Why Have Mortgage Rates Gone Up? Fiscal Cliff Breakdown; CFPB Still Looking to Hire


Occasionally I am asked about a graphic presentation on foreclosures in
the United States, and how they’ve impacted different areas. Here you go.

Hey, those rumors about next week’s MBA conference being “clothing optional”
seem to be totally unfounded – or maybe someone is trying to play a joke on me.
But here is something for real: a couple firms are advertising some free
meeting room space at next week’s convention
. MERS always has a
room, this time in the Columbus Hall G-H. And this time around DigitalRisk
is offering up a place to hang out. It has free WiFi, refreshments, and a
changing station. (Okay, “charging” station, I misread it, but at
first I thought I could bring a baby.) “The Lounge” is also in the
Columbus Hall near the registration desk. The meeting rooms beat scrambling for
a seat in the bar, and then feeling bad about not ordering something from the

For something totally non-mortgage related on this autumn Friday, after 79
years chronicling American life, Newsweek magazine will publish its last
print edition
at the end of December and become digital-only. Darned
digital media stuff!

is the CFPB hiring its staff?
I am sure from multiple sources, but definitely
some right out of school – kind of like the Big 8 Accounting firms do. So here
I am, visiting my son at business school at UT in Austin, when I see on the
bulletin board: “Interested in a career at the nexus of finance,
government, and law? Discover the CFPB Director’s Financial Analyst Program at
our information session. At the session:  Learn the unique challenges and
opportunities you’ll encounter as an analyst at the CFPB.  Current
analysts and CFPB staff will be on hand to answer all your questions. About the
program:  The Director’s Financial Analyst Program gives outstanding
college graduates the opportunity to work on behalf of American consumers while
gaining financial market experience, training, and developmental opportunities
that rival those of Wall Street banks.  Analysts rotate through 2-3
different CFPB divisions over 2 years. About the CFPB:  The CFPB is a 21st
century Bureau that is changing the way consumers are treated in the financial
marketplace.  In the process, we’re changing what it means to be a
government agency. For more information visit www.consumerfinance.gov.”

One thing I am often asked about is the status of FHA Streamline
investors on the correspondent side
. I received this note, “The interest in
Streamlines that mirror FHA guidelines remains high as borrowers and correspondents
alike seek alternatives to major investors, who require high FICO scores and
full property appraisals.  For borrowers whose property values remain ‘underwater’
due to depreciation yet have made on time payments for the past year and would
like to reduce their payments, there are options. First Mortgage is a
California-based lender/investor with no overlays to FHA Streamline guidelines,
and no same-servicer requirement. With no appraisal or AVM requirement and only
a mortgage rating (no credit score) on subject property, FMC will now accept,
in lieu of the occupancy inspection, two forms of occupancy identification such
as two current utility bills reflecting subject address or current utility bill
and current driver’s license or bank statement reflecting subject
address.  FMC buys closed loans in the following non-judicial states: AZ,
CA, CO, ID, IN, NC, NM, NV, OR, TX, UT, and WA.” (If you’d like to learn
more or schedule an appointment in Chicago at the Annual MBA conference, the
correspondent rep for FMC is Sharon Magnuson, and she can be reached by email
at: smagnuson@firstmortgage .com.)

Who should care about the “Fiscal Cliff”? How about everyone! Whether
Congress “kicks the can down the road” or whether it actually resolves the
issues remains to be seen (there are rumors that some in Congress are taking
breaths between campaign speeches and actually addressing the issue), but the
issues created by the government bear some elaboration. In fact, unless
measures are taken some believe that if the “worst case scenario” happens, Jan.
1 may see the biggest shock to the economy since the financial crisis four
years ago. On that day, policy changes will cause federal spending to fall, and
federal taxes to rise, by a combined $607 billion in 2013 alone. The magnitude
and abruptness of the changes gave rise to the name “fiscal cliff.” This
isn’t the result of new laws – it is the result of poorly thought out impending
changes reflecting how existing laws, some passed more than a decade ago, were
designed to play out.

First, we have the expiration of the Bush-era tax cuts. Congress
and President Bush signed tax cuts into law in 2001 and 2003. The legislation
was championed as tax reform but came with a distinct limitation: Rather than being
made permanent, each round of cuts was designed to expire at the end of 2010 to
conform to budget rules. In late 2010, Congress and President Obama extended
the tax cuts for two years to avoid the looming expiration. Now both are set to
expire again on Jan. 1. If they do, federal taxes will increase by $221 billion
next year, according to the Congressional Budget Office.

Second, we have the expiration of the payroll tax cut. A one-year
payroll tax cut was passed in Dec. 2010, reducing taxes on the majority of
working Americans by 2%. The cut was extended for an additional year last
December and expires again on Jan. 1. It will raise taxes by $95 billion next
year. Third, we have budget-deal spending cuts. As part of last summer’s
deal to raise the debt ceiling, both parties agreed to form a bipartisan
“super-committee” tasked with cutting $1.2 trillion in spending over
a decade. If the committee failed that task, $1.2 trillion in automatic
spending sequestration would take effect over nine years. The sequestration
slashes indiscriminately across government programs in an attempt to prod
legislators into action. Alas, it didn’t work. The super-committee didn’t reach
a deal, so sequestration begins Jan. 1. The White House estimates it will
reduce federal spending by $109 billion in 2013. And on top of all that
there is an expiration of extended unemployment benefits, a big cut to Medicare
providers, and a laundry list of expiring tax deductions are set to hit Jan. 1.
Add it all up, and we’re talking policy changes equal to about 4% of the

What is the impact on mortgage rates and housing of this Fiscal Cliff
stuff? Most analysts think that we would avoid most of the scheduled rise in
payroll tax rates set for early next year. But as time has passed that
assumption is now looking less tenable: leaders in both political parties have
voiced a desire for the payroll tax holiday to expire as scheduled at year-end.
If there is an increase in payroll taxes in the first quarter, it will lead to a
decline in disposable personal income. That would be a negative for our economy
do we really think that the government is more efficient than individuals
in spending?
If there is a significant adverse effect on consumption growth
in the first half of next year, watch for a slow-down in the economy. Typically
this would lead to lower rates. But the disappointment in the marketplace, and
in the U.S. Government, may cause monies to flow elsewhere, especially if
Europe seems to be making headway with its problems, eventually pushing rates

How about some vendor and investor news?

Markets Cooperative
formed a strategic alliance with New Jersey-based firm
Secure Settlements, an independent evaluation and risk management
firm. Under this new alliance, Secure Settlements will offer CMC members its third-party
closing-agent risk management program at special terms.

In Kansas, American State Bancshares ($628 million in assets) will
acquire First National Bank of Holcomb
($57 million) for an undisclosed

In Wisconsin, Associated Banc-Corp announced that it will close 12
branches in WI and IL as it seeks to boost efficiency and reduce overhead

Last month Wells Fargo announced has updated the reserve requirements for
Non-Conforming loans such that the required liquid reserves will be based on
combined loan amounts.  For combined loan amounts up to $1 million,
borrowers will need 9 months’ PITI; for loan amounts between $1 and 2 million,
12 months’ PITI.  Combined loan amounts between $2 and 4 million will
require 24 months’ PITI, and anything over $4 million will require 36 months’
PITI.  These policy changes went into effect on October 15th.

The bank earnings continue. BBT reported earnings climbed
28%, as revenue surged. Improving credit conditions, strength in mortgage
banking (up 63% YOY), a lower loan loss allowance, and loan growth (average
loans climbed 8.4% YOY) helped although net interest margin declined from 4.09%
to 3.94%. KeyCorp reported profit increased 0.9%, as higher revenues
were offset by increased loan loss provisions ($109mm vs. $10mm prior year). Fifth
Third Bancorp
reported profit of $363 million (down 4.7% YOY), amid one-time
charges and flat revenue. It did see a 13% increase in mortgage banking revenue,
and NIM fell to 3.56% from 3.65%.

Turning to the markets, yesterday we saw the previous week’s Jobless Claims rise
46k to 388k from a revised 342k the prior week. We also the Philadelphia Fed
General business activity index rise to 5.7 from -1.9 in September, moving into
expansion territory. And the Conference Board’s Leading Economic Index increased
0.6% in September to 95.9, following a 0.4 % decline in August, and a 0.4%
increase in July. What does all that mean? It means an economy that is
fluctuating around a slow growth trend

But why
have mortgage rates headed higher?
The simple answer is: more sellers than buyers. Yes,
the Fed is buying $4 billion a day. But servicers are selling 3.5% securities,
containing higher note rates, due to fears of prepayment risk. There is also
chatter about loan officers “front loading” their lock submissions earlier in
the month than usual and locking earlier. Lastly, and perhaps the reason most
heard, is that the next gfee increase is looming. This reason makes sense
since the 10 basis point (.5-1.0 in price, depending on the buy-up/buy-down
schedule) will be effective for loans sold for cash as of Nov 1. and for loans
exchanged for MBS as of Dec 1st. (Here’s the original FHFA release: http://www.fhfa.gov/webfiles/24259/Gfee083112.pdf.)
So smart secondary marketing personnel are selling commitments early to not be
hit with the price change and avoid as many loans going into the higher gfee
pools as possible. Who eventually pays? The borrower, of course!

So the
10-yr closed at 1.83% Thursday, but is down to 1.79% this morning, and MBS
are perhaps .125 better
. The EU Leaders Summit on the whole wasn’t very
important although the final conclusions were a bit more constructive than anticipated
as officials agreed to have the legal framework for a banking union in place by
Jan ’13 with implementation to occur next year. The Spanish question is still unclear
although there may be some more clarity on that matter following the Sunday
regional elections. In Greece, no formal decision was made at the Summit (this
was expected) although increasingly it appears that a deal will be struck and
Athens will get the next aid tranche sometime in November.

(How does business work?)

A Chinese guy goes into a Jewish-owned establishment to buy black bras,
size 38. The Jewish store keeper, known for his skills as a businessman, says
that black bras are rare and that he is finding it very difficult to buy them
from his suppliers. Therefore he has to charge $50 for them.
The Chinese guy buys 25 pairs.
He returns a few days later and this time orders fifty.
The Jewish owner tells him that they have become even harder to get and charges
him $60 each.
The Chinese guy returns a month later and buys the store’s remaining stock of
50, and this time for $75 each.
The Jewish owner is somewhat puzzled by the large demand for black size 38 bras
and asks the Chinese guy, “Please tell me – what do you do with all these
black bras?”
The Chinese guy answers, “I cut them in half and sell them as skull caps
to you guys for $200 each.”

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