Mish's Global Economic Trend Analysis

Clarification on Freddie Mac Mortgage Fees; A Look at Why Your Credit Score is Important
Weekly Claims Sharply Lower to 407,000, Best Performance Since July 2008; Dollar Firm, Treasuries Lower; Looking Ahead
Freddie Hikes Mortgage Fees .25 Points; Fed Report shows Mortgage Borrowers Deleverage; Mortgage Spreads Highest in Year

Clarification on Freddie Mac Mortgage Fees; A Look at Why Your Credit Score is Important

Posted: 24 Nov 2010 12:03 PM PST

I received a couple of emails regarding Freddie Hikes Mortgage Fees .25 Points; Fed Report shows Mortgage Borrowers Deleverage; Mortgage Spreads Highest in Year

Dan Hughes at Summit Mortgage writes ...

Reuters reporter Al Yoon conflated fee changes regarding Loan-to-Value ratios of 75% with a need for borrowers to get "Mortgage Insurance".

The need for Mortgage Insurance still sits at 80.0001%, the same as before.

From Al Yoon: "However, even the most creditworthy borrowers would be affected unless they put 25 percent down, up from the 20 percent that has long been the minimum equity needed to escape the need for mortgage insurance.

"This makes 75 percent the new 80 percent," said Scott Buchta, head of investment strategy at Braver Stern Securities in Chicago, of the maximum loan taken without added fees."

In a word, bull****. With a 740 score, incurring an extra $500 delivery fee on a $200k loan (whether paid at closing or built into the rate) is not the same as having to have mortgage insurance. The main take-away from the Freddie change is that for all borrowers who don't have very high scores, conventional loans will continue to bear markedly higher rates than FHA loans.

Thanks for your hard work, Mish.

In response to that email and after a review of the actual document from Freddie Mac, I revised the title of my earlier post, stripping out the reference to mortgage insurance. I will add an addendum to that post, pointing to this one.

Freddie Mac Bulletin

Inquiring minds are reviewing the November 22, Freddie Mac Explanation of Service Bulletin 2010-30.

Effective date: March 1, 2011

In this Single-Family Seller/Servicer Guide ("Guide") Bulletin, effective for all Mortgages sold to Freddie Mac with Settlement Dates on or after March 1, 2011, we are revising our postsettlement delivery fees ("delivery fees").

For certain Mortgages, we are:

Increasing the Indicator Score/LTV delivery fee rates by 25 or 50 basis points for Mortgages with certain Indicator Score/LTV ratio combinations
Increasing the Secondary Financing delivery fee rate by 25, 50, or 75 basis points for Mortgages with certain LTV/total LTV (TLTV) and Indicator Score combinations
Adding a new Secondary Financing delivery fee for Mortgages with LTV ratios less than or equal to 65%, and TLTV ratios greater than 80% and less than or equal to 95%
Revising TLTV parameters for Mortgages with Secondary Financing and LTV ratios greater than 65% and less than or equal to 75%

Freddie Mac Fees

click on table for sharper image

The main difference from before is the extra .25 point borrowers have to pay if they do not put down 25%. For some credit scores, fees went up by .50 points.

There is no reference to Mortgage Insurance.

Why Your Credit Score Matters

Looking to buy a house or refinance? Take a look down that table and see what happens.

In the 75%-80% LTV column, you are hit by an extra .50% if your credit score is 699 instead of 700.

The difference between 679 and 680 is a a full 1.0%.

The difference between a credit score of 679 and 741 is a whopping 2.5%.

Both people I talked to today said these values are rigid. If you are looking to refinance or buy, and you are close to a major cutoff, small differences in credit scores can be a big deal.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Weekly Claims Sharply Lower to 407,000, Best Performance Since July 2008; Dollar Firm, Treasuries Lower; Looking Ahead

Posted: 24 Nov 2010 10:21 AM PST

In the best performance since July 2008, weekly unemployment claims fell sharply to 407,000. The 4-week moving average dropped to 436,000. In response, the dollar was firm and US treasuries had a mild selloff.

Bloomberg reports U.S. Jobless Claims Decline to Lowest Since July 2008

Applications for unemployment benefits in the U.S. fell more than forecast last week to the lowest level since July 2008, reinforcing evidence the labor market is healing.

Household purchases advanced 0.4 percent after a 0.3 percent gain in September that was larger than previously estimated. Incomes climbed 0.5 percent.

Orders for U.S. goods meant to last several years unexpectedly decreased in October, the Commerce Department also said. Demand for so-called durable goods dropped 3.3 percent, the biggest plunge since January 2009, after a revised 5 percent jump in September that was larger than previously estimated.

Claims typically increase during the period between the Veterans Day and Thanksgiving holidays, and the Labor Department's seasonal adjustment process takes that into account. During the latest week, fewer Americans than usual filed claims, a Labor Department spokesman said as the figures were released, allowing seasonally adjusted filings to decrease more than forecast.

Seasonal Adjustment Outlier?

Before anyone gets too excited over today's numbers, the last paragraph above may help explain what is going on.

Retailers have been ramping up with temporary holiday hiring at the fastest clip in years. Whether that translates into long-term employment remains to be seen.

Seasonal adjustments have been unusually large recently, for reasons not explained by the BLS. For a better look at what's really happening, please see ...

6 Million Benefit-Paying Jobs Vanish in One Year!

In Search of 1.1 Million Jobs Claimed by Obama; Where the Hell are They?

Looking Ahead

I suspect things are improving, for now, although not at the rate implied by this decrease, and not enough to put any kind of dent into the unemployment rate. Looking ahead, we have mighty high expectations of Christmas sales, and nearly everyone has failed to factor in the effect of state cutbacks.

Moreover, within the next two months, 2 million people are set to use up all of their unemployment insurance benefits, maxed out at 100 weeks. With recent news on jobs, real or imagined, Republicans may be less inclined to extend those benefits in the lame-duck Congressional session.

Regardless, structural headwinds are enormous.

Yield Curve as of 2010-11-24

Once again we see an unwinding of the QE II sure-thing trade, with the middle part of the yield curve selling off at the fastest rate.

7-Year Treasury yields rose 13 basis points, but 30-year treasury yields only rose 7 basis points.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Freddie Hikes Mortgage Fees .25 Points; Fed Report shows Mortgage Borrowers Deleverage; Mortgage Spreads Highest in Year

Posted: 24 Nov 2010 01:05 AM PST

Congratulations to anyone who refinanced last month. That may have been the bottom in mortgage rates.

15 and 30-year fixed mortgage rates have climbed by about a quarter of a point from a month ago, and rates will climb another quarter of a point for many borrowers. ~~In addition, Freddie Mac will now require 25% down for borrowers to avoid Private Mortgage Insurance (PMI).~~

correction

The above sentence was based on statements in a Reuters article confusing the need for mortgage insurance with other changes in Freddie Mac fees. The statement is inaccurate and has been stricken.

Please see my post Clarification on Freddie Mac Mortgage Fees; A Look at Why Your Credit Score is Important for details.

Expect Fannie Mae to follow. If so, the wave of refinancings we saw this year, may be about over.

Please consider Freddie Mac says to hike fees on some mortgages

Freddie Mac, the second-largest provider of funding for U.S. home mortgages, will raise some fees on loans it finances, a sign it sees greater risks even for borrowers making regular payments.

Among changes, Freddie Mac will generally raise fees by 0.25 of a percentage point to 0.75 percentage point on mortgages with a combination of high loan-to-value ratios and/or lower credit scores.

However, even the most creditworthy borrowers would be affected unless they put 25 percent down, up from the 20 percent that has long been the minimum equity needed to escape the need for mortgage insurance.

If a lender applies a 0.25 point fee to an interest rate, it would add less than $10 to the monthly payment on a 5 percent, 30-year loan of $200,000, it estimated.

correction

The paragraph in italics above is incorrect as are other paragraphs in the article itself. Once again, please see my post Clarification on Freddie Mac Mortgage Fees; A Look at Why Your Credit Score is Important for details.

Mortgage Rates

Mortgage rate table courtesy of Bloomberg.

Mortgage Bond Spreads Relative to Treasuries Climb

Please consider Low-Coupon Mortgage Bond Yield Spreads Climb to Highest in Year

Yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates rose to the highest in more than a year relative to 10-year Treasuries.

Fannie Mae's current-coupon 30-year fixed-rate mortgage bonds climbed about 0.01 percentage point to about 0.95 percentage point more than 10-year U.S. government debt as of 5 p.m. in New York, the widest spread since October 2009, according to data compiled by Bloomberg. The gap was 0.76 percentage point on Oct. 29.

Prices for the securities tumbled this month relative to Treasuries even as those of so-called agency mortgage bonds backed by higher-rate loans soared. Rising borrowing costs may cause the lowest-coupon debt to prepay more slowly than investors expected by reducing consumer refinancing and home sales. That would delay the time it takes for bondholders to recoup their principal.

"That is a big concern," said Karlis Ulmanis, an investment manager at Wilmington, Delaware-based DuPont Capital Management, which oversees about $20 billion of assets. "If rates move higher, the lower-coupons are going to extend considerably."

Mortgage Borrowers Deleverage

The Cleveland Fed reports Mortgage Borrowers Deleverage

The housing bubble that preceded the last recession left many borrowers overleveraged once the recession struck. According to the Board of Governors, from March of 2000 to September of 2007, the homeowner mortgage obligation ratio, which measures the outstanding value of mortgage payments as a percentage of disposable income, grew from 8.6 percent to 11.3 percent. However, since the peak of the last business cycle in 2007, consumers have begun to deleverage their balance sheets. This trend is evident in the housing market where consumers have been reducing their exposure to mortgage debt by financing more home purchases with cash and reducing both the loan-to-value ratios and the term to maturity of their mortgage debt.

For the month of September, cash was the number one source of financing for home purchases. According to the November 9 edition of Inside Mortgage Finance, which includes the most recent Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions, 30.5 percent of home purchases were financed with cash, up from 24.4 percent in January.

Consumers have been able to deleverage by reducing both the amount of debt and the term to maturity of their mortgage debt. Loan-to-value ratios have steadily declined since they peaked, falling 680 basis points for existing homes and 520 basis points for new homes. Moreover, consumers have reduced their exposure to mortgage debt by reducing the debt's term to maturity. In June, 2007, the term to maturity of all loans closed was 29.5 years; however, as of September of the term to maturity of all loans closed was 27.6 years.

Borrowers have responded to the recent recession by reducing their exposure to mortgage debt. Since the recession began in 2007, the mortgage financial obligation ratio has declined 97 basis points, from 11.3 percent to 10.3 percent. While mortgages remain a much larger proportion of homeowners' debt today than in 2000, if borrowers continue to deleverage, they will be able to obtain more manageable levels of debt in the future.

Deleveraging attitudes are making Bernanke's life miserable. Debt payback is not what Bernanke wants even though it is the best thing for the economy long-term.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Wednesday, November 24, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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