About a year ago, we had a running semi-serious joke around the office that the government should just buy up every foreclosure for the value of the loan and rent the home back to the owners - back of the napkin math suggested it would just be cheaper in the long run than all of the banking bailouts and the rest of the mess downstream.

I am not sure whether to be pleased or amazed, but our joke is now (almost) reality:

WASHINGTON, DC — Fannie Mae (FNM/NYSE) is implementing the Deed for Lease™ Program under which qualifying homeowners facing foreclosure will be able to remain in their homes by signing a lease in connection with the voluntary transfer of the property deed back to the lender.

Fannie Announces Deed-for-Lease Program [Fannie Mae]

Dear Star-Tribune: 

I dig the asterisk.  Also your new online version of the “real” paper is better than your website.  By a lot.  It took me five minutes to find an article online that was front page above-the-fold this AM.  That seems weird and kind of dumb.

Your friend,

 ~Alex

Nations Hottest Housing Market? [Strib]

Based on a study conducted with my two dogs and the checkout lady at Cub Foods, we know that most people never get beyond the headline. 

In this case, the headline fronting this housing-market story in the Twin Cities Busines Journal, (cropped above) is accurate, until you get to this little tidbit at the tail end of the 5th paragraph:

“…but local home prices have declined 13.7 percent since August 2008.”

That is a positively Kardashian-sized ”but.”

A 13.7% annual home-price decline leads the nation in nothing.  It is a middle of the pack number.

Month-to-month gains, while not negative, are basically statistical noise - a snapshot - and meaningless without the context of a larger trend.  Year over year gains matter far more.

Not to be the one to throw cold water on a market desperate for any sort of positive news, but this kind of thing does not help advance anyone’s understanding of the real estate market.

So for Kim’s sake, if not for mine, keep reading until you get to the but.

It should come as little suprise that the lure of an $8,000 check from the Federal Government - especially one you can get by re-filing taxes outside of the real estate closing - is tempting bait for scam artists:

“The Internal Revenue Service is examining more than 100,000 suspicious claims for the first-time home-buyer tax break, another sign of potential trouble for the soon-to-expire program.
—-
“The IRS said it was investigating 167 “criminal schemes” involving the credit, according to the subcommittee. IRS officials on Monday declined to describe the suspected schemes or provide additional details.”

But hey, with another $16.7 Billion worth of housing tax credits being proposed, $800 Million in fraud barely amounts to spilled milk - Just take it from the Wall Street Bonus pool.
Home Buyer Credit is Focus of Inquiry [WSJ]

Yours truly garnered a couple of quotes in Kara McGuire’s front-pager from Sunday’s Star-tribune, wherein she provides a snapshot of the landscape as first time buyers scramble to find and purchase a home before the $8000 home buyers tax credit turns back into a pumpkin.  Maybe.

Crunch Time for House Hunters [Kara McGuire, Star-Tribune 10/4/2009]

Last Week:
Mortgage rates improved gently last week, and are now firmly affixed below 5% for the first time since May. A series of weak or unremarkable economic reports, along with the growing realization that real economic recovery seems elusively distant, was enough to inspire a positive trade in the mortgage market for most of the week.

To Recap:  The Chicago PMI was “surpisingly” weak, suggesting that broad economic activity has not started to rebound.  A weak employment report (263K jobs lost, 15 million people unemployed), mixed but non-threatening inflation data from the PCE, improving but still ho-hum numbers from housing, and some high-profile public hand-wringing over the employment situation, and you have a recipe for stable to lower rates.

Which is what we got.

This Week:
The economic calendar this week is punctuated by mostly second tier reports.  So rather than economic reports, expect stocks, and supply in the bond markets to be the primary drivers of mortgage rates this week. 

There’s something like 70 Billion in 3 year notes, 10 year notes, and 30 year bonds coming to the bond market on Tuesday, Wednesday and Thursday.  Initial indications are these offerings will be well-bid (a good thing for mortgage rates.) Stocks have been on an extended run recently, but the Dow gave back 177 points last week, and seem to lack a reason to go higher from here.

These two market’s behavior this week should provide a decent verdict on where “they” (Stocks and bonds, respectively) think the economy is in terms of recovery.  If the Bond market laps up this supply and starts looking for more, or if stocks continue last week’s sell-off in earnest, mortgage rates should continue to benefit.

This Week’s Economic Calendar [Barrons]
——–
Watching mortgage rates?  Follow Behind The Mortgage on Twitter for (almost) real-time updates on interest rate movements and other rate-related news

The Washington Post with an update on the Making Home Affordable Refinance program:

“A federal program to allow borrowers with little or no equity in their homes to refinance is struggling to gain traction, according to government data released Tuesday, showing that only 93,070 borrowers have been helped since the effort was launched in April.

The program has encountered difficulties that government regulators had not expected, such as the limited capacity of lenders to carry it out and the large proportion of borrowers who could not initially qualify because their home values had fallen so sharply.”

Given that there were/are multiple indices available showing annual double-digit percentage declines in home prices for the last three years, to say this problem was unexpected and could not have been anticipated is an extreme reach, as was the Obama administrations estimate that “up to 7 million” homeowners would benefit from this program.

To put a local perspective on this - Yesterday’s Case Schiller Home Price Index showed [great chart via CR] a 31.9% drop in Twin Cities home prices since the peak in September 2006.  That means a home purchased three years ago to the day, with 20% down, is likely worth 5-10% less than the underlying mortgage.  Under current rules, refinancing is either impossible, or undesirable, given the rate and cost adjustments (imposed by Fannie/Freddie) due to the lack of equity.

Beyond home price declines, the program’s poor results have been excacerbated by resistant mortgage insurers, who almost universally will not re-insure a loan refinanced under these expanded rules, and second mortgage lenders, who often stand in the way when refinancing with little or no equity.  The result is an environment where it is nearly impossible for otherwise rock-solid borrowers (who happen to have mortgage insurance or a second mortgage) to reduce the interest rate and payment on their primary mortgage.

A recent expansion of the rules at Fannie and Freddie - increasing the allowable loan-to-value ratio from 105% to 125% (meaning, you could refinance a loan of $250,000 on a property worth only $200,000, versus $210k/$200k before) will likely encounter similar problems.  

Already we know:

• That many major institutional lenders will not adopt these expanded rules. At all.
• Those that will must pass on substantial rate and/or fee hikes (imposed by Fannie or Freddie) to customers.
• Counterparties (mortgage insurers, second lien holders) will play pig.
• Ongoing price declines will to shrink the pool of refinance-eligible homeowners. 

With all of these roadblocks, a good result will be another 93,000 refinances, even under the expanded rules.

Eventually, these programs may allow a refinance regardless of equity, so long as the loan has been paid on time, but it may be too little, too late if rates rise before that happens, and the powers that be have proven to be nothing if not behind the curve on this.

Lack of Equity Slows Federal Aid Program [Washingtonpost.com]

About ten days ago, FHA Commisioner David H. Stevens announced that the FHA would, for the first time, fail to maintain it’s required level of cash reserves due to rising default rates. 

Regular readers may know where this is headed: As default rates rise, so do the hurdles one must clear to get a home loan.

Predictably, the FHA recently announced a bevy of rules changes that will make certain types of FHA insured home loans tougher to get.  Especially impacted is a product called a Streamline Refinance.

In the current ultra-low rate environment, Streamline Refinances have been a boon to those fortunate enough to have an FHA mortgage, enabling a a reduction in rate without subjecting themselves to a new appraisal (more often than not a deal killer in a market where home values have declined 17% in the last year alone) and other documentation requirements.

In very real terms, with an FHA streamline refinance, so long as you made your mortgage payment on time, you could refinance with no appraisal, and almost no questions asked, and even include closing costs in the new loan. 

But on Nov 18th, 2009, things are going to change.

After that date, to be eligible for a Streamline Refinance:

• You must have had your FHA insured mortgage for at least six months, and never made a payment 30 or more days late
• Can only have one payment more than 30 days late in the past 12 months, be current, and made all mortgage payments within the month due for the past three months.
• You cannot include closing costs in the new loan, unless a new appraisal is obtained.
• You must be employed and have verifiable income.
• Document any assets you will use to pay closing costs.

Of the list above, the fact that closing costs cannot be included in the new loan is the one that will give would-be refinancers the most heartburn. 

For perspective, in Minnesota, the average out of pocket cost for an FHA refinance on a $200,000 home loan is something like $5K, depending on how the loan is structured. No mean sum, and unless one wants to risk an appraisal that may prevent a refinance entirely, after Nov 18th, these costs must be paid in cash, at closing.

Now, in theory, those costs will be recouped over the long haul by lowering your rate (otherwise, you should not refinance in the first place, right?)

Still, that is a big check for any family to write in the middle of a recession.  Most people would rather keep that cash on hand than spend it to save $195 bucks per month, no matter how much savings-over-time comes out the bottom of a spreadsheet.

So, if you have an FHA Mortgage, you plan to be in the home for the medium to long term, and your rate is anything north of 6%, you should be in touch with your banker and get while the getting is good.
——–
By the way, if you haven’t heard from your banker since closing, drop me a line, I’ll run the numbers for you.

Monday Market Commentary is a weekly post on the week ahead in the mortgage market.  I’ve published this here since 2004 with one thought in mind:

Deciding when to lock your rate is not about knowing where rates are going, but about understanding the market, what has the potential to move rates and avoiding dumb risks.
——–
Last Week: 
Mortgages last week were slightly improved, with 30 year fixed rates hovering at or around 5%, depending on the individual borrower and property level details.The big news, of course, was the Fed announcement that they will extend the deadline, but gradually phase-out the campaign to lower rates by carpet bombing the mortgage markets with billions of dollars.  I covered this in detail in a separate post Friday, but this means that rates will likely start their climb back toward 6% (or higher) in the coming months.In the short term, a weak economic outlook, saber-rattling in Iran, and the fact that the Fed will be purchasing mortgage backed bonds well into 2010 was enough to allow some minor improvement (.125%) to rates by the close on Friday.

This Week:
Now that the real estate market is giving bottoming signals, focus is shifting back to traditional/fundamental drivers of interest rates. In other words, we may start to see the return of Jobs and Inflation as a major force in moving interest rates.

This means that Friday’s employment report will be closely watched, as will the PCE (personal consumption expenditures) component of the Personal Income and Outlays Report, which prints on Thursday at 8.30AM.  An improving employment picture or evidence of inflation will often push mortgage rates higher.

Beyond that, we also have the Chicago Purchasing Managers Index (which measures business conditions around Chicago as a proxy for national activity) and the ADP payroll report to contend with.  Chicago PMI is expected to be slightly improved, which could hurt rates.  The ADP is a notoriously unreliable “sneak preview” of the official employment report, but can move markets if it is a surprisingly strong (or weak) report, so bears watching.

All in all a full week -  don’t forget to grab our Twitter feed for ongoing analysis as these reports hit the street.  There’s no better way to stay on top of mortgage rates.

This Week’s Economic Calendar [Barron’s]

Graphic via Wall Street Journal

From the Fed Statement yesterday:

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.

As mentioned yesterday, the program to purchase mortgage-backed securities was originally intended to end in December.  So while the Fed is not expanding the program, they are extending the timeline to avoid a cliff effect - a rapid rise in rates caused by an abrubt end to the buying.

Though this is no doubt good news for those in the market for a mortgage, don’t assume rates will automatically stay low until the end of the first quarter.

To see what I mean, take a look at the graphic above from The Wall Street Journal that shows just how much money the Fed has put to work (approaching $900 Billion dollars) and it’s impact in driving rates lower.

The graphic also clearly illustrates an a key point - mortgage rates have not moved in lock-step with Fed purchases.  So keep in mind that the these purchases are artificially forcing rates lower by directly intervening the market, and it is an inexact science at best.

And with the Fed now eyeing the exit door, it’s only a matter of time before real market forces exert their influence and push mortgage rates higher.  In all likelihood this will happen before the Fed is done with it’s shopping spree.

Home Buyers Get a Reprieve [WSJ]