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NEW YORK (Reuters) – The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.

Of prime conforming loans, 41 percent will be "underwater" by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties' value, up from 29 percent, it said.

"The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding," the analysts said. Prime jumbo loans make up 13 percent of the total market.

Deutsche's dire assessment comes amid a bolt of evidence in recent months that point to stabilization in the U.S. housing market after three years of price drops. This week, the National Association of Realtors said pending home sales rose for a fifth straight month in June. A widely watched index released in July showed home prices in May rose for the first time since 2006.

Covering 100 U.S. metropolitan areas, Deutsche Bank in June forecast home prices would fall 14 percent through the first quarter of 2011, for a total drop of 41.7 percent.

The drop in home prices is fueling a vicious cycle of foreclosures as it eliminates homeowner equity and gives borrowers an incentive to walk away from their mortgages. The more severe the negative equity, the more likely are defaults, since many borrowers believe prices will not recover enough.

Homeowners with the riskiest mortgages taken out during the housing boom have seen the greatest erosion in equity, in part because they were "affordability products" originated at the housing peak, Deutsche said. They include subprime loans, of which 69 percent will be underwater in 2011, up from 50 percent in March, Deutsche said,

Of option adjustable-rate mortgages -- which cut payments by allowing principal balances to rise -- 89 percent will be underwater in 2011, up from 77 percent, the report said.

Regions suffering the worst negative equity are areas in California, Florida, Arizona, Nevada, Ohio, Michigan, Illinois, Wisconsin, Massachusetts and West Virginia. Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011, it added.

"For many, the home has morphed from piggy bank to albatross," the analysts said.

Mortgage rates continue to hold steady as prices of mortgage backed securities keep to a confined range. Economic data yesterday was as expected and had no impact on trading. The Treasury Department completed the third leg of the August 2s/5s/7s auction cycle, raising $90 billion dollars this week. Although yesterday's the 7 year note auction saw above average demand, MBS prices didnt budge from their current range. Seasonal effects are obvious on Wall Street as slow summer trading has provided some irrational price behavior lately.

This morning the U.S. Department of Commerce published Personal Income and Outlays data. This report provides three economic indicators. The first being personal income which represents the total dollar value of income received from all sources. Next is personal outlays which measures the monthly change in how much money consumers are spending. The final measure is the Fed’s favorite gauge for inflation, the Personal Consumption Expenditure(PCE). Since our economy is driven by consumer spending, market participants are very interested in consumer income and spending. A trend of increasing consumer income should lead to more spending and a more optimistic economic outlook.

The report shows that personal income in July was flat from last month after posting a large decline in June. On a yearly basis, personal income is down 2.4% which is improved over last month’s reading of -3.4%. Economists surveyed prior to this report expected to see a small increase in personal income. The consumer spending component of this report indicates that spending came in right on expectations, marking the second month in a row of increasing spending. The small move higher in spending is partly being attributed to the cash for clunkers program which helped to spark an increase in auto sales. With this government incentive now over, it will be interesting to see whether consumer spending will post a third consecutive increase next month. How about you? Are you out spending money or are you continuing to boost your balance sheet with savings?

As expected, the inflation part of this report continues to affirm that inflation is not a concern. Year over year, the core PCE index shows an increase in prices of 1.4% which is better than last month’s 1.5% reading. The fed’s comfort zone for core PCE is 1% to 2%, so we continue to see no signs of inflationary pressures. Since this report has come in basically in line with expectations, it is having no impact on the markets. If you would like to read more on this report. MND STORY

The final report of the week is a measure on consumer sentiment. A optimistic consumer is more likely to spend money while a pessimistic consumer is more likely to save. The Reuter’s/University of Michigan’s Consumer Sentiment index is a survey of 500 households each month on their financial conditions and attitudes about the economy. The last two surveys showed the consumer becoming more pessimistic after a few months in a row of increasing optimism. The report indicates that the consumer sentiment improved from last reading and came in higher than expected but still below the recent highs of a couple months ago.

Early reports from fellow mortgage professionals are showing slightly worse rate sheets this morning. The par 30 year conventional rate mortgage remains in the 4.875% to 5.125% range for the best qualified consumers. In order to secure a par interest rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs associated with the loan including one point loan origination/discount/broker fee.

As I have pointed out in prior posts, rates will always move higher quicker than they move loweR. Although stocks are due for a sell off which would be a positive for mortgage rates, one cannot rely on that assumption when deciding whether to lock or float. That said, as mortgage rates remain near two month lows....floating is risky.

If you have any questions regarding your particular loan situation, feel free to ask in the comments section. Many professionals read this blog and are willing to give you free advice. I would also like to thank the many readers who do comment and send me emails. I hope everyone has a great weekend!!

Mortgage rates haven't moved much this week as prices of mortgage backed securities continue to bounce around a range. Yesterday's highlight was the Treasury Department's successful 5 year note auction. Demand for the record tying $39 billion issuance was above average, allowing the rates sector to maintain their recent range heading into the close.

This morning the U.S. Department of Commerce reported that GDP was expected to fall 1.00% in the second quarter of 2009, this is no change to their initial GDP reading. GDP is an all encompassing measure of our country’s economic output. The initial estimate of 2Q GDP indicated that our economy shrank by 1.0%. Economists surveyed were expecting today's revision to show that our economy shrank more than initially reported. Since this report is backward looking and close to expectations, it is not having an impact on rates.To read more, click here.

The U.S. Department of Labor reported on weekly jobless claims this morning. This report totals the number of Americans that filed for first time unemployment benefits in the prior week. As part of this report we get continuing claims data which measures the number of Americans that continue to file for benefits due to lack of finding a new job. Recent reports have shown that the level of claims is easing, but are still stubbornly high. Today's release was 570,000 new claims, 10,000 less than last week's revised 580,000. The continuing claims dropped 19,000 to 6.13 million from 6.24 million last week. The positive news on the continuing claims front can be attributed to benefits expiring rather than people finding jobs. To read more, click here.

At 1pm eastern time, the Department of Treasury will conduct its final auction of the week with $28billion of 7 year notes being offered. As always with Treasury auctions, the size of the offering is known in advance so the key component for a successful auction is the demand. High demand for US debt especially from foreign investors helps to keep mortgage rates low. Matt and AQ will cover this on the MBS Commentary blog once the auction is complete.

Reports from fellow mortgage professionals indicate that the par 30 year fixed conventional mortgage rate remains in the 4.875% to 5.125% range for well qualified consumers. In order to secure a par interest rate on a 30 year fixed rate mortgage you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs associated with the loan including one point loan origination/discountbroker fee. If you are looking to secure a 15 year fixed rate mortgage you should expect a par rate of 4.375% to 4.625%. To qualify for a par 15 year fixed rate mortgage you only need a FICO credit score of 620, a loan to value at 80% or less and pay all closing costs including one point.

If you are attempting to access any equity from your home, you should expect your mortgage rate to be higher by about .25% (or you can pay additional fees to buy the rate lower). The higher rates on equity loans are due to the Loan Level Price Adjustment fees institituted by Fannie Mae and Freddie Mac. These igher fees apply to any conventional loan you choose from a adjustable rate to a 30 year fixed rate. For example, a consumer with a 740 credit score cashing out to 80% of the homes appraised value has to pay an additional fee of .50 on top of the other costs to secure a par rate. If the consumer has a 650 credit score, that fee sky rockets to 2.25 pts. (2.25 points on a $200,000 mortgage is an additional $4500 in fees!) These new LLPA fees make it even more important to make sure your FICO credit score is as high as possible. The best rates and lowest fees go to consumers with 740 and higher scores. If you would like to review these fees, you can check them out on Fannie Mae's website by clicking here.

I will continue to caution those who are floating their interest rate. MBS remain at the top of a trading range and have been unable to move any higher. Over the last few months we have seen the same pattern develop over and over. Mortgage rates move to 4.875%, test the top of the trading range, eventually moving lower causing mortgage rates to spike higher. At this point, even though stocks STILL appear to be on the verge of a selloff, you have more to lose than to gain by floating.

Home price report: Case-Shiller shows increase of 2.9%

• may be on the road to recovery.

As MBS prices fall, lenders are forced to raise mortgage rates.

On Monday, a global equity market selloff led domestic stocks lower. Investors who sold stock market assets then reallocated their funds into risk averse (safe) markets. This was of great benefit to Treasury and MBS prices. However, yesterday as the stock market rebounded from the selloff, a portion of the "flight to safety" funding that the Treasury market received on Monday was lost. Consequently MBS prices reacted negatively and the broad majority of lenders were forced to reprice for the worse. This moved the par 30 year fixed rate up to 5.00% from 4.875%.

In the overnight trading session Chinese stocks sold off and European markets followed suit which lead US stock futures lower. Overseas weakness resulted in another flight to safety rally in US bond markets which was ofgreat benefit to both the Treasury and MBS market again. However at the US open, the S&P quickly bounced off 880 and moved up to test a key resistance level at 990. Consequently Treasury and MBS prices moved lower. Currently we are watching the stock market for an indication of things to come for mortgage rates. If the S&P moves back above 990 and gains are held, it could mean bad news for mortgage rates.

The only economic report to be released today was the weekly Mortgage Bankers’ Association Applications index. This report measures the weekly change in mortgage applications at major lenders. An increasing trend in purchase applications would be a positive indicator of future economic growth since the purchase of a home will lead to other major purchases by the consumer. In addition, a consumer would have to feel pretty good about their own personal finances and economic outlook to take the major step of buying a home.

The report indicated that purchase applications increased by 3.9% during the week of August 14th marking the third straight gain in a row. Many other recent reports have also indicated that housing seems to be bottoming but have not turned the corner yet. The refinance activity also posted a healthy gain of 6.9% as mortgage rates have dipped lower. READ MND STORY

Many economists are attributing the increase in purchase applications to the first time home buyer tax credit. The American Recovery and Reinvestment Act of 2009 allows a tax credit of up to $8000 for qualified first time home buyers that are purchasing a primary residence. The purchase must take place between January 1, 2009 and December 1, 2009. You also qualify for this tax credit if you have not owned a home in the previous 3 years. This tax credit is equal to 10% of the home’s purchase price up to a maximum of $8000. There are income limitations to qualify. If you are single with a adjusted gross income over $95,000 or married filing jointly with over $170,000 no need to apply. Applying for this tax credit is easy by visiting the IRS and filling out form 5405. If you have more questions, the IRS also provides all the details regarding this program.

If you are considering buying a new home and you qualify for the first time home buyer tax credit...time is running out. I have spoken to some clients who want to wait to buy as they feel prices have a little more room to drop. That may be true but you must take other items into account. For example, today you can get a 30 year fixed rate mortgage around 5%. By waiting you take the risk of rates increasing and if rates go up by ½ percent, the home will cost you much more in the long run with the higher rate than if you waited for the price to decline.If you have been contemplating buying a home and you have not owned one in the past 3 years remember the $8000 tax credit is scheduled to go away by December 1st of this year.

Early reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage has fallen back to the 4.875% to 5.125% range for the most qualified consumers. If you are securing a 15 year fixed rate mortgage, you should expect a par rate between 4.375% to 4.625%. To secure a par interest rate you must have a FICO credit score of 740 or higher (if securing a 15yr fixed you only need a 620 score), a loan to value at 80% or less and pay all the closing costs associated with the loan including one point loan origination/discount/broker fee.


I will caution again anyone that is still floating an interest rate. We are back to sub 5% rates and history has shown that rates do not want to remain below 5% for an extended period. With the battle between the bulls and bears, the markets are very volatile and things can change quickly. As always, rates move higher at a much faster pace than they move lower. If you are within a closing window of 30 days, consider locking today. Tomorrow brings us first time jobless claims and the treasury announcement of the upcoming supply of treasuries to be auctioned. If jobless claims come in better than expected, the bulls will drive the stock market higher which can cause mortgage rates to move higher. In addition, the announcement tomorrow of 2yr, 5yr and 7yr notes that will be auctioned next week is rumored to be the largest amount of debt ever offered in a single week. This could apply pressure on Treasury and MBS prices to move lower.Mortgage rates lost some ground after prices of mortgage backed securities moved lower following a stock market rebound yesterday. To remind readers, as MBS prices appreciate, lenders are able to pass along lower mortgage rates.

In what was a volatile week, prices of mortgage backed securities moved progressively lower which unfortunately forced lenders to raise the par 30 year fixed mortgage rate from 4.875% up to 5.375% by week's end.

Fundamentally one can blame the perception of an economic recovery or better yet as we like to say...an avoidance of the worst case scenario, specifically depression. While stocks went sideways most of the week in anticipation of the release of the Employment Situation report on Friday, Treasury and MBS priced in the possibility that the data would be "better than expected". When the big day came and those speculative theories were confirmed, Treasuries and MBS continued to sell off and all lenders published the highest mortgage rates of the week. However, as the day progressed, MBS managed to recapture about half the losses which allowed some lenders to offer better pricing later in the day. In the week ahead the marketplace will be working with a clean slate. Stocks have returned to pre-October 2008 levels and the market is now looking for further proof that a recovery is indeed underway.

This week brings us several key pieces of data that will offer up guidance on the extent to which the economy has stabilized. Here is the Economic Calendar for the The Week Ahead.

Other Events of Interest...

Tuesday

1:00pm: The Treasury Department will auction $37 billion 3 year notes. Although there have been more reactions from the announcement of debt auctions, anytime the Treasury attempts to raise money can have an effect on mortgage rates. If demand is not high at this auction, mortgage rates may tick higher. If demand is strong, it signals a healthy appetite for risk averse assets, which is a positive for mortgage backed securities and mortgage rates.

The Federal Open Market Committee begins their two day meeting on monetary policy.

Wednesday

7:00am: Weekly Mortgage Bankers Association applications index is released. This index tracks the weekly change in applications at major lenders. As mortgage rates rose last week, we do not expect this index to indicate that borrowers are activley seeking new mortgage loans. However it would be a positive to see the number of purchase applications increase as the supply of homes on the market needs to dwindle if the economy is to efficiently recover.

1:00pm: The Treasury Department will auction $23billion in 10 year notes. The added supply of debt on the market will apply pressure on both treasury yields and mortgage rates to move higher. Strong demand for the securities can help MBS to improve but weak demand will almost certainly cause mortgage rates to continue the recent trend of moving higher.

2:00pm: The Fed will release their FOMC statement which will be scrutinized line by line by market participants for any hint at future monetary policy and their economic outlook. This statement provides market participatns with an outlook on economic conditions and sets the Fed funds rate. It is widely accepted that they will maintain status quo of the current rate between 0 to .25%.

Thursday

1:00pm: In the last auction of the week the Treasury Department will offer up $15 billion 30 year bonds. With US benchmark yields near summer highs and whispers of deflation still on the minds of many market participants, we are hopeful this auction goes well and mortgage rates tick lower after the results are released.

This week is all about confirmation of "better than expected" economic outlooks...or as we say an avoidance of the worst case scenario. Stocks are looking for reason to move higher with a conscious eye on profit taking while Treasuries and MBS will battle more debt on the market (auctions) and the possibility that attention on stock indices may lower demand for risk averse assets.

So far this morning, MBS prices are posting modest gains. This is allowing lenders to offer better pricing today than we saw on Friday. Early reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage is in the 5.25% to 5.5% range for well qualified consumers. In order to qualify you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including one point loan origination/discount/broker fee.

To continue a discussion from yesterday regarding good faith estimates and yield spread premium.  New legislation wants to eliminate yield spread premium (YSP) which is indirect compensation that is paid to the loan originator based on the interest rate they secure for you.  I quote on my blog par interest rates which would pay zero yield spread premium to the originator thus the reason you would be required to pay all costs including a point to secure that rate.   If YSP is eliminated, then no cost loans and no point loans will go away.  You as a consumer will lose the ability to decide whether you wish to pay closing costs or decide not to.  Our current government is eliminating many consumer choices such as the ability for you to decide who appraises your home with the passing of the Home Valuation Code of Conduct and quite possibly the elimination of no cost loans.

Here is an example of the benefits of ysp.  Let’s assume a particular client has excellent credit, mortgage amount of $200,000, home worth $300,000 and a rate of 6.5%.   Let’s further assume that the loan amount started at $210,000 making the P&I payment $1327 and they only intend to stay in home for 1 ½ years.   They could refinance today by paying closing costs including a point, totaling $5400 fees, to 5% making payment $1100.  Now, does it make sense for this client to pay $5400 in fees to save (1327-1100) $227 per month. Well, $5400 divided by 227 gives a break even point of 23 months.  So, if this client only intends to keep home for 18 months, it makes no sense for them to pay costs and get the 5% rate. 

Now, lets say they do a no cost loan at 5.875%.  This would lower payment to $1183 but no costs would be charged to the client since the higher interest rate will compensate the loan originator enough money to pay the closing costs for the client and still make a profit.  This also allows the home owner to take advantage of a lower interest rate and lower payment thus benefiting their family’s financial position and also the overall economy.  A lower payment allows them to have more money to spend in the economy and by refinancing they are also allowing many people to keep their job.   Here is a link to H.R. 1728.  What are your thoughts regarding this topic? 

Following better than expected manufacturing data, domestically and abroad, Treasuries and Mortgage Backed Securities sold off yesterday, returning all the gains mortgage rates enjoyed from Friday’s rally. The selloff in secondary markets moved the par 30 year fixed mortgage rate back over 5.00% after it reached 4.875% on Friday. Once again, rates fail to remain below 5% for an extended period of time.

We do have some data this morning that will affect the flow of investor money. The U.S. Department of Commerce released the monthly Personal Income and Outlays report. This data set tracks the monthly change in personal income which represents the income that households receive from all sources and personal spending. If income is rising, that is a positive sign of economic growth since consumers will have more money available to spend in the economy. Also, as part of this report we recieve a read on inflation with the Personal Consumption Expenditure (PCE) index. The PCE index is the Federal Reserves’ preferred gauge of inflation, it measures the monthly change in price of a basket of goods and services.

Last month’s report indicated a surge in personal income of 1.4%, this increase was mostly a function of one time payments generated from the Obama’s Administration American Recovery and Reinvestment Act of 2009. Following last month’s surge, personal income was expected to post a decline of 1.1% while consumer spending was expected to increase by 0.3%. Lastly, the PCE index was expected to indicated a 0.2% rise in consumer prices following last month’s 0.1% increase.

Actual data indicated that personal income fell 1.3% while spending increased 0.4%. On a year over year basis, income is down 3.4% and spending is down 2.2%. On the inflation front, the core PCE index came in right on expectations at 0.2%, making the year over year reading of 1.5% well within the Fed’s comfort zone for inflation...providing further evidence that inflation is not an immediate concern. The increase in consumer spending is attributed to a surge in gasoline prices. Today’s report shows that Americans are making less but spending more due to rising commodity prices.

The last piece of economic data today was a read on the real estate sector...the National Association of Realtors’ (NAR) Pending Home sales index. A pending home sale is one in which a contract has been signed but the loan has not closed. With tougher underwriting conditions, a weak labor makretm, and falling home prices (HVCC) many sales are not closing. Since many economists believe that our economy will not recover until housing stabilizes, this report carries more weight than usual.

May's reading came in pretty much unchanged from the prior month, implying that housing was beginning to stabilize. Today's release has indicated that pending home sales for the month of June posted a month over month increase of 3.6%, beating expectations. This was the fifth straight month of improvement, but the first noticeable increase in that time fram. We must remember a pending home sale does not equal an actual closed sale as was pointed out by the NAR President Charles McMillan. Immediately following the release, MBS have given back all of their early morning gains and have fallen lower than the lowest levels seen yesterday as investors have more ammo to support the green shoots economic recovery theory.

I do receive quite a few good faith estimates from readers asking me to review to make sure they are getting a fair offer. First, GFE’s are 2 to 3 pages in length which contain numbered lines from 100 to 1400. The most important part you want to check to make sure the offer you are getting is competitive is the 800 lines. Third party and origination fees are listed in this section. Here are a few examples of third party fees: appraisal, credit report, tax service, MERs, condo warrants, and flood certifications. Here are a few examples of origination fees: origination fee, discount points, processing fee, underwriting fee, administration fee, broker fee (if you use a broker), and application fee. These are the fees you need to check on to see how competitive your offer is when shopping interest rates. A very typical good faith estimate will show 1 point loan origination, a processing fee of $500 and lender fees of around $900 (this varies from lender to lender and often times are just another name for processing and underwriting fees). If the quote you received does not include these fees than you are being premium priced. This means the lender or broker is building your costs into your rate instead of charging them upfront. This practice is under scrutiny at the moment and may be banned if HR 1728 is passed.

After the better than expected Pending Home Sales Data was released, lenders repriced rate sheets for the worse. Consequently increasing the par 30 year conventional rate mortgage to the 5.125% to 5.375% range for well qualified consumers. In order to secure a par interest rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including one point loan origination/discount/broker fee. As always, you can elect to pay less in fees but your interest rate will be bumped higher. To remind readers securing a mortgage rate is like buying anything else, the more you pay the better the rate.

www.equityinvestmentcapital.com

Last week mortgage rates were up, then they were down, then they were up again, then on Friday they finally moved under 5% again. Following a successful auction of 7 year notes on Thursday and weaker than expected economic data on Friday many lenders repriced for the better...bringing mortgage rates barely below 5.00%. However, in what has become a consistent pattern lately, each time rates break the 5% barrier they do not remain there very long., and guess what...so far this morning, that trend looks to be continuing.

Last night, manfucturing data came in better than expected for the Eurozone and China sparking a global rally in stocks which applied pressure on Treasuries and mortgage backed securities to move lower in price. To remind readers, when MBS and treasuries move lower in price, yields (interest rates) move higher.

We do have some economic data this morning which will dictate the flow of investor money for the rest of the day. First out this morning is the Institute of Supply Management’s Manufacturing index which measures the strength of manufacturing by surveying more than 300 manufacturers across the U.S. Each of the last four readings of this survey has indicated an easing of the current recession which is helping to spark the green shoots theory of a quick economic recovery. This sentiment has helped the stock market to move considerably higher over the last couple months. The report has indicated that manufacturing continues to improve coming in at 48.9 beating estimates of 46.5. This better than expected data will provide further support to the green shoots theory and will continue to pressure MBS to move lower. READ MORE

Also out this morning is the monthly Construction Spending report which shows the month over month change to the dollar value of new construction activity on residential, non-residential and public projects. Last month’s report showed construction spending declining 0.9% after gaining 0.6% in April. Expectations for June was for further weakness with a decline of 0.5%. An increasing trend on construction spending would lead to more construction jobs and increased spending, both positive news for economic growth. When a home or office is built there are many things that must be purchased to complete the project. So, when construction spending is increasing, we usually see the stock market rally. The actual report has indicated that construction spending increased last month by 0.3% beating estimates of further declines. This report will also pressure MBS to move lower. READ MORE

For a look at what will move investor money for the rest of the week, Week Ahead. The highest impacting events this week will be the Treasury announcement on Wednesday of the size of the upcoming auction next week of 3 year notes, 10 year notes and 30 year bonds and the Employment Situation report on Friday. This report is the single most influential economic report released on a monthly basis.

Early reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage is in the 5.000% to 5.250% range for the best qualified consumers. Early weakness with MBS has resulted in lenders reissuing new rate sheets. The strength in equities is resulting in market participants selling their low yielding, safe fixed income investments in favor of stocks.