May 29, 2014

Mortgage Rates Drop Abruptly; Now Approaching 4%

After tying the record for most consecutive days with no change, mortgage rates moved significantly lower today.  The significance isn't due to the size of the move--as far as day to day changes go, there have been bigger.  Rather, the impressive part of today's rally is that it occurred while rates were already effectively at the lowest levels in 11 months, further extending an already strong move lower over the past two months. 

Through yesterday, rates had been giving the impression that the string of recent improvements was leveling-off and waiting for more important information on the horizon.  In that context, today was an utter blindside.  It wouldn't have been as surprising if rates merely began drifting lower ahead of those key events.  They sometimes do that after leveling-off in such a manner, but today was anything but a drift.
The most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution) is already close to 4.0%.  Some lenders are there already while others are offering substantially lower costs at 4.125%.  After today's move, few lenders remain competitively-priced at 4.25%.  For imperfect loan files, however, 4.25% is still a sweet-spot in terms of up-front cost vs contract interest rate.

While today's drop in rates is encouraging, markets will now be more sensitive to data and events that suggest a move in the other direction (such as a stronger-than-expected GDP revision tomorrow).  Despite that sensitivity, the first move higher in rate after this rally runs its course isn't likely to be the biggest one.  That affords some decision-making time to those inclined to float (but who also accept that they might be faced with the decision to lock at slightly higher rates than the previous day.  

May 26, 2014

Fixed rates hit low for year

According to Mortgage Professionals America...Fixed mortgage rates hit new lows for the year this week, according to data released by Freddie Mac.

“Mortgage rates continued to decline this week as industrial production slipped by 0.6 percent in April, below the market consensus forecast,” said Frank Nothaft, vice president and chief economist for Freddie Mac. “Meanwhile, housing starts jumped 13 percent in April to a seasonally adjusted annual rate of 1,072,000 units, well above expectations. Permits rose to a seasonally adjusted annual rate of 1,080,000 in April, also above expectations.”

The average rate for the 30-year fixed-rate mortgage dropped to 4.14% this week from last week’s average of 4.20%. The 15-year FRM averaged 3.25% this week, down from last week’s 3.29%.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 2.96% this week, down from last week’s average of 3.01%. The 1-year ARM held steady at 2.43%.

May 13, 2014

Wells Fargo Joins TD Bank in Easing Credit Standards

Wells Fargo & Co., the biggest U.S. home lender, two weeks ago cut its minimum credit score for borrowers of Fannie Mae- and Freddie Mac-backed loans to 620 from 660. The step followed moves by smaller lenders, such as the U.S. unit of Canada's Toronto-Dominion Bank, which lowered down payments to 3% without requiring mortgage insurance for some loans. The impact of these moves points to a couple of factors in the market - one, that banks like Wells Fargo are looking to broaden their portfolio horizon; the other is that these banks might have increased confidence in the economy.

Banks ratcheted up borrowing requirements after the most severe housing crash since the Great Depression, preventing as many as 1.2 million loans from being made in 2012, according to an Urban Institute paper. Lenders rode a wave of refinancing until a spike in borrowing costs last year gutted demand, forcing the biggest banks to cut more than 25,000 mortgage jobs. Now they're removing barriers to mortgages for some borrowers in hopes of reviving a shrinking market.

"We threw the baby out with the bathwater because we had to," said Rick Soukoulis, chief executive officer of San Jose, Calif.-based lender Western Bancorp. "From there, you start to inch back. If you keep selling only what isn't selling, you're just dead."

Contract Mortgage Processing in all 50 states
Lowering standards - good for home buyers. Hope it does not go to new lows !! 

In March, credit standards were the loosest in at least two years, according to a Mortgage Bankers Association index. The measure, based on underwriting guidelines, rose to 114 from 100 when it started in 2012. The index would have been at about 800 in 2007, meaning credit was eight times looser that year, before standards were tightened.

Home buyers with higher debt and lower FICO credit scores are now a growing minority among borrowers of loans backed by Fannie Mae and Freddie Mac, the government-owned mortgage giants.
Almost 16% of the mortgages for home purchases in March went to borrowers with monthly debt obligations exceeding 43% of their pay, according to data compiled by Morgan Stanley. That's up from 13.4% in mid-2012. Federal rules deployed in January expose lenders to liabilities if their mortgages without government backing require payments that, when combined with other debts, exceed 43% of the borrower's income, without proof they can be repaid.

More than 23% of the mortgages in March went to property buyers with credit scores less than 720, an above-average measure on Fair Isaac Corp.'s scale that ranges from 300 to 850. That's an increase from 15.6% in mid-2012, according to Morgan Stanley.

After housing values collapsed in 2008, banks raised their credit standards to the highest level in more than two decades. By 2011, the average credit score of an approved mortgage reached 750, according to mortgage processor Ellie Mae. Fannie Mae required only a score of 620 after raising its minimum from 580 in 2009.

"The pendulum swung too far," said John Taylor, CEO of the National Community Reinvestment Coalition, a Washington-based organization that brings credit and banking services to middle- and low-income consumers. "They over-tightened the standards to the point where qualified borrowers couldn't get access to credit."

The banks boosted requirements partly to stem the costs of having to repurchase soured mortgages. As defaults soared, Fannie Mae and Freddie Mac used a clause in their purchase agreements that let them return loans to lenders if they went bad after faulty underwriting.

In 2009, Fannie Mae asked lenders to buy back $12.4 billion of mortgages, according to a regulatory filing. The number soared to $23.8 billion in 2012, eating into banks' earnings, before dropping to $18.5 billion last year, according to filings.

Franklin Codel, head of production for San Francisco-based Wells Fargo, said clearer communication with Fannie Mae and Freddie Mac about underwriting rules is now allowing the bank to widen credit availability.

"We have more confidence that should the loans go into default we've done our job properly and we aren't going to get a repurchase," Codel said.

While Fannie Mae and Freddie Mac borrowers with lower credit scores must prove the ability to sustain homeownership, Wells Fargo will look for "compensating factors" to close the loan, Codel said. That may include requesting an explanation of a credit history event, reviewing the strength of income and the stability of employment, he said.

Lenders are also relaxing requirements in response to a drop in demand for mortgages. In 2013, a surge in borrowing costs undercut the refinancing boom. Interest rates on 30-year fixed-rate mortgages rose from a record low of 3.31% in November 2012 to 4.58% in late August, according to Freddie Mac surveys. Rates fell last week to 4.33%.

Home prices that have risen 28% since a 10-year low in 2012 have also stymied lending, particularly to first-time buyers. Cash purchases mostly by investors have filled the void, accounting for 33% of sales in March compared with 12% in mid-2009, according to the National Association of Realtors.
In April, Mortgage Bankers Association Chief Economist Mike Fratantoni lowered his forecast for home-purchase loans in 2014 to $626 billion. That compares with $652 billion last year. He also reduced his forecast for total originations this year by $100 billion to $1.07 trillion. In 2013, lenders originated $1.76 trillion in mortgage credit.

As mortgage volumes decline, lenders are suffering losses. Only 58% of independent mortgage banks and bank home-loan units were profitable in the final quarter of 2013, according to a Mortgage Bankers Association survey. JPMorgan Chase & Co., the second-biggest U.S. mortgage lender, said in April that its origination business lost money last quarter and would again do so in the second period.

To increase lending, Wells Fargo has made it easier for borrowers who would have limited equity to include gifts from relatives as part of a downpayment, Codel said. In January, the bank began to accept borrowers with credit scores of 600, down from 640, for FHA loans.
Wells Fargo also will increase its loan-to-value ratios, permitting larger mortgages relative to the worth of the property, in several states this month, Codel said, declining to provide more details. Raising maximum LTVs lowers the requirements for downpayments or minimum home equity that must be maintained in refinances, measures meant to protect lenders or insurers in the case of defaults.

Western Bancorp started offering mortgages with "alternative income verification" at the beginning of the year. So far, the loans are only available to borrowers putting down at least 35%, though the lender hopes to lower that to 30% soon, CEO Soukoulis said.

The lender, which sells the mortgages to community banks, skips the examination of tax returns and pay stubs by using software to vet the income of a self-employed applicant. The technology turns information on their bank statements into data, and then analyzes what it says about their cash flow. The process boils down to "rational" old-school underwriting, Soukoulis said.

The TD Bank unit, which mostly holds mortgages on its balance sheet, in April lowered the downpayment requirement for some loans to 3% from 5%. These mortgages don't force borrowers to take out private or FHA insurance, a typical requirement for loans that account for more than 80% of a home's value. The downpayment can be covered by gifts from family, a government program or a nonprofit.

Peoples Privo Processing is looking to increase its share of the contract mortgage processing business as a direct result of these moves by large banks.

May 9, 2014

Purchase Apps Exceed Refis for First Time Since '09

According to Mortgage News ..Mortgage applications increased 5.3% for the week ending May 2, according to data released today by the Mortgage Bankers Association.

"It's official: we are in a majority purchase market for the first time since 2009," says MBA Chief Economist Mike Fratantoni in a press release. He attributes the jump in purchase applications to lower mortgage rates and job market growth, but notes the volume of applications is down 16% from last year.

The MBA Weekly Mortgage Applications Survey showed that the average rate for 30-year fixed-rate mortgages of $417,000 or less fell from the previous week to 4.43% from 4.49%. Rates for 30-year fixed-rate mortgages of more than $417,000 decreased to 4.29% from 4.37%, their lowest levels since last June.
Refinances accounted for 49% of mortgage activity, down slightly from 50% in the previous week. Adjustable-rate mortgages accounted for 9% of all activity.

Mortgage Rates Drop to 3-Month Lows Ahead of Important Data

Mortgage rates fell at the fastest pace in over a month today bringing them to their lowest levels since early February.  The motivation for a move of this size isn't readily apparent, but tomorrow's Employment Situation Report is likely a factor.  The underlying reasons for that are complex, but the gist of it can be explained with an analogy. 

The financial market participants that trade the securities that end up affecting mortgage rates are like attendees at a sporting event.  They may be out of their seats, moving around the stadium, getting a drink or what have you in the time leading up to the start of the game, but there's some sense of urgency to take one's seat and pay attention to the opening pitch, kick-off, jump-ball, etc.

In this metaphorical stadium, there are no assigned seats either, so there can be jockeying for position right at the start of the game and the moments leading up to it.  The same is true for the jockeying of trading positions in financial markets.  Simply put, everyone is trying to find their best seat before the game starts--their best balance of trading positions before the big employment data.

This frequently leads to the sort of faster-paced movement we're seeing in bond markets today.  Unfortunately, that's tended to go against us on most instances of the big jobs report, but this time, it's been in our favor.  The important thing to understand about it is that it's NOT necessarily indicative of where rates want to go tomorrow.  It just happens to be the easiest spot from which to approach and digest the first play of the big game.  With no assigned seats in this stadium, if that play moves to the other end of the stadium, traders will follow in an even more frantic manner.

What does that mean for you?  Essentially, "lock if you got em."  It could be the case that the jobs data is much weaker than expected and rates continue to improve.  But the fact remains that we have the best rates in 3 months today and a report tomorrow that is more than capable of causing this welcome move lower to turn around and head higher.  To be clear, tomorrow is ultimately all about how the jobs report comes in, but from a risk/reward standpoint, there are few clearer locking opportunities.  In fact the riskiest aspect of locking today is that it seems like such an obvious choice.
The most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution) moved down to 4.25% in most cases, but 4.375% is still close.

220K jobs created in April 2014

ADP said there were 220K private jobs created in April and they revised the March number from 191K to 209K. A little better than 210K expected but didn’t cause a lot of reaction because fifteen minutes later Commerce released the advance GDP report for Q1, it was expected to have slipped from +2.6% in Q4 to +1.1%, as reported the advance GDP was a feeble 0.1%. Prior to the ASDP data the 10 yr note traded -2/32 to 2.70% after the two reports in fifteen minutes the 10 was unchanged. The very weak GDP, while scary on its surface, the weather in Q1 likely had more negative impact on the economy than what had been thought. Keep in mind that this is the advance report and always is revised a month later when the preliminary report includes more data from the third month of the quarter. We believe when we see the preliminary report in a month the revision will be higher. Since the end of Q1 and the end of weather issues, gains in retail sales, employment and manufacturing at the end of the quarter indicate the setback will be temporary. Within 30 minutes of the releases of the data the stock and bond markets were essentially unchanged. In 2013 GDP was up 1.9%, falling from +2.8% in 2012.  
The weekly MBA mortgage applications as on Wednesday were released early this morning and the data wasn’t good. The Market Composite Index, a measure of mortgage loan application volume, decreased 5.9% on a seasonally adjusted basis from one week earlier.  The Refinance Index decreased 7% from the previous week.  The seasonally adjusted Purchase Index decreased 4% from one week earlier. The unadjusted Purchase Index was 21% lower than the same week one year ago. The refinance share of mortgage activity decreased to 50% of total applications from 51% the previous week. The refinance share is at its lowest level since July 2009.  The adjustable-rate mortgage (ARM) share of activity remained unchanged at 8% of total applications. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) remained unchanged at 4.49 percent, with points decreasing to 0.38 from  0.50 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) decreased to 4.37 percent from 4.41 percent, with points decreasing to 0.14 from 0.34 (including the origination fee) for 80% loans.  The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to 4.17 percent from 4.20 percent, with points decreasing to 0.10 from 0.41 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.53 percent from 3.55 percent, with points decreasing to 0.31 from 0.33 (including the origination fee) for 80% loans.

Already this morning the MBS market has shown high levels of volatility. It is the same story, the 10 yr note is coiling like a pissed off rattler, the narrowing trading range is something to follow carefully; the bulls and bears are balanced now. Once the balance shifts the move will be rapid in the direction of the breakout, the deeper look remains the same; the overwhelming consensus is for rates to increase. So far that view has remained but real money in the real market caps any of the near term comments. We believe rates will eventually increase but price action over the last four months doesn’t agree at the moment.