Saturday, April 5, 2008

Great News For Fannie & Freddie...Almost

Finally, Fannie and Freddie have been cleared to open up their coffers, reduce the amount of reserves they need to carry and able to invest in more expensive mortgages in high cost areas. This is great news. Now the biggest and second largest mortgage investors in the country can really put more people into homes. Right? By the news releases and market responses you sure would think so.

But not so fast there my friend. Fannie and Freddie have been increasing their market share since the market truly started to melt down in August of last year. Many large mortgage lenders are only dealing with these two companies. Gaining market share isn't a problem in this environment. Gaining the ability to possibly finance more properties at higher dollar amounts isn't really that big of news. It helps in limited market areas, not all high cost areas.

But here is the thing. Fannie and Freddie have changed their guidelines to make it, A) more expensive and B) more difficult to finance a home through their programs. Both companies had released late last year that they were going to base rate calculations on credit scoring. That went into effect March 1. On March 17, the two released new pricing guidelines that go in effect June 1st. Guess isn't going to be cheaper. Fannie Mae also announced that they are going to be changing DU (their underwriting software) and increasing credit requirements.

While this is going to make it more expensive for the average credit individual, you will still be able to help a vast majority of your borrowers, just maybe not at the most attractive rates. But then there is the issues of the PMI companies.

Not familiar with PMI (Private Mortgage Insurance)? Consider it default insure that your lender put into your payment if you have less than 20% down payment or equity in your property. You pay the premiums in your monthly mortgage payment. If you default on your loan, these insurance companies pay a portion of the loan to the lender.

What is the big deal? If you have less than 20% down or equity in your home and want to do a Fannie or Freddie loan...normally PMI is required. For the last few years lender would do "piggyback loans" to avoid PMI by doing 2 mortgages to finance your home. That has gone by the wayside. Most lenders want the protection that PMI offers in this market. If you want to do a loan with less than 20% equity, you have to be able to obtain PMI if you are going to do a Fannie or Freddie loan.

Most PMI companies have their own guidelines, separate from Fannie and Freddie. They have really dropped the hammer. Want to do a mortgage with less than 5% down? Better have a 680 credit score or better. Want to do any more with PMI, better have a score of 620 or better. If you are in a declining market, you cannot do a cash out refinance to consolidate debt such as combing a 1st and 2nd mortgage.

Those are just a few examples that I see with my PMI company. These are more lax for me since I work for a credit union compared to a banker or mortgage lender, their guidelines are even more harsh. The box to fit loans are getting smaller and smaller.

Oh yeah, and the modernization of FHA? The suggestion this week is to RAISE the down payment/contribution requirement to 3.5% from 3%...not lowering the requirement that has been talked about for months.

Have you seen the Wachovia mortgage commercial yet? I'll talk about it next time.

Wednesday, April 2, 2008

Thoughts on the Fed

There were plenty of things that I wanted to write about when I wasn't posting, but I wanted just to take a break. Sure, my traffic has basically died.

One of the things that kept jumping into my mind is how the market is always reacting to old news. Of course, that is the only news that we can get. But that is one of the main issues facing the Federal Reserve in the next few months and over the next year. They are trying to gauge whether to further stimulate the economy by cutting rates, stay the course and do nothing, or try to finally apply the brakes and start raising interest rates.

It has to be one of the most difficult and frustrating aspect of their jobs. I blame Greenspan for so much of this current mess. Many have voiced their frustration that his Fed held the rate at 1% for too long. And when they did start raising the rates, they did it too slowly. The problem was that they didn't want to apply the brakes to soon and squash a fledgling recovery. And they had to make their decisions, good or bad, with old news. But from what I remember, he was cheered at the time. And remember that when they started raising rates, hoping that long term rates would start to follow along, they didn't. Treasury bonds stayed low fueled by foreign investment.

So be ready. Ultimately, there is no doubt that the current Fed will hold rates too low for too long and will overshoot. It is an unfortunate side effect of using the idea of finding the "perfect rate" for the economy using data that is outdated. I don't know if there is a better way to do it. I'm frankly not that smart.

Tuesday, April 1, 2008

Market Soars on Bad News

Yes, I took a month off. So what, nobody but my wife reads this religiously.

The Dow was up 391 points today based on Lehman efforts to raise additional capital by selling $4 billion in preferred stock. Ford reported a 14% drop in sales. UBS and Deutsche Bank report billions more of write downs and guess what...

That is good news! Who knew? We live in upside down world.

I have been reading a lot lately of those analysts that are calling a bottom to the market. Others say we are exactly half way through the recession period and that is the perfect time to buy stocks.

I'm not sold on it. Rallies like to today are fluff. It's nice to see stocks up, it's a nice warm feeling. But keep in mind that all the news that you saw hit the wires today was still negative. I'm not sure that the banks are done with their write offs.

We have seen Bear Stearns fail since I have spoken to you last. What has been learned? Well, the Fed, having earned a piece of what is REALLY being hidden by big investment banks and commercial banks now will be able to better assess what, if any, changes need to be made. As for the Fed taking on these "risky assets"...uh, the Fed could turn a nice profit, if the assets perform.

My feeling is that you are going to find some stocks that are on sale right now. I really like foriegn stocks, excluding most of China. I have suggested EWZ in the past, the EFT from Brazil. The EFT has reseasonably well in the current market, even with the dollar's struggles. As the dollar regains some strength, which it has in the past few weeks, you will see this EFT surge forward.

I still don't trust financials. Maybe I will miss the boat...but I think once you see at least two full quarters of the major banks posting no write downs, then the tide will have turned. Sure, you might miss some of the upswing, but the downside is still considerable in my opinion.