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Rather than doing my normal Mortgage Market Week in Review, I thought I’d send out something a bit different.  I’m going to, instead, take a look back at what I think were the three biggest issues in the mortgage market in 2009.  On Monday, I’m going to take a look at the top 5 issues that I believe we’ll be facing going forward in 2010.

1.  Without a doubt, the number one issue facing the mortgage market the past year was the Fed’s decision to purchase $1.25 trillion in mortgage backed securities.  We probably saw the most dramatic one day drop in mortgage rates I recall in the 22 years I’ve been in this business.  The mortgage industry ended up writing literally millions of new loans at lower interest rates because of what the Fed did and that changed the ball game for lenders (both individual lenders and financial institutions). 

But this subsidizing of the the mortgage market hasn’t been without it’s costs as well.  We’ve gone from a market that was relatively “free” to a market that has become much more dependent on the government and that’s not healthy in the long run.  Plus it makes you wonder, “what’s going to happen when the government stops?”  That’s a topic for Monday’s update.

2.  The second biggest issue that faced the mortgage world in 2009 was property values.  We started out the year being quite severely limited in terms of what we could do as property values fell.  Then Fannie and Freddie basically threw their rules out the window and essentially said, “If we have the loan, and we’re going to increase the customer’s likelihood of making their payments, then we’ll do the refinance.”  The program is saving Fannie and Freddie borrowers literally millions of dollars, if not more.  But a couple of things that need to be said:

• A lot of the clients that I talked to and did loans for weren’t really at risk of losing their home without refinancing.  Probably, (anecdotal reference only), no more than 10% of the people who took advantage of the new program were at risk of foreclosure.  But the vast majority of them were well over 80% loan to value even if they weren’t when they bought the house.  It showed how substantial the deterioration in values was.
• The loan modification portion of the program (for those who couldn’t qualify to refinance) has been an abject failure.   Why?  I think mainly because of this one fact – the borrowers either can’t afford the modified payments anyway (not a big enough incentive) or they are so far under water in terms of the value of the house vs. the balance owed that they said, “Here bank, you have the keys, I’m out of here.”
• The property value issues started in the lower price ranges and it has crept up the food chain.  The higher price areas are now getting hit just as much if not more than the lower priced areas.

3.  Government intervention is the third big issue that the mortgage world dealt with during 2009.  A few main points:

• The First Time HomeBuyer Tax Credit supposedly generated 350,000 (depending on who you talk to) new sales, but since 1.8 million homeowners are anticipated to take advantage of it for 2009, that works out to a cost of over $43,000 per sale generated for a $8,000 tax credit.  Ouch.
• Give them the Checkbook – On Christmas Eve, the Treasury essentially gave Fannie and Freddie their checkbook and said they will back them for as much as it takes to keep them from going under.  They didn’t do it with any restrictions or controls of how they manage their business.  We’re going to see the ripple effects of that decision for a long time, I’m afraid.
• HVCC – Home Valuation Code of Conduct – a set of rules that basically make it a criminal offense for a loan officer to talk to an appraiser.  Has it improved the quality of appraisals?  I don’t see it.  Has it saved the customer money?  Nope, cost them $50 or more extra per appraisal.  Has it sped things up?  Nope, it’s slowed them down.  I’ll agree that there were some issues of undue influence, but it’s not addressing it the right way.
• Reg Z – what does Reg Z do?  It basically gives the customer a 5 day period to look over the paperwork and then decide if they want to do the loan.  What’s the end result?  It does give the borrower a little more control which is good, but it also slows the process down.
• The Three F’s control everything.  I couldn’t tell you how many times I’ve told people that there are three sources of money in today’s market – Fannie, Freddie and FHA and if you can’t get them to give you the money, you are…… destined to fail.      In all seriousness, the non-governmental mortgage market is non-existent.  There are some big issues that are going to have to be dealt with going forward.  Will we have the guts to make the tough decisions?  I don’t know. 

I could go on for hours on each one of these topics, but I have to admit that time is running out on the year.  So consider this an overview of the things that I see have made a big difference in the last year.

It has been a lot of fun and a distinct privilege getting to know and communicate with all of you over the year.  I’ll have an overview on Monday of what I see are the 5 biggest issues the mortgage world will deal with in 2010.

Okay, you recall the chart I put up the other day about increasing delinquencies in Fannie’s portfolio?

And you recall the fact that Fannie Mae recently rolled out new guidelines that tightened down their underwriting guidelines (the memo took 20 pages).

And you know that FHA recently announced that they intend to go to Congress by the end of January with rules and changes to bring them back within compliance (that’s a fancy way of saying that they need a LOT more cash).

Oh and on Christmas Eve, the Treasury pulls the Thursday night massacre and essentially hands their checkbook to Fannie and Freddie and said, “Here, take how much you need so that you can stay above water.”

And now Barclays says that in the 2nd quarter of 2010 we’re going to see credit restrictions easing on mortgages?   How is that going to happen?

Oh, it does mention that there is a substantial portion of the population with low loan to value and good credit scores who aren’t being taken care of.    A couple of responses to that:

• In certain areas of the country, prices have fallen up to 50%.    So, it takes a LOT of equity for someone to still have a LOT of equity in their house.
• If you know someone who has a good chunk of equity in their house and needs a mortgage but isn’t getting taken care of, then they aren’t talking to the right lender.

Origination Funding May Increase as Credit Restrictions Ease in 2Q10, Analysts Predict : HousingWire

A recent set of research focusing on 2010 strategies for investors of agency mortgage-backed securities (MBS) by analysts at Barclays Capital finds that credit availability for mortgage originations may increase in the next six to 12 months.

However, the situation will remain tight in the next three to six months, they add, as the market grapples with ongoing risk aversion sentiments, loan repurchases stabilization and new regulatory procedures that will need this time to take hold.

“In particular, in H210, there could be a meaningful extension of conventional credit to currently under-served segments,” write the analysts in their Agency MBS Outlook 2010, such as “the substantial population of borrowers with low LTV but only mid-range FICOs (700-740).”

Jumbo loans, those over $417,000 and not guaranteed by Fannie and Freddie (aka you and me), are starting to see growing performance issues.    The delinquency problems are moving up the price “food chain.”

So let me ask you, if delinquencies are rising, do you think that it’s going to be easier to get a jumbo loan any time soon?

Nah, I didn’t think so either.

Calculated Risk: Moody’s: Jumbo-MBS under Review for Downgrades

Moody’s Investors Service placed $143 billion of jumbo-mortgage bonds under review for downgrades … The revisions were prompted by “the rapidly deteriorating performance of jumbo pools in conjunction with macroeconomic conditions that remain under duress,” Moody’s said.

… An “overhang of impending foreclosures will impact home prices negatively,” with values likely to decline 9 percent more … U.S. unemployment will rise to peak at about 10.6 percent …

Moody’s also said it expects the U.S. government’s effort to curb foreclosures to be less effective than it previously expected because the programs have “failed to gain traction.”

Bloomberg has the story about how the Treasury yield curve is steepening.     So what difference does that make?   A couple of quick points:

• It means that short term money is significantly cheaper than longer term money.   If you want to borrow for money for 2 years, it’s a lot cheaper than if you borrowed money for 10 years.
• The main reasons are the fear of inflation and the fear of the tsunami of debt that is going to be hitting the markets as the government needs to pay for all of the bailouts and the stimulus funding that they’ve had to do.
• It means that the financial markets are starting to take it seriously that the Fed is actually going to stop buying mortgage backed securities and that’s going to begin putting pressure on mortgage rates.

So, what does it mean for mortgage rates?  A couple of things:

• They probably won’t be going down.
• Barring any dramatic movements in the market, the overall trend will probably be a slow increase in rates, not a huge spike upward.

My recommendation – if you need a mortgage within the next 60 days, the odds are stacked against rates being cheaper in a month than they are now, so get it while you can.

Treasury Yield Curve Steepens to Record Amid Growth Outlook – Bloomberg.com

The Treasury yield curve, a barometer of the health of the U.S. economy, widened to a record as investors bet an accelerating recovery will fuel inflation and hurt demand for unprecedented sales of government debt.

The difference between 2- and 10-year Treasury note yields increased to 282 basis points before the government announces Dec. 23 how much it plans to auction in 2-, 5- and 7-year securities next week. It rose from 145 basis points at the beginning of the year, with the Federal Reserve anchoring its target rate at virtually zero and the U.S. extending the average maturity of its debt. A report tomorrow is forecast to show the world’s largest economy expanded in the third quarter.

FHA issued an update today which basically said three things:

• If you do a short sale just to buy another property at a lower price, FHA doesn’t want anything to do with you.
• If you do a short sale and were current on your debts, you’d be “fine.”   I’m assuming that this would be the type of situation where someone has to relocate due to taking a new job and short sales their existing house and wants to buy another home?   But let me ask you this question, do you know any lender who has ever agreed to a short sale where the seller hasn’t been behind on their payments?   So isn’t this sort of impossible?
• If a default happens with the short sale, then FHA says that they wouldn’t be eligible for at least three years.

Keep in mind the operative word is eligible, not approved for it.    The three years assumes that you’d be able to reestablish good credit almost immediately.

 HUD Limits FHA Mortgages after Short Sales : HousingWire || financial news for the mortgage market

According to the letter (available to download here) and effective immediately, borrowers are not eligible for a new FHA mortgage if they pursued a short sale agreement “to take advantage of declining market conditions” or to purchase another property at a reduced price.

Borrowers are cleared for a new FHA-insured mortgage if they were current on their previous mortgage and other debts at the time of the short sale and if the proceeds from the short sale serve as payment in full.

If a borrower executes a short sale while in default on their mortgage would not be eligible for a FHA-insured mortgage for three years from the date of the pre-foreclosure sale. Some lenders can make exceptions if the default was due to circumstances beyond the borrower’s control such as the death of the primary wage earner.

Every week, I’m a participant in Bankrate.com’s weekly Mortgage Rate Trend Index.  It’s a survey of many loan officers and those in the business and their opinions on what rates are going to do over the next 35 to 45 days.

Remember, those opinions might not be applicable for your individual situation.   But I’ thought you’d find them interesting to say the least.

So what does this chart represent?   The Fed’s purchase of mortgage backed securities.   They committed last spring to spending $1.25 Trillion worth of our money buying mortgage backed securities and originally planned on doing it by November.    They then decided to “ease” out of things and take until March to do it.

Rates at that point dropped by .375% overnight and have since dropped further.    I’ve read a variety of analysts predictions that rates will go up by anywhere from .25 to 1.25% when the Fed steps out of the market.   My personal opinion is that we aren’t going to see a dramatic reversal, but rather a slow increase once it becomes evidence that they aren’t going to extend it out further than they already have.

Tomorrow’s Federal Reserve Open Market Committee meeting (which is held behind closed doors) will potentially give some insight into the question of whether, how long, how far they might extend or shorten their market stimulus.   My prediction is that we won’t see them make any dramatic moves but reaffirm that they’ll be done in March.    I also don’t anticipate we’ll see the effects of the market dealing with a huge buyer leaving the marketplace until well after the New Year when we get closer to them really being finished.

Number of jobs lost – only 11,000.

Unemployment – down to 10%.

First Reaction – that’s going to make for an ugly day in the mortgage rate market.

Second Reaction – when you compare the ADP jobs report (160K lost) to the official jobs report (11K lost) something’s out of whack.    Time will tell, but expect rates to be higher today.