Confucius says: “This is how the market finds balance”.

Is the party over? Anyone who has been in this business for any length of time has seen this before. Every now and again, rates drastically shoot up and down within the span of a few days. Yesterday, Mortgage Bonds had their worst single day performance since October of last, losing an astounding 206bp and rounding out the week to a grand total of 363bp.

So, what the hell happened and more importantly, what's next?

The main culprit for yesterday's sell off was supply. Remember Econ 101? The Treasury has literally had the money printers working nonstop to pay for the massive bailout. These hundreds of billions of dollars need to be absorbed by the market. The addition literally weighs on the entire market and drags bond prices lower. Now, also consider the impact of the high volume of refinance transactions. All those loans have been bundled, packaged, and subsequently sold on Wall Street. As those closed loans are now getting turned around and sold, this supply must also be absorbed. While the Fed has been a buyer, they simply can't buy enough to balance all the selling. It's Econ 101, “anytime supply exceeds demand, prices will move lower”. This is how the market finds balance.

Personally (DISCLAIMER: I’ve been wrong before), I think that the lowest rates are unfortunately now behind us. The US Government keeps borrowing (supply), and there are signs that the economy is slowly starting to recover. Unless the market continues to worsen (and it very well just might), I don’t know why rates would come back down to the levels of last week. We will definitely see some improvement from yesterday’s volatility, but the fundamentals will push us higher in the long term. Expect to see some lock opportunities every now and again.

As a friend of mine said yesterday: “I think I’ll take that razor blade to my arm now.”

In other news…

Durable Goods jumped more than forecast as a slow rebound in auto demand and surge in defense spending compensated for declines in general business equipment. The 1.9% increase reported by the Commerce Department was the largest since in over a year, and followed a revised 2.1 percent drop in March that was more than twice as large as previously estimated.

Jobless Claims dropped by 13,000 to 623,000. The number of people collecting unemployment insurance however rose to a record high for the 17th straight time. Who is hiring?

New home sales were reported to a projected pace of 352K, just under consensus estimates of 360K. Inventory is finally moving. I wonder why? Do you think decreased prices and cheap financing has anything to do with it?

More mortgage specific, delinquency rates are hitting record levels with almost 8% of loans currently delinquent. This figure does not count for loans currently in foreclosure, which represent another 3%, so add it up and the combined percentage of loans not current is more than 11%. FYI, this is a really big number! This should continue to weigh on the housing markets, as properties already in foreclosure or about to hit foreclosure will compete with any new listings. And if you were wondering how loan modifications are working? Not so well… According to the rating agency Fitch, mortgages that are modified typically only delay the inevitable and roughly 75% of such loans re-default inside of 12 months.

Ryan Ogata
Senior Mortgage Consultant

“HVCC” my new best friend and $729,750 is finally here.

I am the first to admit that if I had to make a living as a day trader, I would be bankrupt within a month. I guess my fallback plan of being a mortgage consultant will have to do for now, but it seems as if common sense and fundamental laws are being broken every day. Yesterday was a perfect example. The “Bank Stress Test” results were leaked out to the public and further confirmed what everyone already knew. Citi, Bank of America, and Wells Fargo will all require additional capital to stay in business. So what happened? Citi and BofA stock went up 17%, while Wells Fargo went up about 16%. HUH???

The long awaited temporary $729,750 Jumbo Conforming loan amount program has been rolled out by lending institutions everywhere. There are some minor guideline differences from the permanent $625K limit, but all things considered this is a really good loan program to help stabilize the real estate market. Watch out for subordinate financing (2nd mortgages) on refinance transactions and if your client needs cash out, it’s very limited. Second homes and investment properties have been limited to 65% LTV and credit score requirements are stricter than ever. Like I said, minor differences, but the flip side is that it expands conforming pricing some $100K for the next 7 months. Go out and sell!

Last Friday the “HVCC” (Home Valuation Code of Conduct) was put into action. “No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or in any other manner including but not limited to…” To summarize, lending professionals are no longer allowed to “interfere” with the appraisal process for all Fannie Mae and Freddie Mac mortgage applications, and there now exists a buffer between the appraiser and the loan officer. In my opinion, this latest reform to the lending industry comes way too late and is going to cause more problems than it will solve. Think about this for a moment. Here we are right in the middle of a refinance boom and we are about to start adding applications to the system, further impacting lender turn times, before value for the property has been established. Not exactly the brightest move, but only time will tell how this one plays out.

In other news…

Looks like the FDIC is trying to come up with a politically correct term for “junk loans”. They don’t call bad loans “troubled assets” or “toxic waste” any more, instead, they are moving ahead with their “legacy loan” program. Part of the Financial Stability Plan, the Treasury Department has released the details of its public-private investment plan to remove “legacy loans” from bank balance sheets. It is hoped that $1 trillion can be sold using advantageous financing provided by the FDIC and the Federal Reserve (tax payers), including acquisitions of mortgages and mortgage-backed securities. Sales of “legacy loans” should free up obstacles to lending, while sales of legacy securities will unclog the secondary markets and help bring back jumbo financing.

MGIC (Mortgage Insurance) reported its seventh straight unprofitable quarter, posting a $184.6 million loss. Are you surprised? This loss has widened from the $34.5 million loss they posted in the same quarter a year ago, and makes you wonder just how much longer non FHA mortgage insurance transactions are going to be around for.

If you did not know, realtors now have their own credit union. REALTORS FCU serves the 1.2 million members of the National Association of Realtors (NAR), their families and staff. It will offer residential mortgages, along with lines of credit, consumer loans, and checking and savings accounts. The Web site for the credit union is www.realtorsfcu.org. Do you think mortgage lenders will get their own CU soon? I highly doubt it!