All Things in Moderation

Vital Statistics:

Markets are calm ahead of the FOMC decision this afternoon. Bonds and MBS are up small.

The FOMC decision is set to come out around 2:00 pm EST today. Beware of locking around that time. Since there is no press conference scheduled, the odds of a rate hike are extremely low. Investors will parse the language of the statement closely. Note the next time Janet Yellen speaks will be in late August at Jackson Hole, so markets will have all sorts of time to fret without any sort of real input from the Fed.

Mortgage applications fell 11% last week as purchases fell 3% and refis fell 15%. Rates rose 2 basis points last week, but they increased 17 basis points the week before.

Durable Goods orders fell 4% MOM and are down 6.4% YOY. Ex transportation they were down .5% MOM and 3.6% YOY. Capital Goods orders fell as well. For all the talk about an acceleration in the economy, these numbers are a warning sign.

Pending Home sales rose 0.2% last month. Tight inventory remains a problem, and the increase was mainly due to the Northeast which doesn’t have the inventory problem we see on the West Coast. Lawrence Yun, NAR’s chief economist had this to say: “With only the Northeast region having an adequate supply of homes for sale, the reoccurring dilemma of strained supply causing a run-up in home prices continues to play out in several markets, leading to the last two months reflecting a slight, early summer cooldown after a very active spring,” he said. “Unfortunately for prospective buyers trying to take advantage of exceptionally low mortgage rates, housing inventory at the end of last month was down almost 6 percent from a year ago,1 and home prices are showing little evidence of slowing to a healthier pace that more closely mirrors wage and income growth.”

Lost in all the focus on falling / negative bond yields is the rise in LIBOR. LIBOR is a short-term rate that is the basis for lots and lots of financial products, from everything to auto loans to ARM mortgages. New money market regulations have been pushing up LIBOR. The explanation is really inside-baseball sort of stuff, but just be aware as this does affect ARM pricing.

Just one more note on ARMS – in this interest rate environment, where long term rates are steady / falling and short term rates are rising – ARMs are unattractive for borrowers. If there are any borrowers out there who still have ARMs now is the time to refi to a 30 year fixed rate mortgage.

Fannie Mae has announced changes to its 3% down HomeReady program.

Changes that go into effect immediately include:

• Income limits have been raised to 100 percent of area median income (AMI) in all areas except for low income market tracts which have no limit. The company says this will expand access to affordable credit and also make it easier for lenders to determine eligibility for the loans.
• The occupant borrower will now be allowed to own other residential properties.
• Homeownership education courses that fulfill the HomeReady mortgage requirement have been expanded to include one-on-one pre-purchase advising from HUD-approved providers. Fannie Mae will offer lenders a $500 credit to encourage borrowers to take advantage of this option. Homebuyer education will continue to be available through Framework, Fannie Mae’s education partner.

The requirement for homeownership education has been removed for limited cash-out refinances and borrowers for loans secured by two- to four-unit properties will no longer be required to take landlord education although homeownership education will remain a requirement.

• The Seller Guide announcing the above changes also noted that Fannie Mae expects to make additional enhancements later this year, including:
• Allowing a maximum loan-to-value up to 97 percent on limited cash-out refinance transactions in Desktop Underwriter (DU) if the existing mortgage is owned or securitized by Fannie Mae.
• Expanding current HomeReady eligibility for buydowns and adjustable-rate loans to include three- to four-unit properties.

Adding additional incentives for the one-on-one homeownership counseling implemented with the current changes.

The strange, strange world of jumbo lending in the Bay Area. Lenders are now taking into account stock and stock option compensation for determining whether a borrower can afford a mortgage. In a place where the median house price is $1.13 million, lenders have to get creative in finding ways to get working stiffs into a home. I guess if real estate prices and the stock market continue to hit new highs, everything is okay until the music stops.

Speaking of crazy lending, car loans are the new subprime, with 8 year car loans at mortgage rates. As investors reach for yield, they inevitably take more risk. That said, fears of this causing a 2008 style calamity are overblown. Residential real estate bubbles are a fundamentally different animal than this sort of thing.

If you missed the Democratic Convention last night, here is the cliff notes version:

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