With all the hullabaloo about lower rates and bailout monies given to banks one would think there would be a higher percentage of closed and funded loans. Sadly the banks continue to hold on TIGHT to their money; as we have seen a higher increase in declined loans in the past 6 months than I have ever experienced in my 28 years in this business.
Borrowers are fitting all the tighter requirements but lenders are not relaxing their property requirement. In fact banks are using the stricter Fannie Mae and Freddie Mac guidelines to underwrite a property which doesn’t make any sense; where in the country are there 3 months comps? Taos is seeing areas of declining markets and this is now being reflected on appraisals. I am sure many of you have spoken to our local appraisers who are also getting frustrated with the extra work and the lending industry in general.
Declining markets move appraisals up the corporate chain to desk reviews and requests for secondary appraisals. These cost the borrower more money and there are no guarantees for lender approval after the extra funds have been spent.
I have received concerned and confused calls from many clients who have initiated their own refinances with their existing lenders only to be declined on a property which was approved last year. Some of these properties have been improved upon since the initial loan and have increased values! Why are they being declined? The good Comps are farther away than the required 5 mile radius because of the slow down in the real estate markets.
Using private investors for our really good loans is no longer an option as so many of their portfolios have shrunk. We continue to shop our loans and push hard to get them closed and funded.
As is evident, there is no more give or common sense in the system.
News
As you know the markets have been erratic since the declaration of the GM bankruptcy and Treasuries and Bonds are on the rise. Panic sets in and reactions are as expected around the globe and within our mortgage markets, hence the higher interest rates. Obama’s home affordability stimulus plan is predicated on lower interest rates to help homeowners keep their homes so patience and standing by is in order if you have not already been locked in with a lower interest rate.
Below is a terrific article on Bernanke and the housing markets from Bloomberg.com.
Bernanke Conundrum Threatens Housing on Mortgage Rate (Update3)
June 8 (Bloomberg) -- The biggest price swings in Treasury bonds this year are undermining Federal Reserve Chairman Ben S. Bernanke’s efforts to cap consumer borrowing rates and pull the economy out of the worst recession in five decades.
The yield on the benchmark 10-year Treasury note rose to 3.90 percent last week as volatility in government bonds hit a six-month high, according to Merrill Lynch & Co.’s MOVE Index of options prices. Thirty-year fixed-rate mortgages jumped to 5.45 percent from as low as 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida. Costs for homebuyers are now higher than in December.
Government bond yields, consumer rates and price swings are increasing as the Fed fails to say if it will extend the $1.75 trillion policy of buying Treasuries and mortgage bonds through so-called quantitative easing, traders say. The daily range of the 10-year Treasury yield has averaged 12 basis points since March 18, when the plan was announced, up from 8.6 basis points since 2002, according to data compiled by Bloomberg.
“Volatility has increased dramatically and it seems to get more each day,” said Thomas Roth, head of U.S. government-bond trading in New York at Dresdner Kleinwort, one of the 16 primary dealers of U.S. government securities that trade with the Fed. “A lot of that has to do with uncertainty about whether the Fed will increase purchases of Treasuries. The market is looking for some change in the Fed’s plan.”
Greenspan’s Conundrum
The rise in borrowing costs in the face of record low interest rates, Fed purchases and a contracting economy is the opposite of the challenge Bernanke’s predecessor, Alan Greenspan, confronted when he led the Fed.
In February 2005, Greenspan said in the text of his testimony to the Senate Banking Committee that a decline in long-term bond yields after six rate increases was a “conundrum.” At the time, he was trying to keep the economy from overheating and sparking inflation. Now, Bernanke may be facing his own.
“The Fed is stuck in a very difficult place,” said Mark MacQueen, a partner at Austin, Texas-based Sage Advisory Services Ltd., which oversees $7.5 billion. “You can’t have it both ways. You can’t say I’m going to stimulate my way out of this problem with trillions of dollars in borrowing and keep rates low by buying through the other. I don’t think that is perceived by anyone as sound policy.”
The yield on the benchmark 3.125 percent 10-year Treasury due May 2019 ended last week at 3.83 percent, up from the low this year of 2.14 percent on Jan. 15, according to BGCantor Market Data. Last week’s 37-basis-point surge equaled the most since the increase of 37 basis points, or 0.37 percentage point, in the period ended July 17, 2003. The yield fell 3 basis points today to 3.8 percent at 8:22 a.m. in New York.
‘Don’t Do Anything’
Bernanke and other Fed officials say the improved economic outlook and rising federal budget deficit are the catalysts for higher borrowing rates, and see no need to increase purchases of bonds. Plus, the Fed has succeeded in shrinking the gap between 10-year Treasury yields and 30-year mortgage rates to 1.77 percentage points from 3.37 percentage points in December.
“To the extent yields are going up because the economic outlook is brighter, the answer would be, don’t do anything,” Federal Reserve Bank of New York President William Dudley said in a transcript of an interview with the Economist last week.
U.S. payrolls fell by 345,000 last month, the least in eight months, the Labor Department said June 5. The economy will likely expand 0.5 percent in the third quarter, according to the median forecast of 63 economists surveyed by Bloomberg.
Wider Deficit
The deficit should reach $1.85 trillion in the fiscal year ending Sept. 30 from last year’s $455 billion, according to the Congressional Budget Office. Goldman Sachs Group Inc., another primary dealer, estimates that the U.S. may borrow a record $3.25 trillion this fiscal year, almost four times the $892 billion in 2008.
While rising, 10-year yields are below the average of 6.49 percent over the past 25 years, and will likely remain below 4 percent through at least the third quarter of 2010, according to the median estimate of 50 economists surveyed by Bloomberg. The Fed’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 percent, in May, the third most on record, data compiled by Bloomberg show.
Higher rates may deepen the two-year housing slump helped trigger the recession and sideline consumers planning to refinance or buy their first home. The median sale price for a U.S. home dropped in April to $170,000, down 26 percent from a record $230,000 in July 2006, according to the National Association of Realtors.
Refinancing Index
The number of Americans signing contracts to buy previously owned homes climbed 6.7 percent in April, largely on cheaper financing costs, according to the realtors group. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan fell 16 percent to 658.7 in the week ended May 29 as borrowing rates climbed.
“The more rates go up, the more we need home prices to go down to equalize consumers’ payments,” said Donald Rissmiller, chief economist at New York-based Strategas Research Partners. “It’s those payments that have brought about a level of stability” in home sales, he said.
Rising volatility, this exposes investors to bigger potential losses, risks pushing up rates on everything from mortgages to corporate bonds. Norfolk Southern Corp., the fourth-largest U.S. railroad, sold $500 million of 5.9 percent debt on May 27. The coupon was higher than on the $500 million of 5.75 percent notes due in 2016 that the Norfolk, Virginia- based issued in January.
‘The Big Question’
“When the Treasury market is moving around a lot more it becomes more risky to step in,” said James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley, another primary dealer.
Outside of Dudley’s remarks, the Fed has largely refrained from public statements about bond purchases. Traders find that confusing from Bernanke, a former economics professor at Princeton University who published research on central bank transparency and pushed for greater openness at the Fed.
“The big question is what the Fed does. Do they increase quantitative easing?” Caron said. “Do they buy more Treasuries or mortgages? That is why there is a lot more uncertainty.”
Investors are reining in the average maturity of their Treasury holdings to guard against higher yields. That may increase costs for the government, which intends to extend the average maturity of its debt after committing $12.8 trillion to thaw frozen credit markets and snap the longest economic slump since the 1930s. The Treasury will sell $65 billion in notes and bonds next week.
Shorter Durations
Over the past month, money managers overseeing about $100 billion shortened the durations of their portfolios, according to Stone & McCarthy Research Associates in Skillman, New Jersey.
Duration, a reflection of how long the debt will be outstanding, dropped to 100.9 percent of benchmark indexes in the week ended June 2, the lowest in almost four months and down from 102 percent in the week ended May 5. The ratio was as high as 103.7 percent in the period ended March 10.
Shorter-term Treasuries, whose lower duration means price swings are smaller relative to longer-maturity debt for the same change in yield, have performed better this year with the Fed keeping its target rate for overnight loans between banks at a range of zero to 0.25 percent.
Two-year notes have lost 0.4 percent, including reinvested interest, compared with losses of 11.5 percent on 10-year securities and 27.9 percent for 30-year bonds, according to Merrill Lynch index data.
‘Predictable Ways’
The Fed probably won’t make any adjustments to the size of the Treasury purchase program before its next policy meeting on June 23-24, in part to avoid reinforcing perceptions policy is reacting to swings in yields, according to Jim Bianco, president of Chicago-based Bianco Research LLC.
“The Fed wants to operate in predictable ways,” Bianco said. “They are also trying to not just look arbitrary, which makes people think ‘I can’t ever go to the bathroom because there could be a press release that the Fed changed the buybacks.’ That’s been a real concern: ‘Wow, I just went to the bathroom and lost $2 million dollars.’”
Summary
While we continue to be patient, it doesn’t appear that patience is really getting us any where. Being proactive and creative is how we continue to stay on top of this crazy and unpredictable industry.
Thank you for your time and consideration.
Sincerely,
Elisabeth Guillemin