On Refi's FNM and Housing
Data compiled from mbaa.org
Here are the mortgage refi numbers as rates declined in August and September:
8-04: 1600 35.8% of activity - 5.97% 30year, 3.90% ARMS, 33.5% ARM share
8-11: 1641 37.2% of activity - 5.80% 30year, 3.85% ARMS, 34.2% ARM share
8-18: 1983 40.7% of activity - 5.75% 30year, 3.95% ARMS, 33.6% ARM share
8-25: 1825 40.4% of activity - 5.78% 30year, 3.90% ARMS, 32.6% ARM share
9-01: 1804 40.7% of activity - 5.75% 30year, 3.79% ARMS, 33.1% ARM share
9-08: 1949 41.4% of activity - 5.79% 30year, 3.93% ARMS, 32.9% ARM share
9-15: 1973 43.2% of activity - 5.68% 30year, 3.86% ARMS, 33.0% ARM share
9-22: 2053 44.5% of activity - 5.66% 30year, 3.89% ARMS, 33.1% ARM share
Let’s look at some data from February and March for comparison purposes:
3-03: 3532 56.4% of activity - 5.49% 30year, 3.36% ARMS, 28.8% ARM share
3-10: 3568 56.1% of activity - 5.34% 30year, 3.20% ARMS, 28.1% ARM share
3-17: 4984 62.8% of activity - 5.37% 30year, 3.27% ARMS, 27.9% ARM share
3-24: 4989 63.1% of activity - 5.38% 30year, 3.30% ARMS, 28.1% ARM share
Somewhere along the line the % of ARMS has risen from 28% to 33%. I believe that is a significant shift and minimizes the need, if any for some expected refis to occur. Note too, the blowoff bottom in yields. Anyone that wanted to refi, did so back in March. Why would anyone that got a fixed rate earlier this year choose to refi now? Mortgage watchers expected a huge rise in the number of refis as 10yr treasury yields plunged these past few months? Looking at the above data I wonder why they were surprised by the lower than expected refi numbers.
Look closely at the data since August:
1)ARM rates have not budged. It would appear that none of those people have anything to gain from a refi.
2)Fixed 30 yr rates have only moved .31BPs lower. Is that enough to cause significant refi activity? With fees, closing costs, etc, I would not think so. Note too, we are talking about a refi only for those that did not do one back in March. That is a small subset of activity to be expecting huge volumes of refi activity to come from.
3)In addition housing prices have stalled and housing backlogs in Orange County, California have gone from 3 weeks supply to 7 month supply, the latter happening in the course of little over a month. Similar situation in Las Vegas and Florida.
4)Jobs are stagnant at best, real wages are falling, business tax credits are expiring, and inventories of autos and other goods are rising. IMO, that does not bode well for increased consumer buying of goods or huge pickups in refi activity.
Now how does today’s FNM news affect this picture?
marketwatch.com
Fannie Mae slides after critical report
Mortgage giant Fannie Mae's shares fell more than 5 percent early Wednesday after a government report blasted the company's accounting practices and questioned the reporting of its past earnings.
The Office of Federal Housing Enterprise Oversight (OFHEO) said Fannie Mae deferred expenses "apparently to achieve bonus compensation targets," and "maintained a corporate culture that emphasized stable earnings at the expense of accurate financial disclosures," according to a Fannie Mae statement released early Wednesday morning.
Some congressional Republicans have been critical of Fannie Mae's related firm Freddie Mac, which agreed to pay a $125 million civil penalty for using accounting gimmicks to make its earnings appear smoother than they actually were. OFHEO's report could spur Congress to tighten rules on both Fannie and Freddie, which are federally chartered private mortgage companies.
OFHEO's is not the only investigation with which Fannie Mae is complying, according to Korologos's statement. The Securities and Exchange Commission is also conducting an inquiry into the firm that includes issues raised in OFHEO's report.
With FNM we have seen time and time again that it does not matter until it matters. The question now is: Does this FINALLY matter?
reuters.com
Fannie Mae woes show strong regulator needed-Snow
U.S. Treasury Secretary John Snow on Wednesday said a government review that found Fannie Mae used inappropriate accounting to iron out earnings volatility reinforced the need for a stronger watchdog for government-sponsored enterprises.
"It's important to have a strong GSE regulator ... GSEs are a very important component of our national housing market, national mortgage market, and because they are such large entities they are also an important part of our total financial system," Snow said.
"We'd like to see the GSEs and their regulator divorced from politics," he said. Snow declined comment on whether another accounting scandal could threaten a negative impact on the stock market or investor confidence.
Right now, banks and other financial institutions have a nearly risk free trade. They take on nearly any mortgage, collect some fees, and pass the risk off to FNM who is left holding the bag. Is FNM over-leveraged? How can they not be after all these years of ever increasing loan amounts and declining credit requirements? Since FNM is unwilling to disclose their hedgebook it is really impossible to know just how bad (or good) FNM’s situation really is. At any rate the wild gyrations in treasury yields since the beginning of January (up, down, huge up, huge down) can not possibly have been any good for FNM’s dynamic hedging activity. This is speculation, but I believe it is possible that Greenspan’s recommendation back in January for people to select ARMs was done primarily for the purpose of reducing risk to FNM and/or other financial institutions from risk of wildly fluctuating mortgage rates.
Those viewpoints aside, what happens to mortgage activity if GSE are reigned in by Congress or the SEC? Will banks be as willing to take huge risks on fixed rate paper, 100% financed? Ha Ha! FNM was willing to take those risks and banks were willing to accommodate that for a fee. Everyone was happy. Right now banks are keeping the best variable rate mortgages from their best customers and passing the junk on to FNM. So what happens if FNM activity is curtailed? IMO one of several things or a combination of all three:
1)More customers are driven to variable rate products (reducing both the rate risk and the refi risk for the lender)
2)We start seeing a huge increase in credit scores required for the typical mortgage
3)Fixed rate mortgages go up
So here we are asking once again: Does FNM FINALLY matter? That is not the only question that matters, however. Here is another one possibly equally important: Are consumers so tapped out that refis are not coming back to high levels regardless of what interest rates do?
The ramifications on our economy will be immense if for any reason mortgage activity significantly declines. There are now two good reasons it might do just that: Forced GSE curtailment and consumers just finally throw in the towel. In this writer’s viewpoint it is just a matter of time before both of these happen.
Mike Shedlock |
