Flood Insurance Update; 2% Paid on Impound Accounts; Insurance Against a Drop in Home Values? Sign Me Up!

Well, here we are. The sun managed to come up (so far at least on the East Coast) after the temporary loan limits weren't extended. On Oct. 1, the size of mortgages eligible for purchase by Fannie Mae and Freddie Mac, in a fair number of areas, dropped to $625,500 from $729,750. Lenders & investors have turned up the burners on their portfolio products and/or improved pricing on jumbo lines. There are variations, of course, but currently the difference between rates on agency and non-agency loans is about .625%. Over the last two years that spread has been as low as .5% and more than 1%.

Late last week the Federal Reserve released its 2010 Home Mortgage Disclosure Act database that concluded that this drop will have only a "small" impact on mortgage originations going forward. Researchers at the Fed estimate that in 2010 just 1.3% of Fannie & Freddie mortgages fell between $625,500 and $729,750, but that an additional 2.1% of 2010 home-purchase loans and 2.4% of refis would "potentially" be affected by a decline in Federal Housing Administration loan limits. (For those who care, government-backed loans - FHA, VA, Rural Housing Services loans, which Fed researchers call "nonconventional" loans - comprised 46% of purchase mortgages in 2010, compared to 48% the prior year. "The share of nonconventional loans in the home-purchase market peaked" in April 2010, per the Fed, when FHA raised its upfront fee by 50 basis points.)

But the change impacts more than just pricing. There are operational issues that warrant attention. I received this note: "Rob, what people in the business don't realize is that we could soon be dealing with capacity issues on jumbo & high balance loans. Most lenders have underwriting turn times of a week or more for jumbos. Now there will be more of them. Many of the county limits in the lower cost areas are going from the maximum down to the mid-$400 high balance conventional limit, so although these counties weren't up at $729,750, the ripple effect through the business could be huge. If high balance and jumbo underwriting turn times are bad now, wait a few weeks!"

And we may-as-well throw national flood insurance into the mix.

Honestly I lose track of all the probes out there. (Insert 5^th grade joke here.) But the latest probe news seems to be that California will "no longer take part in a national foreclosure probe of some of the nation's biggest banks...because the nation's five largest mortgage servicers were not offering California homeowners relief commensurate to what people in the state had suffered."

Friday's commentary discussed servicing values, and impounds. My goal is not to list the fifty states, and each one's policy on paying interest on escrow accounts. It is interesting to note, however, that it seems banks have to pony up 2% interest on impound accounts, which is a heckuva lot more than I am earning on my cash in the bank! But that being said, there seems to be some confusion about national versus state banks, and banks within certain states abide by state laws - which are different. MBA and HUD weighed in. Here is some informal information.

"Regarding the fee charged on loans without escrows, there is one more thing to consider.  When a loan has an escrow account for taxes and insurance, the servicer knows that those obligations are being paid.  Without an escrow account the property taxes could go unpaid resulting in a lien on the property or the insurance could lapse resulting in an uncovered loss.  So, apart from the economics of the interest on the accounts there is a risk factor, too." And, "I think the value of impounds also has another perspective to FDIC institutions. The interest on the impounds is one component, but the ability to leverage that 10-1 or 12-1 is what some banks may desire from impounds."

And there were a few comments on the value of servicing from last week's, "But perhaps servicing companies make too much on loans where there are no delinquency issues, and not enough on loans where there are." Matt Ostrander, the CEO of Parkside Lending, noted, "If one is talking about mortgage companies aggregating and servicing their own production then this statement is counter to what we as an industry are trying to achieve. If a mortgage bank aggregates servicing and there are no defaults then they should be paid for that. In essence the less mistakes the more money you make. I think this is the right economic incentive for the right behavior.

In The Great State of Texas (where Dr.  Pepper was invented in Waco in 1885, and the hamburger was supposedly invented in Arlington in 1906), First International Bank was closed and American First National Bank assumed its deposits.

Basic economics suggest that supply and demand is a basic tenant in setting prices. In our case, if mortgage demand is going to be influenced by the Fed, it sure would be nice to know the details. "The Desk" will reinvest principal payments of agency debt and agency MBS in agency MBS beginning today, and today is also the end of the current practice of reinvesting principal payments from holdings of agency debt and agency MBS in Treasury securities. Agency MBS purchases will likely be concentrated in newly-issued agency MBS in the To-Be-Announced (TBA) market, although the Desk may purchase other agency MBS if market conditions warrant. From now through 10/13, look for about $10 billion in MBS purchases.

Fortunately rates are doing well, and should continue to do so for quite some time. All the attention in the market now appears to be focused on the Fed's plan to reinvest principal payments, noted above, and the likely changes to the HARP program. But don't forget FHA & VA loans: although the increase in FHA annual insurance premiums provides lowers the chance of government loans paying off early, there is research chatter suggesting that originators have started to offer FHA mortgage rates that are 25-50bp lower than conventional rates. And investors are worried that delinquencies on 2009-10 GNMA MBS have started to increase, and here was also a 70% increase in FHA-to-FHA refi applications per the latest HUD report.

Home Value Insurance, based in Columbus, Ohio, has rolled out an insurance product in Ohio which is supposed to protect homeowners from declines in property values. When the homeowner sells their home for less than the insured home value, the policy will help cover the loss. The homeowner can lock in the current insured value for 10 years. If prices appreciate, they can purchase a new policy with a higher insured home value. The policy will cover up to 25% of the protected home value and there is a deductible for the first two years of coverage. The product is marketed through independent agents to homebuyers and existing homeowners.  More

Citi rolled out an October pricing special for selected states (AZ, CO, CT, FL, GA, IL, MA, MD, MI, MN, MO, NC, NJ, NY, OH, OR, PA, TN, TX, UT, VA, and WA) ranging from 20-25 basis points. It is better than a poke in the eye. "Fixed Rate and ARM; Conventional, FHA or VA; any loan program, applicable to Best Efforts, Single Loan Mandatory, and Mandatory Trade Desk, pricing incentive is in addition to all other applicable loan level price adjusters, including existing state adjusters, loans must be in all respects eligible for sale to Citi in accordance with the provisions of your Correspondent Loan Purchase Agreement with Citi."

Flagstar spread the word to its brokers that USDA-Rural Development (RD) announced today that beginning October 1, 2011, they will be temporarily without funding. They will issue RD Conditional Commitments (Form RD 1980-18) "subject to the availability of commitment authority." Flagstar Bank will fully approve and continue funding/purchasing up to $25 million of Guaranteed Rural Housing, Doc. #5830 program loans closed with RD Conditional Commitments including such language. "Flag" also clarified that "Jumbo 10/1 ARMs must be in Approved with Conditions status prior to rate lock.  Please see the complete memo for details." Lastly, "Flagstar will begin to offer FHA Insuring Services to all FHA Delegated Correspondents. Lenders who choose this service can rely on Flagstar to complete the FHA insuring function and obtain the lenders case number MIC."

Turning to the markets, rates are low. 'Nuff said? Friday, among other things, we found out that the University of Michigan Consumer Sentiment index "climbed to 59.4 Final for September, and up from 55.7 in August, stronger than the 57.8 consensus estimate" and that the "Chicago Purchasing Managers Business Barometer rebounded to 62.8 in September, the 24th month of expansion." But do these really matter when Europe is a mess, and our national employment picture is dismal? We did, however, have some apparent progress in Europe last week, which helps.

For economic news this week today we have ISM & Construction Spending, tomorrow is Factory Orders, Wednesday Challenger & ADP jobs numbers (always of questionable relevancy), Thursday Jobless Claims, and Friday the employment data. With the U.S. economy seen dangerously close to a new recession, Friday's September payrolls report could add to those concerns. Analysts see just 60,000 new jobs created last month - not enough to keep up with a growing size of the labor force, although still better than the zero job growth registered in August. With all this "excitement", the 10-yr note, which ended Friday at 1.92%, is down to 1.84%, and look for MBS prices to improve by .125 in the early going.


Dan was a single guy living at home with his father and working in the family business.
When he found out he was going to inherit a fortune when his sickly father died, he decided he needed to find a wife with whom to share his fortune.
One evening, at an investment meeting, he spotted the most beautiful woman he had ever seen. Her natural beauty took his breath away.

"I may look like just an ordinary guy," he said to her, "But in just a few years my father will die and I will inherit $200 million".
Impressed, the woman asked for his business card and three days later, she became his stepmother.

(Women are so much better at financial planning than men.)

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog takes a look at Fannie & Freddie & the FHFA, and the changes they have in the hopper. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.