Good Morning Everyone and Happy Friday! Wow, what a week it has been in equity markets and subsequently, the bond market. Yesterday's over 500 point drop on the Dow was the largest in 2 years, and this week's more than 7% drop in the stock market is the worst since the fateful market plunge of November 2008. A refi boon appears to be well in full swing. The selloff in global markets has erased more than $4.5 trillion in equity values since July 26.
As you know, bad news in equities means good news for mortgage rates. We've not seen the yield on the 10 year Note this low since last Fall. Speaking of refinances, Freddie Mac released the results of its 2nd qtr refinance analysis yesterday and the results are worth noting. In the Q2 of 2011, 77% of refinances of 1st trust liens maintained about the same loan amount or lowered their principal balance by paying-in additional money at the closing table.
According to the report, cash-out transactions accounted for only 23% of all refinance loans, compared to the average cash-out share during the 1985 to 2010 period which was 46% -- a telling sign of how borrowers are holding on to whatever equity they have. Also, the median interest rate reduction for a 30-year fixed-rate mortgage was about 1 percentage point.
Bank of America was in the news yesterday publicly complaining about how the GSE's Fannie Mae and Freddie Mac were changing the rules on purchasing loans from them. The "ever evolving" behavior of the GSE's has caused BofA to suffer increased claims. The behavior of the GSE's "is evolving in a way that diverges from our longstanding course of dealing with them" said Larry DiRita, a bank spokesman. BofA has already spent about $30 billion in settlements and writedowns to clean up mortgage liabilities since Ken Lewis stepped down as CEO last year.
This ever changing mortgage industry is a real uncertainly for investors as big banks continue to take on more water. Unfortunately, it has quite an impact on underwriting and fear for underwriters as they don't want to be responsible for a loan not being purchased. As far as the industry goes as a whole, this drop in rates is well overdue and may help us pull out, in terms of volume, a dismal year into at least a respectable one.
I hope you all have a terrific Friday and a very restful and relaxing weekend.
