Borrowers Desperate For Help

Thousands of homeowners facing foreclosure are turning to the Bush Administration’s foreclosure relief plan for help. HOPE NOW Alliance, a coalition of lenders and nonprofits which plays a central role in the plan, has noticed a significant increase in calls since the campaign was officially announced in the media. In each of the past two quarters, the number of calls has doubled and these days staffers have to deal with up to 3,000 calls a day, up from 100 calls per day in June 2006. The demand is so high that the foundation has tripled its staff, but hiring more counselors is hard, because HOPE NOW cannot offer competitive remuneration. Despite all the blasting the plan received in the media, desperate borrowers are calling by the thousands, and why shouldn’t they: if they get some mortgage relief – perfect, if not – they have nothing to lose by asking for help.

Fannie Mae said that it will reimburse mortgage servicing companies which refer delinquent borrowers to the HOPE counseling hotline, adding to demand for the service. The HOPE NOW toll-free number is 1-888-995-HOPE. It is available 24 hours a day and provides counseling in multiple languages. Now we’ll all sit and watch how all this unwinds, because it’s the best most of us can do – apart from, probably, writing angry comments about irresponsible borrowers/lenders and about using taxpayers’ money to bail out speculators. Oh, in fact Paulson repeatedly denied the possibility of the latter. However, he did say something about the economy and the housing market, but he wasn’t really optimistic: “there is no single or simple solution that will undo the excesses of the last few years”. Sad but true.

Conforming Loan Limit Unchanged In 2008

The conforming loan limit, currently $417,000, will remain unchanged in 2008, announced OFHEO director James B. Lockhart. OFHEO is the entity that regulates Fannie Mae and Freddie Mac, the government-chartered guarantors of home mortgages. Any loans above the $417,000 limit are considered “jumbo” and cannot be guaranteed by Fannie Mae and Freddie Mac, so lenders usually charge higher interest on them. This limit only applies to one-unit properties; multiple-unit properties have higher limits. Alaska, Hawaii, Guam and the U.S. Virgin Islands have higher upper limits than other states. The maximum conforming loan limit is determined by analyzing October-to-October change in the average house price, which has declined more than 3% this year. The maximum limit hasn’t changed for the last 2 years, and it probably won’t get revised upwards anytime soon. The latest NAR report says the inventory of single-family homes on the market is at the highest level in 22 years (10.8 months’ supply), which can only drive home prices down.

FHA To Prohibit Seller Financing

The FHA is about to publish new rules that prohibit seller financed down payment assistance programs. With such programs, sellers can give money to charities, which, in turn, help buyers with their down payments, for a certain fee. The IRS has found that many of these deals are abusive to borrowers, because the fees are often included in the higher price charged. Studies have shown that borrowers using the assistance programs are twice as likely to default on their loans as those who don’t receive assistance. Because seller financing is involved in 30 to 50% of FHA loans, there’s some fear that the new rule will keep some of the borrowers out of the market. Officials at the Mortgage Bankers Association and the AmeriDream charity are against the ruling. The new rule will go into effect 30 days after publication.

GSEs may have their caps lifted early next year

OFHEO (the Office of Federal Housing Enterprise Oversight), the regulator of Fannie Mae and Freddie Mac, said that the investment caps may be removed altogether for the two GSEs if they establish timely and audited financial reporting. This news comes shortly after the caps were placed 2% higher for both companies, which translates into additional $20 billion or so in investments for each company.

Whether or not this move will be made depends on what and how the two mortgage giants report when they file their annual financial statements for 2007. “Current financials with no material weaknesses is a key test”, according to OFHEO director James Lockhart. He also said that, “there’s a reasonable chance” that the caps will be “changed significantly” if not lifted. The investment caps were initially placed after accounting scandals rocked both companies’ reputations and credibility.

After all the recent activity and the disappointing results of the Fed rate cut, I smell panic.

More job cuts in housing-related businesses

Forget about steady job growth, several mortgage lenders have announced further staff cuts, and this is no small news. Weaker employment might further curb consumer spending, resulting in a weaker economy altogether.

Lehman Brothers has eliminated 850 positions, as it downsizes in response to tough market conditions. It is closing its Korean mortgage business and renaming all its residential mortgage origination and servicing businesses “Lehman Mortgage Capital”. Countrywide is taking another round of lay offs, eliminating some 900 employees. The last time Countrywide announced job cuts was less than a month ago. Cleveland-based National City said it will lay off 1,300 employees and stop issuing non-conforming loans that can’t be sold to Fannie Mae and Freddie Mac.

A study by Challenger, Gray & Christmas concluded that the 85% surge in layoffs last month was primarily caused by lenders scaling back. Not a very encouraging statistic. In this relation, MarketWatch published a very interesting article about the Fed’s opinion on the current economic conditions. And I thought the guys at the NAR were too optimistic.

S&P to downgrade Alt-A

Standard and Poor’s said it has put 207 classes of securities backed by Alt-A mortgages on CreditWatch negative. The original total balance of the securities was $913.9 million. After the collapse of subprime lending, Alt-A loans are the next problem group which is causing significant losses to lenders and investors in mortgage-backed securities.

The situation on the mortgage market right now was aptly described as ‘panic’ in one publication, as virtually all types of non-conforming loans – from subprime to jumbo, are either no longer available or prohibitively expensive. Borrowers looking to refinance meet limited to no supply from lenders. Mortgage companies are making daily, and sometimes hourly decisions about the availability and pricing of products, making financing hard to come by.

In other news, the Fed Fund rate remains the same at 5.25%, as expected.

Home builder confidence drops again

The National Association of Home Builders’ July survey of builder confidence showed that less than a fourth of home builders see market prospects as “favorable”. The index dropped to 24 this month, the lowest reading in more than 16 years and the third lowest in the history of the survey. The decline was more dramatic than expected, compared to predictions for a reading of 27.

Patrick McPherron, economist at Moody’s Economy.com, commented that “the bottom of the housing market appears nowhere in sight”. Indeed, we see no reduction in inventories, slumping prices and low buyer activity. With mortgage lenders tightening their credit standards, affordability is becoming even more of an issue. After last week’s downgrades of securities backed by subprime loans, Moody’s is now placing under review deals issued by Bear Stearns and IndyMac, backed primarily by first-lien Alt-A mortgages.

Mortgage rates slide again

30-year fixed-rate mortgage rates dropped to 6.22% this week, from 6.30% last week. This is the lowest level since mid-January, when it averaged 6.21%. According to analysts, the drop reflected a relative weakness in the real estate industry, illustrated by reports of slowing new home construction. Housing starts fell 14.3% in January to the lowest reading since 1997, sparking concerns that the declining housing market may have a serious impact on economic growth. The drop was in part due to large numbers of unsold inventories currently on the market.

15-year fixed rates also dropped this week, reaching 5.97%, compared to 6.03% last week. 5-year adjustable rates fell to 5.96% from 6.01 a week earlier. One-year ARMs dropped from 5.52% to 5.49%.

Lower mortgage rates will make new homes more affordable, so there’s hope this will help absorb the oversupply of unsold houses. But will low rates be around for long enough to really influence the market? This week’s drop is definitely caused by changing circumstances, and yet home prices have to drop further before balance is restored. When and how this is going to happen is not entirely clear, as increasing sales volumes tend to push home prices up as well, so if houses begin to sell faster again, sellers won’t be willing to cut prices.