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"Have & Have-not" Gap Widening; More update on MI changes

Wednesday, March 26, 2014 - Article by: bcahoone - Global Home Finance Inc - Message

Whenever I riffle through my rich neighbor's trash cans looking for paystubs and trying to figure out how much money they make, the motion light comes on and I have to run away. Seriously, I continually hear from underwriters and LOs about how not only is the gap between the "haves and the have-nots" is widening but about how people driving fancy cars and living in fancy houses have nearly no savings. As one veteran broker wrote to me, "Welcome to what we see daily. It is my experience dealing with higher net worth people that this paycheck-to-paycheck group is rapidly growing. The number of people we see who are commissioned or self-employed who have taken a 50% pay cut over the past 4+ years is staggering. At the time they had DTIs below 25 and are now living pay check to pay check, and can't sell their house for a number of reasons. For many the rent would cost more even for a smaller home." The mainstream press has picked up on the story.

Yesterday the commentary discussed MI, and the ability, or lack thereof, of borrowers to have the servicer remove it. Michael U. contributes, "The answer you got on MI was good but it was missing one component. For less than 2 years of ownership, if you can prove that you made dollar for dollar improvements that bring the property down to 75% LTV, MI can drop off. Our servicing department quotes this to clients and we are following agency guidelines. In his client's case, as the rep from MGIC stated, after 2 years Ocwen will likely drop it if they can prove a 78% LTV with an appraisal at the client's cost."

And Scott D. chimed in, "One clarification of the Homeowners Protection Act that is often overlooked but is terribly important: the PMI will automatically be dropped when the loan reaches 78% of the original value through amortization of its scheduled payments (which means that if a borrower prepays, the prepayments are ignored). 99% of mortgage professionals never knew that it's based on the scheduled payments not the actual payments. 'B. Automatic Termination. The Act requires a servicer to automatically terminate PMI for residential mortgage transactions on the date that: the principal balance of the mortgage is first scheduled to reach 78 percent of the original value of the secured property (based solely on the initial amortization schedule in the case of a fixed rate loan or on the amortization schedule then in effect in the case of an adjustable rate loan, irrespective of the outstanding balance), if the borrower is current; or if the borrower is not current on that date, on the first day of the first month following the date that the borrower becomes current (12 USC 4902(b)).'"

We have a lot of home sales information seemingly coming at us every week. Steve Kaye with Catalyst Lending reminds us, "Regarding the information on anemic home sales that is periodically released, ('One reason existing home sales are so anemic is because few homeowners can afford to sell. There are roughly 75 million owner-occupied households, of which 10 million are underwater and 10 million have insufficient equity in their homes to afford a down payment on a new home. So 27% of all owner-occupied homes are effectively off limits under standard loan programs. As such, the 5 million expected home sales this year, 10% of the available stock, is good,' per economist Dr. Elliot Eisenberg.) Another factor that few include in this conversation is the millions of former homeowners who fell victim to either foreclosure or short sale, thus removing them from the market, at least for a while. The housing market thrives on the 'move up' buyer and we have literally removed this sector from the marketplace (or, rather, they removed themselves). Combine this with the 27% of 'off limits' homeowners, and one can see how home sales will more than likely continue to trickle more than pour for the next few years at least." Thanks Steve!

Sure enough, New Home Sales dropped 3.3% in February to 440k, a five-month low. You can blame it on the weather, rising mortgage rates & costs, or whatever, but year-over-year sales (Feb 2014 vs Feb 2013 in this case) were negative for the first time since September 2011. New home sales represent about 10% of all home purchases. The median price for a new home sold in February fell 1.2% from the same period a year earlier to $261,800, and the average sales price was $317,500. There were 189,000 new homes for sale at the end of February, which represents a supply of 5.2 months at the current sales rate.

We also learned Tuesday morning that the Conference Board's index increased to 82.3 in March, exceeding all estimates and the highest since January 2008, from 78.3 in February. And the S&P/Case-Shiller, with its two-month lag, showed that the pace of home price gains slowed. Hey, no tree grows to the moon, right? "The 20-city home value index cities advanced in the year to January at the slowest pace since August." Better than going the other way, right?

This morning we've already had the MBA's application numbers. (I guess those guys get up earlier than everyone else, since their number comes out every Wednesday at 4AM PST.) The average number of mortgage applications slid 3.5% on a seasonally adjusted basis from last week's revised level. Application volume has now dropped in five of the past six weeks according to the MBA. (Some of the stronger companies out there, however, are bucking that trend - good for them!) We've also had the volatile Durable Goods number for February. Expected +1.0 from -1.0 last, it was actually +2.2% with January revised to -1.3%. There are two Treasury auctions on tap: a $13 billion 2-year floating rate note and a $35 billion 5-year note. In the early going rates are nearly unchanged: we had a 2.74% close on the 10-yr yield Tuesday and it is 2.75% this morning; agency MBS prices are worse a smidgeon.

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