Monthly Archives: December 2013
The number of Americans filing new claims for unemployment benefits fell last week to the lowest level in nearly a month, a hopeful sign for the labor market.
Initial claims for state unemployment benefits decreased 42,000 to a seasonally adjusted 338,000, the Labor Department said Thursday.
Claims for the prior week were revised to show 1,000 more applications received than previously reported. Economists polled by Reuters had expected first-time applications to fall to 345,000 last week.
New jobless claims have trended higher since September, although economists say their level is still consistent with job growth. Other labor market indicators have pointed to strengthening job growth.
The four-week moving average for new claims, which irons out week-to-week volatility, increased 4,250 to 348,000.
Citing an improving labor market, the Federal Reserve earlier this month announced it would reduce its monthly $85 billion bond buying program by $10 billion starting in January.
Payrolls increased solidly in October and November. The unemployment rate dropped to a five-year low of 7.0 percent in November.
A Labor Department analyst said no states had been estimated, but noted that claims were still in a period of volatility related to the holidays. The volatility is caused by the difficulty inherent in adjusting weekly data for seasonal factors like retailers and schools adjusting the sizes of their staff for the winter season.
The claims report showed the number of people still receiving benefits under regular state programs after an initial week of aid rose 46,000 to 2.923 million in the week ended Dec. 14.
Mortgage rates rose to new 3-Month Highs today as bond market weakness (read: higher rates) is magnified by holiday trading conditions. In other words, there are far fewer MBS (mortgage-backed-securities, which directly affect rates) being traded this time of year, so if there is an imbalance toward strength or weakness, it tends to have a bigger effect on lender rate sheets. In the current case, that imbalance favors higher rates.
In addition, lenders typically err on the side of caution (read: higher rates) during this time of year, regardless of bond market movement. That doesn’t mean they’ll always raise rates in December, simply that rates are set just a bit higher than they otherwise would be during more active trading. The combination of the market weakness and lender defensiveness made for new 3 month highs.
Most borrowers will experience the movement in terms of the closing costs associated with their quoted rate, while the rate itself remains unchanged. The most prevalently quoted rate for ideal, conforming 30yr Fixed loans is still 4.625% (best-execution), but 4.75% is as close as it’s been since early September.
Loan originators, their advisors and service providers are moving rapidly to achieve compliance by January 10, 2014 with the Consumer Financial Protection Bureau’s (“Bureau’s”) new rule, which generally imposes an affirmative obligation on mortgage lenders to document a customer’s ability-to-repay whenever a residential mortgage loan is made (“ATR Rule”). The ATR Rule provides certain legal protection from suitability challenges with respect to loans that are treated as qualified mortgages (“QMs”).
The ATR Rule fundamentally changes the U.S. residential mortgage finance market from one that is largely based on a disclosure liability standard, to one that is focused on the suitability of the loan for the borrower. This significantly rebalances the legal relationship between the lender and its borrower, a fact which may impact the value of a residential mortgage and residential mortgage-backed securities (“RMBS”) from several different perspectives. Moreover, mortgage loan purchasers, securitizers, RMBS investors, and equity and debt investors in mortgage-related companies must also consider how the new rule may impact their businesses.
The Ability-to-Repay Rule: A Game Changer
The Dodd-Frank Act (“DFA”) prohibits a lender from making a covered residential mortgage loan unless the lender makes a reasonable and good faith determination, based on verified and documented information, that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan according to its terms, and to pay all applicable taxes, insurance and assessments (“ATR Requirement”).
Once the ATR Rule comes into effect, mortgage lenders will have three options:
- Satisfy the requirements for a “QM Safe Harbor” loan to take advantage of the defense it provides to borrower claims for damages or recoupment or offset.
- Satisfy the requirements for a “QM Rebuttable Presumption” loan to take advantage of the lesser degree of defense provided.
- Offer non-QM ATR loans that will not have the benefit of any special legal protections and would be subject to a case-by-case judicial determination as to whether they satisfy the ATR Requirement.
A discussion of the attributes and protections provided by QM loans is set forth in Appendix A. The defenses that borrowers may assert against the lender in a foreclosure or other non-payment situations and the affirmative actions that they may take seeking damages for alleged violations of the ATR Rule are set forth in Appendix B.
The greater the number of loans that may qualify as QMs, the more loans are likely to be available to prospective borrowers. It is expected that many lenders will be reluctant to make non-QM loans because of the uncertainties about the risks inherent in such loans.
It is notable that the Federal Housing Finance Agency has directed Fannie Mae and Freddie Mac to limit their residential mortgage loan purchases to loans that meet certain QM requirements upon the effective date of the ATR Rule. Specifically, Fannie Mae and Freddie Mac will be prohibited from purchasing any loan that is subject to the ATR Rule and is a loan that (i) is not fully amortizing, (ii) has a term in excess of 30 years, or (iii) has “excessive” points and fees.
Many lenders are likely to build their policies, underwriting standards and portfolios around QM loans in the short run until a knowledge and experience base of ATR lending and court decisions is established.
Interests of Loan Purchasers, RMBS Investors and Mortgage Finance Entity Investors: Key Risk Evaluation Considerations
Loan purchasers will need to develop a new approach to their purchasing strategies. As an initial matter, they will have to decide which of the three types of loans they will be prepared to purchase. They will have to consider the extent to which the legal status of a particular type of loan, as well as the associated risks, costs and potential impediments to foreclosure, may impact their purchase and pricing decisions.
RMBS investors will not have the same type of direct contact and negotiating position that loan purchasers will have with lenders. However, RMBS investors must understand the approach that the securitizer has taken with respect to the types of loans that the securitizer has acquired for an RMBS, and how the securitizer, servicer and trustee plan to monitor, mitigate and handle the risks associated with the various types of loans that the RMBS may hold.
Similarly, investors in entities that originate residential mortgage loans and/or that hold significant amounts of such loans must now understand and evaluate the policies that the entity maintains in regard to the ATR Rule. Such investors must also understand how the originator will seek to address and mitigate the risks presented by the particular types of loans that it originates and/or holds in portfolio. To the extent that the lender will originate non-QM ATR mortgage loans, the value of the portfolio will turn on the embedded risks where safe harbor and rebuttable presumption defenses are not available. Similarly, if the lender decides to make only QM loans, then there may be risks of lending discrimination claims that may arise under disparate impact discrimination theory.2
Mortgage loan purchasers, should no doubt try to take advantage of the new opportunities in the marketplace created by the ATR Rule. Indeed, to the extent that financial institutions retreat to the relative safety of QM lending, private capital may fill the void left in the non-QM ATR lending space. Those companies and their investors are facing a rapidly evolving marketplace for residential mortgages, which creates both a challenge and a business opportunity.
In any event, participants in these new markets must evaluate and price the risks inherent in these transactions. This will result in new templates, standards and terms and conditions to make the markets work as efficiently as possible, but only if we understand the elements of the last mortgage finance crisis will we be able to comprehensively underwrite future markets and avoid the next great mortgage crisis.
Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates rising slightly from last week following positive news for housing starts and building permits.
- 30-year fixed-rate mortgage (FRM) averaged 4.47 percent with an average 0.7 point for the week ending December 19, 2013, up from last week when it averaged 4.42 percent. A year ago at this time, the 30-year FRM averaged 3.37 percent.
- 15-year FRM this week averaged 3.51 percent with an average 0.6 point, up from last week when it averaged 3.43 percent. A year ago at this time, the 15-year FRM averaged 2.65 percent.
- 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.96 percent this week with an average 0.4 point, up from last week when it averaged 2.94 percent. A year ago, the 5-year ARM averaged 2.71 percent.
- 1-year Treasury-indexed ARM averaged 2.57 percent this week with an average 0.5 point, up from last week when it averaged 2.51 percent. At this time last year, the 1-year ARM averaged 2.52 percent.
Mortgage rates were unchanged today on average, and thus remain near recent highs with 4.625% the most prevalently quoted rate for ideal, conforming 30yr Fixed scenarios (best-execution). Some lenders are well-enough priced that 4.5% is available, but it should be noted that most lenders currently have big buydowns to move lower in rate right now (meaning it can cost nearly 1% of the loan amount to drop the rate by .125%).
The sideways movement into the end of the week is consistent with our sense of what’s been happening in the rate world since last Friday’s big jobs report. That data was tremendously important because, had it been strong enough, it could have made a more compelling case that the Fed would begin reducing the amounts of the Treasuries and Mortgage-Backed-Securities (which directly affect mortgage rates) it currently buys.
While markets generally seem much more prepared for so-called “tapering” than they were in June, whenever it finally happens, it will still mark the turning of a corner on the path to higher rates. That would likely have quite a negative affect on rates were it to happen in December (as some feel it might) versus the consensus view of March 2014.
But the jobs data wasn’t outrageously stronger than expected–certainly not enough to suggest that December tapering is any sort of guarantee. Heading into that report, rates were in a position to absorb stronger numbers still, and thus embarked on a short relief rally. That rally ran out of steam on Wednesday and rates have proceeded to settle down right between the highs that preceded last Friday’s jobs numbers and Tuesday’s ‘relief rally lows.’
As has been the case ever since the jobs report (but increasingly clearly as the week has progressed), the next big move for rates–and perhaps the only big move left in 2013, is likely to be seen after next Wednesday’s FOMC Announcement.
Mortgage rates moved sharply higher today, erasing more than half of the improvement seen in the relief rally of the past 3 days. That rally was something of a paradox in that stronger employment data (as seen on Friday) typically pushes rates higher.
Rates had been exceptionally weak through the entire month of November and into early December, leaving them in an overly defensive position ahead of a jobs report that wasn’t that much better than expected. In such cases where market trading levels are somewhat offsides, it’s not uncommon to see a “relief rally” lasting anywhere from a few hours to a few days.
The absence of economic data and events during the first three days of the week allowed the positivity to continue unchecked, but the longer a relief rally continues, the more likely it is to bounce. With some help from headlines and an eye toward the week’s first significant piece of economic data tomorrow morning, today became the day for the bounce.
The headlines in question concern the promise of a budget deal from the House. This is a domino in the mortgage rate equation because the Federal Reserve cites “Fiscal Drag” (uncertainty and lack of legislation surrounding the budget, sequester cuts, and debt ceiling) as a reason for delaying a reduction in bond buying.
That bond buying is a positive factor for mortgage rates, and although markets have mostly come to terms with the fact that it will be curtailed in coming months, if that were to happen at next week’s Fed meeting as opposed to some time in early 2014, rates would likely rise.
Had the budget deal already been passed, rates may have risen more abruptly. From 4.5 percent yesterday, rates are back up to 4.625 percent in many cases for ideal, conforming 30yr Fixed scenarios (best-execution).
The biggest event on the horizon is next Wednesday’s FOMC Announcement. This will almost certainly set the tone through the end of the year. The pre-game warm-up for that main event begins with tomorrow’s Retail Sales report–at least it could. If the numbers are much stronger than expected, rates could continue higher, but they could stabilize if the report is significantly weaker.
A rise in mortgage application volume during the week ended December 6 was the first increase in six weeks. The Mortgage Bankers Association said that its Market Composite Index was up 1 percent on a seasonally adjusted basis from the previous week and 43 percent on an unadjusted basis. The week that ended November 29 had included the Thanksgiving holiday and applications were down by 40 percent during that week.
The Refinance Index increased 2 percent from Thanksgiving week but was down 16 percent from the more typical week previous to that. Sixty-five percent of all applications were for refinancing compared to a 63 percent share the previous week.
Refinance Index vs 30 Yr Fixed
The seasonally adjusted Purchase Index increased 1 percent from the previous week and was 3 percent lower than the week prior to Thanksgiving. The unadjusted Purchase Index was up 37 percent on a week-over-week basis but down 10 percent year-over-year.
Purchase Index vs 30 Yr Fixed
Rates across the board, both contract and effective, were higher across the board with all fixed rates rising to their highest level since last September. The average contract interest rate for 30-year fixed-rate mortgages (FRM) with conforming loan balances below $417,000 increased to 4.61 percent from 4.51 percent. Points decreased 0.26 from 0.38.
The contract rate for jumbo 30-year FRM (loan balances above $417,000) increased 10 basis points to 4.59 percent, Points decreased to 0.15 from 0.24.
The rate for 30-year FRM backed by FHA jumped to 4.30 percent from 4.17 percent and points increased to 0.38 from 0.36.
Fifteen-year FRM had an average rate of 3.66 percent compared to 3.56 percent the week before. Points decreased from 0.32 to 0.31.
The share of applications for adjustable rate mortgages (ARMs) has been slowing rising from the 3 percent range where it has languished for years. Last week ARMs received 8.1 percent of applications, the largest share since July 2008. The average rate for a 5/1 ARM increased to 3.11 percent from 3.09 percent and points increased to 0.35 from 0.28.
Rates and application volume information are derived from MBA’s Weekly Mortgage Applications Survey which has been conducted since 1990. Information is provided by mortgage bankers, commercial banks and thrifts and covers over 75 percent of all U.S. retail residential mortgage applications. Interest rates are quoted for loans with an 80 percent loan-to-value ratio and points include the origination fee. The base period and value for all indexes is March 16, 1990=100.
Mortgage rates moved slightly lower again today. The most prevalently quoted rates remain between 4.5 and 4.625 percent for ideal, conforming 30yr Fixed scenarios with the improvements being seen in the form of lower costs. Today’s rates fall somewhere between last Wednesday’s and Tuesday’s for almost all lenders.
There were no significant events on today’s calendar offering motivation for the bond markets that underlie mortgage rates. Volatility was absent for both US Treasuries, which provide a good sense of longer term trends, as well as Mortgage-Backed-Securities (MBS), which most directly affect lenders’ rate sheets. Despite the modest improvements, both Treasuries and MBS looked to be leveling-off more than they were continuing into stronger territory.
The week will continue to be light in terms of scheduled events and investors’ focus is already mostly turned toward next week’s FOMC Announcement. That’s the Fed policy statement at which some market participants think the Fed could move to reduce asset purchases. Economists are fairly divided on that, however, with about half seeing it March and the other half seeing the reduction coming some time between now and then.
Only 1 in 7 surveyed think it will happen next week, but for what it’s worth, that’s not much less than those who DID NOT see it happening in September. Bottom line: it probably won’t happen in December, but the fact that it might is keeping markets on their toes. The net effect on rates is that they’ll be hesitant to make any major moves between now and then. Surprisingly strong or weak economic data on Thursday morning could be a bit of an exception.
Good news for housing, price gains next year are expected to be only about half as strong as in 2013, when sellers stayed on the sidelines. Yes, that’s good news. “For a sustainable recovery you want to see more balance between buyers and sellers,” says David Stiff, chief economist at CoreLogic Case-Shiller, which is forecasting a 6.8% rise in the median home value for 2014.
Inventory is already improving. Nationwide, the number of homes for sale in September rose 1.8% vs. a year earlier, according to the National Association of Realtors. That’s the first increase since late 2011. In Los Angeles, Atlanta, and Orlando, inventory was 10% or higher than a year earlier.
“It will still be a sellers’ market in 2014, given how far we have before inventory is back to normal,” says Jed Kolko, chief economist at Trulia, noting the supply of homes in September was still about 15% below historical norms. “But it will not be as extreme as 2013,” he says.
Buyers will also enjoy an advantage next year as real estate investors are expected to be less of a factor. Why? In an improving market, there are fewer distressed homes, which they covet. According to the Campbell/Inside Mortgage Finance HousingPulse Tracking survey, the investor share of residential home purchases fell from 23% earlier this year to 17% in September. In a more balanced market like this, here’s what you can do to get an edge:
Waiting for more inventory can make sense if you have a dream home in mind. But in 2014 there will be a price for delay — 30-year fixed-rate mortgages are forecast to climb from today’s 4.5% to more than 5%.
Work with a fast closer. Qualifying for loans is easier now, but speed is another issue. Franklin, Tenn., agent Patty Latham says she will not work with buyers using a particular lender that has missed several deadlines. For speed, Virginia agent Rob Wittman suggests sticking with local lenders with ties to nearby appraisers.
Lead with a credible offer. At a time of multiple bids, low-balling isn’t the way to go. “The reality is, sellers don’t have to come back to you with a counter if they’ve got better bids,” Wittman says. Of course, you don’t want to overpay either. Even in markets that are starting to experience bidding wars, such as L.A. and Boston, final sales prices are still typically about 1% below asking. Use that and your agent’s local knowledge and go in with a respectable bid.
If you like your home and are not in a rush to sell, you have great flexibility. For instance, your rising home equity will make it easier to borrow against the property. That can help pay for deferred maintenance or home renovations you’ve been eyeing for years — which will only add value when you eventually put your home on the market.
Remodel within reason. Home-improvement spending is expected to grow by double digits through mid-2014, according to Harvard’s Joint Center for Housing Studies. Atop the wish list: bathroom and kitchen jobs.
Keep resale in mind. While the focus was on value at the market lows, today “homes with all the fixings are the ones attracting multiple buyers,” says McLean, Va., real estate broker Jon Wolford. So, yes, you can splurge a bit, but don’t go crazy. Remodeling Magazine’s cost-vs.-value survey found that moderate kitchen remodels ($57,500) recouped 69% of their cost, close to what minor jobs paid back. Over-the-top projects ($111,000), though, recouped less than 60%.
Take advantage of low home-equity rates. While 30-year mortgages rose nearly a point this year, rates on home-equity lines of credit have fallen a bit to 5.1%. That’s because HELOCs are tied to short-term rates that the Fed isn’t likely to hike until 2015.
If you’ll need to repay your loan over many years, though, go with a fixed-rate home-equity loan. Today’s 6.25% average is about 0.25 points lower than a year ago, as lenders are now more interested in doing deals, says Keith Gumbinger at HSH.com. Credit unions can be the best place to shop for home-equity loans. The average credit union rate is 5.75%.
Bill Gross, manager of the world’s biggest bond fund, said the pace of payroll growth in November signals there a 50 percent chance the Federal Reserve will begin tapering its monthly bond purchases this month.
“It’s at least 50-50 now,” Pacific Investment Management Co.’s Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Mike McKee. “There was some logic for a January starting point, but it’s clear the Fed wants out. The Fed still has to be careful even when they begin to taper,” given the recent pace of growth has produced growth at only about 2 percent so far, he said.
Employers added more workers than forecast in November and the jobless rate dropped to a five-year low of 7 percent, showing further progress in the labor market that will help provide a spark for the U.S. economy.
The 203,000 increase in payrolls followed a revised 200,000 advance in October, the strongest back-to-back gain since February-March, Labor Department figures showed today in Washington. The median forecast of 89 economists surveyed by Bloomberg called for a 185,000 advance.