HAMP's Political Intentions;More Rural Housing Confusion; Investors Shy Away From Property Flipping; Credit Overlays

By: Rob Chrisman •

Just as I was preparing to send the commentary out, this story flashed across the wires: Elin Nordegren was moved up to 4th on the PGA Tour career money list. Congratulations Elin.

Some things make sense to me, some don't. Recently I announced to my staff (my dog Sweetie) that I have given up trying to figure out the USDA's Rural Development program. Companies like Flagstar and Wells Fargo correspondent are not funding them, whereas others still are. ("Flagstar Bank imposed a $25 million funding cap for Guaranteed Rural Housing program transactions until such time as USDA-Rural Development (RD) received additional funding for the program. At this time, RD funding still is not available and Flagstar has reached the $25 million cap. Therefore, we are suspending the program from any further loan approvals.")

Indeed, the USDA has the funding to resume the Single Family Housing Guaranteed Loan Program through increasing the g-fee to 3.5% and an annual fee of 0.5% of the principal balance. But recently the USDA released an update, saying that its systems would not be able to accept the fee changes until mid-September, at which point it will process all the conditional commitments issues since late May.  HERE is a good write up of the status.

According to the OTS, the 753 federally chartered savings and loans, also known as thrifts, originated more single-family loans in the 2nd quarter (about $31 billion, or about $500 million per day) than in the 1st quarter. These thrifts sold $28 billion in single-family loans in the second quarter, up slightly from the first quarter, but down from the $60+ billion they did a year ago.

Every large investor has credit overlays, so that even though a government agency might accept a certain underwriting guideline the investors won't. CitiMortgage notified clients that it has updated its credit overlays, and sent them out. Versus July's update, the new changes to overlays include changing the down payment on investment properties, tax return requirements for conventional loans, rental income on DU-approved loans, FHA collection accounts, etc.

Disasters happen, with the latest being the flooding in Illinois. Of course no investor wants to loan money on damaged collateral, and so they set up policies and procedures to make sure that properties are adequately reviewed in the event possible large-scale damage occurs between the appraisal and the loan funding. For example, US Bank's National Wholesale Sales Division reminded clients that a re-inspection/certification must be obtained prior to closing or funding of the loan. "In the case of the Illinois flooding the Underwriter (including delegated underwriters and MI Company contract underwriters) will determine whether a re-inspection is required, based on information from FEMA, State, or other resources available. A closing condition will be added to those loans on properties determined to be at risk. If a property is subsequently identified to be within a Federally Declared Disaster Area prior to closing/funding a re-inspection may be required." And the best place to monitor disasters that may impact properties is at FEMA's website.

A Wall Street acquaintance of mine wrote to me about dropping trillions of dollars of mortgages by 1%. "I think that something like it may just happen. Many people I've talked to have said the same thing: 'The money would go directly to the borrowers to help our economy, and totally bypass our government. There would be no claims of the government wasting the money on projects or programs at the taxpayer's expense.'"

A lender wrote, "In your paragraph regarding the HAMP modifications, 'But few people, if any, who follow mortgage statistics are arguing that any of the government's modification plans are working', I would argue that they are missing the point.  It is providing a benefit from the government's perspective.  When the HAMP was rolled out last year it effectively stopped, at least temporarily, many active foreclosures.  This along pushing back many new foreclosures stopped more houses from hitting the market and increasing inventory.  The end game may still be questioned though- was the government looking for an improved economy or another opportunity later to roll out another program to buy votes?"

The government's $700 billion bailout of the financial system (TARP) will be argued about well into the future, but the cost to the taxpayer for TARP continues to drop. The Congressional Budget Office projected that the overall deficit impact of the TARP will be about $66 billion, down from the $109 billion estimate the Congressional Budget Office made earlier in the year, and a significant drop from the initial projection of $350 billion. TARP, as we all recall (or maybe not) gave the government the authority to use $700 billion to prevent the collapse of the financial industry (and a few automakers along the way). Banks are repaying bailout money and automakers are continuing to payback their loans.

"There is an issue coming to a head in our market (Michigan) with companies that operate as a middleman to buy properties, usually distressed, on a short sale from banks.  These companies will do some work, mostly cosmetic and then sell them to an end borrower for what is sometimes a significant profit.  This is becoming controversial between the lenders, who are very uncomfortable with these transactions, and the real estate agents and sellers. We have stopped accepting the loans if there is any type of REO negotiation company involved because the loans are often, well let's say, guideline challenged." So wrote Al, a lender in Michigan.

It is rumored that large lenders are beginning to feel the same way - that property flips may represent an unacceptable risk. For example, flips create quick and substantial profits for the property sellers, but potentially high losses for the investor, and the properties are typically located in areas with a high percentage of distress sales. Investors believe that second home occupancy is often dubious, and borrowers who purchase investment properties out of flip transactions are often gullible, inexperienced in property management and unfamiliar with the area where they are buying. The projected rental income may not be realistic because of an imbalance between rental properties and available tenants, or borrowers may be attracted by supposed guaranteed rental income not disclosed to the lender - which is unacceptable. There is a high potential for severe property abuse by foreclosed borrowers, vandals or squatters, and some properties purchased from institutional sellers do not include interior inspections that would discover plumbing or electrical problems. And often times any renovation is merely cosmetic.

On to the markets. Tuesday bonds rallied and stocks got whacked with a huge drop in Existing Home Sales. Yesterday we learned that New Home Sales fell over 12% to the lowest levels since 1963 and giving us 9 months' worth of inventory at current sales levels. Initially we saw the same reaction as we did on Tuesday, with prices improving and stocks selling off. The 10-yr Treasury moved into the low 2.40% range. But then the psychology changed, for no particular reason other than "we've come a long way, and nothing goes up or down forever - the markets are over-extended". The 5-yr Treasury note auction came with a coupon of 1.25%, and 5 years is a lengthy amount of time to tie up your money and "only" earn 1.37% the entire time. Are things really that bad here, and expected to be that bad for 5 years, in the US? Mortgages went from better by .375 in price to roughly unchanged, which resulted in rate changes from investors zipping around e-mails like flying monkeys.

This morning we had the weekly Initial Jobless Claims number, and $29 billion 7-yr note auction. Claims were 473,000 from a revised 504,000 - a drop of 31,000. Treasuries sold off slightly, nudging rates higher. We need to see evidence in next week's August employment report that the labor market continues to expand, even if only modestly. This morning's number not a particularly great number, but stocks like it because it is not a terrible number. After it we find the 10-yr up at 2.54% and mortgages worse between .125 and .250.

Is fishing better than sex for a guy?

#20 - No matter how much whiskey you've had, you can still Fish.
#19 - A limp rod is still useful while Fishing.
#18 - You don't have to hide your Fishing magazines.
#17 - It is perfectly acceptable to pay a professional to Fish with you once in a while.
#16 - The Ten Commandments don't say anything against Fishing.
#15 - If your partner takes pictures or videotapes of you Fishing, you don't have to worry about them showing up on the Internet.
#14 - Your Fishing partner doesn't get upset about people you Fished with long ago.
#13 - It's perfectly respectable to Fish with a total stranger.
#12 - When you see a really good Fishing person, you don't have to feel guilty about imagining the two of you Fishing together.
#11 - If your regular Fishing partner isn't available, he/she won't object if you Fish with someone else.
#10 - Nobody will ever tell you that you will go blind if you Fish by yourself.
#9 - When dealing with a Fishing pro, you never have to wonder if they are really an undercover cop.
#8 - You don't have to go to a sleazy shop in a seedy neighborhood to buy Fishing stuff.
#7 - You can have a Fishing calendar on your wall at the office, tell Fishing jokes, and invite coworkers to Fish with you without getting sued for harassment.
#6 - There are no Fishing-transmitted diseases.
#5 - If you want to watch Fishing on television, you don't have to subscribe to a special channel.
#4 - Nobody expects you to Fish with the same partner for the rest of your life.
#3 - Nobody expects you to give up Fishing if your partner loses interest in it.
#2 - You don't have to be a newlywed to plan a vacation primarily to enjoy your favorite activity.
#1 - Your Fishing partner will never say, "Not again? We just Fished last week! Is Fishing all you ever think about?"