Are the tighter underwriting guidelines helping the market? Yes!

April 7th, 2008 · No Comments


Friday’s employment data, and how this information can move the market, reminds us that there are two basic measures of the job picture: weekly jobless claims and the first-Friday-of-every-month Unemployment data. (It wasn’t until the 1930’s that the government even calculated an unemployment rate.) The data collected is still surprisingly hard to collect, most respondents aren’t obliged to report back to the poll takers (only two-thirds do, which results in the back month revisions that we see), and there is no registry for tracking new companies or companies that go out of business. But, as one article put it in describing the unemployment numbers, “they are much better than their critics say they are but nowhere near as good as investors believe them to be.” Regardless, as long as the unemployment rate is still rising and house prices are still falling, the Fed will not raise rates. So short-term interest rates will need to stay low for an extended period of time, and cuts in overnight funds are much more likely than interest rate hikes.

All investors have narrowed their guidelines, and even Fannie Mae will now requires a minimum credit score of 580 on loans purchased for securitization regardless of DU. Many analysts feel that the worst of the credit squeeze is now over. Fortunately, and please check the graph below (thank you Lehman & Bloomberg), credit spreads have tightened in the last three weeks, with many spreads returning to their early February levels, and the tone in the mortgage market has improved as the Fed’s new liquidity initiatives & effectively buying securities backed by mortgages have removed the threat of forced selling from the market.

  • Franklin American announced that they will begin accepting the higher FHA loan limits for those counties that have increased loan limits, but still fall within the old “ceiling” of $362,790 base loan amounts. At this time the highest base loan amount they can accept for any given county is the lesser of: a) the published county limit, or b) the old FHA “ceiling” as follows: One unit $362,790 Two unit $464,449 Three unit $561,411 Four unit $697,696.
  • What about others? HUD is specifying anything over $417,000, which is confusing. Most lenders are being forced to go with each individual investor as they may incorporate different interpretations. Flagstar and Chase’s policy says $1.00 over original county limit. Countrywide says $1.00 over $362,790, no matter what county! And of course since the county limits are updated on the HUD web site, one cannot determine what the original limit was.
  • I mentioned on Friday that “BofA retail is rumored to have gone to a maximum CLTV of 85% earlier this week…” As it turns out, as I was told by a BofA agent, “that we have many products available to 95% LTV. Our market change to 85% is just for CLTV…anything above 85% CLTV is no longer insured, thus driving the market to a cap on CLTV’s.”

This week brings us the release of only two relevant economic reports in addition to the minutes from the last FOMC meeting and a Treasury auction. Tomorrow, 11:15PST, the FOMC minutes will be released, which may give us insight into their current thought process and individual Fed member opinions. Aside from that, and the weekly jobless claims Thursday morning, the first piece of monthly data is February’s Goods and Service Trade Balance report Thursday morning. There is a 10 year Treasury Inflation Protected Security (TIPS) sale Thursday. The second and final release of the week is the University of Michigan ’s Index of Consumer Sentiment Friday morning. Their consumer sentiment index will give us an indication of consumer confidence, which hints at consumers’ willingness to spend, so “good” news would be a decline from March’s 69.5 reading. Ahead of all of that, the 10-yr is back into the mid-3.50’s and mortgage prices are worse by .125.

A little girl asked her mother, “How did the human race appear?’
The mother answered, “God made Adam and Eve and they had children and so was  all mankind made.”
Two days later the girl asked her father the same question.
The father answered, “Many years ago there were monkeys from which the human race evolved.”
The confused girl returned to her mother and said, “Mom, how is it possible that you told me the human race was created by God, and Dad said they developed from monkeys?”
The mother answered, “Well, dear, it is very simple. I told you about my side of the family and your father told you about his.”

Rob Chrisman 

Tags: Commentary · Mortgage Market

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