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In the New York Times article today Reports Suggest Broader Losses From Mortgages indicates that employment levels will be impacted from the job losses associated with problems in the mortgage industry. So now we have, lower levels of mortgage production, lower levels of construction and lower levels of consumer spending.

I guess thats why federal funds futures are indicating a 70% probability that the Fed will cut rates at their next meeting by 25 basis points.

Since August, Lawrence Yun, Chief Economist of the National Association of Realtors, has kept characterizing the mortgage and credit market problems as temporary. Every month, as the blogosphere continues lament the loss of his predecessor, David Lereah, Mr. Yun has been able to continue the tradition of reality distortion and he does not disappoint.

Temporary? Relative to what? Will mortgage problems continue on forever? Of course not. Merrill Lynch reported an $8B loss due to mortgage related problems today. National lenders are having difficulty selling paper to the secondary market investors. Will this problem go away in a few months? I don’t see how.

If we relied on Mr. Yun’s use of the word temporary and heeded his advice back in August and September, credit market issues would have long been resolved. For next month, here are some alternatives to the word temporary. I vote for fugacious.

I have long lamented how NAR has missed its golden opportunity to gain the trust of the consumer as being the authority on the housing market, despite the fact that they are a trade group. Rather than leveraging the wealth of information at their disposal, they provided comments like this:

“Mortgage problems were peaking back in August when many of the September closings were being negotiated, and that slowed sales notably in higher priced areas that rely more on jumbo loans,” he said. “The good news is that mortgage availability has markedly improved in recent weeks with interest rates on jumbo loans falling, and more people are applying for safer and conforming FHA mortgage products.

The quote attempts to parse out problems with the mortgage markets from the timing of contract and closing dates. Elements of the statement are correct, but out of context, and ultimately paint an inaccurate picture.

Speaking of disconnect, did you hear George Carlin’s comments on The View about the fires in southern California regarding people losing their homes?

Tags: Jumbo Mortgage, Conforming Mortgage, FHA, Lawrence Yun, Pending Home Sale Index, David Lereah, PHSI, NAR, National Association of Realtors

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David Berson, Chief Economist for Fannie Mae, in his weekly commentary discussed a possible sign that there was improvement in the jumbo mortgage market because the spread between conforming and non-conforming mortgage rates was stabilizing, if not contracting. Jumbo mortgages are currently anything over $417,000. Mortgages at or below this threshold are considered conforming and are the type that GSE’s (government sponsored enterprises: Fannie Mae and Freddie Mac) can purchase from banks. This helps promote liquidity and lower mortgage rates throughout the country.

The problem with the credit markets (coming to a theatre near you: Mortgage Meltdown, Subprime Crisis, Credit Crunch) over the summer, was that investors came to the sudden realization that they did not know what loan products were actually in the portfolios they were buying. Did prime portfolios include slices of subprime or Alt-A in prime portfolios? Apparently they did. In other words, the risk did not match the pricing being paid for these loans pools. Thats why American Home Mortgage, Countrywide and others ran into difficultly when selling their mortgage paper in order to free up capital to continue to lend.

Without the GSE’s, investors were especially reluctant to buy mortgage paper from jumbo mortgage originators and as a result, jumbo rates began to spike because it was harder to get a jumbo mortgage. (Fannie and Freddie by definition can’t buy their paper.) The lack of liquidity caused widespread concerns that mortgage money in higher priced housing markets would evaporate, causing housing prices to decline. No buyers, falling prices, etc. At the same time, I suspect the flight to safety seen in the financial markets was also seen in falling conforming mortgage rates to a certain degree. In fact, because of restrictions placed on the GSE’s last year due to the accounting scandal, they were forced to comply with a cap on the volume of mortgage paper they could buy and perhaps that may have eased the liquidity problem somewhat. Fannie and Feddie wanted to buy more mortgage paper but were not allowed to under these restrictions (The debate over raising the conforming mortgage rate or mortgage volume limit by GSE’s is for another post).

To this day, when I talk to agents, clients and appraisers in the field, there is still the impression that jumbo mortgages are scarce. Yet I have had conversations with chief credit officers at various national and regional lending institutions whom are all chomping at the bit (non-equestrian) that this is a sigificant opportunity to grab market share. In addition, jumbo mortgage rates are falling, indicating that that financing is available. However, the reality is that underwriting guidelines are actually being followed now rather than using exceptions as the basis, so it is still more difficult to get financing on marginal deals.

Its very, very early, but the contraction of spreads between conforming and non-conforming mortgages suggest that the mortgage investors are getting a getting a little more comfortable with what mortgage risks are out there and how they should be reflected in pricing, rather than simply waiting on the sidelines. After all, thats their business.

Tags: Jumbo Mortgage, Conforming Mortgage, Fannie Mae, GSE, Sub-Prime, Freddie Mac

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Here are some swirling thoughts about risk.

Although interest rates are slipping, mortgage rates are rising. James Hagerty’s page one WSJ story Mortgage Fears Drive Up Rates On Jumbo Loans covers the issue of jumbo mortgages, to high end buyers with good credit, are seeing their mortgage rates climb.

One could argue that this could be an over reaction by the markets and more sanity will return soon. Of course, you could say that the Bosox are going to win the pennant (sorry, cheap shot – Yanks are now only 6.5 games back). However, this is a credit correction, and has taken the place of a significant housing correction anticipated by many over the past 2 years, but was largely a slow bleed.

And take a look at what the last two weeks have done to the probability of a fed cut by October. The odds of the Fed holding rates steady fell from 85% two weeks ago to 55% this week.

Floyd Norris’ The Loan Comes Due gives a great break down on the different loans that are affected by the credit crunch (hint: it isn’t only home mortgages.) There’s also an amazingly large and well down flow chart of the mortgage market and hedge funds.

Click here for full sized graphic.

Source: NYT

All this has happened with few defaults. Mortgage delinquencies are up, particularly on loans made in 2006 when credit standards were very low, but the real problem is that lenders and investors fear things will get much worse.“This is what we would characterize as the first correction of the modern neo-credit market,” said Mr. Malvey of Lehman Brothers. “We’ve never had a correction with these types of institutions and these types of instruments.”

It now seems likely that the rating agencies, and investors, were lured into a false sense of security by the lack of defaults. With the value of homes, and companies, rising, it was usually possible for a borrower in trouble to refinance the debt or, at worst, sell the home or business. Either way, lenders got paid.

So its not only about the bad things that happened. Its about things that may happen. Wait a second…isn’t that what risk is?

Tags: Jumbo Mortgage, Lehman

Comments Off on Underappreciating Risk

With the subprime cows relegated to dairy duty, here’s a collection of some key prime mortgage stories of the week.

• Who will get caught holding the subprime hot potato? [Salon]
  
• Mortgage problems could slap down housing prices sharply [USA Today]
  
• Subprime Mortgage Woes Are Likely to Spread [WSJ]
  
• Inside The Mortgage Crisis [BW]
  
• Kass: Fed Is No Savior in Subprime Slide
  
• Risky Business Still Attracts Eager Lenders [NYT]
  
• Fannie, Freddie Wary of Controls [WaPo]
  
• Subprime Suspects [Slate]
  
• The Fingers of Housing Instability [John Maudlin]
  
• Pimco Says Subprime Woes May Spread to Alt-A, Jumbo [Bloomberg]
  
• Will I get crushed by the Subprime fallout? [Boston Globe]
  
• Greg Hitt and Sarah Lueck and James R. Hagerty [REJ]
  

Tags: Jumbo Mortgage, Sub-Prime

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The hoopla over this issue occured last week but I have been trying to wrestle with it.

The agency who was responsible for oversight of Fannie Mae and Freddie Mac, who had essentially evolved in rubber stamp agency for the GSEs (government sponsored enterprises).

These enterprises seemed to have free reign in their dealings with the mortgage markets. The risk taken by these government enterprises started to balloon and the reported earnings were being manipulated to enhance compensation by their officers. I guess that means that the competitive advantage these enterprises have over their secondary market competitors breeds this sort of behavior. GSE’s have been a stabilizing factor in the mortgage markets in general. Thats why mortgage rates are relatively uniform across the country by property type.

After the Fannie Mae accounting scandal evolved a few years ago, OFHEO started to wake up and re-take control. One of their first public actions was initiated, after a miscalculation was made by Fannie Mae in calculating conforming loans limits, OFHEO took over this role as well (as well they should). It was off by a few thousand dollars, which is probably not a significant issue, but the symbolism of OFHEO’s actions was what I found important to maintain the trust and integrity of the US mortgage market.

Last week, OFEHO (incorrectly presented by the LA Times as Fannie and Freddie making the decision) kept the [loan limit of conventional mortgages unchanged [LA Times]](http://www.latimes.com/business/la-re-limit3dec03,1,7881568.story):

The conforming loan limit, perhaps the most intently watched number in the mortgage business, will remain unchanged next year at $417,000.

The limit is the legislatively set ceiling on the size of loans that can be purchased or guaranteed by Fannie Mae and Freddie Mac, the two government-sponsored financial institutions that keep local lenders awash in cash for home loans.

Because the enterprises bring a certain amount of standardization to the market, and because investors throughout the world believe the government-sponsored enterprises’ securities are backed by the full faith and credit of Uncle Sam, rates charged on loans at or below the limit are often 0.25% to 0.5% less expensive than so-called jumbo loans above the ceiling.

[The official loan limit sizes for conventional mortgages in 2007 [SOSD]](http://www.signonsandiego.com/news/business/20061129-9999-1b29conform.html) are:

• $417,000 for mortgages on single-family properties
  
• $533,850 for mortgages on two-family properties
  
• $645,300 for three-family properties
  
• $801,950 for four-family properties
  

Its interesting that the decline of national median housing prices per OFHEO would have resulted in a $667 drop in the limit to $416,333, but OFHEO director James Lockhart said he would not order a lower limit next year “so as not to disrupt the end-of-year pipeline.

I don’t follow his reasoning, but nevertheless, I think its a good idea to keep investors from getting jittery, especial given the role the housing market plays into our economy, with the risk of recession rising for 2007.

[OFHEO ESTABLISHES PROCEDURES FOR 2007 CONFORMING LOAN LIMIT [OFHEO (pdf)]](http://www.ofheo.gov/media/pdf/PRConfLoan2007.pdf)
[2007 CONFORMING LOAN LIMIT TO REMAIN AT $417,000 [OFHEO (pdf)]](http://www.ofheo.gov/media/pdf/PRConfLoan07.pdf)

Tags: Jumbo Mortgage, Conforming Mortgage, Fannie Mae, GSE, OFHEO, Freddie Mac

3 Comments