The Refinance share of mortgage activity increased to 46.2 percent of total applications from 46.0 percent the previous week.  The adjustable-rate mortgage (ARM) share of activity decreased to 13.6 from 13.8 percent of total applications from the previous week.  The average contract interest rate for 30-year-fixed-rate mortgages increased to 6.40 percent from 6.32 percent, with points decreasing to 1.00 from 1.08 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.  The average contract interest rate for 15-year-fixed-rate mortgages increased to 6.03 from 5.95 percent, with points increasing to 1.12 from 1.07 (including the origination fee) for 80 percent LTV loans.

 

For more information, please click: www.mortgagebankers.org.

 

Why the turmoil of recent months? 

 

During the recent real estate boom, traditional guidelines and underwriting practices gave way to a menu of products new to the industry. High risk product sets such as low FICO 100% LTV, and high LTV N/O/O, with reduced income verification requirements, became a larger portion of loan originations than in past market cycles.  At the time, the rise in home price appreciation (HPA), the rise in property value, could cover the recapture losses resulting from any associated risk in covering the note and foreclosure costs; should a foreclosure occur.  This cycle worked well until HPA began to level in late 2006.  Further deterioration resulted as loans underwritten to the looser guidelines began to experience performance issues.  With the value of the collateral in question, falling HPA, and the future performance of the borrowers unknown, investors' appetites for this risk has waned.  To attract investors in this environment, rates had to increase substantially.

 

Loans sold to the GSE remain largely untouched in the recent credit disturbance because of the investment qualities of the loans, thus lending support to these products and an overwhelming push towards the originations of the same.  

 

When will we see normal conditions return?

 

This will only improve when three things occur:

1. Loan performance must improve to reasonable loss levels.  Sound credit and underwriting must return.
2. Loans must be priced properly according to the risks associated with those loss assumptions.  Rates have gone up.
3. The investor community will have to regain confidence in the loans and be willing to buy the bonds at good spreads.  This will only happen when loan performance shows improvement over an extended period of time.

 

What will the market look like after all the fallout?

 

There will be fewer brokers and fewer lenders.  Products will be more traditional.  Income will be verified and so will property values.  Non-Prime and Alt-A rates will be at levels relative to product risk exposure and these loans will perform much better. The industry needs this “correction” and a return to more responsible lending.