“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” – Winston Churchill.

Now that we’ve finally reached the day of taper, let’s go back to the original question at hand: is this the end of low interest rates as we know it? The short answer is ‘no’. I take it as a big positive that the 30yr Treasury is below 4%, currently at 3.85%. However with the Fed removing its hold on the interest rate market we should expect some volatility.

The big news this week was that exiting FHFA Acting Director Ed Demarco ordered both Fannie and Freddie to increase their guarantee fees and other credit costs for all loans. He suggested the increases will encourage further return of private capital and gradually reduce Fannie and Freddie’s footprint in housing. The change will increase borrowers interest rates between 25 and 50bps in RATE. The MBA, NAFCU and other trade associations all sent letters to the FHFA urging them to not increase the housing costs on borrowers, especially in tandem with new compliance regulation that will exclude certain borrowers from getting financing that rolls out in January. The Fannie and Freddie changes are effective for loans being delivered in April which means the new fees will find themselves on rate sheets in February. This change impacts all borrowers, even those with 800+ credit scores and LTV’s less than 60%.

Let’s put aside the outrageousness of such a change and at such a critical juncture and look at the facts.

1. The Fed is unwinding its support of long term rates
2. Fannie and Freddie credit charges are going up materially
3. Fannie and Freddie are reporting record profit
4. Home sales are slowing
5. Implementation of QM next month will eliminate many borrowers from financing, especially purchasing homes
6. Economy is improving at a slightly moderate pace
7. Inflation is below a comfortable rate
8. The non-agency whole loan market (private capital) has little to no traction and there is less liquidity now than in January of 2013. Despite record Fannie and Freddie profit, investors are unwilling to re-enter the market.
9. The Big Banks are increasing their market share
10. Homeowners helped during the recession where those whose loan was guaranteed by Fannie and Freddie
11. Homeowners least helped during the recession where those whose loan was held by private institutions
12. With upcoming credit cost change by Fannie and Freddie, approximately 100bps of a borrowers rate will go directly to the GSE’s

Let me repeat that last one, if a borrowers rate was 4.50%. 3.25% will go the owner of the loan, 0.25% will go the servicer and 1.00% will go to Fannie and Freddie. In 2003, about 0.10% to 0.15% went to Fannie and Freddie. Hard to argue that credit costs for loans originated today should be 10 times higher than what they were a decade ago. The origination quality is more than double today what it was in 2003. Delinquencies and defaults for loans originated over the past 4 years are at record lows. So is this really about encouraging private capital, is this pure extortion or is this a game of chicken to see if the US housing market can survive without Fannie and Freddie? I believe it’s a combination of all three depending upon who you talk to.

2014 shapes up to be a truly interesting year and one in which many changes are likely to unfold. Headwinds in the face of a recovery have only increased and the realization of GSE pricing changes, potential reductions to GSE loan limits, compliance changes and stimulus changes will all materialize in 2014. There is speculation that Mel Watt, the new FHFA director will undo DeMarco’s last act on the Fannie/Freddie pricing change. There will likely be more debate about the future of the GSE’s and the push to unwind them as several of our representatives in DC have suggested.

Unwinding Fannie and Freddie? I still struggle with the notion that our politicians will voluntarily give that kind of power (and money) to Wall Street, hedge funds and the big banks. In my lifetime I have not witnessed our government giving away both power and money of this magnitude. I believe the system, albeit seriously flawed years ago, worked, and placing Fannie and Freddie into conservatorship was a necessary step during very unusual times. What’s to save the economy during the next housing crisis if there isn’t a way for the government to intervene? With all of the pricing changes, compliance changes, regulations, etc. haven’t we already ensured we’ve fixed the evils of the past?

I’d prefer my last market update for the year to end on a more pleasant note. But, as mortgage bankers know, this is a counter-cyclical business. What’s bad for the economy is generally good for interest rates. We are a bittersweet group. I expect 2014 to be bumpy but the we’ve also moved passed the biggest bump, which was the increase to interest rates that came in the middle of 2013. If you had asked anyone at the beginning of 2013 what a 100bps increase to interest rates would do to the market, the answer would most likely have been ‘disaster’. The year ended certainly better than that and I expect 2014 to end much better than expectations. Keep a close eye on jobs, inflation and GDP. They are the true markers of economic reality.

Happy Holidays and Good Luck in 2014.

Common Issues Concerning Trusts

The impasse in Congress on the budget and debt ceiling talks has resulted in a shutdown of non-essential functions. But this helped rates yesterday, and stronger-than-expected economic data had little impact. (The news was that the Chicago PMI rose to 55.7, above the consensus of 53.5, and the highest level since May.) The U.S. 10-yr T-note yield hit its lowest level in nearly two months, thanks to the potential slowdown in the US economy from the shutdown. And looking at agency MBS prices, “organic” supply (current production of about $1 billion a day) is more than manageable as official buying from the Fed is still going strong.  All that said, the unemployment numbers coming out tomorrow might be the market mover this week.  I anticipate rates ticking back up a little bit.

Saw this commentary on Facebook…

It seems that Congress is once again tempted to come back to the “mortgage well” since the House passed HR 1629, the STEM Jobs Act of 2012. The bill amends the Immigration and Nationality Act to make up to 55,000 visas available to qualified immigrants with certain advanced degrees who agree to work for at least five years for the petitioning employer or in the United States in a STEM field. STEM is a designation indicating advanced training in science, technology, engineering or math. (Not mortgage banking or real estate.)

When it was sent to the House Rules Committee the bill was altered with what is generally known as a “payfor” which would require Fannie Mae and Freddie Mac to increase their guarantee fees to cover the cost of implementing the STEM Jobs Act. Guarantee fees were implemented a few years ago to pay for the “Government Assistance” they received during the difficult years. With the Federal Reserve buying Mortgage Bonds to keep rates low, doesn’t this seem counterproductive to increase the “Guarantee Fee” which is ultimately paid for by the Borrower’s.

The Mortgage Banker’s Association President, Dave Stevens urged Congress to reconsider their approach of using guarantee fees for this purpose. He said in part, “Fannie and Freddie’s guarantee fees are supposed to be used to help offset the risk inherent in providing mortgages, and any increases to those fees should be used for that purpose. Dipping back into the housing piggybank to pay for unrelated policy items on the backs of America’s homebuyers sends the wrong message at a time when the housing market is starting to show signs of recovery.”

And another note regarding Saturday’s commentary came from Mike L. who wrote, “I have a comment on the “lack” of first time homebuyers that actually are buying homes. By my experience, it’s not for the lack of them trying. I have pre-qualified a multitude of First Time Homebuyers and they are writing offers on homes.

Typically they are using either FHA financing or Conventional financing with 5% to 10% down (some even with 20% down). However they are typically writing offers on lower priced “entry level” properties. These properties are also very attractive to investors, so we are frequently getting beat to the punch by investors using all cash or very large down payments. It’s hard to blame the seller. Why wouldn’t they take an “all cash, higher priced offer” over the lower down payment first time buyer? Some of my first time buyers have been trying for well over a year to have their offers accepted. Combine this with the lack of inventory here in Southern California and the problem is amplified even further.”

Freddie Mac released its National Housing Survey yesterday saying that home loan rates will remain near record lows for the first half of 2013, but will slowly rise in the second half although remaining below 4%. Freddie said that home prices could increase by as much as 3% nationally next year with some localized areas showing even larger gains. Although this is still speculation, this is good news to any homeowner to see us turn a meaningful corner in values.

Trends: On Saturday, just in time for Sunday’s open houses, the commentary discussed how the first time home buyer had been left out of the recent excitement. Deb S., a top Realtor from California, wrote, “Unfortunately for our overall well-being, those purchasers were investors and first-time homebuyers cannot compete with cash. Period. So, they are scrambling like crazy and running from property to property and simply get beaten out (either due to the terms or they can’t even make a decision as quickly as a number-oriented buyer can) every time.

HOA’s are either not acting or being slow to react, with management not well-trained or asleep at that wheel, and they are not making any rules about what % of units must be owner occupied and the result is the complete makeover of many complexes into below 50% owner occupancy and thus, unable to get a loan. The homeowners aren’t informed from the management, they have no idea who is buying, what the repercussions are, and they are suddenly in a home they cannot refinance and must sell at a substantially lower price when our market stabilizes and the investors slow down.” How this could be enforced is anybody’s guess, but it is something to look into if you are on a HOA Board that has this phenomenon happening.

Sharing some comments and thoughts after reading an article/commentary by Rob Chrisman (Mortgage Daily News and Commentary)…

Concerning the new agency designed to “protect” consumers; the Consumer Financal Protection Bureau, CFPB, and whether or not it’s focus is on saving the consumer money; Jeremy Potter with Norcom writes, “In response to TR’s comment about the CFPB’s interest in Federal Housing Finance Agency’s handling of FHA Mortgage Insurance Premiums, I often tell our staff at Norcom, our brokers and anyone who will listen that CFPB never claims to make things cheaper.

Many members of our industry seem to think that part of consumer protection is keeping prices down and we sarcastically say ‘don’t they realize that they are making everything more expensive.’ The truth is that I don’t think they care. They were tasked to protect the consumer and the market. To their credit (I guess), I’ve never heard them claim that that meant making it cheaper to get a loan. In fact, CFPB seems to operate on the ‘make the lender pay’ idea in many areas without regard for where/how those costs might get passed on. We should stop hoping that CFPB turns their attention to consumer cost because it doesn’t look like it’s gonna happen.”

The Bi-Weekly concept is a function of making extra payments. Basically, by making 26 bi-weekly payments, you make 13 full payments which equals one extra payment a year. By making one extra payment a year, you can pay your loan of in 22 – 23 years if it is done from the beginning.

The problem is that most Bi-Weekly programs are not administered by your lender but by a third party. Frankly, I would never recommend that you allow a third party be responsible for timely payments on your mortgage but in addition, most third party companies are going to charge you a fee to set up your Bi-Weekly program and they will charge you each time they debit your account.

The good news is, you can accomplish the same thing without paying a fee to anyone by simply taking the amount of your mortgage and dividing it into 12 even payments and make that extra payment each month. In doing this, you will make one extra payment a year. IE: if your mortgage payment is $1,200 per month, you simply pay an extra $100 per month in addition to your regular payment. The extra money will go towards your Principal balance.

As always, call me if you have any questions or concerns at 310-775-9824.

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