First off, Happy Thanksgiving everyone! I really wish you all the best.
Ok, now down to business – I have heard enough of the rampant speculation about how a 50bps drop in conforming mortgage rates are going to save the housing market – I wish it were that simple. There is not a lack of liquidity in the mortgage market. Rather, a lack of qualified borrowers given current lending guidelines; lack of aggressive Jumbo money; major asset devaluation; and terminal negative-equity. These factors make this excitement over a 50bps drop in rates a red herring.
VERY FEW CAN GET 5.5%
For an in-depth look at today’s mortgage rate environment, check out my most recent story Mr Mortgage: An In-Depth Look at Mortgage Rates: 5.5% is Nowhere Near Reality For Most
Remember folks, the rates at 5.5% you are hearing quoted are for the best AAA, high-FICO, low loan-to-value, owner-occupied purchase or rate & term refi. This loan scenario makes up the small minority of all borrowers. The rates for most of us are still well over 6%. The rates for Jumbos are much worse and did not respond anywhere close to conforming.
We can’t even be certain yet these levels will hold. Remember folks, we have seen this happen a few times this year. Each time, rates went right back up after the initial knee jerk lower. It is happening again this time as well. Ever since the initial betterment on Tuesday morning, rates have been increased higher multiple times in just two business days. As of Wednesday afternoon rates have climbed back up to a level that has wiped out half of their initial gains. For example, last week a zero to half point 30-yr fixed was around 6%. On Tuesday is jerked down to 5.25% and is back to about 5.625% now. I am still not convinced that the low rates will last – I talk about in HERE. I bet we see a 6-handle on base-rates again by year-end.
But, for the purpose of this analysis, let’s pretend that conforming base-rates stay at 5.5% (NOTE – Jumbo Agency money is still well above 6%. Jumbos over the Agency Jumbo limit can be as high as 7-10% because these are bank portfolio loans).
In the good-old days, when rates dropped 50bps in a short period of time, the entire country would refinance for a lower rate, for cash out, to combine a first and second into new first mortgage and then add a new HELOC, etc.
Back then when values went up every month and there were hundreds of lenders with thousands of programs and interest rate structures it was very easy to pump the mortgage money. Back then the refi waves came every 6-8 months and within a few months after a wave began it was noticeable how this injection rejuvenated the consumer.
This can’t happen any longer. Who do you think is out there to take advantage of these low rates? Much fewer than you would think and a lot less than in the past.
-Negative Equity – Within the states that need to most help, the vast majority can’t refi due to negative-equity – see chart in this LINK. In CA for example, some 60% of all mortgagees are either underwater or ‘near’ underwater and and will not be able to take advantage of the rates. NV, FL and AZ are even worse. The top 10 trouble states in the nation are mostly stuck underwater in their homes, unable to move or refinance.
-Rates are really not that low – The rates you are hearing about at 5.25% were there for a brief period yesterday morning but by the end of the day every lender had re-priced rate higher multiple times. Rates jumped back to the 5.5% level where they sit now.
***Rates are lower than last week for sure, but these ‘low rates’ that are being heralded are ONLY for the best AAA Prime gold borrowers with 80% CLTV’s and 720 scores. This represents a small fraction of borrowers. THE REST STILL GET RATES WELL ABOVE 6%. As a matter of fact, most borrowers with this profile did not participate in the past several years of serial refinancing and many already have low 30-year fixed rates at 5% attained in 2003-2004. These rates are not for anyone less than perfect.
-Steep rate adjustments – Now days, the GSE’s have steep adjustments to the interest rate for less than perfect credit scores, higher loan-to-values, cash-out etc. These steep adjusters carry rates for most well above 6% even at today’s lower rate levels.
-Folks don’t qualify – ‘Back then’ nearly everyone could benefit from a drop in rates because values always went up and because stated income and interest only loans made it so everyone could qualify. Until mid 2007, lenders actually funded 75-80% of all loan applications! Now, lenders are funding 40-50% of applications. That is serious fall out. Now, you must have two years tax returns, a current pay stub, great credit and sizable equity to take advantage of the best rates. This profile represents a small minority of borrowers.
With respect to purchasing, since over half the market is distressed sales of foreclosure related properties, rate does not matter as much – home price does. 6% or 5.5% will not change things – its about how cheaply they can buy. Everyone wants a ‘deal’ on a foreclosure.
Many ‘investors’ buying distressed properties pay cash. Those that don’t have much tighter qualifying rules and a much higher rate structure anyway because rental properties carry more risk. The GSE’s are now pricing in that risk.
Renters and first time home buyers are a different story and should see some benefit to lower rates if they hold. They will either save money or qualify for slightly more house. But remember, first time home buyers and renters are the weakest portion of the market and have always been. What is missing is the all-important move-up buyer, which lower rates will not help to any great degree. This is because of the gross amount of negative equity already discussed here and because without all of the exotic loan programs and easy qualifying many can’t even afford to re-buy the home they live in now.
MORTGAGE ORIGINATORS ANNOUNCE RECORD VOLUME ON 11-25…NOT SO FAST
I emailed a good friend at a national mortgage bank yesterday and asked…
Mark: Of all your loan locks today, how many were re-locks of loans already in process with other lenders. If it was heavy, it would show that yesterday’s massive mortgage action was not a bunch of new loans but just an aggregation of that past 30-days of production at higher rates that all moved to other lenders on the same day (today) for lower rates? I am trying to validate that on days where rates drop through the floor in a single day, very few new loans are originated. Rather all bank lose their present portfolio as borrowers and brokers go elsewhere to capture the new pricing.
David: Most were re-locks from other lenders on loans already in process. Some were refi-churns from the past 6 months originations including some of the re-locks. Another problem on days like today is that brokers lock everything in their systems without checking with their clients first because their computer tells them that John Smith can benefit from a refi if rates fall to a certain level. They lock up the loan to protect the rate and then call John Smith to find out he is delinquent, unemployed or the home value has dropped to a level at which he can’t refinance using new guidelines. Days like today feel great when they are happening but end up being costly.
This brings me back to a research note I wrote in Jan 2008 about IndyMac that explains the flurry of mortgage activity yesterday, as rates dropped.
1/24/08 IndyMac locks $1 billion in loans in a single day – The Lies Never Stop
Michael Perry is the biggest information fabricator in the industry. Look back through all of your 2007 press releases and you will see how many times he has said such things only to disappoint the shareholders.
The facts are IndyMac sits on Billions of unsalable subprime, Pay Option and second mortgage loans. These three loan types make up 80% of their portfolio and most of it cannot be sold for any price.
All mortgage companies had record locks yesterday. But this is not ‘new’ business necessarily. When rates crash down like they did yesterday, everyone forward locks loans with whoever has the lowest rates. They may have already had these loans locked at a different lender but relocked somewhere else to get the better rate.
IndyMac took a lot of business from other lenders yesterday. But, they lost a lot too. When this happens, portfolios just tend to shift from one lender to another, as borrowers and brokers want to take advantage of the lower rates and the lender at which they are presently locked typically will not roll down rates to market. If you lock it, that is your rate.
So, yes Indy may have locked $1 Billion (3000 loans) but they likely lost 3000 loans at their shop locked previously in the month because the loan officer locked those with a different lender for a better rate. Of the 3000 loans Indy locked yesterday, 2500 likely were already locked and in process at another lender like Countrywide.
Now for the bad news…all of those loans IndyMac already had in their pipeline previously locked at higher rates that were pulled, will cause massive losses. Not, only paper and hedging losses but real operational losses from having staff work loans that will never fund. These loans are the exact ones that they wanted to fund because they carry a higher rate than market rate in most cases.
The new $1 billion (3000 loans) that they locked yesterday at the one-day lowest rates in 5-years are locked at such low rates, funding these could created massive losses since rates shot up so much in the past 24-hours. Rates are up almost 50bps since yesterday morning.
To add insult to injury, chances are IndyMac was not able to hedge these appropriately and/or do not have the forward commitments necessary to handle that much production. In essence, their entire pipeline of loans they worked so hard on over the past month churned elsewhere for lower rates at a COST to Indymac.
This whole deal could ruin them. Sounds counterintuitive, but it is absolutely the facts.