At a different conference (the National Reverse Mortgage Lenders Association (NRMLA) 2011 Annual Conference) Carol Galante, acting FHA Commissioner and Assistant Secretary for Housing, noted, the FHA Home Equity Conversion Mortgage (HECM) program “is a very important tool for seniors.  We want to make the HECM program the best program it can be.” She sees no immediate reason to reduce HECM loan limits below the current limit of $625,500. There are many originators out there who specialize in the loan, available to seniors 62 years-old and older with significant home equity. They are designed to enable elderly homeowners to borrow against the equity in their homes without having to make monthly payments as is required with a traditional "forward" mortgage or home equity loan. Under a reverse mortgage, funds are advanced to the borrower and interest accrues, but the outstanding balance is not due until the last borrower leaves the home, sells or passes away. Borrowers may draw down funds as a lump sum at loan origination, establish a line of credit or request fixed monthly payments for as long as they continue to live in the home.

Perhaps by then Old Republic International will be writing MI again. The company stopped selling MI less than two months ago when a waiver that had allowed it to stay open for business expired at the end of August. But, per a story reported by the WSJ, “the company plans to seek approval from Fannie Mae, Freddie Mac and state insurance regulators to re-start the operation using fresh capital and a new subsidiary, said Christopher Nard, the head of Old Republic's mortgage insurance business.” But even though the company may “like” the business, Old Republic had a $515 million operating loss in its MI segment in the first nine months of 2011. Apparently the higher MI prices and tighter underwriting standards of the current environment are enticing.

Thoughtful HARP 2.0 comments continue. Kevin I. from Reed Mortgage writes, “The one item that seems to be obviously missing from the recent discussion of “improvements” is addressing loans currently owned by Fannie or Freddie that otherwise would be eligible but are not eligible because the loan being refinanced was sold to Fannie or Freddie under some type of ‘credit enhancement feature.’ My experience is that at least 50% of the recent refinances I have attempted are not eligible under HARP because of this.

“For example, you run the loan through DU and receive this message: ‘This limited cash-out loan casefile was not underwritten according to the DU Refi Plus expanded eligibility guidelines because the subject property was not identified as a Fannie Mae loan that is eligible to be refinanced with DU Refi Plus. Refer to the Selling Guide for additional information regarding why an existing loan may not be eligible to be refinanced using DU Refi Plus.’ So an originator goes to the Selling Guide which states ineligible loans for DU Refi Plus are ‘Existing mortgage loans with certain types of credit enhancement’ which is sort of a non-answer answer. My research indicates that some lenders (large volume lenders) sold loans to Fannie and Freddie under some type of captive re-insurance arrangement…which provided lower G-fees in exchange for this additional insurance although there may be other reasons for what constitutes a ‘credit enhancement.’

“On one hand this is a negative for the consumers: through no fault of their own they cannot participate in this program simply based on the way their loans were sold to Fannie/Freddie. On the other hand, if the basic theory behind HARP is that the new loan would (should) put both the borrower and Fannie/Freddie in a better position, I guess one understands why these loans would not be eligible. It would be interesting to find out from Fannie and Freddie how many loans are excluded from HARP because of this credit enhancement exclusion. My guess is that it is in the millions.”

Another wrote, “The concept of HARP 2.0, or any plan to allow underwater borrowers who make their payments, is very good: it allows people who have been making payments on their homes on time the ability to refinance their loans at much lower interest rates, despite the fact that their home value has dropped significantly. The program would benefit loans guaranteed by FNMA, FHLMC, the VA and FHA. Under the program, debt to income ratios, loan to value and credit would be ignored; as long as the borrower was current for 3 months. This would be a boost to the economy in theory, because it would put money into the pockets of consumers that own homes and help the 11mm or so who have negative equity. One key problem for banks is that they hold billions of dollars of MBS’s that produce a return. Given the drop in interest rates over the past few years, MBS prices have soared to $105 to $108 premiums. When loans that feed those securities refinance or pay off, they do so at $100, so the bank suffers a $5 to $8 immediate hit to performance. Currently about 75% of Fannie & Freddie mortgages carry interest rates above 5%, so the impact of a major refinancing wave could be substantial. One problem with this is that a mortgage is one person’s liability and another’s asset, so if one gets more cash from this event, the other must inherently pay, so things balance out. In other words, the gains the homeowner get come at the cost of bondholders.

“In addition to banks, other stakeholders, such as the Agencies, could themselves take a hit of $40B to $60B (which could reverberate with an OTTI impairment for banks); the Fed could see a $4.5B reduction in interest payments on MBS it holds (hitting taxpayers with $600mm in expected losses); REITs could be severely impacted (and their stocks could get dumped, since
they borrow money and invest the proceeds in MBS); those who lent money to REITs could be hurt; pension funds, insurance companies, mutual funds and foreign investors would also be at
risk. All this would add further uncertainty and risk. This confluence of unintended consequences would also likely change the future. Investors that have been burned by such an
event are likely to demand much higher returns going forward to hold MBS. That could reduce liquidity, decrease lender interest in originating new loans and push up rates for all borrowers (as investors demand higher yield to compensate for increased uncertainty). It could also increase the difficulty of managing refinancing forecasts as part of normal IRR work at banks, so that could further impact bankers.”

"Refi plan or no refi plan, there ain't nothin' that's gonna happen to Fannie & Freddie until after the elections, which puts it into 2013." So said the guy at Midas working on my brakes. But that doesn't stop them from being in the press - here is the latest: http://www.businessweek.com/news/2011-10-26/garrett-seeks-to-preserve-some-functions-of-fannie-and-freddie.html.

Here is some fun with numbers: the Pending Home Sales Index was down over 4% in September, but still better than where the index was a year ago. NAR chief economist Lawrence Yun said, “America’s monetary policy is contradictory and confusing, where some consumers with the best financial capacity and top-notch credit scores pay higher mortgage interest rates…The Federal Reserve evidently has been attempting to lower mortgage rates, yet more consumers are faced with taking out jumbo loans that carry higher interest rates.”  Yun emphasized the need to reinstate higher loan limits in 42 states. “Just leaving excessive cash to sit in banks and not work into the economy is a drag on the overall recovery,” he said. “We need a comprehensive approach to address housing issues – not additional impediments.”

“One trillion” is still a lot of money, and yesterday the news from Europe easily overshadowed any U.S. data. Increasing the bailout fund to $1.4 trillion, for holders of Greek debt to write-off as much as 50% of their face value, and for banks across the union to raise around $150 billion in new capital moved to settle markets down. A weak 7-yr auction (1.79% yield) here didn’t help matters. Our 10-yr was worse by 1.625 and shot up to a yield of 2.40%. Fortunately “everyone” was in buying agency mortgage-backed securities, especially given the lower prices, higher yields, favorable technicals in production coupons, a better prepay outlook for higher coupons. Mortgage banker selling was once again estimated at about $1.5 billion - not enough to satiate the demand (especially with the Fed buying about $1 billion a day). So MBS prices did well relative to Treasury prices, but were still worse by .75.

But there is no rest for the markets today. We have the ECI (Q3) and Personal Income and Consumption for September, along with the final October Michigan Consumer Sentiment reading. The Employment Cost Index was +.6%. Personal Income was +.1% but Personal Spending was +.6%. That drops the saving rate to the lowest since 2007! These aren’t huge market-moving numbers, but we find a slight improvement with the 10-yr down to 2.36% and early MBS prices better by .125-.250.

Boudreaux staggered home very late after another evening with his drinking buddy, Thibodeaux.

He took off his shoes to avoid waking his wife, Clotile. He tiptoed as quietly as he could toward the stairs leading to their upstairs bedroom, but misjudged the bottom step. As he caught himself by grabbing the banister, his body swung around and he landed heavily on his rump. A whiskey bottle in each back pocket broke and made the landing especially painful.