The Shakespeare Festival is still going strong in Ashland Oregon, but I often wonder what “The Bard” would write about the comedy of errors going on in Washington DC. Ben Bernanke made his second appearance today to talk to the “Apple Dumpling Gang” about the state of our economy.  In one day, Ben’s vision of the economy has gone from “doom and gloom” to “hey, things aren’t all that bad”.   Maybe he needs some Prozac ?  If not Big Ben, then the markets do for sure.  Yesterday was a “down day”, and today…..well the Dow is up over 200 points.

Think about it this way, the intrinsic value of the companies that make up the Dow can’t have changed that much in a 24 hour period.  If a company is worth a billion dollars, it doesn’t all of a sudden lose 5% or $50,000,000 in value in 24 hours.  Did their products lose that much in value?  Did their real estate holdings drop that much in one day?  Of course not.  But watching the markets, you would think that they did.  So, what’s my point?  The market is scared and is just as likely to believe that the sky is falling (from Big Ben’s testimony yesterday) as it is to believe that everything is all rainbows and prancing unicorns (based on Ben’s testimony today).

We talked about it yesterday, but the impact of the new FinReg (Financial Regulations) placed on the Ratings Agencies has already begun to show up. If you recall, now that Ratings Agencies can be held liable for inaccurate or misleading information, newly issued debt will no longer include their “official” ratings. In short, the three major ratings agencies no longer feel comfortable rating issuances if they can be sued if they “miss” on a bond rating.  Another way to look at this is to compare it to car shopping.  It’s sort of (in a very simplistic way) like saying that if I take advice from Consumer Reports on a particular car, and if that car turns out to be a lemon, then I can sue Consumer Reports?  Well, that’s silly.  Shouldn’t I test drive the car first? Shouldn’t I look under the hood? Shouldn’t I have my mechanic look at the car?  Well, large investment banks that buy these bonds have skyscrapers full of analysts, attorneys, and traders that review these transactions………but now the ratings agencies are liable.  Don’t get me wrong, I think that (in many cases) the ratings agencies missed the mark on quite a few bond issues over the last few years, but that doesn’t mean that we don’t want them doing their jobs……………and the new FinReg is causing them to step out of the market to protect themselves.

Case in point, last night Ford Motor Company pulled back a financing deal because they could not get a printed rating on the debt offering. Rumor has it, that there are a number of other bond offerings that are being scuttled because of this.  We will continue to follow the fallout from this part of the new FinReg.  We will also begin to see how this impacts mortgage financing.  No matter what happens, it will be interesting to say the least.

Since “they” say that a picture is worth a thousand words, I recommend that you check out this article (especially the graphs) from The Big Picture – it speaks volumes. Now, remember, recoveries and recessions never happen in straight lines, so trend-lines could tell the whole story or be completely useless.  In this case, I think the trend lines tell a very cautionary tale.  Many of the traders that I know have “gone to cash” as they are very concerned that we are not done with an overall decline.

Which brings us to the biggest surprise of the day – we are going to agree with Bernanke. He said yesterday that the economy is “Unusually Uncertain”. At this point, hindsight needs glasses to see well and foresight is running into walls left and right. With government intervention doing a number on our financial reports, we can barely see our proverbial hands in front of our faces. Next up to bat is the Unemployment Extension bill which, politics aside, will make it even harder to see the trend, since at this point a jobless recovery is about as likely as BP making a good public relations move.

The next few months will see a slight decline in housing numbers, but I personally believe that we will see a slight upturn in the fall and then another drop during the December-February months.  Also, keep an eye on consumer savings rates.  A big increase will signal a scared consumer and project less movement of housing inventory.  A drop will indicate a more comfortable consumer and a possible increase in housing activity.

As always, thanks for checking us out and please pass us on to anyone that could use some insight from us.

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Geoff Boyd – PrimeLending – Clackamas, OR

This article is a response to Rhonda Porter, a Loan Officer and Blogger from Seattle, in her Friday post about the House of Representative FHA Reform Bill. You can find her original article here.

Rhonda,

Great post and some very timely consumer information! We couldn’t agree with your assessment of the situation more – the first sentence of the HUD program mission statement – “HUD’s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all.” – says it perfectly – FHA Loans exist to make housing loans available to consumers with more limited resources. This increase in insurance that passed, which raises the annual mortgage insurance premium from 0.5%-0.55% to a maximum of 1.55% (your article says that they will start at 0.9%) plainly makes these loans less attractive to the consumers whom they are meant to serve.

One additional issue that is being considered in this overhaul of the FHA Home Loan program is raising the minimum down payment from 3.5% to 5% – a change of $4500 on that $300k loan that you based your numbers off of – I don’t know how things are in Seattle, but down here in Portland, most people don’t have that just laying around. The good news is that it sounds like, although the possibility is still out there, that this increase will not take place because they have already raised the Mortgage Insurance Premium.

The biggest driving factor in this overhaul is the fact that the FHA program is critically under-capitalized. Several banks that fell at the peak of the crisis were considered well capitalized (at or above 10%). In 2009, the Capitalization Ratio for the FHA Program was calculated at 0.53%. Ouch ! ¹ – the required capitalization for this program is 2%. So, not only are they sitting at barely 25% of their own requirements (in terms of capital) but they are sitting at 1/10th or 1/20th the capitalization of many of the failed banks of the last few years.

I pulled the numbers, here’s what their capitalization situation actually looks like.

We all want/need the FHA program (instituted by the New Deal after the Great Depression) to stick around. The problem is this; FHA is trying to handle a landslide of new loans with the same infrastructure and capital that was adequate 5 years ago. In 2005, FHA (or HUD) insured 43,000 loans. In 2006, they insured 76,000 loans. ² In 2010 they are expected to insure 1.9 Million Loans.³ So, in the past 4 years they have increased the amount of endorsed loans 25 times over. It has taken them less than 4 years to NEARLY DOUBLE the total number of single-family-insured loans in their portfolio, from 3.8 million in December 2006⁴ to 6.2 Million as of April 2010. ⁵

Regulators are afraid that if we see another round of defaults in the coming year(s), that HUD won’t be able to financially handle it. That’s why they voted to increase the MI Premium by such a large factor. On the other hand, we’ve been hearing that the defect rate has come down drastically since 2009, primarily because of the tighter lending guidelines from investors, banks, and the like. Across the board, loan officers, banks, and investors are becoming much more focused on quality loan files, responsible underwriting, and proper packaging of loans on the secondary market. Once again, our regulators are attempting to legislate something that the markets have already taken care of (like no-income loans).

FHA is an awesome program and has helped countless borrowers over the years. It may have a few leaks and rusty parts, and instead of fixing the engine, legislators are under the car with a roll of duct tape, trying to cover up the leaks. What will be interesting, and awful, is to see what happens if a government mortgage insurer goes belly up. Who is going to step in to bail out the FHA? My short-list of white knights? Germany, China and Google. Maybe we can sell them on Ebay or Craigs List? China already owns most of our mortgage debt anyway, we might as well sell them the whole thing.

So, if you want to make a quick buck – go register googlefha.com or buy fha.de/fha.cn today, just in case.

Until that point in time, FHA Loans are still a great option for first-time home buyers; the preferential interest rate usually makes the mortgage insurance payment well worth it.

From her website – “Rhonda Porter originates mortgages on homes located in Washington state.  Rhonda is an NMLS Licensed Mortgage Originator at Mortgage Master Service Corporation. MLO-121324.”

If you guys have any questions for us, Send us an Email or Leave a Comment Below.

You can find us on Twitter @MortgageProBlog, we would love to have you as a follower!

Thanks,

Geoffrey Boyd – Prime Lending – Clackamas, OR – NMLS ID# 184665

Footnotes

1. http://www.hud.gov/offices/hsg/comp/rpts/actr/2009actr_subltr.pdf [↩]
2. http://www.hud.gov/offices/cir/test021507a.cfm [↩]
3. www.hud.gov/offices/hsg/comp/rpts/ooe/olcurr.pdf [↩]
4. www.hud.gov/offices/hsg/comp/rpts/com/06dec.pdf [↩]
5. http://www.hud.gov/utilities/intercept.cfm?/offices/hsg/comp/rpts/com/10apr.pdf [↩]