Sedona/ Verde Valley Real Estate Insider Holly Grigaitis-Svercl Kenneth Svercl

(August 13, 2009)   Edition 111

In This Week's "Good News":

Home Purchase Activity Pointing toward Recovery

Although rising interest rates contributed to a declining Mortgage Bankers Association Market Composite Index (MCI) for the week ended Aug. 7, when compared with the previous week -- continued increases in purchase activity numbers suggest that we could see a housing recovery going forward.

The MCI is calculated from the MBA's Weekly Mortgage Applications Survey, and showed a Purchase Index increase of 1.1%, from one week earlier.  This is the third gain in the Purchase Index in the past four weeks, according to the MBA.

Looking at the Purchase Index's seasonally adjusted, four-week moving average gain of 0.8%, MBA said this behavior is consistent with the view that home sales may now be in a gradual recovery.

In This Week's "Take It How You Will" News:

Second Quarter Loss of $15 Billion Reported by Fannie Mae

Fannie Mae reports a $14.8 billion loss for the second quarter, compared to a $2.3 billion loss a year ago, and the mortgage giant is asking for a $10.7 billion infusion from the Treasury Department to maintain a zero net worth.

The government sponsored enterprise, which as you know is in government conservatorship, absorbed $18.8 billion in credit expenses due to defaults and foreclosures.

The company did, however, benefit from a change in the accounting rules and recorded a $753 million impairment charge on its Alt-A and subprime private-label securities.

In the first quarter, Fannie recognized a $5.7 billion "other than temporary impairment" charge, which contributed to a $23.2 billion loss for that quarter. The Government Sponsored Enterprise (GSE) also increased its reserves by $13 billion and ended the second quarter with a $54 billion single-family loss reserve.

FNMA's Guaranty fee income fell 5% to $1.7 billion in the second quarter from the previous quarter while net interest income rose 15% to $3.7 billion. Fannie said it is experiencing increasing default rates across its entire guaranty book of business and the serious delinquency rate on its $270 billion Alt-A portfolio hit 11.9% in the second quarter. Overall, 3.9% of the GSE's single-family mortgages are 90 days or more past due, up from 1.7% a year

Freddie Mac Forcing Mortgage Buybacks

I will start this article by defining what a "buyback" is:  it is a request (demand) that mortgage sellers/servicers that sell loans to a major servicer, i.e. Freddie Mac or Fannie Mae, that do not perform (typically, go into default within the first 12 months of closing), be re-purchased from the agency holding the note by the seller/servicer that sold the note to them.  This has become a fairly common practice over the past 12 months, because it alleviates the need for the agencies to carry ‘bad' debt on their books, thus (at least in theory) allowing them to be more aggressive in regards to future mortgage lending.

In numbers just released by Freddie Mac, it is showing that Freddie Mac is forcing some of its seller/servicers to buy back $951 million of bad mortgages during the second quarter, a 21% increase from the first quarter.

On top of this, Fannie Mae also saw its outstanding buyback requests continue to increase in the second half of 2009 - but the GSE, unlike Freddie, does not disclose the dollar amount in its securities filings.

What does this mean to the mortgage lending community overall?  In the long run for consumers, this will continue to, and has tended to lead to ‘stricter' underwriting guidelines - often lenders guidelines are so strict that they exceed the necessary guidelines required for the two major mortgage backed securities purchasers/holders Fannie Mae/Freddie Mac.

Lender Program Changes:

As many of you know, a borrowers ability to obtain Private Mortgage Insurance on most high loan-to-value (LTV) mortgages (or those mortgages requiring a down payment of less than 20%) has become increasingly difficulty to acquire due to minimum credit scores required.

One way for the borrower to get around this, was to get Lender Paid Mortgage Insurance (LPMI), but as you may recall most lenders abolished this policy about a month ago.  Good news, albeit not great news, most of the major lenders have brought back a borrower option of LPMI. 

I will note here that lenders are willing to take on this burden because they charge the borrower a bump in their interest rate paid.  However, I will also note, this option is, typically, cheaper for the borrower overall versus the normal Private Mortgage Insurance route.

The downside to this new change by the investors is the fact that the majority of them require a mid credit score of 740. 

It is hoped by mortgage professionals that this required mid score will be decreased over the next few months - regardless, this is a step in the right direction by offering mortgage borrowers more choices.

In This Week's "Wait and See" News:

Wall Street numbers are up somewhat for the week.  Thursday's markets ‘skyrocketed' until news regarding Initial Jobless Claims and Retail Sales numbers was released late in the morning.

Initial Jobless Claim numbers rose +4,000 this week to end at 558,000.  An overwhelming number of economists thought that this number would come in significantly lower than last week.

According to the Commerce Department retail sales numbers dipped -.1%, excluding automobiles, retail sales dropped -.6%.  Dow Jones Newswire expected a gain of +.8%.

Markets ended Thursday like this: DOW up @ 9398.13 (+36.58), NASDAQ up @ 2009.35 (+10.63) and the S&P up @ 1012.73(+6.92). 

Next week's Economic Calendar:

Week of August 17 - August 21