Vicious Circles in the Mortgage Market

The recession(newpression) is not finished with us yet:

Foreclosure Woes Mount for Those With Good Credit: A record 12 percent of homeowners with a mortgage are behind on their payments or in foreclosure as the housing crisis spreads to borrowers with good credit. And the wave of foreclosures isn't expected to crest until the end of next year, the Mortgage Bankers Association said Thursday. The foreclosure rate on prime fixed-rate loans doubled in the last year, and now represents the largest share of new foreclosures. Nearly 6 percent of fixed-rate mortgages to borrowers with good credit were in the foreclosure process. At the same time, almost half of all adjustable-rate loans made to borrowers with shaky credit were past due or in foreclosure.

The worst of the trouble continues to be centered in California, Nevada, Arizona and Florida, which accounted for 46 percent of new foreclosures in the country. There were no signs of improvement. The pain, however, is spreading throughout the country as job losses take their toll. The number of newly laid off people requesting jobless benefits fell last week, the government said Thursday, but the number of people receiving unemployment benefits was the highest on record. These borrowers are harder for lenders to help with loan modifications.

President Barack Obama's recent loan modification and refinancing plan might stem some foreclosures, but not enough to significantly alter the crisis.
"It may be too much to say that numbers will fall because of the plan. It's more correct to say that the numbers won't be as high," said Jay Brinkmann, chief economist for the Mortgage Bankers Association.

How are Mortgages So Low and Can it Continue?

Just Stop Waiting for the Perfect Rate

We speak to dozens of folks that are some way or the other waiting for rates to get lower than the 5% 5Y or 5.75% 30Y Fixed 2 million dollar jumbo they were quoted. Of course, who doesn't want a lower cost on something. Especially a budget item that represents roughly 20-30% of household income. But several factors could make waiting a disaster.

1. Home values continue to fall and your equity is diminished thus resulting in cash required to close. Primarily because loan to value levels in general within the jumbo mortgage market require at least 20% or more equity. Depends on the loan amount and the city/state.



2. The dollar and US based interest rates start to move higher because of a global view that the US is a riskier place to invest/lend. This has started to happen in the last few weeks. The US Dollar vs a global basket of other curriences has started to fall:

The value of the dollar rose nicely after the currency was viewed as a safe haven in Jan till March. Then the full breadth and scope of the recession(newpression?) plus the enormous costs of the bailouts investors(our creditors) began to move away from holding dollars and investing funds in US invesments.

3. The third largest risk is that all the government borrowing by countries around the world crowd out and soak up funds that normally would be put to work in the mortgage market. Here is the chart for what the US Treasury 10Y is currently going for:

Now, this isn't a disaster yet but today the US Government is having to pay 3.35% for ten year money vs about 2.50% range less than eight weeks ago. The enormous stimulus that congress passed has to be paid for right? The US goverment doesn't have any money. We basically have a line of credit with the rest of the world sitting at 11-12 TRILLION dollars owed now. This works out to about 37k for every man, woman and child in this country. See more here.

If investors/lenders decide that the US is a big credit risk then regular mortgage borrowers could be painted with the same brush and see much higher mortgage rates in the future. If you don't believe me and you want someone with some weight how about the manager of the largest bond group in the world? They manage about $750 billion.

If you don't want to play the jumbo mortgage rate casino game anymore with your house, Contact our office or another mortgage professional and get something done. It is better to lock and be wrong than to ride the interest rate rollercoaster in the coming years and regret it.

Does your FICO make the cut?

Credit Score requirements on New Mortgages are on the Rise in 2009 thanks to tighter underwriting standards and a big jump in refinance activity, the average credit scores associated with getting a new mortgage are rising this year. According to numbers compiled by Inside Mortgage Finance, the average FICO score found on a new mortgage in early 2009 was above 700 – one of the highest levels ever recorded. For new Fannie Mae and Freddie Mac loans, which accounted for roughly 60 percent of all mortgages made in the first quarter of this year, the average FICO score was a whopping 760. This was up from an average FICO of 748 in 4Q08.

Even FHA, which is know for accommodating A minus type credit and has no minimum credit score requirement, reported an average FICO of 694 in February. This is well above the 660-670 level found in the latter part of 2008. The average FICO on a jumbo loan was 738 in the first quarter. This is up from 710 in the fourth quarter of 2008. Current minimum FICO levels are generally 680 or 700 depending on program and other factors. This is up substantially from six months ago when 650 was allowed.

To keep these numbers in context, a person can go from a 780 to a mid to high 600 level with one late payment on a credit card or if they have their credit limits reduced. This is common as the credit card companies have projected they will eliminate 2-3 trillion dollars of available credit on cards over the next year.

Listen:Option ARM Time Bomb is Ticking

We have discussed these toxic loans over the last two years as the real wave that will wash over the country ultimately resulting in massive foreclosures in CA, NV, FL, WA, OR, AZ etc. These products were pushed like nothing else by WAMU, INDYMAC and Countrywide. Notice anything about that list of banks? All gone, taken over by other institutions. These loans blew up the banks. No one would merge with them without MASSIVE government support.

These loans are very toxic. They were used as an affordability product or a speculation tool. Various programs allowed for 10% down payments or equity in a property. Landlords would buy homes and rent them out only covering the negative amortization option ARM payment or maybe the interest only. These loans are all resetting over the next few years. They will reset to a fully amortized payment which are hundreds or thousands of dollars higher per month. I believe this is the real cancer sitting on the bank balance sheets. The impact on the middle to high end of the housing market will be dramatic that is why jumbo loans are only going to 75-80% loan to value in these markets. the industry risk managers believe these areas of the country have much more to fall in this segment of the housing market. Time will tell as they say.

How do we get out of this financial mess?