Government Refinance Assistance

This big question on a lot of minds is how much should we expect mortgage interest rates to increase when the Fed discontinues its purchasing of mortgage backed securities at the end of this month. The reality is that nobody knows. If the markets step up the impact could be fairly small, if not, rates could shoot up. Here is an excerpt from a recent MoneyWatch piece on the subject:

The bigger concern for higher rates, however, may be what happens to the market prices for mortgage rates, as the Fed stops supporting the market for mortgage-backed securities (in the course of the various rescues it has bought over a trillion dollars’ worth). Most economists are nonchalant, but they also confess to not really knowing what might happen. …

And we know that when the credit markets seized up in 2008, so did the MBS market. The Fed came in and bought up much of the MBS on hand, and since then has been buying much of the new supply of MBS, and thus has been a crucial source of funds for creating new mortgages. And because the Fed is the Fed, and wants to help the economy get going again, rates on mortgages have held at very low levels.

Consider this — even though the structure through which most of the mortgages in the U.S. have flowed since the early 1980s went through a big freeze in late 2008, interest rates are at record lows. That illustrates how powerful our Fed is.

What happens at the end of March, when the Fed stops its support of the mortgage market? In the latest report of its balance sheet, the Fed owned $1.029 trillion of MBS, an increase of $960 billion from a year ago. I don’t know how much was just laying around unbought, and how much was created since the crisis, or how much slack the “real” MBS market will have to pick up. But it has to be big, even in a slow housing market.

There is an innovative new government-backed program on deck that is designed to standardize the short-selling process for homes. “Selling short” is when a home is sold for less than the amount owed. The value to the seller is that the banks forgive the debt in full and the get to avoid a foreclosure on their credit history. The value to the buyer is they are presumably getting a bargain. The value to the bank is that they presumably lose less with a short sale than with a foreclosure.

But short sales are notoriously hard to pull off because there are always hidden snags. The federal government is looking into ways to make the process easier and more enticing for all parties involved. We get these quotes from a recent NY Times article on the subject:

Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.

“We want to streamline and standardize the short sale process to make it much easier on the borrower and much easier on the lender,” said Seth Wheeler, a Treasury senior adviser. …

Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.”

There was an interesting article in the Wall Street Journal recently lamenting the fact that so many Americans are missing out on the record low interest rate of the last year by not refinancing. With the Fed set to stop buying mortgage backed securities at the end of this month, rates are very likely to be going up. If you haven’t refinanced yet, have a rate in at 5.75% or higher, and think you could qualify, contact us in the sidebar today.

Here are some bits from that WSJ article:

The Federal Reserve has pushed mortgage rates to near half-century lows, but millions of U.S. homeowners haven’t benefited from that because they can’t—or won’t—refinance. …

Around 37% of all borrowers with 30-year conforming fixed-rate mortgages—who collectively hold about $1.2 trillion of home loans—have mortgage rates of 6% or higher, according to investment bank Credit Suisse. Many could reduce their rates by a full percentage point if they refinanced at current rates…

But new refinance applications in January stood near their lowest levels in the past year. Weekly data compiled by the Mortgage Bankers Association also show that refinance activity has been muted, considering that rates are so low.

“Traditionally, these borrowers would be aggressively refinancing,” said Mahesh Swaminathan, senior mortgage strategist at Credit Suisse.

One indicator of the economic impact of refinancing: Loans that refinanced in 2009 will result in $3.4 billion in savings for consumers this year, according to a report by First American CoreLogic, a research firm based in Santa Ana, Calif. That will return an additional $17.2 billion in savings to borrowers over the next five years. That’s money consumers can potentially use to help spur economic recovery.

President Obama’s Home Affordable Refinance Program (HARP) has been extended for another year. The announcement came out earlier today. Here is an excerpt from the Washington Post article on the topic:

The Home Affordable Refinance Program was set to expire in June, but so far it has reached fewer than 200,000 of the up to 5 million borrowers federal regulators hoped it would help.

Market conditions have not changed significantly since the program was launched last year, Edward DeMarco, acting director of the Federal Housing Finance Agency, said in a statement. So to give lenders more time to implement the plan and to “support and promote market stability,” the initiative will be extended to June 2011, he said.

There was an interesting opinion piece over in the Wall Street Journal about when walking away from a home is a good idea. Here is the short version: The author recommends that anyone who is more than 25% underwater on their property should consider walking away. You can be the judge yourself.

Here are some bits from the piece as well:

Stop trying to chase your lost equity. That money is gone. Don’t think like the gambler who blows more and more cash trying to win back his losses. That’s how a lot of people turn a small loss into a big one.

And do the math. Even if you hope the real estate market is near the bottom—it’s possible, but by no means certain—it may still take years to see any meaningful recovery. If you are 25% underwater, your home will have to rise by 33% just to get you back to even.

Is that likely? And over what time period? Even if home prices rose by 5% a year from here, that would still take six years. And during that time you could instead be building fresh savings elsewhere.

People who are underwater on their mortgage normally can’t refinance to a better rate. The main exception to this is people with FHA loans can streamline those loans down to better rates.

According to new reports we should expect US home prices to continue to fall into 2011. For folks who still have some equity and would like to refinance into a fixed rate loan or just a better rate that means that the time to refinance is now rather than later while rates are still relatively low. Here are some excerpts from a recent CNNmoney.com article on the subject of falling home values:

Despite signs that the real estate market might be lurching forward, prices are expected to fall further this year and next.

The average home price in the United States will fall by about 6% by September 2011, according to a joint report between Fiserv and Moody’s Economy.com. And that’s after plunging more than 27% in the past three years.

Most of the projected home price decline will occur during the usually slow summer months of 2010. After that, prices should begin to stabilize, according to Fiserv, and stay almost flat through fall of 2011.

The main reason for continued decline, according to Mark Zandi, economist and co-founder of Economy.com, is foreclosures — the same thing that’s plagued markets for the past three years.

“Foreclosure sales will pick up this spring as mortgage servicers figure out who can qualify for a modification and who can’t,” said Zandi.

He figures there are at least 4.5 million mortgage loans either in foreclosure or clearly headed in that direction. When that additional inventory hits the market, it will provide numerous choices for buyers and encourage sellers to drop their listing prices.

The end of two federal programs, which have been propping up markets, will also tamp down prices.

The Federal Reserve has been purchasing mortgage-backed securities since early 2009, scooping up as much as $1.25 trillion worth. That has dampened rate increases by providing a ready market for the securities. But the Fed’s program lapses on March 31, when it cedes the playing field to private investors, who will almost surely demand higher rates.

Contact us in the sidebar if you think you are a good candidate to refinance.

Some encouraging news was released earlier this week. We get this from the Washington Post story on the subject:

Borrowers fell behind on mortgages at a slightly slower rate late last year, but the overall number of homeowners in financial distress remained at record levels, according to industry data released Friday.

A survey by the Mortgage Bankers Association found a surprising decline in the number of borrowers who had missed just one mortgage payment, the initial stage of delinquency. Mortgage holders who were 30 days delinquent fell to 3.6 percent of all borrowers in the fourth quarter, down from 3.8 percent in the third quarter and 3.85 percent in the corresponding period in 2008. This was the first quarter-over-quarter decline in that category since 2004.

The improvement was remarkable because delinquencies usually rise during the last three months of the year as homeowners divert cash to cover higher heating bills and holiday expenses, said Jay Brinkmann, chief economist for the industry group. If seasonal patterns hold, the rate at which loans go bad will decline again during the first quarter, he said.

The data are a sign that the end of the foreclosure crisis may be in sight, Brinkmann said. “It also gives us growing confidence the size of the problem now is about as bad as it will get,” he said.

Among the companies hit hardest by the housing downturn are the mortgage insurance firms. These companies insure conventional mortgages for banks so that if the home forecloses the bank can collect to trim its losses. The problem is that a lot more homes are foreclosing now than anyone anticipated a few years ago and the insurance companies are taking a beating as a result. See this article on the latest news related to this subject:

Mortgage insurer PMI Group Inc reported a much wider-than-expected quarterly loss, as its U.S. unit continued to post disappointing results, sending its shares down 5 percent before the bell.

The company posted a loss of $228.2 million, or $2.76 a share from continuing operations for the latest fourth quarter, compared with a loss of $181.0 million, or $2.22 a share, a year back.

From the perspective of consumers the problem is that these sorts of things ultimately make it harder to get approved for refinances or other home loans.

Mortgage rates usually mirror to some degree the yields on the 10 year treasury note. With Ben Bernanke announcing the Fed’s plans to pull back on its programs of economic stimulus the price of yields on the 10-year treasury bounced up. With it mortgage rates bounced up nearly a quarter point as well. We may be at the beginning of the expected rate increases already.

With more than 9% of FHA loans now seriously delinquent the fears that the Federal Housing Administration will need to be be bailed out are not going away. Of course that does not mean the FHA will cease lending but it could mean tighter standards and higher fees down the road. We get this from a recent Washington Post article on the subject:

About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency’s figures show.

Although the FHA’s default rate has been climbing for months and eating into the agency’s cash, the latest figures show that the FHA’s woes are getting worse even as the housing market shows signs of improvement. The problems are rooted in FHA mortgages made in 2007 and 2008. Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.

If the trend continues and the FHA’s cash reserves are exhausted, the federal government would automatically use taxpayer money to cover the losses — a first for the agency, which has always used the fees it charges borrowers to pay for its losses.

The Obama Administration’s Home Affordable Refinance Program, like so many other programs before it, has not delivered as well as hoped. One of the hurdles borrowers and lenders are facing is the documentation required to qualify for the program. The Fed recently announced it was going to reduce those documentation requirements in a bid to speed the program along. We get this from a Washington Post article on the topic:

Facing mounting criticism about the effectiveness of the government’s foreclosure-prevention efforts, the Obama administration announced Thursday that it will tighten the documentation requirements for borrowers applying for its marquee mortgage relief program.

Starting June 1, borrowers must prove they qualify for the mortgage help upfront, providing two pay stubs and other paperwork before their payments can be lowered. The change attempts to prevent a repeat of the current backlog of borrowers who received mortgage relief after a phone conversation with their lender but did not satisfy the government’s documentation requirements within three months.

…

While lenders blamed borrowers for not submitting their documentation on time, homeowners and housing counselors have complained that banks often lost the paperwork. In some cases, lenders have been slow to complete the loan modification even after the borrower met all the requirements, they have said. Government officials said the new paperwork requirements will be easier to understand and less onerous for borrowers.

See the official mortgagee letter here for the details. Right now the upfront FHA fee is 1.75%. Starting on April 5th 2010 that will increase to 2.25%. When you combine that with the fact that interest rates will likely be rising soon now is definitely the time to refinance with the FHA if you are a candidate. Contact us in the sidebar if you are a candidate for an FHA refinance.

Several news sources are reporting that the FHA is about to raise the upfront mortgage insurance premium for an FHA loan from 1.75% to 2.25%. This will make refinancing more expensive. We’ll report more details on the timing of the forthcoming changes as they are announced.

The Obama Home Affordable Refinance Program (HARP) and Home Affordable Modification Program (HAMP) are still getting mixed reviews as we approach their one year anniversary. Several new outlets are reporting that the programs are still moving along pretty slowly. Here are some bits from a WSJ article on the topic:

Thousands of homeowners participating in the Obama administration’s foreclosure-prevention plan could miss a government deadline for completing necessary paperwork, putting them at risk of disqualification.

The program, a cornerstone of President Barack Obama’s housing-rescue effort, was launched in February and has been bedeviled by paperwork problems from the start. Many companies have given borrowers modified mortgage terms on a trial basis, based on verbal information, and have struggled to get the documents required to finalize mortgage modifications.

According to data released by the Treasury Department Friday, more than 900,000 borrowers have begun trial modifications under the program, but just 7% of them have received permanent changes so far. …

he administration has said the mortgage program could help as many as four million borrowers. It provides financial incentives for mortgage companies and investors to reduce loan payments to affordable levels.

Through December, 66,465 borrowers had received permanent fixes; an additional 46,056 modifications have been finalized, but await the borrower’s signature. The number of borrowers who have received completed modifications, while low, has more than doubled since November. The Treasury Department announced in December a “conversion drive” designed to increase permanent fixes.

The pending mortgage rate increase is becoming a foregone conclusion. If you have an ARM mortgage or would like to lock your mortgage rate in below 6% for any other reason contact us now in the sidebar. Rates will likely be above 6% again soon so the window of opportunity to refinance is closing.

Here is an excerpt from a recent Reuters article:

U.S. home loan rates could rise by as much as three-quarters of a percentage point in the spring as the Federal Reserve ends its mortgage bonds purchase program, a top Fed policymaker said in an interview published on Saturday.

The Fed has been buying billions of dollars of mortgage backed securities in the last years or so, fueling the huge drop in mortgage interest rated we saw in 2009. Well the plan is to cut that program off in March and that is fueling fears that rates will be skyrocketing soon. We get this from a recent WSJ article:

The Federal Reserve’s pledge to stop buying mortgages by the end of March is sparking fears among home builders, mortgage investors and even some Fed officials that mortgage rates could rise and knock the fragile housing recovery off course.

…

The recent rise in mortgage rates could be a prelude to even bigger increases in coming months as the Fed steps away from support for the market. That prospect has some in the markets counting on the Fed to change course and keep buying past March, which many officials are reluctant to do.

When such a big investor stops buying, “that could lead to material increases in [interest] rates across the board,” said Ronald Temple, portfolio manager at Lazard Asset Management. He sees mortgage rates rising by a percentage point when the Fed stops buying. A withdrawal of government support, combined with high unemployment and rising mortgage foreclosures, could push home prices down 20%, he said.

There was an article in the LA Times recently talking more about the likelihood of mortgage interest rates increasing dramatically in 2010. Here are some bits from that piece:

Mortgage rates are continuing their creep upward in a trend that well may choke off a recent refinancing boom and provide a test of the strength of the housing market in 2010. …

The climb comes even though a government effort to keep rates low is in place for a while longer. A Federal Reserve program to spend $1.25 trillion to support the market for mortgage-backed securities is scheduled to end in the spring.

Every tick up in loan rates makes it less likely that someone with an existing mortgage will refinance to save money.

But rates in the 5% range remain extraordinarily low by historical standards, offering a huge incentive for buyers.

For example, principal and interest payments on a new 30-year fixed-rate mortgage were about one-third less than they were in May 2000, when rates peaked at 8.6%, said Frank Nothaft, Freddie Mac’s vice president and chief economist.

Yesterday we reported that a Morgan Stanley analyst was forecasting much higher interest rates coming in 2010. The folks over at Subprime Blogger are reporting that a Goldman Sacs analyst came out with an opposing opinion.

These two predictions are on completely different ends of the spectrum when it comes to mortgage rates. Morgan Stanley feels mortgage rates are going to move all the way up to 8% while Goldman Sachs feels mortgage rates are going to stabilize

If nothing else, we can be sure that the current friendly mortgage interest rates are tenuous. If you are in need of a low fixed rate contact us in the sidebar while rates are still relatively low.

We get this from a recent Bloomberg article:

Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said.

…

Mortgage rates last reached 7.5 percent in 2000 as productivity gains slowed after the demise of some Internet companies. The average rate on a typical 30-year fixed-rate mortgage climbed to 5.05 percent in the week ended Dec. 24, according to McLean, Virginia-based Freddie Mac.

Yields on mortgage securities issued by Fannie Mae rose to a four-month high of 4.54 percent last week. Fannie and Freddie securities are used to guide borrowing costs on almost all new U.S. home lending.

Higher borrowing costs as the U.S. shows signs of beginning to emerge from the longest economic contraction since the 1930s puts Treasury Secretary Timothy Geithner in a situation similar to one faced by his predecessor Robert Rubin.

“This is the re-emergence of the bond market vigilantes,” said Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management, who oversees $22 billion. “The vigilantes are saying, OK guys you want to do this, you’re going to pay a higher price for it.”

Right now rates are still in the mid 5’s. If you are considering refinancing or purchasing a property contact us in the sidebar right away.

We have known for some time that artificially created low mortgage interest rates we have seen in 2009 wouldn’t last forever. The end to those low rates seems to be upon us now. There was a good article in the WSJ recently on some of the details. Here is a snippet from that piece:

The days of record-low mortgage rates are numbered.

The U.S. government is slowly extracting itself from the market for home loans, closing out several emergency measures put into place in the throes of distress last year to prevent a collapse of mortgage finance.

The Federal Reserve’s $1.25 trillion program to purchase mortgage-backed securities, considered the most critical support, will draw to a close in the first quarter of 2010. Fannie Mae, Freddie Mac and Ginnie Mae will then be without a government buyer of last resort for their home loans for the first time since the mid-1990s and will have to rely solely on private investors.

A couple of reports today show that despite “green shoots” in the economy more and more people are falling behind on their mortgages still. Here is some info from a piece on the subject over at the WSJ online:

The U.S. housing market continued to deteriorate in the third quarter as even the most credit-worthy borrowers increasingly fell behind on their mortgages, highlighting the problems policy makers have faced in trying to address the problem.

A new report from the Office of Thrift Supervision and Office of the Comptroller of the Currency found that the percentage of current and performing mortgages dropped for the sixth consecutive quarter, as foreclosures in process topped 1 million mortgages at the end of September. The report covers roughly 34 million loans totaling $6 trillion in principal balances, or approximately 65% of the U.S. mortgage market.

The regulators said that serious delinquencies, loans that are at least 60 days past due, increased across all loan categories and climbed to 6.2% of the loans in the portfolio during the third quarter. The report said that just 67.7% of option adjustable-rate mortgages were considered current at the end of the third quarter, while 27.9% were either seriously delinquent or in the process of foreclosure.

The most troubling finding was that even borrowers considered “prime,” or the least risky, increasingly can’t pay their loans. The report said that 3.6% of prime mortgages were more than two months behind on payments, more than double from a year ago.

We specialize in helping people prevent falling behind by refinancing out of ARM’s and other undesirable mortgages before they find themselves late. If you fall into that category contact us in the sidebar and we can look at your options.

Recent reports showed lenders canceling a lot of scheduled California foreclosures in November 2009. Here is an excerpt from a San Jose Mercury story on this topic:

Under intense pressure to help more people stay in their homes, mortgage lenders canceled far more scheduled foreclosures in November than in the previous month, according to a report Tuesday.

A total of 10,469 scheduled foreclosures were canceled in November throughout California, up 20 percent from 8,741 in October, according to ForeclosureRadar, a Discovery Bay company that tracks foreclosure activity daily. In Santa Clara County, 337 were canceled, up from 269 in October.

The raw numbers may actually understate the scale of the increase, said Sean O’Toole, ForeclosureRadar’s founder. There were 416 cancellations each business day in October, and 581 each business day in November. That was an increase of 40 percent on an average daily basis because there were three fewer business days in November than October.

After a really good run of about 5 weeks mortgage interest rates started getting worse again after Thanksgiving. Many loans are still coming in between 5% and 5.5% but those rates won’t last forever. If you have been procrastinating looking into a refinance our of a bad rate or an ARM or if you need a cash out refinance contact us in the sidebar before rate creep back toward 6% and higher again.

Congress is apparently becoming fed up with banks resistance to modifying loans for struggling homeowners. Here are some excerpts from a recent AP story on the subject:

Only one in three homeowners who have signed up for the Obama administration’s mortgage relief plan have sent back the necessary paperwork, highlighting continuing problems for the government’s effort to stem the foreclosure crisis.

The poor results from the mortgage industry drew sharp criticism from House Financial Services Committee members Tuesday. Since the program was launched in March, lenders have made loan modification offers to just 680,000 borrowers, far short of the administration’s goal of up to 4 million.

“Taxpayer-funded foreclosure mitigation programs have been an abject failure,” said Rep. Jeb Hensarling, R-Texas, at a hearing on the program. “Throwing more money at programs that do not work is absolutely insane.

…

Much of the criticism for the disappointing results is being leveled at the banks, many of which received billions in taxpayer bailout dollars. Calls are growing louder on Capitol Hill for the Obama administration to take a tougher approach.

“We haven’t spanked anybody,” said Rep. Emanuel Cleaver, D-Mo. “I think they’ve come to the conclusion that spankings are not on the agenda … Why can’t we do something to one of them?”

Herbert Allison, the Treasury Department’s assistant secretary for financial stability, said punishment could be in the works.

While recent FHA policy changes eliminated some of the benefits of FHA streamline loans, the FHA streamline program is still running and still has some real benefits. Here are some of those benefits:

- FHA streamlines still allow for homeowners who are underwater on their FHA mortgages to refinance to a better rate without requiring an appraisal
- FHA streamlines require more paperwork than they used to but still require significantly less paperwork than traditional refinances

The biggest difference for FHA streamlines going forward is that they will normally require some money at closing because FHA is no longer allowing escrow prepayments, title fees, or bank fees to be rolled into the new FHA loan. Usually the best way to deal with this is to close the FHA streamline loan near the end of the month and to bring the normal mortgage payment due the next month to the closing. So for instance, for an FHA streamline closed in January the borrower would make the normal January payment at the start of the month and then bring the February payment to closing on, say, the 26th of January. With the February payment made the first payment on the new FHA loan would be due in March.

Of course each situation is different and in some cases we as the federally-chartered lender would be able to foot the bill for some of the closing costs.

The primary point is that FHA streamline program is still one of the best programs available for people who already have an FHA loan and would like a lower interest rate. Contact us today in the sidebar if you have an FHA loan at 5.75% or higher and we’ll see if can help you lower your rate and payments.