You are Officially On the Clock

If you have been holding off buying or refinancing your home in hopes of a lower monthly payment or perhaps to leverage some of the appreciation in equity your home undoubtable gained over the last 4-5 years, might I strongly suggest you start that process today. Like, this evening. When you get home. Today, the U.S. 10-year Treasury yield shot higher, taking mortgages and various consumer loan rates with it. There are a couple key reasons for this market movement and why this one has some legs. We are going go focus on two, both of which have little to do with the Fed.

1. The Bank of Japan (BOJ) who has been fighting negative interest rates in a market desperate for a steeping yield curve surprised the markets today (July 23rd) when the Japanese' Government pressed the 10-year Japanese government bond by 5 basis points, to 0.083 percent, the highest since February. The BOJ, which meets next week, announced it would buy bonds to curb the action, and the 40-year JGB also spiked, touching 0.92 percent. All Markets are interconnected. Fixed Income even more so.

2. The fight with China over US-China deficit GDP is just heating up. To understand how and why this affects US Mortgage rates is to simply understand that China is not only one of the largest buyers of US Treasuries, but they are also one of the largest owners of US Treasuries. The US buys over $500 billion in Chinese goods annually. China only buys $130 billion from the US. Quick math shows that a trade war focused on tariffs will hurt the Chinese more. How would they respond, we suggest they do it one of two ways. First by lowering or devaluing their currency (the Yuan). This is quick and they already do this as needed. Second, they slow or worse stop buying US Treasuries. Selling their $1 trillion in US Treasuries would also force bond yields could climb. That’s problematic as Treasury holders around the world, including the U.S. government and (you and I) will see their bond prices drop. Higher yields also make it more expensive for the U.S. government to borrow through new debt issues, while companies that issue corporate debt, would have to pay higher borrowing costs.

With the first already taking flight, we strongly suggest you move date night to another evening and spend some time getting your home loan in order.

Considering Buying or Refinancing a Home? Read This....

According to a survey conducted by J.D. Power, 27% of new homeowners ultimately came to regret their choice of lender. Twenty seven percent. The major reason for the dissatisfaction was overall poor customer experience. That's pretty vague so let's dive further. A lack of communication or unmet expectations (again back to communication) topped the "poor customer experience" sub list. Other regrets listed included pressure from the lender to choose a particular product/loan and not closing on time. Communication is a two way street. As a homeowner or potential homebuyer, you can remove some of the tension and turmoil of home loan process by carefully vetting potential lenders. Here are 5 questions to ask potential lenders before you make a commitment.

1. What mortgage programs do you offer? In many cases, choosing the best loan for your specific financial situation requires working with a lender who offers a wide array of loans. You don’t want to work with a lender who tries to push you into one loan simply because that’s the only option from their limited selection. Ask them if they regularly handle the type of loan you are looking for. If the type of loan you are looking for is more specific than say, a conventional fixed-rate mortgage, a little more expertise is useful — and in some cases, it might be necessary. An uncommon home loan like a United States Department of Agriculture loan, for instance, must go through an approved lender.

2. Inquire about the qualifications for the home loan you are seeking. There may be two lenders who offer the same type of loan, but their minimum requirements could differ. For instance, Department of Veterans Affairs loans require a minimum credit score of 620, but a lender might require a minimum score of 640. Comparison-shop. Don’t assume the same type of loan means the same terms.

3. Ask your lender to provide an estimate of the rates and fees expected to pay. Important note here; If you have taxes and insurance tied to your mortgage payment, an initial estimate will never guarantee your final, out-of-pocket expense. Numbers will change as things like title are received or surveys are approved or ordered. That said, it can be a solid jumping-off point for evaluating lenders. If the loan programs are the same, a helpful starting point is to compare the interest rate and total origination costs. It is important to know rates fluctuate, so try comparing lenders on the same day to get the most accurate mortgage rate comparisons. Speaking of rates....

4. Ask when you may be able to do a rate lock. As we mentioned above, mortgage rates can change multiple times a day. They can be as fluid as the stock market. Be sure to ask about the associated fees, including how much it costs to extend the lock should it expire before closing.

5. What is the time estimate for processing my home loan? This is critically important if you are selling a home or coordinating the end of a current lease with a new home purchase. Under the TRID guidelines, it's vitally important you receive your initial closing disclosure four business days before your closing date. In short, get the key dates of the appraisal and underwriting approval. Of course, it’s always a good idea to build in a small buffer if you can — and not just because loan preparation can take longer than expected. Along these lines, make sure you explain that you expect communication in a straightforward and timely manner.

First-Time Homeowners and our Existing FHA Clients

Federal Housing Administration announced they will reduce the annual premiums most borrowers will pay by a quarter of a percent. The new rates are projected to save new FHA-insured homeowners an average of $500 this year said U.S. Housing and Urban Development Secretary Julián Castro.


This announcement along with Efinity's Mortgage's pledge to get our FHA borrowers into homes for only the required 3.5% down payment makes this the time to call us and get your home loan started.



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INSURANCE | INVESTMENTS | MORTGAGE


Announcement & Source: https://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2017/HUDNo_17-003

It's SUMMER TIME!

It's SUMMER TIME! Many of our Mortgage clients are asking us about financing pools. There are a few different options for this.

For those of you buying a new home and leveraging a conventional loan, Efinity Mortgage offers the Fannie Mae Homestyle program. This allows our clients to finance the cost of improvements (pools included) into the home loan. The original appraisal is completed subject to the improvements being completed. Additional downpayments may be required depending on the final valuation.

If you are an existing homeowner and looking to add a pool to your home, there are a number of different home equity and specific pool financing options for you.

As for the type of pools, many people are not aware there are several different types available.

1) Natural pools
Natural pools are chemical-free, low-tech and affordable alternatives to conventional models. You can build a natural pool with gravel and clay instead of concrete and fiberglass. Aquatic plants keep the water clean instead of chlorine or a filtering system. Plants are also a natural purification system that introduces oxygen and good bacteria into the water. You can also include additional elements like green pool roofs and vertical gardens to increase the health of your pool.

2) Moss-filtered pools
Moss-filtered pools cut down on the need for chemicals like chlorine. Having moss in your pool also reduces water use and decreases how often you need to backwash the pool for cleaning. According to statistics from the University of Maryland, moss systems reduce chemical usage by 40 percent, water consumption by 75 percent, and save about $6,700 annually in bills.

3) Saltwater pools
Like the ocean, saltwater pools use a saline composition to keep water clean without chemicals. Saltwater pools use a mixture of chlorine and table salt to create electrolysis, which gets rid of algae and bacteria. If you want a mild saline pool, clean your chlorine cell once a year to prevent calcium buildup and add salt to the water once a month. Reducing chlorine usage helps to minimize overall chemical consumption.

4) Ozone sterilization
Installing an ozone sterilization system is another enviro-friendly method of cleaning your pool. An ozone system uses electricity to convert oxygen into bacteria-destroying ozone. These systems can reduce the need for chemicals by at least 80 percent, if not altogether. This will save on your pool maintenance costs and help keep the environment clean.

5) Efficient heating
Efficient condensing boilers can help to cut down your pool heating costs by almost 20 percent. You can use alternative heating methods like solar blankets and energy-efficient heat pumps to keep your pool warm. Enviro-friendly heating methods can lower your bills and reduce carbon dioxide emissions. Efficient heating isn’t a type of pool, but it’s a simple way to help your pool remain friendly to the environment and your wallet.

We hope you find this information helpful and feel free to reach out to us with any questions you might have.

Buying a Home and Have Questions?

Wonderful! Congrats on the decision. We have pulled together some helpful tips to get you started. These go pretty much in order, as most in the real estate industry will tell you it is important to stick with this road map to save yourself and others much anxiety.


How Much House Can You Afford?
Buying a new house is a big investment. You want to be sure that you have all the right finances before proceeding. Spend the time to do a serious audit of your finances and determine a budget. Use an Affordability Calculator to estimate how much you can afford on a house based on your income, savings, debt and assets. Any of Efinity's licensed mortgage professionals can also help with this. Check your credit score. Every year you are allowed one free copy of your credit report.


Get Preapproved For Mortgage
Now that you’ve checked your finances, it is time to see what kind of mortgages you qualify for. Many buyers make the mistake of assuming that being prequalified and preapproved for a mortgage are the same. They are NOT. At Efinity Mortgage at time of application we press deeply into your financial situation and certainly through the application process, an extensive financial background check and a current credit score report.


Find the Right Realtor
A realtor or real estate agent is another great person to have as you maneuver the home buying process. They have the in-depth knowledge on home buying and help you negotiate the purchase. This service is free for the buyer because the realtor is compensated by the seller. You can search online for a realtor at Realtor, Zillow, Trulia. Efinity Mortgage also works with a large number of realtors throughout our network.


Find a Home
You’re finally at the step you’ve been waiting for. Be sure to create a checklist of items you need and want in your future home. This will narrow down the endless choices of homes and help you focus on only the right ones. Also, make a list of your neighborhood preferences like safety, commute, type of schools, local shopping and grocery.


Get a Home Inspection
The home inspection is a step that many home buyers tend to skip over but this is a very important step once you’ve found a home you like. A home inspection checks for any damages to the home’s structure or foundation as well as any major or minor fix-ups that need to be done. Once a thorough home inspection is completed the buyer and seller will receive a report from the home inspector.


Make An Offer
Make an offer with the help of your realtor and don’t be afraid to negotiate price. This may take longer than you think but always be ready if the seller says yes.


Close the Sale
Before you close review all the costs associated with both the purchase and the expected monthly payments. No matter how much time and effort we put forth, it is still amazing to us how often clients gloss over these things. Spend the time and know what you are buying.

Interested in buying a home? Here the difference between success and failure (per the NAHB)

August 4, 2014 - Each $1,000 increase in the cost of a new median-priced home price forces 206,000 prospective buyers out of the marketplace, according to a new study by the National Association of Home Builders (NAHB). source: http://www.nahb.org/news_details.aspx?newsID=16947 In all the wrangling over credit, construction and confidence in this housing recovery, the real cost of owning a new home could come down to about the same amount as the cost of a new washing machine. NAHB claims just $1,000 makes all the difference. "Each $1,000 increase in the cost of a new median-priced home price forces 206,000 prospective buyers out of the marketplace," reads the first line of a new report from the National Association of Home Builders. NAHB researchers based their findings on the number of households that would not qualify for a mortgage (factoring income, debt, interest, property taxes and homeowners insurance) based on that price increase to a median-priced home. They varied state to state, with a low of 313 borrowers not qualifying in Wyoming, to a high of 18,250 in Texas. "It all adds up. A thousand dollars means an additional monthly cost, based on someone's income. That may make the difference between owning and renting," said Robert Dietz, a tax and market analyst at the NAHB. The NAHB is using the analysis to focus on the effects that building regulations have on affordability, noting that higher regulatory costs for builders are passed on in the price of a new home. That said, the $1,000 figure is striking evidence of just how many Americans teeter on the edge of homeownership. The nation's homeownership rate continues to fall, as job and wage growth does not keep pace with home price growth. Nationwide, home prices, including distressed sales, rose 7.5 percent in June 2014 compared with June 2013, according to a report released Tuesday by CoreLogic, a data company. This is a moderation in the double-digit price gains seen last year, but still represents 28 straight months of year-over-year appreciation. "Home prices are continuing to rise fueled by ongoing tight supply, low rates and aggressive investor buying on the East and West coasts," said Anand Nallathambi, CEO of CoreLogic, in a release. "The expected surge in the number of homes for sale has not materialized to date, as many homeowners are staying put and waiting for better economic times and higher prices." Supply issues are easing somewhat and should continue to moderate price gains, but other issues in the mortgage market are also keeping the price of home ownership higher. While builders complain of construction regulations, mortgage lenders argue they are being handcuffed by a still backward-looking housing finance system. They need to have $1,000 extra, according to the builders, but that is just one small part of a far more complicated housing recovery. Home buyers need good credit, sufficient down payments, proof of solid employment…or cold hard cash as covered by Diana Olick with CNBC. Souce: http://www.cnbc.com/id/101895900 While the national news agencies quickly found this story appealing, the truth behind the matter is if you have been responsible in your borrowing, have shown steady employment for over two years and have at least the required down payment; most everyone can obtain a mortgage. There, we said it. It's really not that hard. We have programs available today which allow 1st time homeowners leveraging FHA financing to have as low as a 580 credit score. They only need steady employment and the HUD required 3.5% down and even that can be a gift from a family member! In closing, don't let the headlines fool you. As in years past, steady income and responsible borrowing have been and always will be the key to homeownership.

Welcome to Spring - Home Buying Time!!

With Spring upon us, and new buyers out looking for houses, we thought today might be a good time to review the basics of what lenders look for as they decide to approve (or deny) mortgage applications. For at least the last two decades we have heard them called “The 4 C’s of Underwriting”- Capacity, Credit, Cash, and Collateral. Guidelines and risk tolerances change, but the core criteria do not.

CAPACITY
CAPACITY is the analysis of comparing a borrower’s income to their proposed debt. It considers the borrower’s ability to repay the mortgage. Lenders look at two calculations (we call ratios). The first is your Housing Ratio. It simply is the percentage of your proposed total mortgage payment (principal & interest, real estate taxes, homeowner’s insurance and, if applicable, flood insurance and mortgage insurance – like PMI or the FHA MIP) divided by your monthly, pre-tax income. A solid Housing Ratio (often called the front end ratio) would be 28% or less; although, at times loans are approved at a significantly higher number. That’s because your front end ratio is looked at in conjunction with your back end ratio.
The back end ratio (referred to as your Debt Ratio) starts with that mortgage payment calculation from the Housing Ratio and adds to it your recurring debts that would show up on your credit report (auto loans, student loans, minimum credit card payments, etc.) without taking into consideration some other debts (phone bills, utility bills, cable TV). A good back ratio would be 40% or less. However, loans sometimes are granted with higher debt ratios. Understand that every application is different. Income can be impacted by overtime, night differential, bonuses, job history, unreimbursed expenses, commission, as well as other factors. Similarly, how your debts are considered can vary. Consult an experienced loan officer to determine how the underwriter will calculate your numbers.

CREDIT
CREDIT is the statistical prediction of a borrower’s future payment likelihood. By reviewing the past factors (payment history, total debt compared to total available debt, the types of monies: revolving credit vs. installment debt outstanding) a credit score is assigned each borrower which reflects the anticipated repayment. The higher your score, the lower the risk to the lender which usually results in better loan terms for the borrower. Your loan officer will look to run your credit early on to see what challenges may (or may not) present themselves.

CASH
CASH is a review of your asset picture after you close. There are really two components – cash in the deal and cash in reserves. Simply put, the bigger your down payment (the more of your own money at risk) the stronger the loan application. At the same time, the more money you have in reserve after closing the less likely you are to default. Two borrowers with the same profile as far as income ratios and credit scores have different risk levels if one has $50,000 in the bank after closing and the other has $50. There is logic here. The source of your assets will be examined. Is it savings? Was it a gift? Was it a one-time settlement/lottery victory/bonus? Discuss how much money you have and its origins with your loan officer.

COLLATERAL
COLLATERAL refers to the appraisal of your home. It considers many factors – sales of comparable homes, location of the home, size of the home, condition of the home, cost to rebuild the home, and even rental income options. Understand the lender does not want to foreclose (they aren’t in the real estate business), but they do need to have something to secure the loan against, in case of default. In today’s market, appraisers tend to be conservative in their evaluations. Appraisals are really the only one of the 4 C’s that can’t be determined ahead of time in most cases.

Now, each of the 4 C’s are important, but it’s really the combination of them that is key. Strong income ratios and a large down payment with strong reserves can offset some credit issues. Similarly, long and strong credit histories help higher ratios….and good credit and income can overcome lesser down payments. Talk openly and freely with your loan officer. They are on your side, advocating for you and looking to structure your file as favorably as possible. We hope you find some value in this information as you elect to move up, move down or accross this great country of ours!

As we called it, Double Dip Housing has arrived

Here are latest from S&P/Case Shiller report out this morning.

• 4.2 percent decline in Q1 of 2011, 2.9 percent from one year ago.

• The 10 cities fell .6 percent in March

• Top 20 cities fell .8 percent in March

What's probably most concerning and begs to question, what happened to the home buyer tax credits which were supposed to stimulate the economy and housing market (not necessarily in that order)?

Perhaps the best news to come out of this will be evidence that mortgage rates will remain low as yields become subject to basic economic supply and demand. With new mortgage transaction counts down, there just isn't enough fixed income products out there to buy outside of corporate bonds and US Treasuries..

To further the point, the National Association of Realtors released an article the other day verifying the median income of real estate agents has fallen 22% to $34,100? Median income….half make more and half make less. Also, a mere 16% of national real estate agents made 6 figures last year. I’m sure you’re curious to what that number represents and it’s 176,556 agents.

Ok, so all this wonderful news is out there. Here's our take on how to truly jumpstart both the housing industry and this economy.

• Bring back down payment assistance. I know the GSE's (Fannie Mae and Freddie Mac) despised these buyer assisted grant programs. Here's how the vast majority of them worked: Seller of the home (at closing) would make a "charitable donation" to a Non-profit organization (say a church), the church in turn work pocket a $900 admin. fee but remit the rest of the month (at times up to $10,000) towards the buyers closing cost. True the default in loans structured in the aforementioned way had higher default levels but now that HUD has grossly increased both the initial upfront Mortgage Insurance Premium and Monthly Premium, there's got to be a pretty decent model which supports a 3-6% default and still ensure "success" in homeownership.

• Housing is only so important to an already service oriented country like the US. Manufacturing MUST return. Leadership in Washington DC must bring back significant incentives to "defend" this countries manufacturing arm.

• Flat tax. If this county remains (as we suspect it will) a service oriented country, we must tax it accordingly whereby those leveraging the most services or consuming the most goods, in turn pay more.

Simple, now where do we petition these simple requests?

If you won't listen to us... perhaps the writers with the AP will sway you

Era of super-low mortgage rates is OVER


30-year benchmark rises to 5.05 percent from 4.81 percent
The average rate for a 30-year home loan rose above 5 percent this week for the first time since last April — just as Americans are feeling more secure in their jobs and confident about the economy, and just before the big spring home-buying rush.

Freddie Mac said Thursday that the average rate was 5.05 percent, almost a full percentage point higher than in November, when it hit a 40-year low.

Economic signals suggest the recovery is gaining momentum. New claims for jobless
benefits came in this week at the lowest in three years, and the unemployment rate has fallen nearly a full percentage point in two months. Americans are spending more and saving less.

The exception is the beleaguered housing market. Record foreclosures have forced home prices down, and last year was the worst for sales in more than a decade. About the only good news was that qualified buyers could get the deal of a lifetime from their lenders, if they had the means — and the stomach — for the market.

Now rates are rising, and analysts expect that will continue through the end of the year, to about 5.5 percent. The next few months are the busiest for the housing market — about one in three home sales happens in the spring.
It doesn't help," says Greg McBride, a senior financial analyst with Bankrate.com. "Any increase in mortgage rates takes away buying power and dilutes the incentive to refinance."

Rates have been rising since the fall, mostly because of fears that higher inflation is coming. Investors have been demanding higher yields on Treasury bonds ever since the Federal Reserve announced its program to pump up the economy by spending $600 billion to buy government debt. Mortgage rates tend to track the yield on the 10-year Treasury note.

"You'll see some effect on demand, but it's really how secure people are in their jobs and how much money they feel they have relative to their homes," says Cristian deRitis, an economist specializing in housing for Moody's Analytics.

"Many of those people just won't buy a house," says Wells Fargo senior economist Mark Vitner. "They'll hold off."

Home prices are expected to fall at least 5 percent more this year. Because of the feeling that the home isn't the failsafe investment it used to be, renting is more attractive. Especially when some analysts say it could be years before prices return to their pre-recession peak.

That may be contributing to the fact that, despite record inventory levels of affordable homes in nearly half of U.S. cities, mortgage applications continue their downward slide as buyers remain on the sidelines.

"Believe it or not, what I'm seeing, and I'm working with first-time homebuyers, they are not as affected by the interest rate as they are by getting a down payment," says Julie Longtin, a real estate agent with RE/MAX Cityside in Providence, R.I. "That's what is holding them back."

On a $200,000 loan, the payment difference between today's rate and November's is less than $100 a month — hardly enough by itself to spook a buyer.

If rates continue to rise, as many predict they will, the housing market will be in for yet more trouble. "Six percent would do serious damage if it happened in a very short period of time," said Patrick Newport, U.S. economist at IHS Global Insight.

Even 6 percent would be a bargain for homebuyers historically. Rates were in double digits through most of the 1980s. It wasn't until 1991 that rates consistently stayed below 10 percent. At the peak of the credit bubble in July 2006, the 30-year fixed mortgage was 6.76 percent.

All this leaves buyers wondering: What is the new normal for interest rates?

"We're turning to a more normal mortgage rate environment, says Guy Cecala, publisher of the trade magazine Inside Mortgage Finance. "That pretty much means the 30-year in the 6 percent range. I don't think rates will be going down." - AP writers JANNA HERRON, MICHELLE CONLIN

What this REALLY means for the market and housing over the next 3-5 years + will be detailed in the Efinity Report's next blog. Stay tuned...

Mortgage rates steady

The average rate on the 30-year fixed mortgage changed little this week.

Freddie Mac said Thursday the average rate rose to 4.81 percent this week from 4.80 percent the previous week. It hit a 40-year low of 4.17 percent in November.

The average rate on the 15-year loan slipped to 4.08 percent from 4.09 percent. It reached 3.57 percent in November, the lowest level on records starting in 1991.

Rates have been little changed this year after spiking more than half a percentage point in the last two months of 2010. Investors sold off Treasury bonds during that time, driving yields lower. Mortgage rates tend to track the yield on the 10-year Treasury note.

High foreclosures, job worries and expectations that home prices will fall further have kept many potential homebuyers on the sidelines. Historically low mortgage rates haven’t been enough to jumpstart the housing market.

To calculate average mortgage rates, Freddie Mac collects rates from lenders across the country on Monday through Wednesday of each week. Rates often fluctuate significantly, even within a single day.

The average rate on a five-year adjustable-rate mortgage fell to 3.69 percent from 3.70 percent. The five-year hit 3.25 percent last month, the lowest rate on records dating back to January 2005.

The average rate on one-year adjustable-rate home loans was unchanged at 3.26 percent.

The rates do not include add-on fees, known as points. One point is equal to 1 percent of the total loan amount. The average fee for the 30-year and 15-year loan in Freddie Mac’s survey was 0.8 point. The average fee for the five-year ARM was 0.7 point, and the fee for the 1-year ARM was 0.6 point. - JANNA HERRON | THE ASSOCIATED PRESS

In short, get your cheap money now as the inflation monster is coming.

Todays Thought: Does your mortgage rate start with 4?

It’s often said that home is where the heart is. Yet we find that many of our clients fail to realize that a mortgage is at the heart of every good financial plan. Making sure you've got the right one can save you from unnecessary interest payments, which allow for further wealth creation and financial health for your family. Today, October 7th, we reached all historic lows for home loan rates (see http://www.msnbc.msn.com/id/38770102/ns/business-real_estate/) NOW is THE TIME to; refinance your current home loan, consolidate your existing home loan(s), access your equity and pay down higher credit rate loans or put home buying on the front burner!

When it comes to determining if your mortgage is still the right one for you, there are some important factors to consider; include the type of loan (or loans) you may need, your timeline for purchase, if you have an existing mortgage the your current loan balance, your existing interest rate, and any recent or upcoming changes to your financial situation (i.e. job change, marriage, divorce, kids going to college, etc). While considering the home loan process may seem like a daunting task, have no fear. Pick up the phone or email now to discuss your options with one of our licensed financial professionals. The time to ask is NOW. Just as rates arrived at historic levels, they very likely won't stay this way forever. On a side note, the importance of these historic rates can be summarized in the following way:

A $200,000 mortgage with a 30yr term at a rate 5.00% has a monthly principal and interest payment of $1,073.64.

At today’s rate, the same payment ($1,074.18) can be had with a $225,000 mortgage.

OR

A $400,000 mortgage, at 5.000%, has a monthly payment of $2,147.28 (P&I).

Today, that same payment ($2,148.37) gets you a $450,000 mortgage. That’s $50,000 more!!

With the disappearance of the capital markets in the residential mortgage space, the majority of all mortgage loans are now being purchased by our federal government. Yes, the same federal government who might seriously consider raising taxes! In closing, allow me to encourage you to spend a little time reviewing your situation today. After all, no one wants to look back and realize that a great opportunity to improve their financial situation has passed them by.

The Domino's Continue to Fall....From GSE to GCE

Fannie Mae and Freddie Mac are no longer Government "Sponsored" Entities, but Government "Controlled" Entities. The following series of statements were made by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers
Good morning. I’m joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency, FHFA.
In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs – including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action.
Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers – both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.
Based on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.
The four steps we are announcing today are the result of detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve.
We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection. Throughout this process we have been in close communication with the GSEs themselves. I have also consulted with Members of Congress from both parties and I appreciate their support as FHFA, the Federal Reserve and the Treasury have moved to address this difficult issue.
Before I turn to Jim to discuss the action he is taking today, let me make clear that these two institutions are unique. They operate solely in the mortgage market and are therefore more exposed than other financial institutions to the housing correction. Their statutory capital requirements are thin and poorly defined as compared to other institutions. Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other U.S. financial institutions.
I support the Director’s decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs.
I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today’s action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither. New CEOs supported by new non-executive Chairmen have taken over management of the enterprises, and we hope and expect that the vast majority of key professionals will remain in their jobs. I am particularly pleased that the departing CEOs, Dan Mudd and Dick Syron, have agreed to stay on for a period to help with the transition.
I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing. Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.
To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.
Treasury has taken three additional steps to complement FHFA’s decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders – senior and subordinated – and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.
These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.
Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise.
Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses. The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital.
The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses on their holdings of Fannie Mae or Freddie Mac common or preferred shares, whether realized or unrealized, are likely to reduce their regulatory capital below “well capitalized." The banking agencies are prepared to work with the affected institutions to develop capital restoration plans consistent with the capital regulations.
Preferred stock investors should recognize that the GSEs are unlike any other financial institutions and consequently GSE preferred stocks are not a good proxy for financial institution preferred stock more broadly. By stabilizing the GSEs so they can better perform their mission, today’s action should accelerate stabilization in the housing market, ultimately benefiting financial institutions. The broader market for preferred stock issuance should continue to remain available for well-capitalized institutions.
The second step Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Given the combination of actions we are taking, including the Preferred Share Purchase Agreements, we expect the GSEs to be in a stronger position to fund their regular business activities in the capital markets. This facility is intended to serve as an ultimate liquidity backstop, in essence, implementing the temporary liquidity backstop authority granted by Congress in July, and will be available until those authorities expire in December 2009.
Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS. During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we’ve seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. Treasury will begin this new program later this month, investing in new GSE MBS. Additional purchases will be made as deemed appropriate. Given that Treasury can hold these securities to maturity, the spreads between Treasury issuances and GSE MBS indicate that there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains. This program will also expire with the Treasury’s temporary authorities in December 2009.
Together, this four part program is the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition of the GSEs. Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking. The Preferred Stock Purchase Agreements minimize current cash outlays, and give taxpayers a large stake in the future value of these entities. In the end, the ultimate cost to the taxpayer will depend on the business results of the GSEs going forward. To that end, the steps we have taken to support the GSE debt and to support the mortgage market will together improve the housing market, the US economy and the GSEs’ business outlook.
Through the four actions we have taken today, FHFA and Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible.
And let me make clear what today’s actions mean for Americans and their families. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation. That is why we have taken these actions today.
While we expect these four steps to provide greater stability and certainty to market participants and provide long-term clarity to investors in GSE debt and MBS securities, our collective work is not complete. At the end of next year, the Treasury temporary authorities will expire, the GSE portfolios will begin to gradually run off, and the GSEs will begin to pay the government a fee to compensate taxpayers for the on-going support provided by the Preferred Stock Purchase Agreements. Together, these factors should give momentum and urgency to the reform cause. Policymakers must view this next period as a “time out” where we have stabilized the GSEs while we decide their future role and structure.
Because the GSEs are Congressionally-chartered, only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission. The new Congress and the next Administration must decide what role government in general, and these entities in particular, should play in the housing market. There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form. Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk. I recognize that there are strong differences of opinion over the role of government in supporting housing, but under any course policymakers choose, there are ways to structure these entities in order to address market stability in the transition and limit systemic risk and conflict of purposes for the long-term. We will make a grave error if we don’t use this time out to permanently address the structural issues presented by the GSEs.
In the weeks to come, I will describe my views on long term reform. I look forward to engaging in that timely and necessary debate.
Look for additional releases over the next several days from Paulson and others to this and other GCE's matters. I would also expect announcements from the 4 major mortgage lending firms discussing hopefully business as usual or futher pullbacks on capacity or product depth.

Fannie & Freddie: "To Regulate or Not to Regulate... that is the Question"

As I write this piece, the current stock prices for Fannie Mae (FNM) and Freddie Mac (FRE) are sitting just off their 60’ year lows at $5.20 and $3.28 respectively. There has been a plethora of talk, both on Wall Street and those around Capital Hill as to what exactly should and can be done with these Government Sponsored Entities (GSE's).

Here’s a question; Assuming these entities are “too big to fail” (or perhaps too important) which I believe they are, it begs to question who really benefits if these firms are not privatized.

My thoughts: Both of these companies have some of the largest lobbyist groups in the country. The non-balance sheet payrolls these firms have include very senior officials in both branches and on both major governmental parties. In fact the GSE's have some of the most impressive "paid" supporters of any industry.... and that’s pretty impressive considering the likes of the auto industry, oil, and others.

While the discussions may publicly revolve around the GSE’s ability to remain solvent or if necessary raise more capital to meet federal regulations as it relates to balance sheet ratio’s, a real challenge remains; Will the large number of people who receive a handout from these firms do the right thing, look themselves in the mirror and recognize the overwhelming benefits of taking these firms off of the national balance sheet or will greed and self interest prevail. Unfortunately, I believe we all quickly realized the answer to that question. So look for more shallow justification about the values and virtues of keeping the mission statement alive for Fannie and Freddie.

This week’s economic news:

Release Date & Time
Economic Indicator
Consensus
EstimateMy Analysis

Mon. Aug. 25, 10:00 a.m. ET
July Existing Home Sales
Up 0.8%
Certainly one month of data does not make a trend and no one is suggesting that the bottom has been reached in the housing sector – but if the consensus estimate is accurate, the July number may be a first small step in the right direction. Just kidding!!! This number is insignificant… most pundits are now in strong support of a lengthy recovery which may last till 2010.

Tue. Aug. 26, 10:00 a.m. ET
July New Home Sales
Down 1.3%
Most fixed income traders will take a pretty good look at this number. This data is expected to add one more hopeful sign to a growing number of signs that the worst of housing bubble may soon be behind us. While this is a narrow minded approach, the sales number that matches the forecast won’t likely influence the direction of mortgage interest rates much. A sales pace number showing a drop of 0.6% or less will probably put a little upward pressure on mortgage rates. My personal opinion is that the consensus estimate will likely prove to be too pessimistic this time around.

Tue. Aug. 26, 10:00 a.m. ET
Aug. Consumer Confidence
53.0 vs. last 51.9
Investors are always far more interested in what the consumer is actually doing -- than how they say they are feeling. Look for this data to have little, if any direct impact on the trend trajectory of mortgage interest rates today.

Tue. Aug. 26, 2:00 p.m. ET
Minutes of Aug. 4th & 5th Federal Open Market Committee meeting released
While this document will likely do little more than reinforce mortgage investors’ conviction that the Fed will not hike short-term interest rates anytime in the foreseeable future, it will provide for some guidance for Wednesday and Thursday and a low volume trading week in the equities.

Wed. Aug. 27, 8:30 a.m. ET
July Durable Goods Orders
+0.1% vs. last +0.8%
July orders probably eked out a small gain on an uptick in demand for aircraft and auto manufacturers response to increased calls for more fuel efficient vehicles. This data will likely do little more than take up space on this week’s calendar.

Wed. Aug. 27, 1:00 p.m. ET
Treasury auctions $31 bil. of 2-year notes
It likely will be very difficult for mortgage interest rates to move to notably lower levels in the face of the deluge of supply coming in from Uncle Sam over the next two days.

Thurs. Aug. 28, 8:30 a.m. ET
1st revision to Q2 Gross Domestic Product
+2.7% vs. last +1.9%
New information released since the government made its initial estimate of the value of all the goods and services produced in the United States points to a sizeable upward revision here. Mortgage investors have already priced this expectation into their rate sheets.

Thurs. Aug. 28, 8:30 a.m. ET
Initial jobless claims for the week ended 8/23
Down 2,000
Unless this number is significantly lower, this report will likely have little, if any impact on direction of mortgage interest rates today.

Thurs. Aug. 28, 1:00 p.m. ET
Treasury auctions $21 bil. of 5-year notes
Wednesday’s $31 billion of 2-year notes and today’s big 5-year note offering will likely choke the thinly traded pre-holiday market. If my assessment proves accurate, it will be very difficult for mortgage interest or any fixed income products rates to move notably lower today.

Fri. Aug. 29, 8:30 a.m. ET
July Personal Income Spending PCE
Index 0.0 vs. last +0.1% 0.2% vs. last +0.6%+0.3% vs. last +0.3%
The few traders still at their desk will likely shrug off the income and spending figures but will bore in on the personal consumption expenditure index with laser-like intensity. A gain of more than 0.3% for this measure of inflation pressure at the consumer level will likely prod investors into pushing mortgage interest rate higher.

Fri. Aug. 29, 2:00 p.m. ET
US market will closes early for Labor Day Holiday

This Week's Economic Figures....Lot's of Data, little value.

Stock movements, Oil, regulation push from Hank Paulson (America's Treasury Secretary) on Fannie and Freddie matters, as well as financial updates from our nations largest banks (Wachovia due out today) are going to drive residential mortgage pricing this week more than any of these macro-economic reports. That said, this country continues to slide into recession, regardless of the two day run we witnessed last week in the stock market.



Release Date & Time
Economic Indicator
Consensus Estimate
Analysis

Mon. July 21, 10:00 a.m. ET
June Leading Indicators
-0.1% vs. last +0.1%
This second tier report drew nothing more than a passing glance from mortgage investors.

Tue. July 22, 1:00 p.m. ET
Treasury auctions 20-year inflation-indexed securities
The “adjustable” feature of this offering will likely make it attractive to a broad range of investors. As witnessed, this had no discernible impact on the direction of mortgage interest rates today. If fact we opened lower and continue to trend lower still.

Wed. July 23, 1:00 p.m. ET
Treasury auctions
2-year notes
A solid auction with good foreign investor participation will likely be considered an omen that not only is confidence returning to dollar denominated assets -- but the prospects of a near-term rate hike from the Fed remains extremely low. If this auction goes well, it will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates.

Wed. July 23, 2:00 p.m. ET
Fed releases latest “Beige Book” data
Named for the color of its cover, this compilation of economic data from all 12 Federal Reserve Districts is expected to show generally sluggish growth across the country and anecdotal evidence of an uptick in inflation pressures at both the wholesale and consumer levels. Nothing in this report will likely surprise anyone – so its impact on the direction of mortgage interest rates will probably be minimal to non-existent.

Thurs. July 24, 8:30 a.m. ET
Initial jobless claims for the week ended 7/19
Up 9,000
Most investors tend to discount some of the jobless claims data this time of year to compensate for the volatility surrounding auto manufacturers’ temporary plant shutdowns for new model year retooling. An increase of 9,000 or more new jobless claims will tend to support steady to perhaps fractionally lower mortgage interest rates. If jobless claims fell last week look for investors to push mortgage note rates higher. My take here, it will be higher and while and we shall see headline news in this area.

Thurs. July 24, 10:00 a.m. ET
June Existing Home Sales
Down 1.2%
The expectation for another puny existing home sales number from the National Association of Realtors is already priced into the mortgage market – probably making it a “yawner” as far as most investors are concerned. In the off-chance the Realtors report a month-over-month gain for existing home sales – look for mortgage interest rates to move higher.

Thurs. July 24, 1:00 p.m. ET
Treasury auctions
5-year notes
Given the big run-up in yields last week – I look for this offering to be well received by market participants.

Fri. July 25, 8:30 a.m. ET
June Durable Goods Orders
-0.3% vs. last 0.0%
The modest decline in the June Durable Goods Orders figure was likely created by significant weakness in transportation orders. It really does not matter much – since this data is unlikely to have a notably impact on the trend trajectory of mortgage interest rates today.

Fri. July 25, 10:00 a.m. ET
June New Home Sales
Down 1.8%
Home Builders continue to find it difficult to reduce their inventories. As long as this number remains negative -- it will likely have little impact on the direction of mortgage interest rates. In the off-chance that new home sales post a positive number expect investors to react by pushing note rates higher and prices lower.

Mon. July 28
No releases.

Have a great week. Keep an eye on the developments of Fannie and Freddie. I am not sure their powerful lobbyist' contingencies are going to keep them out of regulation any longer. They simply failed to keep the cash aside over the last few years run up for anyone to feel comfortable in allowing themselves to be self-managed.

Taking Account

I am writing this morning from Houston where I have spent the last 72 hours trying to explain to my family, my dad's friends and his concerned golfing partners that despite his good health.... he still had a cardiac event the evening of July 4th. He is in CCU, and battling for his life. So while my focus has not been on the state of the union, the existing housing crisis, the price of oil, the mismanagement of Regional Banks, or the sagging dollar; that does not mean it hasn't been on another commodity... our time. Life, like money, is best utilized when it is spent wisely.

This week's economic calendar is as follows:

Release Date & Time
Economic Indicator
Consensus Estimate
Analysis

Mon. July 7,

Tue. July 8, 10:00 a.m. ET
May Pending Home Sales
-3.0% vs. last +6.6%
Most analysts anticipate a little “give back” in May after April’s surprising surge. If the consensus estimate is accurate, investors will likely view this data as slightly mortgage market friendly. In the unlikely event the actual number comes in stronger-than-expected (a slump of 2.5% or less) look for mortgage interest rates to creep fractionally higher.

Tue. July 8, 10:00 a.m. ET
May Wholesale Inventories
+0.7% vs. last +1.3%
Traders holiday sunburns will likely draw far more of their attention than this data set will.

Wed. July 9
Void of economic news

Thurs. July 10 8:30 a.m. ET
Initial jobless claims for the week ended 7/5
Down 14,000
Most investors tend to discount some of the jobless claims data this time of year to compensate for the volatility surrounding auto manufacturers’ temporary plant shutdowns for new model year retooling. A decline of 14,000 or less in the number of jobless claims filed last week will tend to support steady to perhaps fractionally lower mortgage interest rates. If jobless claims fell by more than 15,000 last week look for investors to push mortgage notes and fixed income products to move their rates higher.

Thurs. July 10, 1:00 p.m. ET
Treasury Dept. auctions
10-year inflation indexed securities

Mortgage investors will likely pay a little more attention to this auction than normal. These securities will likely serve as a bellwether index for the longer-term trend trajectory of mortgage interest rates. If the yield on the 10-year inflation-indexed securities should rise look for mortgage interest rates to rise as well -- while a steady to lower yield on these securities will likely indicate the trend trajectory will favor steady to fractionally lower mortgage rates ahead.

Thurs. July 10, afternoon
The current delivery month for most mortgage-backed securities will “roll” to August

This is a standard monthly administrative function of the mortgage market. The price impact on this change from July to August delivery is roughly 25 basis points and is already reflected on most of your investors’ rate sheets.

Fri. July 11
Empty


Mon. July 14
Empty