Archives for April 2017

CoreLogic says loan performance is weakening

Back in 2006, before the economy crumbled in 2008/2009, loan performance started to show signs of stress. Homeowners were missing payments, defaulting on their loans and the rise of foreclosures started to become an issue for banks.  Most people, investors and banks didn’t think twice about it however we know that was a mistake. Sam Khater, CoreLogic’s chief economist, said in a recent blog post that loan performance is beginning to show some cracks and that it’s something we should keep an eye on.  According to Khater this might be an early CoreLogicsign of a potential downtown in the current credit cycle.  

In 2008 mortgage rates were volatile.  As one more lender after another closed; investors in Mortgage Backed Securities (MBS) were fleeing the bond market causing rates to jump. Could this be another 2008 like mortgage collapse?  Let’s hope not!

He argues that economic expansions and contractions are largely influenced by loan performance (in terms of the ability of borrower’s to repay their loan).  When the economy is good; borrowers have little problems keeping up with their debt payments.  When the economy is weak then one of the first things to show that weakness is borrower’s not paying back the money they borrowed.  And if economy does take a downturn then it is likely the downturn will be more severe due to the already present problem of borrowers missing loan payments prior to the downturn.  

He does not go into detail about what might happen to mortgage rates if the credit cycle worsens however if it does worsen it may follow the same path as 2006-2008.  As the economy slowed and the initial credit cycle worsened; rates remained low and in some cases improved despite the increasing default rates. Getting the best California mortgage rates was possible up until investors started to worry about the quality of mortgage loans.  Then bond yields went up as well as mortgage rates.  It took a long time for yields and mortgage rates to settle and eventually move to lower levels once investors believed in the quality of the mortgages made.

Back to Khater’s view of loan performance.  He sees three trends starting to form from his analysis (which differs from the traditional analysis of just looking at payment history) and he concludes “Historically, when the mortgage credit cycle begins to deteriorate it continues to do so until the economy bottoms and the credit cycle begins to improve again. While the deterioration in mortgage performance is very small and rising from very low levels, it is important to track because turning points are critical but difficult to identify in real time.”

Economic data and mortgage rates April 28 2017

Today we received some key economic data readings and mortgage rates, for the most part, remained flat heading into the last weekend of April. Chicago PMI came in stronger than expected (58.3 and estimates were at 56.4) however Advance reading Q1 GDP was weaker than expected (0.7 vs 1.2). Consumer spending was a tad bit below expectations; US Cost Index came in strong than anticipated (not good for bonds), business investment was much strong than Q4 and the PCE index was a bit stronger than expected. The Price index was flat compared to Q4 2016 Mortgage Rateand overall the bond market sold off in the morning only to rally back to positive territory before lunch. The economic data and mortgage rates on April 28, 2017 were a mixed bag and mortgage rates remain in a solid position heading into the weekend. The best California mortgage rates were a few weeks back however the market is only a tad bit above that so for 2017 mortgage rates are still very attractive.
This morning, the 10y yield was up above 2.3; and heading into the afternoon the yield has fallen below 2.30 and looks to finish the week just above 2.80. Economic data for next week ISM, Consumer Spending, ADP Employment, Challenger layoffs, Non-farm payrolls and the FOMC rate decision (that is on Wednesday). There are also several bond auctions and mortgage rates might see some volatility if there are any significant surprises with the economic data and/or the FOMC meeting. Since mid-March 2017; the bond market yields have been improving and mortgage rates have followed. Over the last week or so those improvements have leveled out and next week’s economic data could be what the market needs to move below the recent lows. Overall it appears mortgage lenders are getting more comfortable with the idea that 10y yields are not going to explode significantly higher (Jan/Fed traders feared the 10y was going to approach 3.00) and thus you’re seeing some lenders be a bit more aggressive with terms offered to borrowers.

Mortgage Interest Rates April 27 2017

Earlier this morning we received several key readings that had a slightly positive affect on mortgage interest rates.  The first reading that had a positive affect on mortgage interest rates is the Durable Goods report that came in slightly weaker than expectations (0.7 vs the expectation of a 1.2 reading).  Along with the Durable Goods report we also received the unemployment numbers (weekly) showing a slight increase and above expectations in unemployment.  The unemployment claims was expected to show a reading of 245k new claims however the reading came in at 257k claims which is a positive for mortgage interest rates.  Also on April 27, 2017 we received the pending home sales for March which came almost in line with expectation.  In addition the KC Fed released their mortgage interest ratemanufacturing reading and that was much weaker than last month. The reading for last month was 37 and this month the reading came in at 12.

The Mortgage Backed Securities market has generally improved since the data releases and it’s being helped by a a moderate rally in German bonds and a sell off in the oil market.  Overall mortgage interest rates for April 27, 2017 remain near their 2017 lows and it appears we should finish out the week at these levels.  However you never know heading into the weekend since tomorrow we have the Chicago PMI reading which can influence the bond market if the reading is not in line with analyst expectations.  Down the road we see the tax reform debate playing a role in the direction of the bond market along with the potential further expansion the Administrations protectionism trade policies with Canada and Mexico.  If the Administration continues to pursue protectionist trade policies it might have a negative affect on the US economy and/or worse cause inflation…..and inflation is bad for bonds.  Mortgage interest rates would rise in an inflationary environment and fall in a deflationary environment.

Mnuchin Corporate tax cut proposal and Fannie Mae reform

Treasury Secretary Steven Mnuchin announced a proposal from the Trump administration that would cut the headline corporate tax rate to 15%.  This would be the largest cut to the headline rate ever however the average corporate tax rate, after deductions, is current effective rate is less than 13.00% (per the General Accounting Office or GAO).  Mnuchin’s announcement of the corporate tax cut proposal (and he mentioned Fannie Mae reform which we’ll discuss later in the article) was not a surprise as Trump floated a 15% corporate tax rate during the campaign.  The details of how the plan will work, and if it will bring the effective rate below 13% as it currently is, are unclear because no details have been released.  The details of the plan are supposed to be released later today.  Mnuchin corporate tax

It will be important to see what role “TrumpCare 2.0” plays in this because many economist have said that the administration needs a new health care plan in place prior to a new corporate tax plan to avoid blowing out the annual budget.  Many fear the corporate tax cut will add hundreds of billions to the deficit each year (some have estimated it could be as high as a trillion per year).  Right now the United States has more debt than ever before so the tolerance to massively increase that, on top of the increases that happen each year, is very little.

Treasury Secretary also brought up Fannie Mae reform as well.  When the government took over the mortgage giant in 2008; the government was losing billions of dollars.  Since then the loses have been recovered and the mortgage giant supplies a steady stream of profit.  Fannie Mae has provided low California mortgage rates for years now and any reform of the mortgage giant will be looked at closely.  

30 year fixed rate mortgages, 20 year fixed rate mortgages and 15 year fixed rate mortgages generally have been the preferred mortgage programs obtained by home buyers or those refinancing a current mortgage.  Reforming Fannie Mae will be extremely difficult because the mortgage giant is a huge part of the mortgage industry; in fact it’s the biggest and most important piece.  Californians, like many Americans, have relied on the mortgage giant for their home mortgage needs.  Fannie Mae has recently announced reforms to how the calculate student loan debt, a Day 1 Certainty program that reduces the amount of documentation for some borrower’s and various regulations to try and spur the home mortgage market.

Mortgage Solutions For Borrowers With Student Loan Debt

Earlier today the mortgage giant Fannie Mae, which is currently run by the government, announced some various solutions for those that have excessive student loan debt tied to their credit profile. The mortgage solutions for borrowers with student loan debt is welcome by some and not welcome by others.  The side that welcomes the new initiatives say this will provide better home ownership opportunities to many communities across America.  Those on the side that think this is bad move say these are not real solutions and will put more American’s at greater risk (due to the structure of the mortgage solutions put forth by Fannie Mae).

The problem for many potential Fannie Mae mortgage solutionshomeowners or potential homeowners over the last 5 years is the amount of student loan debt their children have taken on and they co-signed for.  Under the current rules a mortgage company must include the payment’s amount in the debt to income calculations even if the child is paying back the loan.  Since technically they, the parents, are also responsible mortgage lenders include the debt payment amounts into the debt to income calculation.

Fannie Mae’s mortgage solution for borrower’s with student loan debt now allows a mortgage company to ignore student loan debt where the child is the primary borrower.  Also in this are car loans and credit cards that parents co-sign for their children.  Obviously the borrower has to prove they’re not the primary borrower for the accounts, before a lender will exclude them from the debt to income calculations.  As you can see these new mortgage solutions can present a major problem for banks when the economy slows because if the child can’t pay back the student loan it falls onto the parent.  It’s understandable that Fannie Mae wants to open the door for the purchase of a new home or the refinance of a current mortgage but the question is; Does the solution put significant risk back into the mortgage lending business?

Per Fannie Mae:

“Innovative Solutions for Making Homeownership Affordable for Borrowers with Student Debt
Because there is rarely a “one size fits all” approach to this issue, the policies announced today provide options to borrowers based on their individual circumstances:

  • Student Loan Cash-Out Refinance: Offers homeowners the flexibility to pay off high interest rate student debt while potentially refinancing to a lower mortgage interest rate.
  • Debt Paid by Others: Widens borrower eligibility to qualify for a home loan by excluding from the borrower’s debt-to-income ratio non-mortgage debt, such as credit cards, auto loans, and student loans, paid by someone else.
  • Student Debt Payment Calculation: Makes it more likely for borrowers with student debt to qualify for a loan by allowing lenders to accept student loan payment information on credit reports.”

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