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Let's recap the objectives of the Homeowner Affordability and Stability Plan and provide some clarity on what we are waiting for...

The key components...

Affordability: Provide Access to Low-Cost Refinancing for Responsible Homeowners Suffering From Falling Home Prices

Enabling Up to 4 to 5 Million Responsible Homeowners to Refinance

"The Obama Administration is announcing a new program that will help as many as 4 to 5 million RESPONSIBLE homeowners who took out conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance through those two institutions."

This initiative is focused on adding disposable income to a very specific group of consumers...those who have proven their ability to remain responsible borrowers during the downturn and are able to qualify for a government issued mortgage (as determined by AUS). These are the consumers who will be ABLE to SPEND the additional money...these consumers have been targeted to stimulate the economy.

A few challenges need to be addressed if this objective is to be successful. The most obvious is that home values have fallen and loan to value ratios have increased. This adds significant impediments for borrowers whose LTV has increased to over 80%. As widely discussed by our reader community mortgage insurance has become difficult if not impossible to obtain. In order for this program to properly persuade borrowers to refinance their current loan, Mortgage Insurance needs to be LESS EXPENSIVE and MORE AVAILABLE. When further details arise we expect to hear about some form of PMI waiver or Mortgage Insurer Guarantee Program that will assist in government efforts to lower the cost of mortgage borrowing.

Another hindrance (less than MI) is the increasing upfront delivery fees and LLPAs charged by the GSEs. These fees have increased over the past year and add to the cost of borrowing for refinancers. Unfortunately there wasn't any attention paid to this problem in the Executive Summary released by the White House...so any changes to these fees would be a surprise...if anything the GSEs may do this on their own via better direct pricing and increased investor incentives.

There has also been much debate surrounding the "appraisal waiver" issue to allow underwater borrowers to avoid GSE LTV restrictions. Again there wasn't any consideration given to this topic in the Executive Summary so any statement on the subject would be a surprise. Do you think appraisal waiver's exemplify responsible lending?

For MBS this implies accounts will move their positions down in coupon.  REMEMBER: TO INCREASE DISPOSABLE INCOME THE GOVERNMENT WANTS MORTGAGE RATES TO BE LOWER so borrowers who can AFFORD to refinance WILL REFINANCE. A steady government bid in the short end of the stack will allow lenders to price mortgage loans at lower rates. The "up in coupon" profit takers strategy therefore goes into a holding pattern...but don't rule that trading tactic out of the question for future MBS positions. MBS market participants are skeptical of the speed and order that a "it that shall not be named"  will occur..this doubt opens the door for further MBS risk taking. Until borrowers start refinancing this trade will remain a viable option...the extent to which it is utilized depends on the details offered up by the Obama Administration. In order for the recent "up in coupon" strategy to be eliminated the details offered up have to convince the MBS market that prepayment behavior will be consistent. Then borrowers have to start "pulling the trigger".

Supporting Low Mortgage Rates By Strengthening Confidence in Fannie Mae and Freddie Mac

Ensuring Strength and Security of the Mortgage Market

"Using funds already authorized in 2008 by Congress for this purpose, the Treasury Department is increasing its funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market and to help maintain mortgage affordability"

This plan outlays an additional $200bn for the Treasury to  increasing its Preferred Stock Purchase Agreements with the GSEs. After the GSEs were placed into conservatorship investors lost confidence in Fannie Mae and Freddie Mac. The additional funds being laid out for the GSEs will help to restore confidence and ease the credit premiums that are presently baked into MBS coupons and GSE debt issuances (extra yield demanded to account for perceived weakness of GSE balance sheets).

It was also announced that Fannie and Freddie's portfolios would be allowed to grow to $900bn each....which is a $50bn increase in size. This isn't a big MBS positive but it is constructive. The more important feature of the proposed plan was that the Treasury Department pledged their continued participation in the Agency MBS market. This add funds to the demand side of the MBS market and fosters low mortgage rates.

Stability: Create A $75 Billion Homeowner Stability Initiative to Reach Up to 3 to 4 Million At-Risk Homeowners

Helping Hard-Pressed Homeowners Stay in their Homes

"This initiative is intended to reach millions of RESPONSIBLE homeowners who are struggling to afford their mortgage payments because of the current recession, yet cannot sell their homes because prices have fallen so significantly"

This part of the plan targets  borrowers who are struggling to make their monthly payment, servicers who are losing cash flow on every missed payment, and lenders who have been burned by a multitude of side effects. The most obvious benefit of this initiative relates directly to housing supply. Plain and Simple we need housing to hit bottom...until homeowners relocate their moral responsibility to make their mortgage payment (many simply don't care, they prefer to go into foreclosure) the housing downturn will be prolonged and bank balance sheets will continue to be muddled by non-marketable securities.  The glaring objective of this portion of the plan is to limit deliberate defaults and increase EVERYONE'S  incentive to modify mortgages. Unfortunately this program will most likely not add production to individual loan officer's pipeline...we however await the guidelines of the loan mod program. FDIC/Indy Mac model will be used as foundation for regs.

So the BIG question (mystery) is....HOW MANY BORROWERS WILL THIS PROGRAM HELP?????

This is where the UNKNOWNS arise.

We know some of the guidelines already...more details to come March 4 (and maybe tonight?)  The program applies to borrowers whose LTV is between 80% and 105%.  Borrowers will have to meet DTI requirements and the plan will only benefits BORROWERS WHOSE LOAN IS GUARANTEED BY FANNIE AND FREDDIE.  (There are a few more too)

When further considering WHO/HOW MANY this program will benefit one must also account for the appreciation of home values. Equity will be determined by when you bought your home....anyone who bought a home/refinanced in 2003, 2004, 2005 should have SOME equity in their home...the borrowers who bought/refinanced in 2006/2007/2008 will most likely fall into the 80% to 105% category and some will fall into the +105% territory. 

Borrowers will likely need at least a 50bps incentive to refinance. This implies the 30 year fixed rate mortgage needs to be between 4.0 and 4.5....

The biggest question on the minds on MBS market participants...WHEN WILL THE RATE OF PREPAYMENTS INCREASE? If it is perceived that the plan will not benefit enough borrowers than we could be looking at another cycle of up in coupon profit taking and erratic lender pricing strategies. It's all about perception at this point...

Closing Marks...

FN30­­­­­­­_______________________________________

FN 4.5 -------->>>> -0-03 to 100-25  from 100-28

FN 5.0 -------->>>> -0-01 to 101-30 from 101-31

FN 5.5 -------->>>> +0-00 to 102-15 from 102-15

FN 6.0 -------->>>> +0-03 to 103-06 from 103-03

Headline news continues to move money in all markets. Comments from Ben Bernanke helped rally stock markets which unwound flight to safety positions in the US Treasury market.  MBS trading activity was again subjected to the gyrations of the yield curve but continued to be insulated from exaggerated movements due to government participation in the mortgage market.  MBS trading was below average. Rate sheets ended the day worse off than yesterday. We witnessed the return of "up in coupon" today which may be a indication of slightly higher mortgage rates in the near future. Anything beyond the "near future" remains dependent on headline news though. (Near future could mean as early as tonight).

Yes -- if you plan to stay awhile. But even lower mortgage payments can cost you in the long run.

Waves of homeowners are rushing to refinance their mortgages. And no wonder: Long-term rates have collapsed to historic lows.

Thirty-year home loans can run as cheap as 5% right now -- down from 6.4% as recently as last summer.

By any long-term measure, today's rates are a great deal.

But before you join the stampede, it's worth asking: When does it make sense to refi?

If you are planning to move or even pay off your loan within the next few years, refinancing probably makes little sense because you won't be paying monthly bills long enough for the savings to cover the costs.

On the other hand, in some circumstances, refinancing is pretty much a slam dunk.

If you plan to stay in your home for years, and you are currently in an adjustable-rate mortgage, you should strongly consider a refi. ARMs are incredibly dangerous -- the financial equivalent of Russian roulette, but with multiple bullets. Refinancing into a 30-year fixed-rate loan may not cut your current monthly payments by much, but it gets rid of the risk that those payments will suddenly skyrocket.

Refinancing also usually makes sense if you are currently paying a much higher rate, though few homeowners are any more.

As a rule of thumb, Patriot Home Funding looks for a payback period of a couple of years. "Generally, if you can earn the costs back within two to three years, and it's a home you're prepared to stay in for much longer than that, it's usually a good thing.

But if the savings are more marginal, you need to do the math.

Some mortgage brokers will tell you how much interest you will save "over the life of the loan" if you refinance.

It's usually a very large number. But it should also be taken with a grain of salt.

First, that number ignores taxes. Mortgage interest is deductible from your income tax. So paying less interest may mean you will pay slightly higher taxes.

What that actually does to your monthly savings is more complex, because your mortgage bill includes principal repayment as well as interest, and only the interest is deductible. Interest shrinks as a proportion of the bill over time. But you could certainly shave maybe 25% off the overall savings as a very crude starting point to see a more realistic number.

The second problem? The total savings figure also ignores the time value of money.

Thanks to inflation, those dollars are going to be worth a lot less by the time you get hold of them than they would be today. Even if inflation only averages 2.5% a year, which is incredibly optimistic, a dollar in 30 years' time will only be worth 50 cents in today's money.

And that's not all. That figure also ignores the magic of compound interest.

Refinancing costs money. And that money, if you invested it instead of spending it on refinancing fees, could earn you a very good return. Especially over a long time period -- like 30 years.

Imagine your refinancing costs would be a fairly typical $2,000. If you socked that money away at just 5%, by 2039 you'd have $8,600.

And that's a paltry long-term return.

The collapse in the stock market makes this more compelling, not less. At today's distressed levels, anyone investing over 30 years has an excellent chance of producing terrific returns. If you can earn 9%, then that $2,000 would grow to a thumping $26,500.

Food for thought.

Economic Stimulus and the First Time Homebuyer

Amid all the debate and discussion over the new stimulus package there are some points that may have gone unnoticed as they relate to first time homebuyers.

It appears the $7500 tax credit which is repayable over 15 years at $500/per for first time home purchasers will be allowed to sunset and be replaced by a new $15,000 tax credit for new home purchases by first time buyers that will not have a repayment provision. Obviously this will go a long way towards stimulating the Central Florida real estate and mortgage market at a time when we collectively need all the help we can get.

I would propose the following amendment to this valuable credit: Allow approved FHA lenders to certify that the buyers qualify for the first time buyer credit- that the property is a primary residence, that the buyers have not owned other real estate in the previous three year period, that the property meets FHA property guidelines- and allow the funds to be drawn from the treasury through the local government down payment assistance entities and used for the purchase, which may allow the buyer to get into the house for no money out of their pocket. The buyer would then forward their settlement statement , or similar government document certifying the moneys used, to the IRS with the tax returns the following filing period and the remainder of the money, if any, would be credited.

In my opinion this would really help jump start the market as it would allow buyers access to funds at the time of purchase that they qualify for after the fact. There is no shortage of prospective buyers in the Central Florida area who qualify for mortgages, whose mortgage payment may be equal to or even less than their rental payment, but don’t have the necessary funds available for a 3.5% down payment plus a portion or all of their closing costs. This proposed advance of the tax credit would alleviate that issue and bring more buyers to the market.

Hopefully we’ll see a provision like this included in the new bill.

Please check in next week when our next blog will discuss the exciting new FNMA Homepath initiative!

Pierce Outlaw