Market Update – January 20, 2010

 The MBAA reported that mortgage application volumes increased 9.1% last week from the week before. Refinancing filings rose almost 11%, and purchase apps were up a little over 4%. Nationwide refi’s make up almost 72% of apps.
The press has certainly focused on FHA lending lately, and many feel with good reason. FHA-insured mortgages are thought to be a problem in the future. Government officials, who only five years ago were clamoring for more lenient guidelines to increase home ownership percentages, now want to further tighten guidelines. The FHA allowed builder and seller-funded down-payment assistance programs longer than other loan types, which didn’t help their situation or their capital reserve ratio, nor did institutional investors refinancing “at risk” mortgages into FHA loans. According to a story in the Wall Street Journal, the FHA says the loans it is guaranteeing these days will turn a profit because the credit profile of its borrowers has improved. The average credit score for FHA borrowers has risen to 681, from 630 two years ago. The median U.S. score is about 720. Of course, those in the business know that investors have FHA overlays which have contributed toward the improvement.

And in fact the FHA announced changes to its guidelines yesterday. It will raise the minimum down payment required for borrowers with credit rating scores below 580 to 10%, while the down payment for higher-ranked borrowers would stay at 3.5%. The up-front MI premium is also going from 1.75% to 2.25%. HUD is seeking congressional approval to allow it to raise annual mortgage insurance premiums — which are paid out by the borrower over the life of the loan — above the 0.55 percent maximum. Lastly, the FHA also said it was cutting the amount of aid sellers could provide buyers to 3 percent of the purchase price from 6 percent; a move it said could help lessen incentives to inflate appraised home values.
Of course the press, and economists, will question whether or not it will cut off the housing recovery. If you think about it, in the long run is raising the down payment requirement, or the minimum credit score, the cost of MI, or cutting seller contributions going to kill the housing market? The FHA, after all, doesn’t lend money to home buyers. It collects fees to insure lenders against default on loans that meet FHA criteria. Of course, with the current criteria, everyone in the business knows that their nickname, deserved or not, is now the “new subprime” loan: average credit scores of FHA borrowers is lower than other types of loans, delinquencies are much higher, and the market share of FHA loans is between 25-50% in many parts of the US.

In an interesting quote, Warren Buffett weighed in on the plan to tax banks. “I don’t understand plans for a bank tax – it just doesn’t make any sense to me  that banks should be taxed to cover losses at other bailed-out companies, such as automakers, Fannie Mae , or Freddie Mac.”

Getting back to the market, yesterday was pretty quiet, giving lenders and lock desks a day after the holiday to work on projects, extensions, renegotiations, etc. Dealers reported that mortgage selling was pretty light, with just under $1 billion in supply, and the Fed, money managers, and hedge funds doing the buying. But today we have had a flurry of news. U.S. Housing Starts unexpectedly fell 4% in December, pulled down by a lack of activity for single-family dwellings. Starts for single-family homes fell 6.9 percent last month, but multifamily starts were up over 12%. The Producer Price Index was up for the third month in a row, rising .2% (up 4.4% for the year) versus expectations of being unchanged. The core rate, ex-food & energy, was unchanged, lower than expected.

But perhaps more important than the economic news were the earning results this morning. Morgan Stanley earned $413 million in the 4th quarter, but it was still below estimates. Wells Fargo swung to a profit in the fourth quarter on net income of $2.82 billion, versus Bank of America’s loss of $5.2 billion due to taking a hit from higher credit costs and TARP repayments. And the Bank of New York Mellon profit beat estimates, hitting almost $600 million.

Bank of America’s stats included a 2009 net income of $6.3 billion, a one-time $4 billion TARP repayment cost, provisions for credit losses of $10.1 billion, and nonperforming assets of $35.7 billion. Morgan Stanley reported income from continuing operations for the year of $1.1 billion, compared to a loss of about $800 million a year before. They also incurred a repurchase of TARP capital, net revenues for the year of $23.4 billion compared with $18.2 billion in the prior year, total nonperforming assets of $27.6 billion as of December 31.

After all of this we find the 10-yr yield at 3.65% and mortgage prices better by between .125 and .250.