Financial markets for the first time in several weeks seemed to forget about the European debt crisis and focus more nationally. The market even ignored Japan and their claim that they too could be heading towards a Greek crisis. It seems rather fashionable today that a new administration must make the announcement that the previous administrators had allowed the finances to get so far out of control that tattling must be their first act of leadership. Hungary caused markets to swoon; Japan’s edict on Friday had no reaction possibly due to the World Cup. (Actually, the Japanese people hold their nation’s debt unlike Greece, Spain, and Portugal as an example which contains the panic.)

Ignoring the realities in the euro-zone allowed the US markets to ignore the realities here in the states and focus on hope. A disappointing retail sales report on Friday was cast aside in favor of a better than expected University of Michigan Consumer Sentiment Index (the 12 month outlook weakened and went unnoticed). Thursday, markets latched on to a better than expected weekly jobless claims report as well as data out of China that showed huge increases in their trading business for May. China’s largest trading partner is the 27 nation European Union which makes the financial markets surmise that all is well.

But all is not well. Federal Reserve chairman Ben Bernanke says unemployment will remain high throughout the recovery. How can a nation, who’s economy relies on consumer spending, recover with high unemployment? The answer thus far has been the $787 billion stimulus package along with others like the Home Buyer Tax Credit, bank debt guarantees, TARP funds, $1.25 Trillion in Mortgage Backed Security purchases, bond purchases, Fannie and Freddie credit lines and on and on. In short, it’s been a Herculean effort of the government printing press to push GPD north of zero rather than the consumer. It is also important to note that most of these stimulus packages are recently ended or due to end.

When you look at the entire picture of stimulus ending, the oil spill, the European debt crisis, state budget problems, jobs picture, and consumer’s personal debt issues, it is really hard to see how the US economy will have growth. This is why I have said in previous updates to watch what government officials do rather than what they say. For instance, the Federal Reserve keeps talking about recovery yet keep interest rates below 1%. As a result, I see mortgage rates remaining low and possibly even going lower as soon as the last of the stimulus funds run its course. I do, however, expect a choppy ride as equity markets look for any reason to rise which will cause volatility.

MORTGAGES

On Tuesday I sat through 90 grueling minutes on a conference call with Fannie Mae as they explained their Loan Quality Initiative. During that time, I heard the ominous word “repurchase” several times throughout. Granted, the fine representatives of these wards of the state were quite nice as they dropped this word at just the right intervals to prevent any mortgage banker listening to fully relax and enjoy the presentation. But their message was clear like crystal and here it is in my own words: We are going to do anything possible to make, you the lender, responsible for any loan that goes bad. If you do anything to step out of line with our vague guidelines, then you will repurchase mortgages.

Now for those of you who don’t know, repurchase means that a lender will have to buy-back any loan that Fannie Mae requires at a price equal to the outstanding principal loan balance plus any fees. This is not a pleasant image for anybody in mortgage finance. Additionally, Fannie may ask lenders to repurchase mortgages that aren’t even delinquent. But, if a loan goes delinquent, then you can bet your last dollar that they will do whatever is humanly or governmentally possible to shift the toxic asset on to the offending originator’s balance sheet.

What this means to you is that the mortgage loan process with any governmental agency is going to get much more difficult. And yes, I consider Fannie and Freddie governmental agencies who are fast becoming a very hot political potato.

Expect tighter verification of income as well as increased worry over borrower identity verification and appraisal. If you read last week’s update, I outlined the most critical piece of this program which is the fear over increased or undisclosed debt. It may be common that lenders will pull a new credit report right before closing to ensure the borrower did not obtain more credit. I hope you can appreciate the slew of issues that can arise from this procedure. One such issue that could spell absolute disaster if your lender is not on the ball is new credit scores. If the lender obtains new scores and they are lower it could mean added fees for a borrower. For instance, a credit score drop of just 2 points from 681 to 679 could cost a borrower one additional point at closing on a conventional 20% down mortgage. Then after that shock, you will have to deal with the onslaught of new disclosures and a painful mandatory waiting period. I would advise everyone to make sure they work with a lender who can understand and work with these changes.

As I stated earlier, I expect rates to hover near unchanged but are subject to market volatility. Longer term I see lower rates. I’ll keep you updated of course. Have a great week.

It’s these little shoes that drop at different periods that keep pushing rates down. As you look at the chart below you will see how, recently, the 10yr Treasury takes a dip down then levels off or rises and then goes back down. This happens because investors attention spans shift from data point to data point as they appear. For instance, rates were trending back up late in the week last week until the ratings agency Fitch lowered Spain’s debt rating.

10YR Treasury for the last 3 months

This week investors were feeling better and looking for the US job market to add 517,000 jobs in May only to get 430,000 jobs added of which 411,000 were temporary census jobs. Also adding to the list of woes is Hungary who came out on Friday and said that the previous administration had been cooking the books ala Greece and is in grave trouble. Again, the chart below shows how rates started drifting up until we received the jobs data and Hungary news on Friday. This is what makes forecasting trends so difficult as one never knows what is lurking around the corner.

10 Yr Treasury Last 5 days

Dow Jones last 5 days

The employment data for May is a catalyst to push rates down further as evidence of a stalling US recovery and the European problems together will move rates down. It is important to note, however, that the direction of the human mind is to move towards positive territory when it comes to assets. Anybody who watches even 5 minutes of CNBC will quickly understand that the hosts of their news broadcasts immediately start to spin data towards the positive in the face of the most negative financial news. I find I need to turn the station off immediately upon extracting the data I need because I start to buy in to the spin. You can find local evidence of this when speaking to any homeowner who will point out the many reasons why his home is worth much more than his neighbors in spite of data suggesting otherwise. In short, it is going to take an ongoing consistent stream of negative news to push rates down. The probability is there, but the volatility is high.

Real Estate

Remarkably, the equity markets advanced (Tuesday) on news that the National Association of Realtors Pending Homes Sales increased a bit more than expected. This adds to my previous point of how investors focus on the most recent data and how the mood is usually to push asset prices higher. What makes the Dow movement up on Tuesday when the report first came out so incredible is that everybody knows that these numbers are meaningless because it was the last month for the tax credit. How can anybody trade on skewed numbers? It’s hard to believe, but they do and it is a lesson to understand when tracking markets.

Meanwhile the Mortgage Bankers Association reported that applications for the purchase of real estate dropped 4.1% from the previous week’s numbers. According to the banking group, applications for purchases are 16.8% lower when compared to last year. “With another week of historically low mortgage rates, the trend from the prior three weeks continued, as refinance applications increased while purchase applications dropped. Purchase applications are now almost 40 percent below their level four weeks ago, while the refinance share, at 74 percent, is at its highest level since December,” said Michael Fratantoni, MBA’s Vice President of Research and Economics.

Mortgage Finance

There has been a new change to Fannie Mae’s guidelines that is worth noting. Current underwriting guidelines state that a credit report is good for 90 days, but due to all the foreclosures, Fannie noticed a large number of borrowers had obtained additional debts between loan application and loan closing. They also have noticed a large number of undisclosed liabilities too. As a result, lenders are required to check borrowers out more diligently before closing to turn up any undisclosed or added debt. Some procedures Fannie is wanting lenders to implement are:

1. Obtaining a new credit report just before closing
2. Signing up with vendors who monitor credit reports from application to closing who will alert the lender of any new credit for borrowers
3. Direct verification with all creditors who are listed under recent credit inquiries for confirmation that borrower did not initiate new debt
4. Running an updated lien search on borrowers to make sure that there isn’t more mortgage debt being placed at the same time

Yes, this is true and it is in place now for all lenders who sell mortgages to Fannie Mae. So make sure that you or any clients are not out securing more debt during the loan process or you will be dealing with a problem right before closing.

Guests this week are Amy Bohutinsky from Zillow.com and Jeb Smith from the National Association of Realtors.

Check back as I add details for the show this weekend.

Listen live by tuning in to WHLO 640 at 7am, 1340 WNCO at 8am, 1520 WQCT and 1350 WARF at 9am on Saturday. I will be there each time and so will Karaoke Bob.

Kate Berry, Reporter for American Banker, tells us what she knows about these trial modifications and if they will make it to permanent modification. Kate lives and breathes this stuff.

Paul Muolo, Executive Editor for National Mortgage News and author of the book Chain of Blame, will sheds light on the health of the FHA.

Plus, I share with you the results of a National Association of Realtors survey, the builders confidence survey, and a story about a couple who thought they modified their loan terms with their bank.

This Saturday I will cover the Commerce Department’s starts and permits numbers, the MBA delinquency report, and the mortgage application index.

Kate Berry, Reporter for American Banker, will tell us what she knows about these trial modifications and if they will make it to permanent modification. Kate lives and breathes this stuff.

Paul Muolo, Executive Editor for National Mortgage News and author of the book Chain of Blame, will shed some light on the health of the FHA.

Plus, I share with you the results of a National Association of Realtors survey, the builders confidence survey, and story about a couple who thought they modified their loan terms with their bank.

Listen live by tuning in to WHLO 640 at 7am, 1340 WNCO at 8am, 1520 WQCT and 1350 WARF at 9am on Saturday. I will be there each time and so will Karaoke Bob.

Tim Hefty, CPA, discussed the extension and the expansion of the First Time Home Buyer Tax Credit.

I covered the third quarter Metro Home Sales Report from the National Association of Realtors. Are we stabilizing? I compared the Realtor data against the data from Lender Processing Services regarding delinquencies. Speaking of delinquencies, I provided an update on how the Making Home Affordable modification program is coming along.

Should you continue to make your house payment if you owe more on your mortgage than the value of your home? Brent T. White, University of Arizona Associate Professor of Law and Affiliated Professor of East Asian Studies, will give his thoughts on the topic. He’ll definitely make you think.

Tim Hefty, CPA, will discuss the extension and the expansion of the First Time Home Buyer Tax Credit.

I will cover the third quarter Metro Home Sales Report from the National Association of Realtors. Are we stabilizing? I’ll compare the Realtor data against the data from Lender Processing Services regarding delinquencies. Speaking of delinquencies, I will give an update on how the Making Home Affordable modification program is coming along.

Listen live by tuning in to WHLO 640 at 7am, 1340 WNCO at 8am, 1520 WQCT and 1350 WARF at 9am on Saturday. I will be there each time and so will Karaoke Bob.

Executive Director of the Ohio Housing Finance Agency, Doug Garver,  tells us about their latest programs available at OHFA. This is a must listen to interview because the people at OHFA are great to work with and offer tremendous programs.

Amy Bohutinsky from Zillow.com shares the latest with celebrities and their real estate. She is a lot of fun to listen to and provides us some interesting insights to real estate; celebrity style.

Executive Director of the Ohio Housing Finance Agency, Doug Garver, will tell you about their latest programs available at OHFA. This is a must listen to interview because the people at OHFA are great to work with and offer tremendous programs.

Amy Bohutinsky from Zillow.com will tell us the latest with celebrities and their real estate. She is a lot of fun to listen to and provides us some interesting insights to real estate; celebrity style.

Plus, I will provide an update on the First Time Home Buyer Tax Credit.

Listen live by tuning in to WHLO 640 at 7am, 1340 WNCO at 8am, 1520 WQCT and 1350 WARF at 9am on Saturday. I will be there each time and so will Karaoke Bob.