On Friday, President Obama signed into law the Temporary Payroll Tax Cut Continuation Act. This Act uses increased guarantee fees on new mortgages to pay for reduced payroll taxes. The amount of the g-fee increases will be included in future mortgage rates. Below are general provisions pertaining to increasing the Guarantee Fees for Fannie, Freddie, and FHA. Several elements in the bill are not quite clear and may take weeks or months to determine. The primary questions are: 1. How much will the Fannie and Freddie g-fee rise? The Act calls for a minimum increase of 10 basis points, but the amount of the increase is to be determined by FHFA and is supposed to a)"cover the risk of loss associated with the guarantee", and b) be based on "the cost of capital allocated to similar assets held by other fully private regulated financial institutions". This definition could result in a wide range of fee increases. The early expectation from insiders is that the increase will be 10 basis points. 2. When will the increase become effective? The Act says the increase is to be applied to guarantees issued after enactment of this section. The date this provision is to [...]
Recent low yields for Treasuries and MBS indicate that investors have priced in little risk of a damaging default when the debt ceiling limit is reached on August 2. For bond investors, the big question has been to what degree lawmakers would tackle the budget deficit. Simply lifting the debt ceiling without meaningfully addressing the deficit would disappoint investors and be bad for bonds. Tuesday, a bipartisan group of senators released a proposal to raise the debt ceiling which included a plan to cut the deficit by $3.7 trillion through a combination of spending cuts and tax reforms. President Obama backs the plan, and there is support from both Republicans and Democrats. The proposal marks a big step forward in reaching an agreement to raise the debt ceiling. Investors were pleased that the plan makes a serious attempt to bring the deficit under control rather than pushing the issue further into the future, and yields fell after the news. A smaller government deficit would mean a reduced supply of Treasury securities, resulting in lower yields. Less government spending also would slow economic growth, reducing inflationary pressures and making bonds more appealing. The plan still has a long way to go [...]
QRM Update: The FDIC has voted to release its proposed definition of a Qualified Residential Mortgage (QRM). QRMs will be exempt from risk retention requirements. Under the proposed definition Fannie Mae, Freddie Mac, FHA, and VA loans will be QRMs. For non-agency loans to meet the definition and to avoid being subject to risk retention, among other requirements, they must have down payments of 20% or more and DTI of 28% / 36% or less.
March Pending Home Sales increased 5.3% from February, and were 21% higher than one year ago at this time. The Pending Home Sales index, which measure sales of existing homes based on contracts which have been signed but not yet closed, is a leading indicator for the housing sector. The index provides guidance for future Existing Home Sales reports. The chief economist of the National Association of Realtors (NAR) suggested that the home buyer tax credit has helped "stabilize the market". Contracts had to be signed by the end of April to qualify for the tax credit, so many buyers rushed to take advantage before the deadline. As a result, the NAR chief economist expects "measurably lower sales" in May. The growth in housing sector activity will then depend largely on the performance of the economy and the labor market. The housing sector may also benefit from increased availability of jumbo mortgages and other forms of credit from non-governmental sources. http://www.realtor.org/press_room/news_releases/2010/05/phs_upswing