Origination

Mortgage rates will remain below 5% for the first half of this year which will help stabilize home sales and keep a refinancing wave going, according to a consensus forecast by banking economists. "A surge of refinancings is already under way and lower home prices and interest rates will gradually support an increase in home sales," said Bruce Kasman, chief economist at JPMorgan Chase. Mr. Kasman is chairman of the American Bankers Association Economic Advisory Committee, which expects the government's efforts to stabilize the financial system and stimulate the economy will lead to a recovery in the second half with gross domestic product rising to 3.8% in the fourth quarter of 2009. However, the bank economists see house prices continuing to fall and mortgage delinquencies rising throughout 2009. The refinancing wave will be "substantial," predicted Mr. Kasman, noting that a high rate of applications may be rejected and cash-out refis will be modest.

The Senate late Thursday voted down a resolution, sponsored by Sen. David Vitter, R-La., that would have denied the new Obama administration access to the remaining $350 billion in Troubled Asset Relief Program funds. The resolution was rejected by a 52-42 vote. The defeat clears the way for president-elect Barack Obama to use the TARP funds to inject capital into banks, guarantee bad assets and implement foreclosure prevention programs. Meanwhile, on Thursday government officials worked out a deal to invest another $20 billion of taxpayer money in Bank of America, which over the past six months acquired two of the biggest players in subprime: Countrywide Financial, the nation's largest subprime lender/servicer, and Merrill Lynch, the investment banking firm that financed and then invested in several subprime originators. Merrill, which BoA bought in early January, securitized billions of dollars in subprime loans, selling the end bonds in the form of asset-backed securities and collateralized debt obligations. Merrill also invested in CDOs itself, investments that are now on the books of BoA.

The Federal Reserve purchased $23.4 billion of GSE mortgage-backed securities for the week ending January 14 -- nearly double the previous week's amount. The Fed kicked off its $500 billion campaign to buy Fannie Mae, Freddie Mac and Ginnie Mae MBS on Jan. 2, purchasing $10.2 billion in MBS during that week. Meanwhile, the two-week buying spree is having its intended effect of driving down mortgage rates. According to a recent survey by Freddie Mac, 30-year FRMs are now being offered below 5%, depending on the points. Separately, Rep. Patrick Murphy, D-Pa., wants the Fed to provide "detailed information" about its hiring of four investment managers to run the MBS purchase program. During debate on a Troubled Asset Relief Program bill, he expressed concerns about conflicts of interest. The Treasury Department also remains active in the MBS market. It purchased $21.8 billion in Fannie and Freddie MBS in December after purchasing $23.2 billion in November. The Fed reports its MBS purchases weekly while Treasury reports its MBS purchases monthly.

The $825 billion economic stimulus package drafted by House Democratic leaders will restore the $729,750 GSE loan limit in high cost areas until year-end 2009. The package also includes a provision that increases the loan limit on Federal Housing Administration-insured reverse mortgages to $625,500 from $417,000 nationwide. Congress originally raised the maximum loan limit on Fannie Mae, Freddie Mac and FHA loans to $729,750 in February 2008 as part of the first stimulus bill. But that provision expired Dec. 31 and the loan limit adjusted downward to $625,500 where it stands today. In addition to raising the maximum loan limit, the House bill expands the definition of high cost areas by allowing regulators to designate wealthy residential communities as "sub-areas" within a metropolitan statistical area. If the maximum loan limit in an MSA is $650,000, for example, the loan limit in the sub-area could be $729,750.

Fannie Mae and Freddie Mac have been directed by their regulator to record -- beginning in 2010 -- identification numbers for loan officers, appraisers and others involved in originating mortgages they purchase in the secondary market. The names of these origination professionals will not be recorded and instead each will be given a number under a new national registry for mortgage professionals. Requiring "identifiers" will allow the GSEs to "monitor performance and trends of their loans," said Federal Housing Finance Agency director James Lockhart. "If originators or appraisers have contributed to the incidences of mortgage fraud, these identifiers allow the enterprises to get to the root of the problem and address the issues." A nationwide licensing and registry system that goes into effect June 30 requires all loan officers and mortgage brokers to have a unique identification number. But the GSE regulator is taking it a step further by insisting on appraiser identifiers. FHFA maintains it is important to detect negligence and fraud. In addition, Fannie and Freddie will be changing their systems to collect loan originator and company identifiers. "Simultaneously implementing collection of appraiser identifiers would be reasonable and practical," the agency said.

As the refinancing boom gathers steam selected residential funders are beginning to charge "rate lock" fees to both consumers and loan brokers, according to industry participants. One mortgage executive, requesting anonymity, said his current servicer, Chase of Iselin, N.J., wanted to charge him 50 basis points to lock in a low rate on his refinancing. He passed on the offer. A call to Chase's 800-number by National Mortgage News resulted in a ten minute wait, and the representative on the other end of the line would not quote any loan information without the caller filling out a credit report. At least three top ten lenders contacted by this newspaper -- Bank of America, Wachovia, and Wells Fargo -- said they do not currently charge lock-in fees for retail applicants. Marc Savitt, current president of the National Association of Mortgage Brokers, said he has heard stories about wholesalers charging brokers a fee to lock in but has not seen anything in print. (For the full story see the Monday, January 19 edition of NMN.)

An expert in real estate finance said a lack of liquidity remains the major obstacle to a recovery in the commercial real estate markets at least until the end of this year. "We will also see a curtailed supply of new construction, more focus on cash flow, new incentives for tenants, greater equity required of borrowers and increased government regulation," said Stan Ross, chair of the University of Southern California's Lusk Center for Real Estate. Citing retail bankruptcies, bank closures, greater unemployment and an oversupply of office space, he does not see commercial or residential real estate markets starting to recover-and then only slightly-until the fourth quarter of 2009 with another full year before they grow again. Among the problems facing property owners are declining cash flows and debt coming due that cannot be refinanced while credit is scarce. "Borrowers can still avoid foreclosure with creative restructuring, giving the lender an equity position in return for a lower interest rate or getting a temporary moratorium on principal payments," Mr. Ross explained, pointing out that borrowers should demonstrate a willingness to take action by selling assets to raise cash or getting new equity investors. But there is an opportunity for well-capitalized opportunity funds to buy distressed assets or debt at a deep discount, he said.

Commercial real estate markets "deteriorated' in most areas of the country, according to the Federal Reserve's Beige Book, which also registered an increase in residential refinancings during December. "Contacts in the Boston District described the commercial real estate market as grim and depressing," the Beige Book says. The Dallas Federal Reserve Bank said that CRE transactions in its district have "ground to a halt." In the previous Beige Book, the Fed said CRE markets had "weakened broadly." Meanwhile, residential real estate markets remained weak. "Reduced home sales, lower prices or decreases in construction activity were noted in most districts," the Beige Book says. However, the New York, Cleveland, Richmond, Chicago, Kansas City and San Francisco district banks saw an increase in residential mortgage refinancings.

House tax writers are proposing to make a first-time homebuyer tax credit more attractive to buyers and provide tax refunds for builders and certain financial institutions that have incurred large losses in 2008, but were profitable in past years. The package also includes a five-year carry-back provision that allows companies to charge off their 2008 losses against their profits going back to 2003. But Fannie Mae, Freddie Mac and companies receiving assistance from the Troubled Asset Relief Program are not eligible for this extended carry-back provision under the tax provisions drafted by House Ways and Means Committee chairman Charles Rangel, D-N.Y. "This package was developed with strong coordination between the House and Senate leaders, president-elect Obama and his economic team," Rep. Rangel said. The tax package removes a repayment requirement on the $7,500 first-time homebuyer tax credit. But it does not increase the tax credit or expand it to all homebuyers as requested by the homebuilders and Realtors. These tax provisions and others will be included in the economic stimulus bill.

To jump start multifamily projects that depend on low-income housing tax credits, the Mortgage Bankers Association and other housing groups are recommending a program that would provide 4.5% financing. "Under our proposal, the Treasury Department would purchase mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae that are backed by loans on properties assisted by the LIHTC program," according to a letter to House and Senate Democratic leaders that are working on the economic stimulus package. Under this approach, "Treasury would agree to purchase the loans at a 4.5% note rate," the Jan. 13 letter says. The eight housing groups, including the National Apartment Association and National Multi Housing Council, point out that many projects to build and renovate affordable rental housing are stalled due to the drop in the value of the tax credits and other market factors. But the low cost financing would "reduce debt service costs" and allow a number of these developments to move forward, create jobs and increase the supply of affordable housing, according to the proponents.