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.

Rates On Fixed Mortgages move up

According to Freddie Mac’s weekly survey, 30-year fixed-rate mortgages averaged 6.42% in the week ended September 27. 15-year fixed-rate mortgages carried an average interest of 6.09%, up from 5.98% a week ago. Adjustable-rate mortgages declined this week, with the 5-year ARM dropping to 6.15% from 6.21% a week ago and the 1-year adjustable home loans at 5.60%, down from 5.65%. The demand for ARMs has dropped dramatically recently, as consumers try to escape adjusting loan payments and look for the safety of fixed-rate loans. Home loans are mostly used for refinancing, rather than home purchases, and the result is a 7-year low in new home sales in August. According to the U.S. Census Bureau and the Department of Housing and Urban Development, sales of new, single-family homes dropped 8.3% on a monthly basis in August to a seasonally-adjusted annual rate of 795,000.

Financial data for August doesn’t fully reflect the impact of the crisis that occurred mid-month, so we can expect even gloomier results when the business and economic stats for September are released.

Mortgage Applications Decline

Mortgage applications dropped 2.8% last week, according to the Mortgage Bankers’ Association. Refinance applications increased 3.3% and the purchase index declined 8.3%. Apparently consumers are waiting for better news from the lending industry, and they’re probably disappointed with the latest interest rates. U.S. subprime problems are affecting banks worldwide, and it’s not just the hedge funds and BNP Paribas. In latest news, Switzerland’s second-largest bank, Credit Suisse Group, is cutting staff in its mortgage-backed securities unit. No units are being closed yet, but staff is reduced drastically. Subprime securities, until recently the bankers’ favorite toy, are not attractive anymore. The credit crunch and the ongoing financial turmoil have revealed mechanisms and interlinks in international finance that caught many by surprise. Economists are saying there’s more trouble ahead, but I guess many have already learned the important lessons. Perhaps the world is changing.

Home Sales Dropped In August

Home sales fell for the sixth month in a row in August, with a remarkable 12.8% year-over year drop. The seasonally adjusted annual sales rate was 5.5 million, the lowest figure since August 2002. Economists believe that August sales data does not fully reflect the consequences of the credit crunch experienced by financial markets, so September figures could be even worse. In this context, NAR’s Lawrence Yun did his best to lighten up the mood: “Once we get through these disruptions, we’ll get a better sense of where the actual market is in late fall as conditions begin to normalize”. Thanks, that was funny, you’ll find more on realtor.org. There’s a record 10-month supply of unsold homes on the market, and that is not going away before the end of the year. Analysts are saying that sales will not stabilize until mid-2008, and some believe even that is optimistic.

Amid the turmoil, home builders are feeling the pain, too. Home builder Lennar Corp. reported the biggest quarterly loss in its history, $513.9 million, or $3.25 a share. This was unexpected, because the lowest estimation predicted a loss of $1.21 a share.

Dollar record low vs. Euro

This is yet another of the “Fed-rate-cut-related” news, the U.S. dollar hit a record low vs. Euro on Monday with Euro trading at $1.4130. Counter-intuitive as it may sound, some analysts seem to be of the opinion that a weaker dollar is good for the economy, because it will make U.S. goods more easily affordable for other countries, which will allow higher exports. This, in turn, creates more work load for U.S. manufacturers, thus strengthening the job market. The Fed is expected to cut rates again before the end of this year, which may result in further weakening of the greenback. This may boost exports, but prices on imported goods will probably rise, reducing affordability. Economists believe hardships are far from over for consumers, but some of the largest banks are already saying they’ve seen the bottom and things are going to get better from now. Bloomberg.com cites officials at Lehman Brothers and Bear Stearns saying that the worst is “behind us”, and Goldman Sachs said the market is beginning to improve. Is this the beginning of an upward slope?

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.

In spite of rate cut, mortgage rates edge up

After the Fed cut the Fed Funds Rate on Tuesday, one would expect mortgage interest rates to ease. What they did, however, was climb higher. One possible explanation Freddie Mac’s chief economist Frank Nothaft gave is the increased number of mortgage applications after last week’s 4-month low in interest rates. One way or another, analysts are saying Ben Bernanke’s decision missed the mark. Oil, gold, and stocks moved higher, and those were doing quite well even before the rate cut. The Canadian dollar traded at $1.0001 for a while, something that hadn’t happened in more than 30 years, and is currently priced at $0.99 and above. The U.S. dollar fell against the Euro, too, and all this against a backdrop of a weak job market and high personal debt.

Furthermore, Ben Bernanke himself said we’ll see more foreclosures soon, and borrowers will keep defaulting on their mortgages in spite of the recent moves. He added that the Fed is monitoring the situation and is ready to step in if needed, but that doesn’t really sound like a good long-term plan. President Bush said the financial indicators are good and he is confident the economy will remain strong. Tell this to all the pessimists out there.

Interest rates on 30-year fixed-rate mortgages averaged 6.34%, up from last week’s 6.31%. 15-year fixed home loans were at 5.98%, compared to 5.97% a week ago. 5-year adjustable-rate mortgages increased from 6.21% to 6.17%, and 1-year ARMs carried an interest of 5.65%, somewhat lower than last week’s 5.66%.