HSH Market Trends

TARP, Mortgages and RESPA Modified; Rates Ease

November 14, 2008 — A week light on economic data didn’t lack for activity. Stock markets continue to rage about, bond yields continue to bounce around, and our newly-activist government is engaged yet again.

This week, Treasury Secretary Paulson all but abandoned the original Troubled Asset Relief Program (TARP), which was intended to pull bad mortgage-related assets off of lender books in an effort to clear their balance sheets. The $700 billion program was supposed to shift bad debts to the government’s books at some market clearing price, but not a single transaction occurred. The process of culling rotten loans and securities turned out to be more cumbersome and slow than expected, and our guess is that lenders simply failed to show much interest in the program, which would have exposed those assets to some pretty harsh market valuations. If conditions stabilize or improve over time, those assets could prove to be more valuable than today’s market can bear.

Whatever the reason, the focus (and at least some of the remaining cash in the TARP) will be put toward building backstops for AAA-rated markets for auto loans, credit cards, and other kinds of loans. The goverment still hopes to spur this kind of lending, since it came to a crashing halt over the last few weeks with dire consequences for the economy, which continues to struggle considerably.

Mortgage rates eased a little this week. HSH’s Fixed-Rate Mortgage Indicator (FRMI) shed 14 basis points (.14%), closing the survey week at 6.74%. The overall average for the five-one Hybrid ARMs shed 18 BP, finishing the survey week at 6.52%. Like expanding ripples on a pond, the wide swings in rates seem to be diminishing after a series of near half-point moves. Settling down is a welcome sign for the market, and that they are settling lower is to the benefit of borrowers.

HSH’s FRMI includes conforming, jumbo and expanded conforming mortgage prices. See the latest trending charts for these and other series.

The average for traditional conforming 30-year FRMs (up to $417,000) declined by another 17 basis points this week, landing at 6.21%.

Aside from the sudden shift in the TARP roiling markets (the price of some mortgage assets which might have been offloaded under the program nosedived, according to a chart in The Wall Street Journal), this week was all about new loan modification plans for troubled borrowers. The Federal Housing Finance Agency announced a plan to identify and modify more Fannie and Freddie-backed or -owned mortgage loans. While admitting that GSE-backed loans represent perhaps only 20% of at-risk mortgages, FHFA Director James Lockhart expressed optimism that by setting a series of standards for “streamlined” modifications, others might follow the lead of the agency and improve the number of mortgages changed. Servicers can earn $800 for each loan adjusted to more closely match the borrower’s capabilities; they’ll use a 38% housing ratio for determining monthly mortgage payments, among other factors. Although the FHFA offered only a vague estimate of how many borrowers might be served by the program, “thousands” will probably benefit. To be eligible, a borrower should have missed at least three payments and not filed for bankruptcy. Borrowers will need to contact their servicer and provide supporting documentation and a hardship statement.

Not to be outdone, the FDIC offered its own plan for loan modifications on Friday, but specifically for non-GSE backed loans, so this program would include jumbo, subprime and other non-conforming loans. While offering servicers a $1000 bounty for each loan mod, the program here goes a step further in providing some offset of risk to the investor should the newly-modified loan again fail. The FDIC estimates that originally some 2.2 million mortgages could be eligible by the end of 2009, but expects that perhaps a full third of them will re-fail over time. In such a case, the FDIC will cover up to 50% of the loss to the investor. How it will all work out wasn’t especially clear, and details on the FDIC website were rather thin, but the program could have an expected ultimate cost of about $24 billion while serving to keep perhaps 1.5 million homes out of foreclosure.

These new plans join the ranks of the FHA Secure program and the private initiatives from Citibank, JPMorgan and Bank of America announced in recent weeks.

Given that the economy is weak and perhaps getting still weaker in light of the late summer/early fall financial fallout, the need for more loan mods may indeed be in the offing.

There was little good news to look to this week. With the downturn in economic activity and the 60% retracement for oil prices, the nation’s imbalance of trade showed a considerable narrowing, declining to a gap of $56.5 billion in September. While imports slowed by 5.6%, exports dove even more, easing by 6% for the month. With the US economy continuing to slow, a decline in imports is to be expected, but the economy has been leaning on exports to pull it though a troubled period, and our trading partners are now showing more clearly their own stresses.

The imbalance may narrow some more in October as the costs of goods are declining, rapidly in some cases. The aggregate cost of imported goods dove off a cliff in October, sliding 4.7%, the largest month-to-month decline on record. Prices of imported goods have now fallen for three consecutive months; over the past year prices have risen just 6.7% (a figure which was 21.4% as recently as July) and falling fast. Even excluding petroleum’s freefall, goods prices were off by 0.9%. The cost of products we ship offshore also eased, sliding by 1.9% during the month, and have now increased just 4.2% over the last twelve months. Easing inflation could give the Fed even more room to lower short-term rates, but there’s little room to do so and even lesser benefit to the general populace, given that previous decreases in rates are still not being fully (or in some cases even partially) to consumers and businesses.

Amid the ongoing turmoil, consumers have simply pulled back and battened down the hatches. Retail Sales declined a worrisome 2.8% during October, the 4th consecutive month of reduction and the steepest decline yet. Hopefully, falling gasoline prices will loosen pocketbook strings before long, or retailers will be in for a truly pathetic holiday season full of huge discounts and meager profits. Many are already reacting to the terrible environment by shedding stores and employees, or issuing dire warnings about the outlooks for the season. “Core sales”, those minus automobile and gas station purchased sported a broad-based 0.5% decline for the month.

After threatening to do so for weeks, weekly unemployment claims moved into new territory during the week ending November 8, landing at 516,000 new applications for benefits. While mild for a time, layoffs accelerated starting in July and have been on a fairly steady upward path since. Hiring (and firing) are lagging indicators, occurring after conditions have stayed poor (or improved) for a period of time, and we are probably seeing the lagged effects of late August and September’s swoons long about now, meaning higher claims may yet come in the weeks ahead.

Consumers are a resilient bunch, though. It appears that, for the moment, consumer moods are about as dark as they will get. Despite all the issues in the headlines, the weekly ABC News/Washington Post poll of Consumer Comfort only ticked back mildly to -50, a level tested on a number of occasions this year. Surprisingly, there was even a slight improvement noted in the University of Michigan survey of Consumer Sentiment, which moved up from October’s final 57.6 mark to a November preliminary 57.9 level.

After a long delay and much consternation, RESPA reform hit the markets this week, with new documentation requirements for lenders. For the first time, a HUD-standardized Good Faith Estimate of Closing Costs (GFE) will be required, as will ways to help consumers compare loans with and without costs. More controversial elements, such as explicitly disclosing yield-spread premiums (YSPs) or the requirement of reading a “closing script” to the borrower, didn’t make the final cut. The GFE and the final settlement statement — known as the HUD-1 form — will have to have matching descriptions of the fees charged to the borrower. The imposition of a 10% limit on certain fee differentials quoted in the GFE versus the loan’s final statement should help eliminate some borrower surprises at the closing table. Overall, it seems a pretty fair compromise between the industry’s desires and the needs of consumers. We hope that when the new regulations fully take effect in 2010 that borrowers continue to take the time to actually read these new disclosures, as perhaps six years and many millions of dollars have been spent to produce them (or keep them from being produced).

Mortgage rates dipped this week, pulled back by a sour economy and fast-declining inflation concerns. Unfortunately, more of the same is likely to come next week. Measures of housing activity, producer and consumer prices, industrial production and more are due out, and while we’ll be looking for silver linings, we’re not expecting to find many among the dark clouds. A few more weeks of this and we just might see conforming mortgage rates dip into the 5’s, and that would lend a bit of cheer for sure.

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