With the demise of the Stated Income Mortgage, North Carolina might have sealed its fate for upper priced home prices. What NC did was place a tax on self employed people. These may be busines owners or even those on commission based incomes. The rational is simple.

To qualify now for a mortgage loan in North Carolina, you have to prove you income. This is verified with income tax returns for the previous two years. The effect of this change has several outcomes. First, many of those who can afford higher priced homes are business owners who shelter much of their income through corporations or other business structures. By making them claim higher income to qualify for a mortgage, they are in effect raising their taxes. And we know raising taxes hurts the economy and especially small businesses which are the largest aggregrate employers in the country. Although I’m sure the state and federal governments wouldn’t mind collecting more funds. So North Carolina either raised taxes and hurt employment or they hurt the high end homes as self employed buyers shy away from those higher taxes and buy smaller homes.

Second, they took away the initial reason for stated income loans. They were originally used for self employed borrowers. Where things went wrong was when lenders started using stated income for W2 employed borrowers and going as far as No Doc loans. We will see how these mortgages perform in the coming years but it seems to me, the complete loss of Stated Icome mortgages in North Carolina will have negagtive effects for years to come.

Today’s comment from the Fed was much of the same. Except they left out the statement that they felt the housing market had stabilized. The housing numbers this week did not make a case for a stabilizing or improving market. Instead it just highlighted that without stimulus, the housing market is not recovering. Yet! I have made the case that we will have to lend our way out of this and this is not happening. The over reaction in lending guidelines continues to mean we have fewer qualified borrowers. And those guidelines continue to get tighter, albiet at a slower pace. My take continues to be it makes little difference in how many MBS the Fed buys. Without expanding the base of buyers who can qualify, it will not help.

For those who are new here, I will repeat my solution. The Fed and US Government has already guaranteed FNMA and FHLMC. And with the FHA now handling roughly 30% of the loan volume these days, the Government is again backing up these loans. So the government, ie, FNMA, FHLMC, FHA, VA and USDA all need to expand guidelines and take the risk.

Sure, that was the catch phrase from a famous diet program but it applies now to the FHA. By announcing that they are again raising the FHA insurance premium to 2.25%, lowering seller paid concessions to 3% they might be sealing the fate of the housing recovery. Let’s see if this makes sense. FHA wants to raise the level of the “skin in the game” that borrowers have to have to get a FHA loan to buy a house. Who has any skin left to give? We are in a near depression. Unemployment continues to rise, and the real estate market has collasped over the past three years. Let’s give bailouts and stimulus to every company around, but make it harder for buyers to afford a house. I don’t need to repeat that lending standards went way too loose, but continuing to tighten those standards will trying to stimulate the economy and housing just seems to be moving in the wrong direction. Or at least opposing what is being done to help these situations. I have to take a break. More later as I try to regain my composure after seeing this latest move.

In this case, AA stands for Alcoa. As usual they kicked off the earnings season. And they flopped. Considered by many as a bellweather for the economy, Alcoa threw up some lousy numbers and even worse forecasts. How does this relate to mortgages? It helps the Treasury and MBS markets. And right in the middle of the huge Treasury auction. That combined with the Chinese government trying to slow down their economy helped recapture the coupon price drop. So rates improved. To throw some cold water on the rate party, the MBA called for an additional drop in mortgage originations for 2010. This after they had already lowered their numbers. So let’s hope for lower rates and hope Big Ben continues his hunger for more MBS.

Well the Fed continues to worry about housing from the Dec 15 meeting.  As they should.  With foreclosures still increasing, modifications not working and resets coming, I don’t think we are out of the woods by a long shot.  And it looks like the Fed is hinting that it might continue its MBS purchases.  I’m not taking a stance on whether or not the Fed should continue the purchase program.  I am just commenting that without it, mortgage spreads and there fore, mortgage rates would be higher.  As rates have moved higher the past two weeks, mortgage applications have dropped to their lowest level in 6 months.  That’s a tell on how sensitive the mortgage market is right now.

I agree with Bill Gross at PIMCO that the economy is still not that strong without the government stimulus.  And I don’t think the Fed can pull any legs out from the stool, so more of the same. Are you rolling the dice of the Friday jobs report?

With pending sales of existing homes dropping by 16% in November is it any wonder many of us doubt the much touted housing recovery. Pure and simple, its not happening anytime soon. Why, because the surge from the Obama tax credit is over. Nice that they extended it but without it, housing would have fallen at least another 10%. Why can us on the frontlines keep predicting this? Because mortgage underwriting guidleines continue to get worse. At a slower rate however, but FHA looks to increase minimum scores again. And anyone who has tried to get a mortgage loan lately knows the process is burdensome and long. Lenders are now going out of their way to scrutinize every loan. The only way out of this is the path that got us into this mess. Lend more. Create more jobs, and lend more. The US is already subsidizing Fannie and Freddie and have basically nationalized them. So, let the US step up, ease lending, and get the market moving again.

The New Year begins with a full economic calendar highlighted by Friday’s jobs data. The consensus estimate is that zero jobs were lost in December, a slight difference from the 11,000 lost jobs reported in November.

The year has begun with a strong rally in the equity markets, partially driven by stronger than expected growth in the U.S. manufacturing sector and an increase in oil prices. Oil has breached the $80/bbl again as extremely cold weather and positive economic data from around the globe have increased demand.

As you know, lock volume the last two weeks of December was non-existent as increasing interest rates drove folks to the sidelines. Loan submissions remain steady while borrowers wait to lock, hoping the Fed will come to their rescue once again. Historically, mortgage rates in the 5% range have been in high demand, but unfortunately memories are short. With finishing such a large Treasury auction, one would think an improvement in rates will be coming.