Events This Week:
Durable Orders Up
Sentiment Rose
Housing Mixed
Manufacturing Fell
________________________________
Events Next Week:
Mon 6/1
ISM Manuf.
Income
Tues 6/2
Pending Sales
Wed 6/3
ISM Services
Factory Orders
Fri 6/5
Employment
Fed Clarifies MBS Purchase Policy
As the pressure for higher real estate mortgage rates has increased in recent weeks,
investors have speculated that the Fed would step in to "defend" certain
interest rate levels, but that hasn't happened. This week, Fed
officials explained that their mortgage-backed securities (MBS)
purchases are designed to support the real estate mortgage market and not to set
rates. The Fed's MBS purchases of $25.5 billion this week were similar
to levels seen in recent weeks. Disappointed that the Fed hasn't
increased its quantity of asset purchases, investors sold MBS this week,
and mortgage rates moved higher which could adversely affect the Maui, Hi real estate market.
A number of factors have been developing which typically push interest
rates higher. The coming supply of debt needed to pay for government
programs will compete for investor funds. Despite strong demand for this
week's large Treasury auctions, investors are concerned that higher
rates will be required in the future. In addition, an improved economic
outlook has made investors more willing to move funds to riskier assets
and away from safer assets such as bonds. It also means that higher
inflation may be a concern sooner than previously expected.
The difference between short-term and long-term rates reached record
spreads during the week. With the Fed-controlled fed funds rate close
to zero, short-term rates remained low. Long-term rates, which are
market-controlled and influenced by investor expectations, rose
significantly. A wide yield curve spread is often found during periods
when the economy is strengthening.
HUD Clarifies Use of $8,000 Purchase Tax Credit
New guidelines were issued today for the monetizing of the $8,000
first-time homebuyer tax credit that can be used as a down payment on
FHA loans for Real Estate that was announced by HUD and then delayed by HUD. The primary change is that the money cannot be applied toward the 3.5% minimum down
payment. It can be used for a larger down payment or applied toward
closing costs.
Borrowers Finding It Tough Going In “Making Home Affordable”
Two major hurdles have dashed many prospective borrowers’ hopes when
applying for The President’s mortgage initiative, also known as the
Making Home Affordable Program. The two snags are for those with
Mortgage Insurance, and the second is for those with a 2nd mortgage.
MI Issues
Under the Fannie/Freddie plan, those with MI are allowed to refinance up
to 105% of their appraised value and either transfer their MI
certificate or have a new one issued at the same rate, even though the
loan-to-value has gone up. MI rates are based on brackets of 80%-85%
LTV, 85%-90% LTV, and 90%-95% LTV. The program is supposed to allow
someone who originally had an MI rate based on 83% LTV to get the same
rate, even if the new loan is at 103% LTV. This is a great plan, except
that most lenders do not have their loan underwriting systems updated to
accommodate this program. The result – borrowers with MI can not get
their loans. Most lenders claim they will have the “glitches” fixed
shortly.
2nd Mortgage Issues
Under the Fannie/Freddie plan, those with a 2nd mortgages are not
allowed to consolidate those junior loans with their 1st mortgage if
they want to take advantage of the 105% LTV program. An example: In
2007 a borrower bought his new home using the 80-10-10 1st / 2nd
mortgage piggyback program. Today, due to falling values, the loans are
now a 95% LTV 1st mortgage and combined with the 2nd mortgage for a
total of 105% Combined Loan To Value. The only option under the federal
program is for the 1st mortgage to be refinanced, and the borrower is to
obtain a subordination agreement from the holder of the 2nd mortgage.
In theory, if the 1st mortgage rate is reduced, it will make it easier
for the homeowner to keep his home and continue to make his payments on
time. This should be a good thing for everyone, right?
Lenders who gave those 2nd mortgages just a couple of years ago to 90%
or even 100% LTV are either not providing 2nd mortgages at all, or have
scaled back their lending to a maximum of 75% LTV. Since the borrower
in the example above no longer has a 2nd mortgage that fits the lender’s
guidelines, the holder of the 2nd mortgage will not allow the refinance
to take place (by not agreeing to a subordination agreement). This
problem has surfaced for many borrowers trying to take advantage of the
Making Home Affordable Program. During the boom years most home
purchasers used a 1st / 2nd mortgage combination instead of taking MI.
The government would double the amount of homeowners that could
refinance if they were to come up with a program to service the needs of
this large group of homeowners. Until then, this group of homeowners
will just have to continue with their existing mortgage rates and
payments.
Also Notable:
* April Existing Home Sales increased 3% from March
* May Consumer Confidence rose to the highest level in eight
months
* Continuing Jobless Claims climbed to a new record high
* Oil prices rose to $66 per barrel, the highest level of the year
Average 30 yr fixed rate:
Last week:
+0.15%
This week:
+0.35%
Stocks (weekly):
Dow:
8,400
+100
NASDAQ:
1,750
+50
Week Ahead
Next week, the important Employment report will come out on Friday. As
usual, this data on the number of jobs, the Unemployment Rate, and wage
inflation will be the most highly anticipated economic data of the
month. Early estimates are for a loss of about 550K jobs in May. Before
the Employment Data, the ISM index, Personal Income, and Construction
Spending will come out on Monday. Pending Home Sales, a leading
indicator for the housing market, will be released on Tuesday. ISM
Services will be released on Wednesday, and Productivity is scheduled
for Thursday. Fed Chief Bernanke will be testifying on Wednesday.
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