New Rate Adjusters

The cost of high risk loans (high LTV's or low FICO scores) is about to rise signifianctly. Huge jump.

This just came in from a major lender. (The 2% increase is to price, not rate).

2% Rate Adjuster for Seven Loan Categories Requiring Any Mortgage Insurance

Audience: Wholesale Sales and Operations

From: IL Project Management Office

System: LPS/MEX

Effective: Monday, June 2

Client Communication: Newsflash attached

Due to dramatic changes in mortgage insurance (MI) availability, Wholesale Lending will implement a 2% rate adjuster on loans (conventional conforming and non-conforming) with the seven specific categories defined below that require lender-paid or borrower-paid mortgage insurance.

· The 2% rate adjuster will be applied to impacted loans locked and/or relocked on or after Monday, June 2.
· Loans in the categories defined below will need to be funded prior to July 31, 2008. Any commitment that has not funded on or prior to this date cannot be honored due to unavailability of MI coverage.
· Lock extensions and/or relocks will be allowed, but expiration dates cannot go beyond July 31, 2008.

Tug Of War

The Winner: Inflationary Expectations

There has been a tug of war going on in the interest rate markets between a slower economy (lower rates) versus inflationary pressures/expectations (higher rates). Well, the dam wall has finally broken in favor of higher interest rates.

You can see the chart to the left of the 30 Year 5.5% FNMA Bond breaking below the 200 day moving average. This is a significant break. For those looking to refinance, the odds are that we will see higher interest rates. The next chart is more stark.

30 Year Index

The 3o Year Index, below, is showing a breakout above a long established range going back to last November. The big problem, as I see it, is that the chart is not yet over-bought (this is a yield chart, not a price chart, so the chart is inverted). From a momentum standpoint (Wilder RIS) , imo, this chart needs to go through the process of getting overbought, pulling back, and then having a failing rally. During this momentum process, interest rates can go significantly higher. We could be at a 6.75% 30 year fixed mortgage rate in fairly short order.

As you can see above, interest rates have been in a trading range going back to November '07. We are breaking above this range today.

With the inflationary pressures already in the system, combined with all the Fed stimulus that has been going on for the last 8 months, plus the fiscal stimulus that has been added, I really don't see interest rates turning back. The low rates have been nice while they've lasted, but I believe they are now history. I hope I look back on this post in a few months and find that I was totally wrong, but I don't believe that's going to occur.

A Sign Of The Times

A Sign Of The Times

Janis went to Safeway on Saturday, and picked up, amongst other weekend items, 2 containers of Dryer's Ice Cream. Dryer's has downsized from a 1/2 gallon container to a 1.5 Quart container - reducing the ice cream volume by 25%. Dirty dogs.

BCA - Treasuries Testing The Upper Limit?

U.S. Treasurys: Testing The Upper Limit?
10:01:00, May 26, 2008

Last week's selloff in Treasurys is likely to be short-lived, due to still weak domestic economic conditions and house price deflation.

Rising oil prices are stoking already excited inflation fears, which has backlashed into the Treasury market. However, the epicentre of U.S. economic weakness, the housing market, is not yet able to support higher bond yields. The mortgage refinancing index turned south as soon as yields started to climb.

Thus, there is a cap on how high yields can rise until AFTER the economy stabilizes, and we expect that Treasurys will trade in a range at or below current levels in the coming months. To this end, the equity market is starting to signal that yields are hitting the upper limit, and stocks will remain at risk until (oil-induced) inflation fears calm. Stay tuned.

http://www.haver.com/

More Fallout From The Credit Crisis?

Is Lehman Bros. being honest?

A very eye-opening report of discrepencies between the Lehman Bros. 1st Qtr Conference call and their subsequent 10-Q release. The paper is written by David Einhorn, and his company, Greenlight Capital is a hedge fund that is short Lehman.

If Einhorn's report is true, while it's surprising that it is coming from Lehman, it shouldn't be so surprising. If Einhorn's report rings true, it is consistent with other bubbles that have burst. It is consistent with the Enron and Worldcom frauds of the dot.com bubble years. Companies get desperate and they deceive the public in order to attempt to buy time to work themselves out of the situation they're in.

And put the Lehman situation in perspective. Bear Stearns had just been decapitated. Wall Street's spotlight then turned to Lehman. Lehman's neck was on the chopping block. And then they pulled a seeming miracle from out of the hat.

By March 14, 2008 (LEH) had already fallen from $66 in early February (Feb 4) to close at 38.85, a 41% drop. For point of reference, the weekend of March 15 and 16 was the weekend of the Bear Stearns debacle.

On Monday, March 17, Lehman opened at $24.41 and began to free fall. Lehman continued to fall to 20.17, and then, a miraculous rebound ensued. Lehman hit a high of 34.77 before closing at 31.62. All in a single day.

Please read the Einhorn report here.

Lehman Brothers had a bad week, and I am sure that Einhorn’s article didn’t help. The stock plunged -17.3% last week, and is back to it's breakdown point of mid-March. The hero's high-five accorded to Lehman CFO Erin Callan back in March may prove to ring hollow over the course of the summer.

For everyone involved in the mortgage industry, this is a story worth keeping your eye on. It could prove to be another very large shoe to fall, every bit the potential calamity as Bear Stearns back in March.

The risk to the market is the potential for liquidity to disappear, virtually overnight. The is no guarantee that the financial markets are "through the woods" at this point.

IMPORTANT CHANGES: Mortgage Insurance and Credit Requirements

This is from one of our major lenders:

Policy Changes Impacting Mortgage Insurance Requirements
Mortgage insurance companies continue to make significant changes in their requirements and pricing; therefore, the following changes are effective with registrations and/or locks on and after May 23, 2008. All loans must fund/close by June 30, 2008. NO EXCEPTIONS FOR ANY REASON ALLOWED!

Conventional Loans
§ Loan Score & LTV requirements
o Minimum 620 allowed with LTV's greater than 80% up to and equal to 95

§ Cash-out refinances with Loan Scores of 679 or lower
o NOT allowed with LTV’s greater than 80%

§ Cash-out refinances with conforming investment properties
o NOT allowed with LTV’s greater than 80%

§ Cash-out refinance on second homes
o NOT allowed with LTV’s greater than 80%

§ Conforming investment properties with Loan Scores of 679 or lower
o NOT allowed with Loan Scores of 679 or lower

§ 3-4 unit properties
o NOT allowed with LTV’s greater than 80

§ All At Risk Market policy reductions continue to apply
o 90/90% LTV/CLTV for purchases (primary residence or second home)
o 80/90% LTV/CLTV for all investment property transactions
o 80/90% LTV/CLTV for all cash-out refinances transactions
o 80/90% LTV/CLTV for all loans with the Interest-Only payment feature

Changes to Home Opportunities, MyCommunityMortgage®, Alt 97, Flex 97, Home Possible and Easy-to-Own Remittance Mortgage programs

§ Loan Score and LTV requirements
o 680 required for LTV’s between 95.01% and 97%

§ If a Home Opportunities loan is at 97% and is in a market classification 2,
o Then the LTV would need to be dropped to 90%.

§ Homebuyer Education class for first-time homebuyers
o Required for all first-time homebuyers on the loan application

§ Other secondary financing
o NOT allowed unless an approved DAP

The fine print (in Big Letters)
§ Pipeline loans must be locked by 6 p.m. Pacific Time on May 22, 2008.
§ Loans must fund & close by June 30. NO Exceptions will be allowed.
§ The changes above impact lender-paid and borrower-paid mortgage insurance (LPMI and BPMI ) for all conventional conforming and non-conforming loans with LTV’s greater than 80%
§ The changes below DO NOT impact loans with LTV’s less than or equal to 80%
§ The changes below DO NOT include Government loans

Mortgage Strategery

This is Dan.

I've created this blog to post real-time thoughts on the mortgage market, and use it as a place to post communications that I get from the lenders regarding mortgage programs. Feel free to ask questions, post comments, etc. The only thing I'll ask is that everyone be respectful. Bad language and/or abusive comments will be deleted.