Mortgage Stocks Rebound Slightly, But GSE Concerns Linger

Many major players in the residential mortgage market remained on financial thin ice this week as last week’s government closure of IndyMac Bank and lingering concerns about Fannie Mae’s and Freddie Mac’s ability to weather the ongoing mortgage crisis continued to spook investors. Yesterday, financial stocks saw a rebound as mortgage lending giant Wells Fargo posted better than expected second quarter results.

Despite the small uptick, most mortgage-related stocks remained at very depressed levels. Together the two government-sponsored enterprises have watched more than $50 billion of their market capitalization vanish this year. And in a sign of the times, Fannie Mae is now worth 20 percent less than Bed, Bath and Beyond in terms of market capitalization.

GSE Relief Plan Gets Mixed Reception in Marketplace, on Capitol Hill

The Bush administration moved decisively on Sunday night to announce a financial aid package aimed at restoring investor confidence in U.S. mortgage giants Fannie Mae and Freddie Mac. But the plan, which would require Congress to quickly pass emergency legislation, received mixed reactions this week both in the capital markets and on Capitol Hill. In the capital markets, the announcement of a government plan to provide Fannie and Freddie with an unspecified amount of liquidity and/or capital on a temporary basis helped to improve pricing on the government-sponsored enterprises’ debt and MBS. But it did nothing to halt a freefall in Fannie’s and Freddie’s stock prices.

Meanwhile, lawmakers questioned the wisdom of giving the Treasury Department a blank check to buy GSE obligations – including stock – even on a temporary basis. They also questioned whether the Federal Reserve Board should be stepping in to help regulate Fannie and Freddie under the Treasury plan.

IO Sales to the GSEs Fall Again in Second Quarter

Sales of interest-only mortgages to Fannie Mae and Freddie Mac continued to decline in the second quarter of 2008, according to the Inside Mortgage Finance MBS Database. Lenders sent $19.1 billion worth of the mortgages to the government-sponsored enterprises in the quarter, a 65.1 percent drop compared with the peak volume seen in the same period in 2007. Fannie purchased 52.4 percent of the mortgages in the most recent period.

Housing Legislation Inches Toward Passage in Congress

Omnibus housing legislation stalled in the Senate could be approved by the end of this week. The bill has been held up by parliamentary maneuvering, which is expected to be resolved shortly. However, the new head of the Department of Housing and Urban Development expressed some concern this week with the legislation, particularly about a provision that would place a moratorium on risk-based pricing.

Democrats and Republicans are also still at odds over permanent conforming loan limits, a controversial proposed tax credit, the timing for the establishment of a new regulator for the government-sponsored enterprises and a new FHA program to help troubled borrowers.

Despite Tightened Underwriting, Fannie/Freddie Volume Climbs

Fannie Mae and Freddie Mac continued to dominate the residential mortgage business in the first half of 2008. But the imposition of significantly tougher underwriting standards could limit the government sponsored enterprises’ activity in the balance of the year.

According to numbers compiled by Inside Mortgage Finance, Fannie’s and Freddie’s combined mortgage business jumped a healthy 15 percent in the first six months of the year. Much of the growth came from Fannie, who posted a huge 24 percent jump in volume on a year-over-year basis. Freddie, meanwhile, saw a much more modest 5 percent increase in business volume.

The GSEs’ tightening of underwriting was very apparent in the second quarter as both firms saw lower loan-to-value ratios and higher FICO scores. Fannie’s average LTV was 71.3 percent and average FICO was 737.6 in 2Q08. Freddie’s average LTV was 70.5 percent and average FICO was 741.8 for the period.

FICO, LTV Requirements Biggest Obstacles to Getting GSE Loans

Not being able to meet higher credit score and lower loan-to-value requirements are currently the biggest impediments for borrowers looking to utilize Fannie Mae’s and Freddie Mac’s mortgage programs. That’s one of the findings of a new survey sponsored by Inside Mortgage Finance and conducted by Campbell Communications last month.

The report, “How to Do More Business with Fannie Mae and Freddie Mac,” is based on a survey of more than 3,100 mortgage originators – including mortgage bankers, mortgage brokers and correspondents. “Easy access to automated underwriting” was the most significant reason for placing borrowers into Fannie programs, while “rates and terms” was the most popular reason for selecting Freddie’s programs. Click here for more info.