You need to be aligned with a company that is is in a good position to originate FHA loans and Reverse mortgages in your market and you can for the most part eliminate refinance out of your business model.

Refinance will not disappear completely but I believe you will see the numbers continue to drop.

With home values dropping home equity is going with it. Even the best markets have lost 20% – 25% equity. This greatly reduces the refinance market. With the problems Fannie and Freddie are facing FHA is going to be the primary source of mortgage funds in the short term.

If you are not with a company that is in good standing with FHA you should consider making a move.

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the LIBOR rate has spiked in recent weeks.

What is the LIBOR and why is something your clients should be concerned about?

From a report on Bloomberg this week..
“The overnight Libor rate in U.S. dollars soared 3.33 percentage points to 6.44 percent today, its biggest jump in at least seven years, according to the British Bankers’ Association. The one-week rate rose by more than a percentage point, to 3.88 percent from 2.49 percent on Monday, and the one-month rate increased to 2.75 percent from 2.5 percent.”

LIBOR is short for London Bank Inter Offered Rate. It is a rate index that is set by the British Bankers’ Association.

Created in the mid 80′s the index became widely used in the mid to late 90′s in the US mortgage markets as the preferred index for adjustable mortgages. Most subprime and about 40% of conforming adjustable rate loans are based on a LIBOR index.

Becasue the LIBOR is set by the British Bankers’ Association these loan rates cannot be controlled by the FED.

If the LIBOR’s recent increases continue this means that the adjustable rate mortgage payments that are tied to the LIBOR could more than double at adjustment time.

In the last 5+ years the LIBOR rate has been a safe haven for borrowers looking for the lowest payment.

Most LIBOR based loans are tied to the 6-month index. This means that the rate is a rolling 6 month average. So will a short term spike cause rates to jump? No. But an ongoing increase will.

If you have past clients in a LIBOR rate keep a very close watch on the monthly rate.

This would be a great opportunity to make contact with these clients and make them aware of the possibility and to alert them that they should not wait for the rate to spike before they have an exit strategy.

Look at some of the ramification of the take over.

1. The CEOs will be fired – Great… it should have happened a long time ago.
2. The boards will be replaced – same as above!
3. There will be restructuring of the balance sheets – not so good!

The devil is always in the details.

The restructuring will result in a new class of stock to be created that has precedence over current stock holders. This new senior preferred stock will earn 10% a year.

Fannie and Freddie will be required to make major cuts in their mortgage holdings. Over several years they will have to cut their portfolios by almost 70%.

Mortgage rates are currently in the 6% range – Fannie and Freddie will be forced to borrow at 10% – you do the math!

With Fannie and Freddie cutting their portfolios by more than two-thirds this means that conventional mortgage money will be choked at the source.

This leaves FHA as the sole survivor. Let’s face it with Fannie and Freddie cut to one-third of their original size they will become secondary players. Is HUD prepared for the role it is being thrust into. For years this agency has taken a back seat and is now at 3 times it’s former production levels. This change will put a substantially larger burden on HUD.

Let’s hope that HUD is up to the challenge.

• What is it?
• What is your number (Compare Ratio)?
• Why is it important?

If your branch has poor numbers in Neighborhood Watch  you could lose the ability to originate FHA loans. The Neighborhood Watch System is a web-based software application that displays loan performance data for lenders and appraisers, by loan types and geographic areas using FHA-insured single family loan information.

What is it?
The loan information is displayed for a two-year origination period and is updated on a monthly basis. The default data includes current defaults, and defaults within the first year and first two years from endorsement. A defaulted loan is one that is 90 or more days delinquent. First defaults are when the loan went into default the first time and could have been subsequently cured. Current defaults are loans that were 90 days or more delinquent as of the date reported and have an active FHA insurance status. These loans are displayed in the statistics because it is important to note that a loan went into early default within the first 24 months of its origination. The loan performance data is HUD’s method for grading and monitoring the performance of a company’s loan production.

Compare Ratio
Compare ratio is the value that reveals the largest discrepancies between the subject’s default percentage and the default percentage to which it is being compared. The percentages being compared are the percentages of originations that first defaulted during a selected period (e.g., defaults within the first two years). A higher ratio is indicative of an area (or lender) that has an unusually high default percentage in comparison with that region or lender’s surrounding area. For example, if a lender has an 8% default rate in California and 4% of all California loans defaulted, then the lender’s compare ratio equals 200%.

What is your number?
Looking up your number is very easy. You go to the HUD link, search your company name, locate your office if your company has more than one office. You can filter by branch, institution or by originator.

The Compare Ratio is shown as a percentage. Higher numbers over 100% are bad, lower numbers below 100% are good. Many wholesale investors will not accept loans from offices with numbers over 150%.

Companies that operate as a centralized operation instead of licensing each branch with HUD run the risk of losing their authority company wide if their numbers are very high.

Companies that license each branch separately are minimizing their risk.

Net Branch and Neighborhood Watch