Medicare/Social Security Underfunding. Tougher FNMA Guidelines.

Rate Watch #695 Medicare/Social Security Underfunding. Tougher FNMA Guidelines Coming Soon

November 6, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

Product	Rate	Points	Est. APR*
CONFORMING LOAN PRODUCTS (Loans less than $417,000)
30 Year Fixed conforming
	4.875%	1.00	5.04%
	5.125%	0.00	5.22%
15 Year Fixed Conforming
	4.5%	1.00	4.67%
	4.75%	0.00	4.85%
JUMBO CONFORMING (Stimulus) LOAN PRODUCTS (Loans greater than $417,000 and less that the new amount for your county)
30 Year Fixed Stimulus
	5.75	0	5.85
	5.375%	1.0	5.55%
15 Year Fixed Stimulus	4.875%	0	5.00%
	4.625%	1	4.85

* conforming loan limits for 2009 are:

1 unit $417,000
2 units $533,850
3 units $645,300
4 units $801,950

Note that the above table now means something different than it used to. "Conforming" now mean "traditional conforming" (<$417,000 for SFR is the new jumbo-conforming which depends on county. You can find the new Jumbo-conforming limit for your county here. That page says "FHA" but those amounts also pertain to FNMA & FHLMC.

You must not read these as quotes because the rate and price which you will get depends on your precise situation and is affected by but not limited to the following factors: credit scores, property type, occupancy, income, value of property, length of time of the rate lock, whether of not values in your area are declining.

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II) Fundamentals

The BLS Employment Situation Report shows a loss of 190,000 jobs in October. Goods Producing jobs took a large hit. Only Education and Health (+45,000) and Professional & Business Services (+18,000) were up. The Unemployment rate rose to 10.2%. Crossing the 10% line may serve to erode consumer confidence. We are now a that phase in the economic recovery cycle where GDP is expanding and jobs are being lost and the average guy is confused. He is confused because he was not adequately informed about how economic cycles work. Jobs lag GDP. That is the way things happen.

Initial Jobless Claims were 512,000 last week. This is better than consensus and previous but still bad. Worker Productivity (GDP/hr worked) was up 9.5%. This is not the result of technology but of downsizing. Companies are getting as much produced with fewer workers. This, presumably, benefits the bottom line. Layoffs have been aggressive and hiring will be slow during the recovery in GDP. Some of those who lost their jobs do not have the skills for new jobs. Labor participation is going to be constrained by slowing birth rates and the demographics of a aging labor force. This may prove to be something other than "just another recession".

Factory Orders were +0.9%. This led a Bloomberg reporter to say "Orders placed with U.S. factories rose in September for the fifth time in six months, reinforcing signs that manufacturing will drive the economic recovery". Huh? The U.S. economy is a service based economy. Pending Home Sales +6.1%, ISM Index 55.7%, Construction Spending +0.8% - all are above consensus.

The SurePayroll monthly Small Business Scorecard survey shows: hiring up slightly (a 2.2% increase year-to-date), salaries down 7.3% and optimism down. Small business salaries are down so significantly because these are companies where the owners tend to take large pay cuts in hard times.

What is in fact happening us that large business are becoming more profitable but small businesses have not gotten the attention of the government and continue to hurt. The significance of this is that it is these small businesses which do the actual job creation and the implication is that economic recovery will be slower because the attention of the government has been elsewhere.

The report also shows the consistent correlation between average paycheck and number of jobs. Business are moving from high costs states to lower cost states. This has not gone unnoticed here in California.

The FOMC report revealed nothing new. Same story - increased GDP, no increase in jobs. The interesting thing is that the Fed is still saying that it plans of stopping its purchases of FHLMC/FNMA debt at the end of 1stQ2010. I do not believe that can happen without disastrous increases in mortgage rates and savaging of real estate prices in the high-value conforming counties.

III) The Technicals

The techs are bearish and we are likely to see higher Treasury yields and mortgage rates for at least 10 weeks. There is so much underlying angst in markets that the techs are probably not as useful at present than in times past.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

I am just going to slip this in here and try to comment on it at some later date. This is an interesting article by Nouriel Roubini a professor at NYU. Roubini is one of those people who is capable of generating some original thought. This piece makes the case that investors are borrowing at low rates, shorting dollars and making risky investments in foreign assets as well as driving up commodity prices. He states that this will come crashing down.

Investors short the dollar to buy high yielding and highly leveraged global assets. The problem of course is that when everyone tries to sell those assets those asset prices will crash and then dollar will rally.

This is a risk stemming from low interest rates. While the Fed is keeping interest rates low to spur economic growth when these speculative bubbles burst we will hear that it was the Fed's fault for keeping interest rates so low for so long. These "dollar carry trade" speculative investments are a side effect of low rates. This can create further economic disruption. Attempts to alter fiscal policy to quash speculation have been unsuccessful in the past.

Read Roubini's piece. Even if this is not precisely what will happen it does give insights.

One more word on health care reform. Read this speech by Richard W Fisher of the Dallas Federal Reserve delivered here at the Commonwealth Club in SF last year. The present underfundings of social security and Medicare are not small and are not large - they are massive. The present value of the shortfalls over the next 75 years is $34 trillion. That means that unless we increase premiums or decrease benefits we would have to put $34 trillion into it today to pay what is promised.

Could someone please explain to me why we are even thinking of expanding health care coverage when we are not even close to adequately funding the present system?

V) New FNMA Guidelines

There may be a new force which will soon undermine housing value. FNMA is making their underwriting more strict. We can get FNMA on-line underwriting done with something called Desktop Underwriter (DU). This is a great tool because it gives us an idea of what we need to close a loan. FNMA will issue a new release of this on December 12. It appears that the biggest concern is that debt ratio are stricter than they once were. In the past I have gotten approvals with debt ratios above 60%.

The new FNMA guidelines call for a max debt ratio of 45% with allowance to 50% with strong compensation factors. The expression "strong compensation factors" is not defined but I would guess that the two big compensating factors are high credit score and low loan-to-value.

The bottom line here is that anything with a debt ratio over 50% will no longer be sellable to FNMA and anything over 45% could be problematic. This will translate into fewer qualified borrower/buyers.

There are some additional restrictions. Two unit properties (like my house) have more strict LTV and CLTV guidelines. Trailing spouse income will no longer be counted. This is damaging to people who are relocating.

There are tougher guidelines about credit scores and documentation but from what I can see the 45% debt ratio is the 1,000 pound gorilla.

While the goal presumably is to make FNMA/FHLMC securities of higher quality and attractive to investors I don't know if folks are aware of what the effect will be on housing values.

If you have something to add to this discussion please post a comment on the blog.

 

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Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

Comments

[Neal]

Dick,

"Could someone please explain to me why we are even thinking of expanding health care coverage when we are not even close to adequately funding the present system?"

The short answer is that politicians are rewarded for spending, not saving. At most, they care only about what happens on their watch. Plus, there's the Democrats general belief that all social problems must be solved by government programs.

[Dick Lepre]

Neal,

I do not see this as a Democrat v Republican thing. Bush created the Medicare prescription program. To me ignoring this is akin to planning a vacation next summer when a large comet is about to strike the earth in a month.

One more point. I made a mistake in the original post. The $34 trillion is Medicare A only. The total underfunding forn all 3 programs is $85.6 trillion.

[Antivirus_man]

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