The Labor Department gave us July’s Producer Price Index (PPI) this morning, saying that the overall index fell 0.9% and that the core data reading fell 0.1%. Analysts had predicted a 0.2% decline in the overall reading and a 0.1% rise in the core data. This means that prices at the producer level of the economy were much weaker than expected. That indicates that inflationary pressures at that level are not a concern at the moment, making long-term securities such as mortgage related bonds more attractive to investors. Unfortunately, traders seem to be more concerned with the stock markets than today’s economic news.

The second report of the day was also favorable for bonds, but it is much less important than the PPI reading. The Commerce Department said that starts of new homes fell last month, hinting that the housing sector may not be as ready to recover as some analysts had thought. Many market participants were expecting to see an increase in stats of new homes. A weak housing sector if favorable to bonds because it makes a broader economic recovery less likely in the immediate future.

There is no relevant economic data scheduled for release tomorrow, so look for the stock markets to again influence bond trading and mortgage pricing. If the stock markets can hold this morning’s gains and move higher tomorrow morning, there is a pretty good possibility of seeing mortgage rates inch higher tomorrow. But if we see stock weakness, bonds may benefit, pushing mortgage rates lower.

Thursday’s primary data is July’s Leading Economic Indicators (LEI) from the Conference Board. This index attempts to measure economic activity over the next three to six months and is considered to be moderately important. A higher than expected reading is bad news for the bond market because it indicates that the economy may be strengthening more than thought. However, a weaker than expected reading means that the economy may not grow as much as predicted, making stocks less appealing to investors. This also eases inflation concerns in the bond market and could lead to slightly lower mortgage rates Thursday if the stock markets remain calm. Current forecasts are calling for an increase of 0.6% in the index, indicating economic growth over the next couple of months.

If I were considering financing/refinancing a home, I would…. Lock if my closing was taking place within 7 days… Lock if my closing was taking place between 8 and 20 days… Float if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now…

AP

The clock is ticking fast. Qualified borrowers need to have house offers accepted by the end of September to assure lenders enough time to beat the Nov. 30 federal deadline to close deals, industry executives said.

“I am willing to settle for something” to finish buying quickly, said 20-year old Kielar, who works at the Denver County Jail, and is a part-time student. The tax credit carrot “is speeding up the process,” she said, adding that “$8,000 could help remodel the house, redo carpets and cabinets.”

For loans backed by the Federal Housing Administration (FHA), which require a minimum 3.5 percent downpayment, the $8,000 can be also be applied upfront toward the purchase rather than later on tax returns like other mortgages.

The National Association of Realtors projects 350,000 additional first-time buyers will own homes thanks to the tax credit, said spokesman Walter Malony.

First-time buyers are injecting life into the most severely battered housing market since the Great Depression.

Home sales have risen for three straight months, a ray of hope after three years of tumbling sales that swept prices down more than 30 percent on average and drove record foreclosures.

The state of housing is critical to the overall economy. While stabilizing, housing is unlikely to quickly recover as long as unemployment stays at the highest rate in more than a quarter century, most economists agree.

But various federal stimulus offers, mortgage rates that sank to record lows in April and pockets of economic strength make home buying more fathomable.

Odete Gomes, a 30-year old women’s wholesale clothing buyer in New York City living with her parents and six-year old son, said the soon expiring tax credit “kicked me in the butt to not lose this opportunity” to buy her first home.

“Especially now with the government helping you a little bit, you just gotta go for it,” she said.

Affordability, Obstacles

Average 30-year home loan rates of 5.29 percent in the past week were above the all-time low of 4.78 percent set in April, but much lower than 6.52 percent a year ago, said home funding company Freddie Mac.

Rigid credit standards will prevent the type of wholesale lending that fueled a record home sales and price spree early this decade.

Still, distressed prices, plenty of available properties and low borrowing costs should keep housing from falling apart anew once the home buyer credit disappears, said Gregory Miller, chief economist at SunTrust Bank in Atlanta.

“These programs are giving housing a boost,” he said. “When the tax credit expires, the housing market should have even more legs under it” and gain traction on affordability.

“Housing is on a sustainable path,” Miller added. “We have those who wanted to buy before but couldn’t afford the price, and those who would have bought before but couldn’t sell the existing house. Both of those groups are lined up to buy now.”

The real estate industry is making a full-court press to get the Obama administration to extend the program, though health care and other priorities may derail those efforts.

Realtors said many borrowers remain unaware of the credit and its expiration date.

“There needs to be an extra rush by buyers, because the transactions need to close by Nov. 30 and that will put some types of transactions in peril,” said Sherry Chris, president and chief executive of Better Homes and Gardens Real Estate in Parsippany, N.J.

Once aware, some potential first-time buyers, who tend to be younger and have less savings, will be unable to clean up their credit enough to get loans approved for the deadline.

Documentation has intensified since the financial crisis spawned by massive losses on loans made when standards were lax. The process has been prolonged as a result.

Gomes, who with a friend is buying a new $280,000 home in Newburgh, New York with an FHA loan, has an estimated closing date of Sept. 30, almost two months from purchase commitment.

Some transactions, including foreclosures and short-sales, take much longer to complete.

Property owners are also expected to sweeten offers to lure potential buyers to capitalize on demand spurred by the tax credit in its final stages.

The Home Valuation Code of Conduct has been a thorn in the side of many mortgage originators, real estate agents…and borrowers. Last week,the Federal Home Finance Agency published some clarifications regarding our HVCC “misconceptions”

Here’s what they had to say:

“Misinformation has been circulated about the content of the Code and some have tried to cite the Code as the source of unrelated market dislocations. FHFA believes that the Code is serving the intended purpose and will continue its oversight role both as to the implementation of the Code by the Enterprises and its market impact.”

Communications with appraisers– Contrary to some suggestions, the Code provides for communications with appraisers about errors, additional needed information and unprofessional conduct. Quality control personnel may communicate with appraisers and other lender personnel, outside of the loan origination function. The real bar is on communications that seek to influence the appraiser to adopt a set valuation, which is prohibited.

Low appraisals— Contrary to some suggestions, the Code does not lead to lower appraisals for property. The Code insulates appraisers from pressures that led to higher or lower appraisals and should now lead to more accurate valuations. This is in everyone’s interest. Declining home prices began long before the deployment of the Code and relate to many other factors. Current efforts at mortgage market stabilization are a central focus at FHFA and the Enterprises, but that needs to be achieved by keeping borrowers in their homes, not urging appraisers to improperly overvalue homes.

Appraisal management company (AMC) role— Contrary to some suggestion, the Code does not favor the use of AMCs over independent or in-house appraisers. Significantly, for the first time, the Code places the same requirements for appraiser independence on AMCs as the limits placed on lenders. Lender use of AMCs was increasing prior to the Code and one of the key goals and results of the Code was to strengthen appraiser protections when engaged by AMCs.

Unqualified or out-of-area appraisers– The Uniform Standards of Professional Appraisal Practice (USPAP) requires that an appraiser be competent and knowledgeable of the local market to perform an appraisal. In addition, in reinforcing USPAP, the Enterprise appraisal guides require appraisers to have knowledge of the local market. The use of unqualified in-state or out-of-state appraisers, unfamiliar with local conditions, should be reported to state appraiser licensing agencies.

Increased costs at closing— Closing costs have risen in some instances, but that has not been a function of the Code. Lenders have tightened underwriting standards, often requiring additional comparables by appraisers and even requiring second appraisals. Market investors have focused on reducing fraud and sought greater assurances about valuations. Appraisers have been working hard to meet these requests.

Turnaround times for appraisals— The Code may initially have slowed appraisal time as it was being implemented. However, there are other reasons for turnaround time changes; these include increased demands by lenders, the efficiency of a particular lender’s underwriting process and the workload of appraisers. The Code’s appraiser independence standards are critical for accurate valuations, a lesson learned in the current market crisis. Assuring a good appraisal is in the borrower’s interest. As the market adjusts to new underwriting standards, including those for appraisals, more efficiency will reduce turnaround times.

Transferring an appraisal – Contrary to some suggestions, appraisals are transferrable between lenders under the Code. Transferring an appraisal may obviate the consumer’s need to pay for a new appraisal should the first lender deny the loan. Whether a lender decides to transfer or
accept an appraisal, however, is up to the lender, and is not related to the Code. Lender discretion in this area predated the Code.

I am not sure how I feel about how the FHFA worded their press release, specifically:

“Misinformation has been circulated about the content of the Code and some have tried to cite the Code as the source of unrelated market dislocations”

From Freddie Mac HVCC FAQ:

Are lenders permitted to use appraisers who have been selected or retained by a mortgage broker or real estate agent?
No. The Code specifically prohibits lenders from accepting appraisal reports completed by an appraiser selected, retained or compensated in any manner by mortgage brokers and real estate agents

So HVCC is not to blame for deals I have lost due to poor valuations from AMC appraisers? HVCC is not to blame for brokers having to use AMCs? Who is to blame? Is it the broker’s fault just because they are a broker?

Following this press release, Fannie Mae and Freddie Mac published new FAQ’s to help cleap up some of the confusion regarding the GSE’s application of HVCC guidelines. Here are a few updated from FANNIE MAE’s FAQ and FREDDIE MAC’s FAQ

The Code requires the lender to provide the borrower a copy of any appraisal report concerning the borrower’s subject property promptly upon completion. In this instance, what is meant by “completion”?
The word “completion” is meant to reflect when the lender has reviewed and accepted the appraisal to include any changes or corrections required.

How do lenders determine the correct process for selecting an appraiser?
Sellers must comply with the following requirements related to the selection of an appraiser:

Sellers must select appraisers in compliance with the terms of the Code

Appraisers must be certified or licensed in the state in which the property is located, and must be eligible to perform appraisals in that state

Appraisers must be familiar with the local market in which the property is located, must be competent to appraise the subject property type, and must have access to the data sources needed to develop a credible appraisal

Are processors, closers, secondary marketing employees, underwriters, etc. permitted to order appraisals if they do not receive commission or incentives to close loans, but they ultimately report up to a senior-level employee who is responsible for loan production?
The Code states that members of the lender’s loan production staff who are compensated on a commission basis or who report to any officer of the lender not independent of the loan production staff and process are not permitted to order appraisals or influence the selection of appraisers. Ideally, a Seller should establish complete separation of appraisal activities from loan production activities. At an absolute minimum, the degree of separation should be no less than one level up in the reporting structure. To mitigate any potential conflict of interest due to reporting relationships, Sellers should establish, maintain, and enforce written policies and procedures that are designed to reinforce independence

Does the Code change any of Fannie Mae’s requirements regarding the role of the appraiser?
No. The Selling Guide requirements for the appraiser remain at their same high level. Fannie Mae requires the appraiser to provide complete and accurate reports; to report neighborhood and property conditions in factual and specific terms; to be impartial and specific in describing favorable or unfavorable factors; and to avoid the use of subjective, racial, or stereotypical terms, phrases, or comments in the appraisal report. The opinion of market value must represent the appraiser’s professional conclusion, based on market data, logical analysis, and judgment.

Additionally, it is important to note that when an appraiser signs Fannie Mae’s residential appraisal report form, the appraiser is also certifying the following:

“I have knowledge and experience in appraising this type of property in this market area.”
And
“I am aware of, and have access to, the necessary and appropriate public and private data sources, such as multiple listing services, tax assessment records, public land records, and other such data sources for the area in which the property is located.

Does the Code prohibit appraisers from reviewing reconsideration of value requests?
No. Reconsideration of value requests that are based on correcting objective, factual errors (such as incorrect square footage, incorrect number of rooms, etc.) are permissible under the Code.
Who on the lender’s staff, or on the staff of an authorized third party, may have communications with an appraiser relating to or having an impact on valuation, including ordering or managing an appraisal assignment?
Anyone who is not part of loan production staff or who is not compensated on a commission basis upon successful completion of a loan or anyone who does not report, ultimately, to any officer of the lender not independent of the loan production staff or process, may have communications with an appraiser relating to or having an impact on valuation, including ordering or managing an appraisal assignment.

Does the Code prohibit the appraiser from talking with the Realtor involved in the subject transaction? Can the Realtor provide comparable data and/or explain their pricing strategy to the appraiser?
The Code does not prohibit the appraiser from talking with the Realtor; Realtors can often be a source of data in the market in which the subject property is located. Any data provided by a third party

Does the Code require lenders to select appraisers on a rotational basis to perform appraisals?
No. Lenders may choose to use a rotating roster of appraisers, but this is not a requirement of the Code.

Does the Code prohibit the use of foreclosures as comparable sales?
No. The Code does not address the use of foreclosures as comparable sales nor does Freddie Mac require appraisers to use Real Estate Owned (REO), foreclosures, or short sales as comparables sales. However, if the appraiser determines that REOs, foreclosures, or short sales are representative of the properties available to typical purchasers for the market in which the property is located, appraisers must consider their use.

NAR thought these updates were a good step in the right direction but they also stated that…

“NAR has asked Congress and the FHFA to immediately implement an 18-month moratorium on the new HVCC rules to further address unintended consequences of this new rule. We will continue to push for this, but are pleased that this first step was taken today.”

I suppose slow and steady progress is better than no progress at all ?

So far today, MBS prices are lower but slowly moving back towards flat on the day. Treasuries are the driving force behind lower MBS prices with the benchmark 10 year note yield rising to an intraday high of 3.76 before falling back to 3.72. If you recall, on Wednesday, the 10 yr TSY note was trading well under 3.48%. Rising benchmark yields today are a result of record Treasury debt auctions this week. Since MBS and treasuries are both a fixed income investment, they tend to move in ssame direction, so because Treasuries are selling off, MBS prices have been pressured lower too. 

HERE is a recap of what will move markets in the week ahead.

Reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage is in the 5.25% to 5.375% range for the best qualified consumers. In order to meet the criteria of best qualified 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 1 point loan origination/discount/broker fee. 

Thoughts on the HVCC updates?

The dust-up is a reaction to the new Home Valuation Code of Conduct (HVCC) for mortgages securitized or held by Fannie Mae or Freddie Mac. The new rules prohibit real estate agents and mortgage brokers from hiring the appraiser. The mortgage lender is now in charge of that part of the loan process; the lender can use an in-house appraiser to handle the evaluation or farm it out to an appraisal management company. New York Attorney General Andrew Cuomo pushed through the new regulation as settlement of a 2007 lawsuit that accused mortgage lender Washington Mutual (now subsumed by Chase) of a far-too-cozy relationship with an appraisal management company that used appraisers who were happy to sign off on inflated valuations.
Realtors, builders and mortgage brokers insist this corrective measure has swung the pendulum to the other extreme, threatening any chance of a meaningful real estate rebound. Their main gripe seems to be that lenders are relying more on appraisal management companies as middlemen to handle the assignment and execution of appraisals, and the companies — according to the howlers — are assigning appraisers to neighborhoods and entire regions they are wholly unfamiliar with. That then leads to lower appraisals, they say, since only a local would be able to understand the nuances of that particular market.
Another oft-heard lament is that the out-of-town appraisers pull up any old comparable, including foreclosures and short-sales, thus distorting home values. That definitely sounds like some bellyaching from the real estate lobby. If there are recent sales of foreclosed and short-sale properties that are in comparable condition to a “regular” sale (or refinance), how is the value of that property not a rational comparable? Indeed, in a July 10 release, Freddie Mac said distressed properties are fair game, when appropriate:
“Freddie Mac does not have requirements about what comparable sales the appraiser is to use. For example, we do not require appraisers to use Real Estate Owned (REO), foreclosure or short sales. However, if the appraiser determines that these are representative of the properties available to typical purchasers for the market in which the property is located, appraisers must consider their use.”
Notice that last part about “must consider their use.”
Now that’s not to say the new HVCC is perfect. Bankrate’s Holden Lewis makes the case that it may not be great policy to let one attorney general in one state set national policy. And anecdotal reports indicate that appraisal costs have risen 30% or more since the introduction of the HVCC.
But I’m not buying one solution floated last week: A bipartisan bill was introduced in the House that would impose an 18-month moratorium on the enforcement of the HVCC, during which time various entities (state, federal) aided by the powerful real estate lobby could hash out some new and presumably better iteration of the HVCC. In the meantime, are we supposed to just roll back the rules to exactly the way they were when we got ourselves into this mess? That’s a solution?
Here’s what I want to know: Among those of you who are trying to buy or refinance, do you feel you have gotten a fair shake on the appraisal? I’m not asking if you liked the appraisal, but whether you think it fairly reflects the current value of homes in your neighborhood.

Neither of today’s economic releases have enough influence to lead to this morning’s stock strength and bond weakness. I suspect the selling in bonds is much more of a result of the stock gains as investors sell bond holding and shift funds into stocks. Whether this is temporary or a trend is yet to be seen. But I am staying on the cautious side towards mortgage rates as it appears there is more room for bonds to fall, at least short-term.

Tomorrow’s only relevant economic data is the final revision to July’s University of Michigan Index of Consumer Sentiment that will help us measure consumer optimism about their own financial situations. This is important because rising consumer confidence means that consumers may be apt to make large purchases in the near future. This adds fuel to the economic recovery and is looked at as bad news for bonds. It is an update to the preliminary reading we saw two weeks ago, so unless we see a drastic revision to the preliminary estimate, I think the markets will probably shrug this news off.

There is no relevant economic data scheduled for release today. This makes it likely that bonds will be influenced mostly by changes in the stock markets today. As long as the major stock indexes remain calm, I would expect bonds and mortgage rates to follow suit. If the stock markets give back this morning’s gains, bonds may react favorably as the day goes on. However, afternoon weakness seems to be routine lately so we should go into the weekend with a cautious approach.

Next week is fairly active in terms of economic releases. There are several scheduled for release that may influence mortgage pricing, but we also have an FOMC meeting on the calendar next week. In addition to those items, there is another round of Treasury auctions on the agenda that may also affect bond trading and mortgage rates.

None of the economic data or relevant events take place on Monday, so look for it to be a day of preparation for the week’s events. Unless something positive happens or is announced over the weekend, there is little to lead us to believe Monday will be a strong day for bonds. But look for more details on next week’s data and relevant events in Sunday’s weekly preview.