Much of life is a balancing act. For example, I eat my Captain Crunch with only low-fat milk because I wouldn't want unnecessary calories. Underwriting is also a balancing act, matching the risk of the borrower being able to make payments with the desire for the lender to earn a rate of return on the loan commensurate with the risk. In mortgage lending, there is some feeling that the "pendulum" has swung too far to one side here in the last year or two, leaving some borrowers (self-employed and jumbo, to name a quick two) in the lurch. But there are old, and new programs, out there that go back to the "old days".

 

But zero down payments - again? A new program from Fannie Mae called Affordable Advantage is available to first-time home buyers in Idaho, Massachusetts, Minnesota and Wisconsin, and created in conjunction with the states' housing finance agencies. Proponents say that low down payments themselves were not the problem, except when combined with other risk factors like adjustable rates or lax underwriting. Various state agencies have continued to make loans with low down payments to those who may or may not have the best credit. Affordable Advantage loans are 30-year fixed mortgages, with mandatory homeownership counseling, available to people with credit scores of 680 and above (720 in Massachusetts). The buyers have to put in $1,000 and must live in the homes.

 

In some areas, smaller lenders have lending programs that are similar. In Texas, for example, lenders such as Envoy Mortgage and BBVA Compass offer programs to historically low-risk professions with good payment histories. BBVA, for example, offers a 100% LTV program and the borrowers avoid paying MI. Strictly done through retail, BBVA has offered "professional mortgages" for about ten years to borrowers with occupations such as accountants, physicians, dentists and certain high-level executives at public companies. In 2008, Bank of America stopped making loans with 100 percent financing to doctors, but just resumed the program - slightly modified - this month. BofA's program is directed at doctors and dentists coming out of medical school who don't have 20 percent down payments typically required for jumbo loans - those exceeding $417,000. When considering their credit, the bank doesn't take into account the borrower's student loan payments.

 

Another new modification program, announced in March, has begun, the target being underwater loans for homeowners who are current on their mortgage payments. In FHA's "short refinance" program, banks and other creditors that write down mortgages to less than the value of the property can essentially hand off the reduced loan to FHA. Where is the government finding the money to cover the expected 1 in 5 default risk? It set aside $14 billion previously earmarked for housing aid from the Troubled Asset Relief Program to cover losses. Of course, the bank or investors that own the loan must be willing to write down its value, and the servicer must have the time and manpower to process the loans.

 

The jumbo market is seeing some continued revival. Redwood Trust is rumored to be coming to market with a $300 million jumbo MBS sometime in the fourth quarter. Five months ago the company put out a $238 million jumbo security backed by 255 prime Citi loans. Late last week Wells Fargo pushed its jumbo rates below 5%, although the big banks seem to be still holding on to their jumbo production and keeping the loans in portfolio.

 

Speaking of rates and pricing, a reader from ApexAnalytics reports that, "One of my clients is beginning to retain some servicing. I was analyzing the actual SRPs being paid by a major aggregator on a few FNMA loans that they had to sell. The calculation was very basic.  All in price from the aggregator minus the price I could get selling directly to FNMA for cash.  On a FNMA15-yr 4.0% note rate the actual SRP was -.0715 - negative! My client made more profit selling the loan servicing retained for cash.  The "published SRP" for that loan was 1.32.  More mortgage bankers need to get set up with sub-servicers so they can capitalize on this opportunity.  Even FNMA 30yr fixed in the 4.5% range are only getting a servicing multiple of 2!"

 

Fannie Mae has published the DU Version 8.1 October Update Release Notes, and told the industry that during the weekend of October 16 it will update the DU property risk assessment that determines eligibility for the DU Refi Plus™ property fieldwork waiver. https://www.efanniemae.com/sf/guides/duguides/doreleasenotes/

 

HUD and FHA sent out another Mortgagee Letter, in this case introducing new minimum credit scores and loan-to value (LTV) ratio requirements for FHA-insured loans. Go to: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-29ml.pdf

 

FHFA, the regulator of Fannie Mae and Freddie Mac, issued final rules that will bar those agencies from purchasing mortgage-backed securities to meet affordable-housing goals. The companies can no longer receive affordable-housing credit by purchasing securities backed by commercial and residential mortgages. The FHFA rejected Freddie Mac's appeal to preserve the option as long as the company conducted "substantial due diligence" on the underlying mortgage collateral - no more undertaking "economically adverse or high-risk activities in support" of the affordable-housing goals. The new goals still require F&F to target a certain amount of their loan purchases for this segment, but FHFA will adjust the rules depending on market conditions.

 

Any companies servicing FHA loans had some news late last week: the deadline to participate the US Treasury's FHA-HAMP incentive program is approaching. "FHA Servicers that want to participate in the Treasury program that entitles you to receive incentive payments for successful FHA-HAMP performance must execute a new or amended Servicer Participation Agreement (SPA) and related documentation with Fannie Mae, in its capacity as financial agent for the United States as designated by the Treasury Department.  FHA servicers should submit the Treasury FHA-HAMP registration form no later than Sept. 8, 2010 to ensure the SPA can be executed by the Oct. 3, 2010 deadline as published in ML 10-11."  To enroll, go to https://www.hmpadmin.com/portal/getstarted/index.html.

As large lenders go, so do the smaller lenders. Pinnacle - a west coast wholesaler, adopted the recent appraisal guidelines requiring interior photographs, and told its broker clients that "Loans with non-occupant co-borrowers: the owner-occupant must qualify at 35%/43% ratios, regardless of AUS findings, and loans with non-occupant co-borrowers will only be offered fully amortized loan programs. On the credit side of underwriting, "each borrower must have a minimum of 3 trade lines that have been active for a minimum of 12 months, regardless of AUS findings", and so forth. Pinnacle will require the new FHA Mortgage Insurance Premiums on all loans with case numbers assigned on or after October 4.

 

For more good news - a tiny amount, last week's Pending Home Sales picked up a little bit. PHS is signed contracts between buyers and sellers, and they rose in July by about 5%. Sales are still down by 19% versus a year ago. And it was reported that the increase or decrease in values is still very localized. In California, for example, the LA Times reported that the State Board of Equalization stated that the value of properties fell 1.8% to $4.4 trillion. Forty-eight of California's 58 counties saw totals fall this year, but the decline was less than the -2.4% last year.

 

 

Yes, rates are still great, even with the little uptick we saw last week. But interestingly, the effective mortgage rate outstanding on all $11 trillion of US household residential mortgage debt remains basically unchanged at 6%. Originators on the front lines know that even though rates are at all-time lows, a huge proportion of households cannot refinance due to credit or value issues. So unlike previous low-rate cycles, when prepayments increased predictably, this time around is different.

 

Now that we're back from the weekend, let's take a look at the actual bond markets. The Treasury market was hit Friday with the stronger-than-expected employment report. For the week, overall, news was not great for the economy but better than expected, and since the Treasury markets seemed to be priced to a worst case scenario, prices went down and rates up. 10-yr Treasury yields went up more than 30 basis points in 6 business days (2.42% to 2.75%). And not only have we seen decent news, but the markets have supply to grapple with: this week we have 3's,10's and 30-yr auctions, and the corporate debt supply calendar looks very heavy this month - both of which compete with mortgage pricing. $2.1 billion hit the market in MBS's on Friday, and current coupon mortgages were worse about .375.

 

Besides the $67 billion auction this week, there is not much economic news. Thursday we have Jobless Claims and the international trade numbers. And the Fed's Beige Book will come out tomorrow. I guess that the financial news networks can focus on the elections, still two months away. This morning's 10-yr yield is back down to 2.64%, and 30-yr mortgage prices are better by roughly .250.