FHA loans, and a credit policy enhancement for home equity rental income documentation.

Bank of America told its brokers that, "An HO-6 policy will be required for Conventional and FHA attached Condominium property type loans (including 2-4 unit projects) submitted to the Wholesale Loan Center on or after August 9, 2010.  The HO-6 policy provides "walls in" or "interior" coverage to the condo unit and includes any items not insured by the Home Owner Association policy. Within this policy, a unit owner's personal belongings, wall, floor and ceiling coverings and any accessories not originally installed in the unit will be covered in case of damage. The Underwriter will be requesting the following prior-to-doc condition: Provide an acceptable Individual Contents and Liability Policy with "Walls In" coverage of at least 20% of the unit's value if the condominium Master Policy does not provide sufficient coverage. The Wholesale Lending website has been updated to capture the HO-6 premium."

US Bank Wholesale reminded brokers of its new 80% CLTV in AZ, CA, FL, MI, and NV which was effective earlier this month. "Minimum 720 FICO score on all applicants, single family dwelling only (condos, manufactured homes and multifamily units not allowed), maximum 45% debt to income (DTI) ratio, maximum $900,000 loan amount, purchase money and rate/term refinances only (no cash/equity out allowed) - 80% CLTV is not available in Clark County, Nevada."

Mountain West Financial, who is offering sponsorship to brokers not currently approved to offer FHA financing, began accepting USDA Rural Housing loans with a Guarantee Fee for purchase transactions of 3.5%. (If the Guarantee Fee comes in lower, watch for a principal reduction.) Loan documents must have an October 1, 2010 or later 1st payment date. And for those not familiar with the program, you can always start with http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?NavKey=home@1

Originators sold less than $1.4 billion on Thursday. Either they're letting the locks float and not hedging them, or production continues to slow. If it is reason (b), congratulations to anyone who is really busy funding loans.  As stocks tailed off, bond prices improved, with the 10-yr heading back below 3%. Investors seem to be in a real quandary about high coupon (current coupon back then) production from recent years. Will borrowers with 30-yr rates above 5.5% refinance? Can they even if they tried? Will rates move down even more, and/or will the Fed step in and buy more mortgages? And if a huge refi takes place, will that make investors skittish about buying mortgages in the future?

As mentioned at the start of this commentary, the economy is pretty slow, and although it is really not a laughing matter, interest rates have benefited from the weakness. Fiscal stimulus by the government has faded, and the private sector has not stepped in yet. GDP estimates have been scaled back over the last several weeks. Today's Q2 GDP report is the highlight of this week's economic data docket, and also included annual revisions going back to Q1 2007. The revisions are at least as important as the Q2 sequential change, because they could change what we know about the depth of decline in output, inventory restocking, as well as the profile of the recovery to date. The 2nd quarter GDP number actually came in at 2.4%, about as expected, although there were indeed some serious revisions. And the Employment Cost Index was +.5%.

Today we've already had the GDP numbers, the Institute of Supply Management numbers, and the Employment Cost Index numbers. Ahead - another University of Michigan survey. After the initial numbers, stocks dropped even more, the 10-yr moved from 2.95% to 2.92%, and mortgage prices appear better by .125-.250.

A drunken man who smelled like beer sat down on a subway next to a priest. The man's tie was stained, his face was plastered with red lipstick, and a half-empty bottle of gin was sticking out of his torn coat pocket.  He opened his newspaper and began reading.

After a few minutes the man turned to the priest and asked, "Say Father, what causes arthritis?"

The priest replies, "My Son, it's caused by loose living, being with cheap, wicked women, too much alcohol, contempt for your fellow man, sleeping around with prostitutes and lack of a bath!"

The drunk muttered in response, "Well, I'll be darned - wow." 

Then he returned to his paper.

The priest, thinking about what he had said, nudged the man and apologized.

"I'm very sorry. I didn't mean to come on so strong. How long have you had arthritis?"

The drunk answered, "I don't have it, Father. I was just reading here that the Pope does."