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Some more good reading about the pro’s and con’s of the new 125% refinance loans……

naked capitalism: Is the new affordable FHFA loan program predatory lending?

Yves said her piece about the new affordable FHFA program to allow home ‘owners’ in negative equity to stay in their homes……..

I have another angle too. You’ll notice I mentioned Maria is no financial wizard. She probably does not appreciate the intricacies of mortgage finance. Here are two points to consider.

1. In the state of California, you can just walk away because first mortgages on primary residences are non-recourse. That means that the mortgage is only secured against the house you have bought.
2. However, in the state of California, refinance mortgages are recourse loans. What does that mean? It means you are on the hook for that loan. You cannot just walk away. The bank can come after you and take your car and the stocks in your E-Trade account. They can garnish your wages. They can even take your clothes and the shirt off your back, literally. The only thing they can’t touch is your 401-K. But it’s down 40% anyway.

Why would you trade a non-recourse loan from which you can walk away for a recourse loan that guarantees you’ll end up as bad as some poor slob at Tappahannock? It doesn’t seem like an incredibly appealing choice, does it?

125% Refinance

Anyone who’s been a reader of Straight Talk for a while has known that I’ve been an avid reader of what Yves Smith at Naked Capitalism writes.   Well, she’s got a somewhat cynical but very thought provoking look at the new 125% refi program.

Take the time to read it…..

Tom Vanderwell

naked capitalism: Freddie, Fannie to Provide 125% LTV Mortgages, Worse Than Extremes of Subprime Frenzy

Freddie, Fannie to Provide 125% LTV Mortgages, Worse Than Extremes of Subprime Frenzy

If you had any doubt that the intent of policy, such as the heroic efforts by the Fed to channel money to the mortgage market my manipulating spreads of mortgage paper so as to lower borrowing costs, was not merely to clear inventory but boost prices, today’s action should put your mind at rest.

The powers that be have just put in a big time above market bid, now permitting refis of 125% LTV for borrowers who are current. That is, assuming they get any takers.

The effort is presumably to address borrowers who are already under water, and so would be swapping out of a mortgage that is in negative equity land for one that has a lower coupon. That lowers their payments (ex costs) and frees up some of the money formerly spent on the mortgage to spend on other stuff, like paying down their credit card debt (that was a lame attempt at humor, the authorities hope this will lead to more consumption). In addition, the new mortgage in theory is less prone to default than the old, since it consumes less of the borrowers’ income.

But theory may not map on to practice, First, in most states, a purchase money mortgage is non-recourse, but a refi is. So some borrowers will put themselves in worse shape it they take up this offer.

Second, defaults are more likely with negative equity loans, apart from payment stress. Why? Let’s face it, even if you make your payments, you still expect a big bill when you sell the house unless the market appreciates enough to enable you to sell it for your mortgage balance. The other exit is negotiating a short sale with the bank, but that still leaves the hapless seller with a large tax bill if prices fail to recover by the time the forgiveness window closes (2012?).

Lousy endgames leave buyers not highly motivated to work hard to make payments when adversity arises. They realize, correctly, that they are better off not throwing good money after bad.

But this program nevertheless suggest that the authorities sincerely believe that current price levels for housing are the result of panic, and not a return to historic relationships of housing prices to incomes and rental prices.

Naked Capitalism

Enjoy!

The Krugman Blues ~ Loudon Wainwright III

Paul Krugman

HUD made the announcement that Fannie and Freddie are going to start doing refinance transactions up to 125% of the value of the homes.    There are particular rules and regulations that I’ll get into more when I write my Mortgage Market Week in Review.   I’m going to write that tomorrow (Friday) so if you aren’t already on the list, sign up for your copy now in the column on the left.

A couple of quick reactions:

• These are only rate and term refinance loans, so all they can pay off is an existing mortgage that is currently with either Fannie or Freddie.
• This is a risk reduction strategy for Fannie and Freddie.   The thinking is that they can hopefully avoid some foreclosures by lowering payments.
• Due to rising interest rates and recently (at least as far as I know, recently) instituted credit score and loan to value pricing adjustments and ongoing employment challenges, I think the number of loans that will happen through this program are a lot less than the government is predicting.

More on it later……

Tom Vanderwell

HUD Allows 125% LTV in Home Affordable Refis : HousingWire || financial news for the mortgage market

The administration expanded its Home Affordable Refinance Program to include borrowers current on payments but whose mortgages are worth up to 125% of the house’s value.

US Department of Housing and Urban Development (HUD) secretary Shaun Donovan announced the LTV limit expansion today while touring a Las Vegas neighborhood–a befitting venue for the reveal, considering 67% of homeowners there are underwater on their mortgages.

125% Loan to Value

Of course, this is kind of a like a Friday since the financial markets are closed tomorrow.  

But still, 7 is not a healthy number for the day and the day is still young, it’s barely 5 PM on the west coast.

Tom

Seven banks bring 2009 U.S. failures total to 52 - MarketWatch

Seven banks were closed by regulators on Thursday, including six in Illinois, bringing the total for 2009 to 52 as the U.S. banking system remains under pressure from rising unemployment and record foreclosures.

Bank Closings

So what’s the market doing today?   I think one word describes it pretty well:

“Reevaluating”

What are they reevaluating?   A number of things:

• How bad is the jobs and the economic picture going to get?
• Did the green shoots wilt?
• How is the consumer going to pull out of the slump that they are in if the job losses keep mounting?
• What does this mean for foreclosures, house sales?
• Is the trend of declining job losses that has been reversed in June the trend that we need to follow?
• Or was that the “blip” that is now over and the trend is reversing?

A lot of uncertainty has been “germinating” in today’s market and correspondingly, the stock market isn’t doing well.   This is putting some downward pressure on mortgage rates.

My recommendation is pretty simple:

Lock all loans that need to close within 1 to 2 weeks - the financial markets are closed tomorrow (Friday) and that means that we’re going from today until Monday with a lot of opportunities for things that could mess with the market.    Don’t risk the longer weekend.   If you can and  need something soon, lock it now.

If you have 2 to 6 weeks, then I’d give it a cautiously float recommendation.   The depressed economic news might bring some additional rate relief, albeit a short term and minor amount.

See below for some of what I’m quoting today…..

Tom Vanderwell

Purchase, owner occupied, 30 year fixed, 30 day lock, $400,000 price, 20% down, 5.25% with no points or 5% with 1 pt and a 740 credit score.

Purchase, FHA, 3.5% down, owner occupied, 30 year fixed, 30 day lock, 5.375% with no points or 4.875% with 1 pt.  and a 660 credit score.

APRs available upon request

Mortgage Market Update

Nassim Taleb, the author of “The Black Swann,” did an interview on CNBC this morning.   It covered a wide ranging number of topics, but the overall point of it was essentially this:  “We’ve got way too much debt and it’s going to take a LONG time to work through that.”

Not fun stuff to listen to, but important as we look and plan for the second portion of the year……

Tom Vanderwell

The pace of losses in the labor market had been moderating for four months but in June nearly half a million jobs vanished from the economy, in contract to widespread expectations. The Bureau of Labor Statistics said 467,000 jobs were lost, pushing the unemployment rate to 9.5%, the highest in 26 years. “The heavy loss of jobs in June is a warning that the road to recovery will be bumpy, but doesn't yet indicate that we have gone off the track” . . . ...(read more)

Bill Gross of PIMCO has some interesting and sobering analysis of what the jobs report means…..

Jobs

Well, the market had been expecting 325,000 jobs lost and instead we got 467,000 jobs lost.   I think you could describe that as…..

A Swing and a Miss!

Not a good sign for the overall health of the economy but it might help mortgage rates a bit.

Stay tuned, we’ll be talking about this more as the day progresses…..

Tom Vanderwell

Jobs are lost at a faster pace in June - MarketWatch

The U.S. economy shed jobs at a faster pace in June than in May, suggesting that the turnaround in the economy may take longer than expected.

Nonfarm payrolls shrank by 467,000 in June, higher than the 325,000 decline expected by economists surveyed by MarketWatch and the 322,000 jobs lost in May.

The unemployment rate ticked higher to 9.5% in June from 9.4% in the previous month. Economists had expected the unemployment rate to rise to 9.6%.

There was only a very slight 8,000-downward revision to payroll losses in April and May.

Jobs, Monthly Employment Report