What is Quantitative Easing? Investor Raises FHA Minimum FICO to 640; New Mortgagee Letter
At the mortgage banking conference in Atlanta, this was overheard from a woman attendee: "I looked at him and wondered, 'Do I want this man spending weekends with my children in the future?'" Ouch.
Yesterday I wrote about candy corn, and whether or not the three flavors taste different. This ignited a firestorm of e-mails. Perhaps the highlight was a comedian discussing how all candy corn was actually produced in 1911, and we're just eating candy left uneaten from previous years. WATCH THE VIDEO
Some days there is a lot of mortgage news, and other days not. Yesterday was a slow news day - not necessarily a bad thing. Many of the movers and shakers are attending the conference in Atlanta. There, of course, conversations are mostly revolving around buy backs and turn times, along with guarded comments about "What will Elizabeth Warren do?"
The bond markets are consumed with Quantitative Easing II. "Quantitative" refers to the fact that a specific quantity of money is being created; "easing" refers to reducing the pressure on banks. Many economists feel that the Fed's (Federal Open Market Committee) next moves will reflate the US economy. But buying Treasury debt to push long term government bond yields lower will not directly transmit lower funding rates to any important parts of the economy (like mortgages or credit cards in the household sector). For mortgage bankers, the $1.25 trillion of buying of agency 30yr MBS's was meant to lower mortgage rates for households, but only a small portion of the $11 trillion of household mortgage debt has been able to qualify and the rest remains around 6%. Analysts believe that we could see $1 trillion of additional Treasury purchases per year in addition to the roughly $400 billion in maturing MBS that will be replaced by Treasuries - but will it help the US consumer?
The Fed meets next week, and further moves are already priced into stock and bond market levels. As I mentioned recently, when the US government, who prints money, wants inflation, it is not a wise strategy to bet against them. The QE II that the press is consumed with is a form of government monetary policy used to increase the money supply, when necessary, by buying government securities or other securities from the market. This increases the money supply by giving financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing appears when banks' interest rates (overnight Fed Funds, discount rates, etc.) have already been lowered to near 0% levels and have failed to produce the desired effect. The major risk of quantitative easing is that although more money is floating around, there is still a fixed amount of goods for sale. And as we all know, with more cash and the same amount of goods, inflation usually increases, which in turn pushes rates (like mortgage rates) higher.
But currently, in our low inflation environment, low rates have not been enough to maintain an adequate money supply, and quantitative easing is employed to increase the amount of money in the financial system. The first step is for the central bank to create more money by crediting its own account (I wish I could do that!). This newly "created" money is then used for buying government bonds, or mortgage-backed securities, which in turn puts more money into the system. But a big drawback is that an increase in money supply to a country's financial system has an inflationary effect by diluting the value of a unit of currency - and thus we see the dollar plunging.
Central banks are typically more concerned about faster inflation, but that certainly is not the issue now, and since overnight rates are near 0% and the purchase $1.7 trillion of securities has not had as much impact as they would have liked, next week the Fed will be discussing more purchases of Treasuries to flood markets with cheap money as well as strategies for raising inflation expectations to prevent stagnating prices from undermining the recovery.
For mortgage rates, however, no one is looking for much of a move one way or the other. "QE2 is already baked in the cake" as one economist put it. How and when the Fed will initiate new measures to stimulate the economy are good questions. Deflation is bad, a little inflation is good, and too much inflation is bad. Got it? Any increase in inflation is necessary in this environment but, any increase, or perceived increase, is not supportive to continued lower rates at the long end of the curve or mortgages. READ MORE ABOUT QEII and MORTGAGE RATES
HUD released a Mortgagee Letter which "eliminates the requirement that the sum of all liens not exceed the geographical maximum mortgage limit for both purchase and refinance transactions. Only the FHA-insured first lien is subject to FHA's maximum mortgage limits." HERE is mortgagee letter 10-35
US Bank National Wholesale Sales division notified clients that starting Monday, all Government loans, both FHA and VA, must have FICO scores greater than or equal to 640 for all borrowers on the application. This includes AUS decision loans, either LP Accept or DU Approve Eligible, and Manually Underwritten loans. FHA loans above $417k have a higher minimum FICO, and VA loans have other minimums based on loan amount, LTV, and program.
Yesterday's Treasury auction of $10 billion of 5-year inflation indexed notes was "ok", but not great. On the plus side, the National Association of Realtors released Existing Home Sales data for September, showing an increase of 10% versus August. This number includes completed transactions that include single-family, townhomes, condominiums and co-ops. We are still about 19% below a year ago. $2.8 billion of MBS's were sold and mortgages finished the day worse between .125-.250. (The 10-yr closed the day at 2.55 %.) Numerous investors had intra-day price changes. As one BofA trader wrote, "Higher equities, looming treasury auctions, and a large seller in futures space sent the rates market tumbling this afternoon. With the buyers finished for the day, mortgages were left vulnerable into lower prices."
A man is dining in a fancy restaurant and there is a gorgeous redhead sitting at the next table. He has been checking her out since he sat down, but lacks the nerve to talk with her.
Suddenly she sneezes, and her glass eye comes flying out of its socket toward the man.
He reflexively reaches out, grabs it out of the air, and hands it back. "Oh my, I am so sorry," the woman says as she pops her eye back in place. "Let me buy your dinner to make it up to you," she says.
They enjoy a wonderful dinner together, and afterward they go to the theater followed by drinks. They talk, they laugh, she shares her deepest dreams and he shares his. She listens.
After paying for everything, she asks him if he would like to come to her place for a nightcap and stay for breakfast. They had a wonderful, wonderful time.
The next morning, she cooks a gourmet meal with all the trimmings. The guy is amazed. Everything had been so incredible!
"You know," he said, "You are the perfect woman. Are you this nice to every guy you meet?"
"No," she replies. "You just happened to catch my eye."