Below is a collection of articles, news, and announcements associated with our industry.
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We have received a few questions today about why mortgage-backed securities (MBS) prices do not show the same drop in prices as seen from the Fannie Mae window. The reason is that Fannie Mae, this morning, built into their whole loan prices an increase in their required guarantee fee (G-fee). Since G-fees are paid from the borrower’s loan rate and not by the owner of an MBS, MBS prices are unaffected by a change in G-fees. Most lender rate sheets began reflecting the increase in G-fees over the last few weeks, depending on lock term and delivery method.
On August 31st, FHFA announced another increase in the guarantee fee (G-fee) charged by Fannie Mae and Freddie Mac on the loans they insure. The amount of the increase is set to average 10 basis points, but the amount of the increase may vary by product and seller. The increase is to be effective on loans sold directly to Fannie or Freddie beginning in November and for any loans to be pooled in a mortgage-backed security (MBS) with a December 1st or later issue date. Longer term locks already reflect this increase. Short term locks may as well, depending who is buying the loan and whether the loan will be pooled in a MBS. If they don’t now, they will very soon. G-fees are paid by the borrower from the interest paid on the loan or are collected upfront as a cost to the borrower. The cost is approximately five times the increase in G-fee. The effect of this increase in G-fee on the borrower has been masked somewhat by recent price increases in the MBS market. Loans locked at prices before the G-fee increase was added will incur heavy extension fees, if required, so timely delivery of well documented, high quality loans is extremely beneficial.
Economic troubles in Europe have helped mortgage rates move lower in recent months. One reason is that slower global economic growth reduces the risk of inflation, and inflation is negative for mortgage rates. The second reason is that investors have been concerned that the debt problems in Europe could spread to other countries and hurt the global banking system. As a result of the uncertainty, investors have shifted some funds to relatively safer assets, including US mortgage-backed securities (MBS).
Greece has experienced the worst of the European debt troubles. After weeks of negotiations, on Monday European officials finally agreed to provide a $172 billion bailout package to Greece. This aid will allow Greece to avoid defaulting on debt maturing on March 20, removing some uncertainty from the market. As it became clearer last week that a deal was close, investors began to reverse the flight to safety trade, selling MBS, and mortgage rates moved a little higher.
Investors will continue to watch the situation in Europe. It is not at all certain that Greece will fully implement the severe austerity measures required in the deal, and other countries such as Portugal are teetering on the same economic edge as Greece. With the Greek bailout package done, events in Europe, at least for the short-term, may have less influence on daily US market movements. Investors likely will focus more on incoming US economic data which has generally been surprising to the upside so far this year. A stronger economy, although great for employment and the stock market, is potentially inflationary and may not be good for mortgage rates.
Our special guest on the Lykken-on-Lending blog talk radio show today was Doug Duncan, the Chief Economist for Fannie Mae. Doug provided his thoughts on the economy, housing, Europe, and inflation, but the most interesting comments had to do with his answer to a question asking how he would characterize what will happen in 2012. Doug answered by directing the listeners to a Fannie Mae research paper entitled 2012 – Year of the Political Economy. This paper can be found on the Fannie Mae web site at http://www.fanniemae.com/portal/about-us/media/financial-news/2012/5609.html. Doug explained that 2012 will be very heavily effected by the number of regulations just added to the books, as well as the many new regulations to be issued in the months to come. The consequence of the huge number of new regulations is UNCERTAINTY. He estimates that uncertainty will cost the economy 1% in Gross Domestic Product or $500 to $750 billion in 2012, effecting both the consumer and businesses.
Click PLAY to listen to the podcast of this week’s BlogTalkRadio/Lykken on Lending with Dave Lykken and MBSQuoteline‘s Joe Farr:
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Tune in every Monday at 1:00pm(et) for up-to-the-minute information on interest rates, loan programs and “hot” industry news related to the mortgage industry. Dial: (646) 716-4972 or log in at: www.blogtalkradio.com/lykken-on-lending
Greece has experienced the worst debt troubles of any European nation, and its debt burden is clearly unsustainable. European officials and bondholders both want to avoid a default, so they have been negotiating a “voluntary” agreement to reduce Greece’s debt burden by 50%. As usual, though, the sticking point for the two sides is price. In the case of bonds, this means the yield on the new bonds. Bondholders want the highest possible yield. A higher yield means higher debt payments, however, and Greece will require financial aid from the IMF and other European Union countries to make the payments. A default would trigger many costs and raise the level of uncertainty for investors, possibly raising yields for other European countries, which gives bondholders some leverage. On the other hand, if the Greek government defaults, there is little reason to give bondholders anything. The lack of progress has caused a flight to safety, which has helped relatively safer investments, including US mortgage-backed securities (MBS). Mortgage rates are largely determined by MBS prices, and a “messy” deal or a default would likely cause US mortgage rates to move lower. If bondholders agree to a deal at a yield which Greece can handle comfortably, then investors may partially reverse the flight to safety trade, leading to higher US mortgage rates. The negotiations have been going on for months, and it’s not clear what will break the impasse. Meanwhile, US financial markets continue to be influenced by the news from Greece.
European officials are scheduled to meet this weekend and again next week, and they hope to release a plan for a comprehensive aid package by Wednesday. Officials are divided on what steps to take to help ease debt problems in troubled nations. Given the conflicting goals of the parties involved, the optimal solution is not clear. Whatever the outcome, it will likely have a significant impact on mortgage rates next week. Until the results of the summit are known, MBS prices may be subject to a high level of volatility, as news and speculation comes out. A decisive plan to prevent the spread of debt problems could cause investors to reverse the flight to safety trade, leading to higher mortgage rates. On the other hand, a plan which disappoints investors could produce an increased flight to safer assets, causing mortgage rates to move lower. In any case, be prepared for higher than normal volatility over the next several days.
If you need additional information about this blog post, please visit our website MBSQuoteline.com or call 800-627-1077.
This morning, FHFA announced their enhancements to the HARP refinancing program. Operational details of the plan are to be released on November 15. Only loans that were purchased or guaranteed by Fannie Mae or Freddie Mac on or before May 31, 2009 and have a current LTV over 80% are eligible. In addition, the loan must be current, no late payments in the last six months and no more than one late in the last 12 months. There are no restrictions on who may refinance these loans. Program guidelines include:
*No limit on LTV, if new loan is a fixed rate loan (current LTV must be above 80%)
*Loans previously refinanced under HARP not allowed
*Certain agency fees will be waived if new loan is a shorter term loan
*Appraisals not required where Agency AVM is available
*Certain originator Reps and Warrants will be waived
Borrowers can determine if their loan is owned or guaranteed by Fannie or Freddie at http://www.fanniemae.com/loanlookup/ or http://www.freddiemac.com/corporate/
If you need additional information about this blog post, please visit our website MBSQuoteline.com or call 800-627-1077.
Since the Fed released its statement yesterday afternoon, MBS markets have staged a very strong rally for several reasons. First, quite simply, the Fed confirmed that there are “significant downside risks” to the US economic outlook. Slower economic growth reduces inflationary pressures, which is favorable for MBS markets. Second, the Fed announced the widely expected Operation Twist program. This program will extend the average maturity of the Fed’s portfolio by purchasing $400 billion of longer-term Treasury securities and selling an equal amount of shorter-term Treasuries. The increased demand for longer-term assets is intended to help push longer-term rates lower. The third major element from the statement helping MBS markets was a surprise to most investors. The Fed will begin to reinvest MBS principal payments (from prepayments and maturing securities) in additional agency MBS. Until now, the Fed has been reinvesting the MBS principal payments in Treasury securities. With roughly $885 billion in MBS holdings in the Fed’s portfolio, these principal payments are expected to create a significant source of additional demand for MBS, and this measure is specifically targeted at keeping mortgage rates at low levels. As usual, the impact of the economic news was priced in very quickly, similar to the reaction to prior Fed announcements about purchasing MBS.
Prices on lower coupon mortgage-backed securities (3.5% and 4.0%) have improved today while prices on higher coupon securities (above 4.0%) have fallen. The cause appears to be an announcement that the Obama administration is considering a broad refinance program for government guaranteed loans to be refinanced without the normal restrictions, like LTV. The details of plans being considered are not available. The goal of the program would be to stimulate the economy, as people would have more discretionary funds. The downside could come from MBS investors whose investments will pay off much faster than anticipated. On future investments, investors would likely pay lower premiums for higher coupons. This news should have little impact on most loans currently in your pipeline.
Read the full article from The New York Times: U.S. May Back Refinance Plan for Mortgages
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