It was the best of times, it was the worst of times…

The month of May was the third month in a row for stock market gains. I realize that many in my audience of real estate professionals have had a hard time enduring this market, but if you have anything left in the bank, my advice would be to throw it at stocks. Alright, it’s not that easy, but simply put, stocks have been appreciating as the credit freeze and bank liquidity crisis has settled down. The S&P 500 has gained about 34% since its March low, jobless claims are slowing down, consumer confidence is increasing and oil prices are rising. All good news right?

Not so fast. As one would imagine, this has not helped mortgage rates as of late. Follow the logic even further and you should be fearful that these higher rates will put a damper on our beloved housing market that was just finally starting to take off. The good news is that rates are only part of the “home buying equation”. Think about this for a second. Our industry does not thrive on appreciating markets, but rather transaction volume. Many houses are now more affordable, families are saving money for down payments, and rates are still relatively low.
As you know, the Federal Open Market Committee (FOMC) is meeting today and tomorrow to discuss the direction of interest rates. It will make a statement tomorrow at 11:00 AM PST. Here are my predictions:

-The Federal Funds (Prime) rate will stay the same
-The Fed will make a statement that inflation is “contained”
-And of course there will be some of ambiguous statement to the tune of “the weakness in the economy is still a major factor to be dealt with.”

What the mortgage market is looking for is some clue that the Fed will continue to inject money into the economy by buying Treasuries and mortgage bonds from Fannie Mae and Freddie Mac. If they make this statement, expect rates to drop dramatically for a few days. Who knows, we may see rates as low as 5% or below.

Ryan Ogata
Senior Mortgage Consultant

Confucius says: “This is how the market finds balance”.

Is the party over? Anyone who has been in this business for any length of time has seen this before. Every now and again, rates drastically shoot up and down within the span of a few days. Yesterday, Mortgage Bonds had their worst single day performance since October of last, losing an astounding 206bp and rounding out the week to a grand total of 363bp.

So, what the hell happened and more importantly, what's next?

The main culprit for yesterday's sell off was supply. Remember Econ 101? The Treasury has literally had the money printers working nonstop to pay for the massive bailout. These hundreds of billions of dollars need to be absorbed by the market. The addition literally weighs on the entire market and drags bond prices lower. Now, also consider the impact of the high volume of refinance transactions. All those loans have been bundled, packaged, and subsequently sold on Wall Street. As those closed loans are now getting turned around and sold, this supply must also be absorbed. While the Fed has been a buyer, they simply can't buy enough to balance all the selling. It's Econ 101, “anytime supply exceeds demand, prices will move lower”. This is how the market finds balance.

Personally (DISCLAIMER: I’ve been wrong before), I think that the lowest rates are unfortunately now behind us. The US Government keeps borrowing (supply), and there are signs that the economy is slowly starting to recover. Unless the market continues to worsen (and it very well just might), I don’t know why rates would come back down to the levels of last week. We will definitely see some improvement from yesterday’s volatility, but the fundamentals will push us higher in the long term. Expect to see some lock opportunities every now and again.

As a friend of mine said yesterday: “I think I’ll take that razor blade to my arm now.”

In other news…

Durable Goods jumped more than forecast as a slow rebound in auto demand and surge in defense spending compensated for declines in general business equipment. The 1.9% increase reported by the Commerce Department was the largest since in over a year, and followed a revised 2.1 percent drop in March that was more than twice as large as previously estimated.

Jobless Claims dropped by 13,000 to 623,000. The number of people collecting unemployment insurance however rose to a record high for the 17th straight time. Who is hiring?

New home sales were reported to a projected pace of 352K, just under consensus estimates of 360K. Inventory is finally moving. I wonder why? Do you think decreased prices and cheap financing has anything to do with it?

More mortgage specific, delinquency rates are hitting record levels with almost 8% of loans currently delinquent. This figure does not count for loans currently in foreclosure, which represent another 3%, so add it up and the combined percentage of loans not current is more than 11%. FYI, this is a really big number! This should continue to weigh on the housing markets, as properties already in foreclosure or about to hit foreclosure will compete with any new listings. And if you were wondering how loan modifications are working? Not so well… According to the rating agency Fitch, mortgages that are modified typically only delay the inevitable and roughly 75% of such loans re-default inside of 12 months.

Ryan Ogata
Senior Mortgage Consultant

“HVCC” my new best friend and $729,750 is finally here.

I am the first to admit that if I had to make a living as a day trader, I would be bankrupt within a month. I guess my fallback plan of being a mortgage consultant will have to do for now, but it seems as if common sense and fundamental laws are being broken every day. Yesterday was a perfect example. The “Bank Stress Test” results were leaked out to the public and further confirmed what everyone already knew. Citi, Bank of America, and Wells Fargo will all require additional capital to stay in business. So what happened? Citi and BofA stock went up 17%, while Wells Fargo went up about 16%. HUH???

The long awaited temporary $729,750 Jumbo Conforming loan amount program has been rolled out by lending institutions everywhere. There are some minor guideline differences from the permanent $625K limit, but all things considered this is a really good loan program to help stabilize the real estate market. Watch out for subordinate financing (2nd mortgages) on refinance transactions and if your client needs cash out, it’s very limited. Second homes and investment properties have been limited to 65% LTV and credit score requirements are stricter than ever. Like I said, minor differences, but the flip side is that it expands conforming pricing some $100K for the next 7 months. Go out and sell!

Last Friday the “HVCC” (Home Valuation Code of Conduct) was put into action. “No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or in any other manner including but not limited to…” To summarize, lending professionals are no longer allowed to “interfere” with the appraisal process for all Fannie Mae and Freddie Mac mortgage applications, and there now exists a buffer between the appraiser and the loan officer. In my opinion, this latest reform to the lending industry comes way too late and is going to cause more problems than it will solve. Think about this for a moment. Here we are right in the middle of a refinance boom and we are about to start adding applications to the system, further impacting lender turn times, before value for the property has been established. Not exactly the brightest move, but only time will tell how this one plays out.

In other news…

Looks like the FDIC is trying to come up with a politically correct term for “junk loans”. They don’t call bad loans “troubled assets” or “toxic waste” any more, instead, they are moving ahead with their “legacy loan” program. Part of the Financial Stability Plan, the Treasury Department has released the details of its public-private investment plan to remove “legacy loans” from bank balance sheets. It is hoped that $1 trillion can be sold using advantageous financing provided by the FDIC and the Federal Reserve (tax payers), including acquisitions of mortgages and mortgage-backed securities. Sales of “legacy loans” should free up obstacles to lending, while sales of legacy securities will unclog the secondary markets and help bring back jumbo financing.

MGIC (Mortgage Insurance) reported its seventh straight unprofitable quarter, posting a $184.6 million loss. Are you surprised? This loss has widened from the $34.5 million loss they posted in the same quarter a year ago, and makes you wonder just how much longer non FHA mortgage insurance transactions are going to be around for.

If you did not know, realtors now have their own credit union. REALTORS FCU serves the 1.2 million members of the National Association of Realtors (NAR), their families and staff. It will offer residential mortgages, along with lines of credit, consumer loans, and checking and savings accounts. The Web site for the credit union is www.realtorsfcu.org. Do you think mortgage lenders will get their own CU soon? I highly doubt it!

Recently seen bumper sticker: “Honk if you are paying my mortgage”.

One by one, lenders are announcing their ability to fund loans under the new Fannie Mae program DU Refi Plus. This program is designed to assist borrowers that have demonstrated good pay histories on their mortgages but have been unable to refinance due to a decline in home values. Financing properties with a new first mortgage of up to 105%, the big question is what will happen to existing second loans recorded against the property. Under this new program, a lender in second position could be forced to subordinate to negative equity in the property (150% CLTV???).

After an unfortunate last couple of years in the lending world, Thornburg Mortgage, long thought of as a “make sense” lender of money to people who don’t really need to borrow, is likely going to file for Chapter 11 bankruptcy protection. Assets will be sold off to reduce their outstanding debt and the highly prized servicing rights to their pristine mortgage pool of Jumbo ARMS with one of the lowest rates of default in the industry will be transferred. Once these sales and liquidations are completed, the company will likely discontinue operations. For a market like San Francisco, this represents a massive blow to finance options for multi-million dollar properties. Once hailed as the best financing available for Jumbo loans and TIC transactions, the collapse of the secondary mortgage market has left this institution with no place to securitize their financing. They almost made it…

Speaking of mortgage companies filing for bankruptcy, does anyone remember New Century? Based in Irvine, California, New Century disclosed accounting errors some two years ago marking the beginning of the mortgage banking collapse. The stock promptly plunged 90%, and they immediately went bankrupt. Now we have a new lawsuit to follow: The trustee for New Century sued accounting giant KPMG last Wednesday, blaming it for its demise and accusing KPMG of failing its public watchdog role by helping the subprime mortgage lender make misstatements about its finances and by filing "grossly negligent audits." Good luck with that one!

As mortgage banks try to offer better pricing for their agents and brokers, one solution is to move from a best-efforts platform to a mandatory platform. Since loan “pull through” is at the top of every executive’s watch list for maintaining profitability, one idea is to pass the cost of breaking a loan lock to the consumer in exchange for lower rates. Of course, there are inherent risks in doing so, but it is something to be considered as lenders are looking to squeeze every possible dollar of profit out of their fundings. Overall the spread is now around 1 point in price. In another example of cost cutting and subsequently going “green”, Franklin American, has given their clients an imaged file delivery option. After June 1 if they transmit closed loan files for review and purchase by FAMC via hard copy paper files, FAMC will charge an additional $25. Loans submitted via imaged delivery will not incur the additional expense.

In other news, mortgage applications in the U.S. rose last week to the highest level in three months: +4.7%. The Mortgage Bankers Association’s index of applications to purchase a home was +11% and the refinance index was +3.2%. Mortgage bankers who were selling about $1-2 billion a day in mortgage securities, now average about $4-5 billion per day thanks to the Fed who is buying the bulk of the debt and keeping rates low (roughly $6.5 billion per day).

Is anyone else sick of walking into your local bank branch and being assaulted by the staff? You can’t walk through the door without having a “greeter” ask you about your day and offer you a cookie (As if they actually care… And the cookies totally suck!). As service standards have fallen drastically since the invention of the ATM, the fierce competition for deposits these days has forced many institutions to redefine their customer service experience. Work harder guys, I expect to see more creativity especially since it’s my tax dollars that are keeping the lights on. I’m still counting the days until I can walk in and get back all the money I lost on the market.

Ryan Ogata
Senior Mortgage Consultant

Former Treasury secretary, Henry Paulson, is writing a book about his role within the US economy. To my surprise, the book starts on Chapter 11.

It was the last day of the month and lending professionals everywhere were scrambling to fund loans. Lock volume continues to be strong and successful companies have made it clear that limiting fall out is critical to survival. I guess the old days of hedging your locks with one investor and floating with another are over, but as the industry continues to evolve, I expect to see more lenders charging upfront lock fees and employing other client retention strategies to keep their clients from straying.

After a seemingly long wait, Fannie Mae has announced that it will begin purchasing the new high balance loans of $729,750.00 for loan closings of May 1st and later. While the pricing of this long awaited "Jumbo Conforming" product is still TBD, the entire industry has our fingers crossed hopping for the best. My guess is that investors will figure out what to charge over the next month or so, but if recent changes to the overall lending system are of any indication, I would expect these loans to fall relatively in line with current $625K pricing. Fannie has revised loan-to-value ratios for certain loan types, implemented new minimum credit score requirements, and added additional appraisal requirements. (And no, I don’t know what they are, but hope for the best and expect the worst) More on this as information becomes available…

With all of the wonderful economic news circulating out there, it is hard to believe that rates could go up much in the near future. The Stock Market remains volatile to say the least and inflation threats are virtually nonexistent (at least for now). The Mortgage Bankers Association's applications index rose by 3% in the week ending March 27th. The purchase applications index was basically unchanged, and refinance index gained about 3.7 percent.

Ryan Ogata
Senior Mortgage Consultant

The economic downturn has more Americans shifting to smaller homes. For example, Bernie Madoff just traded a 3,500 square foot penthouse for a 9 x 10 windowless studio in lower Manhattan.

Are mortgage rates heading any lower?

I truly wish that I had a crystal ball to consult. My prediction is that conforming has most likely bottomed out for the time being, aside from the occasional market rally, and that jumbo is going to come down soon. As it stands, borrowers can pay a point or two and tie up a 4.5% 30-yr mortgage on a conforming program. This is because the US government continues to buy conforming paper. When other investors express an interest in owning mortgages, jumbo or conforming, we should see mortgage rates drop across the board. Keep in mind however that this may take some time as companies are continuing to grapple with staffing, processing, and funding issues. In the meantime, they will continue to keep their margins high and make as much money as they can. Consider this, commercial and retail banks are looking at overnight Fed Funds near 0%, but conforming mortgage rates are closer to 4.5 - 5%. The average spread between fixed mortgage rates and the 10-year T-note is 2.3%, the highest it has been in over 20 years. And rates still have not moved…

Does anyone know when the $729,250 loan limit will be rolled out? (Why didn’t they just make it 730K???) I guess I may be out of the loop on this one, as I have heard rumors that the big banks are already advertising the new limit. Since this information came from my “cousin’s friend’s uncle’s dog’s best friend’s owner”, (I have seen nothing tangible) I remain skeptic that anyone has access to the funds. FHA has already been raised, but not conventional financing. I guess we will just have to wait and see.

In other news…

We have witnessed firsthand the problems with residential loans – is commercial paper next? Banks are reporting increased loan delinquencies from owners of office buildings, casinos, and shopping malls. The country’s 10 biggest banks have $327.6 billion in commercial mortgages, and Wells Fargo and Bank of America account for about half of commercial mortgages owned by these 10. According to a study from research firm Reis Inc., commercial property prices are down almost 20% in the past year. Bank of Hawaii Corp., City National Corp., Comerica Inc. and Sovereign Bancorp Inc. were among the companies put on Moody’s list of lenders with a “negative outlook” last week, partly because of their “risk concentrations” in the commercial market.

Ryan Ogata
Senior Mortgage Consultant

Big news hit the wires yesterday afternoon, as the Fed made a blockbuster announcement that sent Mortgage Bonds into rally mode. The Federal Reserve announced that over the course of 2009, they will purchase an additional $750B of Mortgage Backed Securities in an effort to help the housing market and keep rates low. On the announcement, Mortgage Bonds exploded higher, yielding prices at the best levels that we have seen in some time.

Great news right? Not exactly…

Fed purchases may keep a lid on rates, but not necessarily push them dramatically lower. HUH?

Remember that lenders are still not working at max capacity and like all things American, are very likely not going to pass all the gains through to the rate sheets delivered to the consumer (More Profit). The good news is that perhaps this will help lenders feel a bit more comfortable staffing up HR a bit as this massive buying will likely keep rates from moving significantly higher. (Faster turn times)

Bottom line - although the media is already spinning it differently (10% truth, 90% hype), this is NOT a time for clients to stay on the fence, hoping and waiting for lower rates. Home loan rates remain within inches of all-time historic lows, and may not necessarily move significantly lower.

Now...something else worth paying attention to.

Since yesterday's Fed Meeting, the US Dollar has been hit hard, as the aggressive Fed moves appear quite INFLATIONARY (not good for rates). In turn, this has pushed Oil up to $51 per barrel, nearly $5 higher since yesterday afternoon. Gold, which is purchased as a hedge against inflation, is up near $950 an ounce - moving up $60 on the day! While we know there is no inflation at the present time, the potential for future inflation could have a negative effect on Mortgage Bond prices ahead, or at least stifle their move towards lower rates - yet another reason to get your clients lined up to take advantage of present historically low rates.

Ryan Ogata
Senior Mortgage Consultant

Bernie Madoff and his wife are saying they have $69 million that is theirs and is not part of the money he swindled. They say it's money he saved by switching to GEICO. HA!

In all seriousness, I apologize for not getting these daily updates out this week. As you can imagine, we have been pretty busy here at RPM mortgage. Lock desks everywhere have seen a welcomed pickup with application volume up 11%. (+13% for the REFIS and +7.1% for the PURCHASES).

I have several clients calling about the stimulus package and how it may apply to them. Seems like everyone wants a ride on the Obama bailout express. The most common question is “How do I know if my mortgage is owned by Fannie Mae of Freddie Mac?” Since these institutions function primarily as a secondary market, your mortgage statements could be coming from Bank of America, Chase, Countrywide, Wamu, or any other of a hundred different mortgage “servicing” companies. So how can you find out?

Simple:
http://www.fanniemae.com/homepath/homeaffordable.jhtml
https://ww3.freddiemac.com/corporate/

Other cool links…

Here’s everything that you wanted to know about TALF but was afraid to ask: http://www.newyorkfed.org/markets/talf_faq.html
And here’s everything you wanted to know about how the stimulus activity impacts your state: http://www.stimuluswatch.org/project/by_state
And lastly, Countrywide (“Countryfine”) gets a little publicity in the Simpson’s. http://www.hulu.com/watch/61224/the-simpsons-no-loan-again-naturally

In other news…

Several American banks, including Goldman Sachs and Wells Fargo, are “mulling” the return of bailout funds they received because of the growing number of strings the federal government is attaching to the money. And it is already happening: the Signature Bank of New York informed the Treasury Department the bank will give back $120 million it received from the government, due to executive pay caps. Bailout funds include caveats about executive compensation, the postponement of evictions, modification of mortgages for troubled home loan borrowers, reduction of dividends, cancellation of employee training and morale-building events, and the withdrawal of job offers to foreign workers.

RealtyTrac, who tracks foreclosures and hasn’t seemed to put forth good news for a few years, released its report for February. Default notices, auction sale notices and bank repossessions went above 290,000, an increase of 6% from the previous month and an increase of nearly 30% from February 2008. The top states were Nevada (1 in 70 in foreclosure), Arizona (1 in 147), and California (1 out of 165). Rounding out RealtyTrac’s Top 10 were Florida, Idaho, Michigan, Illinois, Georgia, Oregon and Ohio, but on average 1 in every 440 U.S. housing units received a foreclosure filing in February. In spite of many investors putting foreclosures on a temporary halt, according to their spokesman there were some exceptions. For example, a 45-day voluntary moratorium in Florida expired at the end of January, and foreclosure activity there was up 14% from the previous month. In New York foreclosure proceedings delayed by a new law for an extra 90 days appear to have hit the system in February, when the state’s foreclosure activity increased 23% from the previous month.

Come next Monday, Radian will have a different set of guidelines that apply to all markets as Radian is retiring their Declining Markets policy. (For Radian, markets will no longer be classified as stable or declining.) The changes include a Maximum LTV - 90%, Maximum Loan amount - $417,000, Minimum Fico Score – 720, Maximum DTI- 41% (Regardless of AUS decision), and Occupancy- Primary Residence, 1 Unit Only. Ineligible Property types include Attached Condo’s, Attached PUD’s, Construction- to-perm, Interest Only, and Cooperatives or Manufactured housing. And speaking of MI companies, the credit-ratings agency Fitch Ratings placed mortgage insurer MGIC Investment Corp. and its operating subsidiaries on a “negative watch”. A downgrade to junk status could further hinder the insurer's ability to generate new business, and the downgrade occurred after MGIC said it said it would defer interest payments on $390 million in junior subordinated debt. The deferral is further indication of the increasing financial pressure on the company and the entire MI industry. For “good news”, Fitch noted that MGIC has enough liquidity to meet immediate financing needs. (If it is any consolation, Fitch also downgraded Berkshire Hathaway Inc.'s AAA issuer default rating and senior unsecured debt ratings by one notch, saying “a top rating isn't appropriate for financial-oriented holding companies in the current volatile market”.)

Have a great weekend!

Ryan Ogata
Senior Mortgage Consultant

Many mortgage professionals have been anxious to take advantage of today's historically low rates. I personally have encountered tremendous frustration stemming from lower home values combined with much tighter underwriting guidelines. This tough mix has restricted refinancing to those who, unfortunately, probably need it the least.

Those anxiously awaiting some aid from Washington will be happy to find that the refinancing element of the Recovery Initiative allows for rate and term refinances to 105% loan to value. In order to qualify, loans must be currently guaranteed by Fannie Mae or Freddie Mac, be in good credit standing, and meet present "qualifying guidelines".

Like all new things however, there are still a few unknowns in the mix. For example, it remains unclear how second mortgages will play into the picture. In order for these refinances to go through under this plan, holders of second mortgages in many cases may have to agree to subordinate. Since the LTV limit of 105% on the new first mortgage does not account for amounts owed on second mortgages, holders of second mortgages may get nervous in situations where the combined LTV of both mortgages is say, 125% of the value.

More to come...

What the hell is going on out there???

Simple, market conditions have increased loan volumes by over 50 percent and many major investors have not been able to keep up. The Federal Government has turned on the spigot and they are forcing interest rates down. This has created a refinance boom that, quite frankly, the industry cannot handle. It is projected that the mortgage industry will do two times the volume in 2009 as it did in 2008. If this is true, it would mean that we would do approximately $3.6 trillion as an industry. To give you some perspective, in 2003 (the mother of all years) total loan volume amounted to $3.8 trillion. The significant differences between 2003 and 2009 are that only one third of the lenders are still in business, the average loan is twice as hard to get through the underwriting process, and investors are still in fear mode.

The Federal Government will continue to force interest rates down so that the vast majority of Americans can refinance out of loans that are resetting. Additionally, it is my belief that the Federal Government will soon be stepping in to partially insure jumbo loans so that many Americans, who are locked out of a refinancing, will be able to take advantage of these historically low rates. Stay tuned…

Ryan Ogata
Senior Mortgage Consultant

There has been little done to help the actual borrower in the present market condition since it is near-impossible to find a solution that will satisfy both the borrower and the investor. Though many steps have been taken, with the Fed buying MBS’s and lower mortgage rates probably being the most helpful, what I would consider to be actual aid has been scarce to say the least. Principal reductions may help many stay in their homes but will it make the economy turn around?

If you were a mortgage servicer like Wells or Chase, and you have been buying 5.5% mortgages at a 2 or 3 point premium above par, thinking that you might have them on your books a while, would you be excited about “Homeowner Affordability and Stability Plan” announced yesterday? The jury is still out since prepayments might increase, but banks, money managers and hedge funds were selling their higher rate mortgage pools and selling 4 and 4.5% MBS’s, which would include 4.25 – 5.125% mortgage rates.

Ryan Ogata
Senior Mortgage Consultant

From: Rob Chrisman Subject: Feb. 19, 2009: Appraisal update; Homeowner Affordability and Stability Plan.

The Homeowner Affordability and Stability Plan may assist as many as 9 million homeowners, but will it help the mid-size mortgage banker? Many hope so. The plan applies to primary residences, and only to loans that don’t exceed Freddie Mac/Fannie Mae conforming loan limits. Homeowners who have conforming loans owned or guaranteed by Freddie Mac and Fannie Mae will be allowed to refinance their homes, even if they do not have 20 percent equity. If homeowners are actually underwater, but not necessarily delinquent, the “Homeowner Stability Initiative” takes over and lenders, servicers, and the government will work together to share in the cost of the modification which reduces the monthly payments to not exceed a 38% DTI. (Servicers would receive an up-front fee of $1,000 for every eligible modification meeting the initiative’s guidelines. Guidelines Mortgage holders will receive an incentive payment of $1,500, and servicers $500, for modifications made on loans that are current but at risk of imminent default.) And lastly, and this should help smaller mortgage companies, the Treasury Dept. plans to increase their Preferred Stock Purchase Agreements with both Fannie Mae and Freddie Mac, and will continue to purchase Fannie Mae and Freddie Mac mortgage-back securities in order to help promote stability and liquidity in the marketplace.

May 1 will be here before we know it and supposedly on that date mortgage brokers can no longer order appraisals direct. Instead they will be forced to use a designated pool of appraisers of unknown quality and efficiency. The New Home Valuation Protection Code, used by Fannie & Freddie, created requirements governing appraisal selection, solicitation, compensation, conflicts of interest and corporate independence. Mortgage brokers will be prohibited from selecting appraisers, lenders are prohibited from using in-house staff appraisers to conduct initial appraisals, and lenders are prohibited from using appraisal management that they own or control. Appraisers, good and bad, are scrambling to sign up with management companies who have placed them on rotating lists, typically at a cost to the appraiser. Interestingly, the code mandates that mortgage brokers adhere to the rules of using a management company’s pool of appraisers, but mortgage bankers are not.

For scheduled news today, we had Jobless Claims remain unchanged from the previous week at 627,000, still near a 26-year high and slightly higher than the 620,000 forecast. U.S. producer prices climbed more than forecast in January, +0.8%, also higher than projected and which followed a 1.9 percent drop in December. The core rate, excluding food and fuel, was +0.4%, also more than anticipated. Later, at 7AM PST, we will see Leading Economic Indicators, expected about unchanged, and the Philly Fed survey. Unfortunately rates have moved higher this morning, both before and after this news. Maybe focused on the supply issue of $97 billion of debt to be sold next week to support the government’s spending? The 10-yr is back to 2.85% and mortgages are worse by .250-.375 in price.

Rob Chrisman

General Motors and Chrysler said Tuesday they could need an additional $21.6 billion in federal loans because of “worsening” demand for their cars and trucks. Huh? Because consumers refuse to buy a GM or Chrysler vehicle, the tax payer should invest more money in these companies? If anyone else finds this is to be a ridiculous statement, please feel free to agree.

In other news, Obama is unveiling his mortgage foreclosure prevention plan today. The program is seeking to help some 9 million borrowers through a combination of principle relief and interest rate reductions. Unlike previous initiatives, this one compensates mortgage servicers for both the initial modification, and further compensates them if the newly modified loan remains in good standing. Furthermore, for the first time, lenders are being incentivized to proactively modify mortgages before they go into default. Rocket Science!

Ryan Ogata
Senior Mortgage Consultant

From: Rob Chrisman Subject: Feb. 18, 2009: EquiFirst calls it a day; locks skyrocket everywhere & brokers are maxing out locks, MI companies in the news.

CitiMortgage now requires the following minimum FICO scores on all FHA and VA loans, including FHA Streamline and VA IRRRL. For loans ≤ $417,000, it is 620, above $417 borrowers need a 660.

EquiFirst, a 20-year veteran retailer and wholesaler headquartered in Charlotte and owned by Barclays, yesterday announced, “Effective immediately, EquiFirst Corporation is ceasing its lending operations and will no longer accept mortgage loan applications for any type of mortgage loan product. EquiFirst will continue to process any completed mortgage loan application upon completion of underwriting and processing.”

For the markets, yesterday was another day of “stocks down, bond prices up” although as we know that is not always the case. It depends on the reasons, but with every country’s economy doing poorly, they can’t support higher rates. Along with Japan’s dismal data, manufacturing in the New York area contracted at the fastest pace on record, spurring concern the government’s stimulus package won’t be enough to curb the recession, which some think will lead to a depression. Today is Housing Starts (expected -3.6% but was down almost 17 %!), Building Permits (expected -4% but down almost 5%), Industrial Production (expected -1.5% but down1.8%), and Capacity Utilization. Later on we will have a flurry of Fed speakers, along with the release of the Fed minutes from the January 28th meeting. After this we find mortgage prices roughly unchanged from yesterday afternoon, and the 10-yr around 2.63%.

The MBAA announced that last week’s mortgage applications were up 46% due to refinancing being up 64%! Purchases were up over 9%, which was a welcome sign that at some point, and some interest rate level, purchases are starting to pick up. Originators who are still locking on a loan-by-loan basis are regularly hitting the daily caps set by large investors for them, whereas it appears that companies that are hedging their locked pipelines using securities or bulk forwards are avoiding this problem.

Rob Chrisman

President Obama has signed the $790 billion economic stimulus bill. It includes an expansion of the first-time homebuyer tax credit ($8k, no pay-back) and restores to $729,750 (in the 2008 Stimulus Act) the upper loan limit in high-cost areas for Fannie Mae, Freddie Mac and FHA loan guarantee programs.

Just like last year however, a few things MUST happen before any investor will accept applications with higher loan amounts. Ultimately, the Agencies (Fannie Mae and Freddie Mac) and FHA must determine whether pricing, policy and/or delivery requirements will be changed. In short, I expect the lenders to take about 30 days to try and figure out some scheme to ultimately screw the consumer. If you remember the first time the loan amounts were raised to this level you can understand my skepticism.

Ryan Ogata
Senior Mortgage Consultant

What a day we had yesterday in the mortgage business. Lock volume exploded as rates for conforming loans dropped drastically amidst another rally in the bond market this week (at least that’s what I hear…)

The Senate and House are set to vote today on the new stimulus package. Looks like the $15,000 tax credit we were all hoping for is off the table and has been replaced with the $8,000 tax credit that won’t work in San Francisco. Oh well...

Long overdue news from ING: Beginning today, “Interest-Only is no longer available on properties located in California. Financing on second homes is no longer available on properties located in California. And LTV price incentives are no longer available on properties in California.” I thought this was the Golden State”.

Ryan Ogata
Senior Mortgage Consultant

From: Rob Chrisman Subject: Feb. 13, 2009: ING cracks down in CA, what the stimulus plan will do for housing, locks snowing investors under.

Is it any wonder that Bill Gross wants mortgage rates to come down? Pacific Investment Management Co. (PIMCO) is rumored to have made large investments in mortgage-backed securities last month, and their “Total Return Fund” has $136 billion under management – 83% of which are mortgage-backed securities. Mortgages are “a very safe and well-supported security based upon what the Treasury has announced and the Fed has announced that it’s going to do,” Gross said in a Feb. 6 interview on Bloomberg television. One cannot argue with their performance last year, which beat many other funds.

The $790 billion economic stimulus plan is on track for vote today in the House, and the Senate will either vote later today or over the weekend. There will be $4 billion to repair and make more energy efficient public housing projects; $2 billion for the redevelop foreclosed and abandoned homes; $1.5 billion for homeless shelters and $2 billion to pay off loans on public housing accounts. $6.6 billion will be allocated to repeal a requirement that an $8,000 first-time home buyer tax credit be paid back over time for homes purchased from Jan. 1 to Nov. 30, unless the home is sold within three years. The bill increases the size of an existing temporary and refundable first-time home buyer credit to $8,000, up from $7,500. It also removes the requirement under current law that the credit be paid back if the buyer stays in the home for at least three years. And it would extend the credit's expiration date to Dec. 1, 2009, from July 1. Those eligible for this credit must have purchased a home after Jan. 1, 2009, and before Dec. 1, 2009. The full credit is available to those making $75,000 or less ($150,000 for joint filers).

Obama administration was creating a plan to subsidize mortgage payments for troubled homeowners. Reuters reported yesterday afternoon that the administration will work with mortgagors to re-write and subsidize mortgage payments for those with difficulty, but must pass a means test. There are no details, but the news did help to reverse a Dow Jones that was down another 250 points. This speculation that the government will support the housing market by working with borrowers rather than in buying treasuries seems to have energized portions of the financial community. Speaking of the Fed, they bought $23.2 billion of mortgage-backed securities last week, mostly 4 & 4.5% coupons, which include 4.25-5.125% 30-yr mortgages. The only news out today is the University of Michigan Consumer Confidence Survey, which is expected to drop slightly.

Rob Chrisman

Sometime “early this week” is what legislators are saying about the Senate vote on the stimulus bill. Remember, however, that even if it passes, the differences between their bill and the House bill need to be worked out. Last Friday Senate Republicans and Democrats cut back the package, and Senate Democrats (who control the chamber with a 58-41 majority) were able to close off debate yesterday. If approved, the package would go to a vote today.

The key difference is the $35.5 billion measure that would create a new tax credit equal to 10% of a primary-home purchase, up to $15,000. The House bill has much smaller $2.5 billion housing provision, which would waive the repayment requirement for a $7,500 tax credit that already exists for first-time home buyers.

Also, read below regarding the potential outsourcing of key mortgage origination positions. Can you imagine how much of a pain it would be to call India to get your docs to escrow.

Ryan Ogata
Senior Mortgage Consultant

From: Rob Chrisman Subject: Feb 10: lay-offs, who doesn't do them, and how to avoid them. Rates drop overnight.

What do Aflac, Nugget Markets, Devon Energy, Scottrade, Quik Trip, The Container Store, NuStar Energy, Stew Leonard, and Publix Super Markets have in common? None of them have ever had a lay-off! Strategies and comments include not replacing employees who leave voluntarily, locations within 15 miles of each other sharing staff, cross-training employees, using past employees for temp work, keeping costs low, no raises in slow times but mid-year raises in boom times, telecommuting and flex schedules helping streamline operations, and cushioning p&l swings by giving the employees a share of profits rather than giving them to stockholders/owners.

Let’s hope that owners of mortgage companies out there aren’t thinking about lay-offs already, unless funding volumes pick up. STRATMOR, a consulting and investment banking company that specializes in mortgage banking recently released the results of a survey they performed. They state that “lenders strongly believe that a large proportion of mortgage banking origination tasks or functions have the potential to be outsourced. In general, however, those functions that typically involve direct contact with borrowers are not viewed as candidates for outsourcing. Independent of company size, a majority of lenders approach origination outsourcing on an ‘a la carte basis’ and most lenders want to be able to pick and choose those functions that they will outsource. Lenders perceive that outsourcing all or most of their back office origination functions puts them at great strategic risk to the pricing, performance and continued business operation of their outsource service provider, so would like to be able to adopt outsourcing on a gradual basis and, as only where it makes economic and strategic sense. Lenders told us that controlling costs, managing operational risks and improving efficiency and productivity are the primary reasons for outsourcing.”

UBS posted the biggest annual loss in Swiss history and said it would cut a further 2,000 investment banking jobs. UBS lost $7 billion in the 4th quarter, but also said that net new money turned positive in both wealth and asset management in January, after three consecutive negative quarters.

Fortunately we are seeing some buying in the fixed-income markets, and rates have crept back down. Yesterday, in a speech, FHFA Director Lockhart said Fannie/Freddie may need more than the $200 billion already pledged by the US Government if the housing market continues to deteriorate. Once again there is no scheduled economic news, but rates have dropped: the 10-yr is back to 2.94% and mortgage prices are better by .250 or more. Apparently, there is some sense that today’s $32 billion 3-yr Treasury auction will generate investor demand. Will the US Government turn around and buy the Treasury instruments? I can’t quite figure that one out, but perhaps Fed Chairman Ben Bernanke will help explain things when he testifies today before the House Financial Services Committee on the Fed’s lending programs at 1PM EST. We also have Treasury Secretary Timothy Geithner testifying before the Senate at 10AM EST on the oversight of the financial rescue plan before outlining the details an hour later.

Rob Chrisman

How big exactly is a “trillion” dollars? Lawmakers and economists throw “billions” and “trillions” around every day, but we rarely stop to think about just how big these numbers are. To put a “trillion” in perspective, at a $58,000 salary per year it would take 17,241,379 years to reach 1 trillion dollars. That’s a lot of overtime.

If you want scheduled economic news of any substance, you’ll have to wait until later in the week, and even then it is light. The first will be the Trade Balance on Wednesday. Thursday we have Jobless Claims and Retail Sales (try to guess how those numbers are going to look), and on Friday we have the University of Michigan Consumer Sentiment number. Treasury Secretary Timothy Geithner was initially scheduled to speak today at noon to unveil details of the Obama administration’s plan, but it has been delayed until tomorrow at 11 a.m. EST. Why? Since the Senate is voting on stimulus plan today, the administration’s economic officials need to focus on that. They may also need more time to finalize the main points of the rescue plan and firm them up with key members of Congress.

News regarding the Senate's fiscal stimulus proposal and the Treasury's financial institution cleanup plan may be the biggest drivers of mortgage rates this week. Bond markets will close early on Friday in observance of Presidents Day. We do, however, have a $32 billion 3-yr auction tomorrow, $21 billion 10-yr on Wednesday, and $14 billion of 30-yr on Thursday, which will also be guiding the market – and this news has not been kind to interest rates.

Ryan Ogata
Senior Mortgage Consultant

From: Rob Chrisman Subject: Feb 9: Fannie loosens non-owner limits. GMAC wants houses with kitchens - is that too much to ask? Who is Chris Warren?

Federal prosecutors said Friday that they charged 27-year-old Christopher J. Warren of Sacramento (who had been cooperating in their investigation before he fled) in a $100 million mortgage fraud and investment scheme that spanned five states after he fled the country in a private jet last week. Prosecutors allege that Loomis Wealth Solutions attracted investors through public investment seminars. First, the investors bought a life insurance policy through the company's president, Lawrence Leland "Lee" Loomis, and then they invested their home equity and retirement plans through the company in what prosecutors allege was a Ponzi scheme that used money from later investors to pay off earlier investors. Finally, investors were used to purchase real estate under false premises from lenders across the nation, prosecutors said. The arrest warrant says that the scam involved 500 properties in at least five states, including Arizona, California, Florida and Illinois. According to the IRS affidavit, Citimortgage Inc. alone lost more than $6 million on 15 bogus loans.

Fannie Mae has issued Announcement 09-02, “Updates to Multiple Mortgages to the Same Borrower Policy, Reserve Requirements, Reserves Definition, and Form 3170.” In what is good news for “professional borrowers” with multiple investment properties, Fannie Mae is changing their current limit of four financed properties per borrower when the mortgage being delivered to Fannie Mae is secured by an investment property or second home. They will allow “five to ten financed properties per borrower, with certain eligibility and underwriting requirements, including a 720 minimum credit score and 70–75% maximum LTV/CLTV/HCLTV (depending on the transaction and property type). The requirements apply to any investment property or second home loan being delivered to Fannie Mae, regardless of whether Fannie Mae is the investor on the borrower’s other mortgages. Second home and investment property loans to borrowers with five to ten financed properties will be accepted for whole loan purchase or delivery into MBS with purchase dates on or after March 1, 2009, and new Special Feature Code 150 will be required at delivery.” Brokers everywhere await Wells, Citi, Chase, etc. to follow.

GMAC Bank Correspondent announced that all Jumbo loans with a LTV/CLTV's greater than 80% require a minimum FICO of 700. And, this is classic, “due to the numerous inquiries about the condition of the kitchen in real estate transactions, GMAC Bank has confirmed with the agencies, HUD and VA, that the kitchen must be functional, meaning that there must be kitchen cabinets, and a working sink and working stove. This applies to all real estate transfers. In addition, all property must be habitable and all appliances, plumbing, electrical, etc. must be functional and in good working condition. GMAC Bank will not purchase a loan unless these minimum property standards are met. This policy applies to all conventional, FHA and VA loan programs.”

Rob Chrisman

Lots of great things going on out there! Fannie just announced that they will purchase non owner properties from investors with 5-10 properties. This is excellent news for the market!!! Property Investors (my Bread and Butter) have unfortunately been subject to the most extensive lending reform of any property owning demographic. Prior to today, in order to qualify for financing, borrowers were limited to a maximum of 4 financed properties. I guess that desperate times called for desperate measures, but the 4 financed property rule made absolutely no sense…

Next week will be a big week for the markets in general. The next stimulus package should be voted in and we will hopefully see the conforming loan limit raised back to $729,750. Treasury Secretary Geithner (spelling?) will be laying out the second half of TARP and further stimulus programs for mortgages. I expect to see rates go lower next week, all predicated however on the new stimulus plan getting through Congress.

In other good news, there is now a Republican amendment that would temporarily offer homebuyers a tax credit worth $15,000 or 10% of a home’s purchase price, whichever is less, with the option to utilize all in one year or spread out over two years. The credit does not have to be paid back. It would be available to all purchases of any home from date of enactment for one full year - no longer just a first time homebuyer credit, and borrowers would be able to claim the credit against the 2008 tax return.

Rates for a conforming 30-yr fixed rate are about 5.75% with no points, 5.00% with one point, and 4.5% for a cost of 1.5 points. As much as our clients have been taught to believe that points are bad, are they going to get a better return from their 1.5 points by investing it in the stock market???

Ryan Ogata
Senior Mortgage Consultant

From: Rob Chrisman Subject: Feb 6: Senate's version contains a $15k tax credit. The jobs number is ugly but rates haven't dropped – yet

How about this idea, from a mortgage industry veteran? “With the lending criteria becoming too strict, the stimulus program needs to include a conventional (FNMA/FHLMC) Rollover Program similar to what was done in the 1980’s for FHA. The only qualification is that the property be an owner-occupied primary residence, the payments are current, and the borrower has equity to cover closings costs and prepays. Peg the rate at the stimulus rate. Like the FHA programs, fees should be restricted and instead closing a whole new loan, maybe a modification or rollover agreement form could be recorded to keep the costs and loss of equity (what equity is left) down. Money can still be made and the customer is once again protected. A FNMA/FHLMC rollover plan could help those of us that are not delinquent, using our hard earned income and savings to keep making our mortgage payments. Yes, the “forgotten” group of us that deserves a break too!! Lower those rates through a Rollover Program so we can put that hard earned income or savings back into the economy.”

Citigroup is selling the billing-and-collections rights on 185,000 mortgages (face value: $37 billion of mostly subprime and Alt-A) to Wilbur Ross’s American Home Mortgage Servicing for $1.5 billion. The deal lets Citigroup wind down Citi Residential Lending, formed from the remnants of ACC Capital Holdings/Ameriquest. As of last autumn, Citi Residential held servicing rights on about 247,000 loans, compared with about 6 million for Citigroup’s consumer-banking division. The deal will increase the number of loans American Home services by 45% to 575,000.

The Federal Reserve Bank of New York released its "Agency Mortgage-Backed Securities Purchase Program" report for the period January 29th through February 4th. Purchases totaled about $22 billion with $10 billion in Freddie securities and $10.5 billion in Fannie’s. Approximately 60% of the Gold purchases were in 30yr 4.5’s (4.75-5.125% mortgages) while the Fannie purchases were more evenly distributed from 4.5% up to 6.5 securities.

The market is currently digesting the Unemployment data, which (this should be no surprise) points to a grim economy. Nonfarm Payroll was down 598,000 in January, the deepest cut in payrolls in 34 years, and the Unemployment Rate hit 7.6%. These numbers are worse than expected, and in addition we saw some downward revisions to December and November. "January's sharp drop in employment brings job losses to 3.6 million since the start of the recession in December 2007," Commissioner of Labor Statistics Keith Hall said in a statement, and "about half the decline occurred in the last three months."

Manufacturing was down 207,000, the worst since October 1982, construction industries were down 111,000 jobs, and retail businesses cut another 45,000. Normally, an economy as bad as this would push rates lower, but instead, due to the supply and demand concerns, we find the 10-yr back up 2.95% and 30-yr mortgages either unchanged or worse by .125.

Rob Chrisman

The figures are in and personal income and consumption are both down, -0.2% and -1.0% respectively. 0.2%??? It feels more like 20% if you ask me. Since spending is falling even faster than income, the savings rate actually rose to 3.6%. I guess the only positive outcome for us Americans is that spending less than we earn is becoming a new trend for this country. Rocket science if you ask me.

In fact, personal consumption is down for the sixth straight month. That’s almost three holes on my belt!

In other news, Conforming loan amounts may be increased back to the 2008 level of $729,750. Do you remember that useless program that was introduced as part of the original economic stimulus package? The problem was that it was priced way too high and almost never made sense. Well, the decision makers have finally figured out that they may have canceled the program prematurely. Maybe they counted up the loans that were funded and realized that they only need two hands…

Ryan Ogata
Senior Mortgage Consultant

From: Rob Chrisman Subject: Feb 2: Quite the January! Some investor updates. And the return of $729,750 loan amounts!?

According to Mortgage Daily, Wells Fargo was the largest residential lender in 2008, originating $230 billion worth of residential mortgages. Chase was second at $185 billion. Bank of America, Countrywide and Citigroup Inc. made up the rest of the top five. Countrywide's figures were just for the first six months of last year since it was bought by Bank of America in July. U.S. originations were down 36% in 2008 compared to 2007 – but most expect a nice volume rebound in 2009.

On the correspondent side of Wells, starting on the 4th they will have new requirements for non-conforming loans. Eligible loans include 30-yr fixed and 5/1 ARM products – 15-yr, 7/1, and 10/1’s become ineligible. Borrowers must have a minimum 720 FICO, and LTV’s will be limited to 75% for 1-2 units, 70% for 3-4 units, and 70% for cash out depending on market classification. In addition, money held in retirement accounts cannot be used to meet post-close liquidity requirements.

Chase increased the hit for loans with FICO’s from 600-619 from .250 to 1.0. They also made some changes in the documentation used in identifying and documenting undisclosed debt that brokers should be aware of.

Are lenders in major metropolitan areas hoping for the return of the $729,750 loan amount? They may get their wish! In the version of the Stimulus Bill passed by the House, and moving on to the Senate, the loan levels revert to where they were last year.

Here, read it for yourself - “(a) Loan Limit Floor Based on 2008 Levels- For mortgages originated during calendar year 2009, if the limitation on the maximum original principal obligation of a mortgage that may purchased by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation determined under section 302(b)(2) of the Federal National Mortgage Association Charter Act (12 U.S.C. 1717(b)(2)) or section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1754(a)(2)), respectively, for any size residence for any area is less than such maximum original principal obligation limitation that was in effect for such size residence for such area for 2008 pursuant to section 201 of the Economic Stimulus Act of 2008 (Public Law 110-185; 122 Stat. 619), notwithstanding any other provision of law, the limitation on the maximum original principal obligation of a mortgage for such Association and Corporation for such size residence for such area shall be such maximum limitation in effect for such size residence for such area for 2008….the Director may, for mortgages originated during 2009, increase the maximum original principal obligation limitation for such size or sizes of residences for such sub-area that is otherwise in effect (including pursuant to subsection (a) of this section) for such Association and Corporation, but in no case to an amount that exceeds the amount specified in the matter following the comma in section 201(a)(1)(B) of the Economic Stimulus Act of 2008.”

Rob Chrisman

Here is your word of the day: Monopsony

A Monopsony exists where there is only one buyer of a product, as opposed to a “monopoly” where one seller controls the market. Although there is a minor amount of interest by investors in owning securities backed by mortgages, most would agree that at this point the Fed is the primary buyer, and that we are approaching a monopsony, which, like a monopoly, is rarely good. Use that word tonight during Happy Hour.

Also, looks like they are finally revamping the credit scoring matrix. Maybe they figured out that credit scores are pretty much meaningless. The lenders sure did!

Ryan Ogata
Senior Mortgage Consultant

From: Rob Chrisman Subject: Jan 30: Don't be the last one on your block to own FICO 08

Are mortgage rates getting you down? Don’t blame the NY Fed – they’re going as fast as they can, to the tune of almost $17 billion last week of MBS purchases.

Fair Isaac has something new to talk about. They will start offering the revamped score, "FICO 08," to lenders. Fair Isaac believes that the new score will do a better job of predicting borrower defaults, be more forgiving of one-time slipups, take a harder line on repeat offenders, and in general will do a deeper analysis of borrowers with poor or thin credit histories. The score will still range from 300 to 850.

Yesterday was not a good day for Treasury or mortgage rates, or the housing industry. New-Home Sales fell 14.7% in December, and are down 45% from December 2007! This represents the 5th straight month of declines. Durable Goods, as I mentioned yesterday, were also down for the 5th month in a row. Regardless, the Treasury auctioned off $30 billion of 5-yr notes, and it did not go as well as hoped. At this point the last thing on the Fed’s mind is inflation, and in fact deflation is on the minds of many.

How about today – do we need more news that the economy is doing poorly? Will the 10-yr Treasury make up some of the nearly 2 points in price that it lost yesterday? We have already seen Gross Domestic Product, which showed that the U.S. economy shrank at its fastest pace in nearly 27 years in the fourth quarter. It dropped at a 3.8% annual rate, the lowest pace since the first quarter of 1982, when output contracted 6.4 percent. For 2008, GDP rose 1.3 percent, the slowest pace of growth since 2001, when the economy expanded 0.8 percent. U.S. employment costs rose last year at the slowest pace on record, with the Employment Cost Index increasing 2.6% in the 12 months to December, down from a 3.3 percent rise in 2007. The numbers indicate that companies have been cutting overtime and reducing workers' benefits like pension contributions. We still have the Chicago Purchasing Manager’s survey and the University of Michigan Consumer Confidence survey later, but for now the 10-yr stands at 2.80% and mortgages are about .250 better in price than yesterday late afternoon.

Rob Chrisman

Fannie 4.5’s are trading above 101. What does that mean? For every dollar of debt that gets sold to Fannie Mae at 4.5%, the seller collects a 1% commission for the transaction. So, imagine how much money a lender is making if they sell your loan at 5.25%, at 5.5%, at 5.75%. This is what truly infuriates me about the bailout. The US tax payer has just given the financial sector a transfusion of greenback and how does the financial thank us? They turn around and gauge the consumer with a wide profit margin on the loans that they fund and ultimately sell.

Sound a bit screwy to you? Maybe this explains how Citi actually had the nerve to try and buy a $50 million dollar corporate jet.

Here's your financial vocabulary lesson for today:

"Liquidity" - When you look at your investments and wet your pants.

Ryan Ogata
Senior Mortgage Consultant

From: Rob Chrisman Subject: Jan 27: Wells opens mod program to Wachovia; FHA guidelines starting to tighten; First Fed bails on wholesale lending - who is left?

First Federal of California is the latest lender to close their wholesale channel to brokers. Files received today, January 26, 2009, will be returned un-processed. Files that have not been previously approved (in suspense) as of January 26, 2009 will be declined. All files that are approved and in the funding process must be funded by February 27, 2009, and only files that satisfy all of the Bank’s conditions by such date will be funded. Any fees previously collected on a file that has not been approved will be returned within 30 days.

Franklin American, reflecting the market, adjusted their FHA guidelines. Effective for locks on or after Wednesday, January 28, 2009, all loans must meet the new guidelines as stated below. Minimum Credit Score All FHA and VA loans must have a minimum 600 credit score. All FHA streamline refinances and VA IRRRL’s require the borrower to not have had any late payment on any mortgage account during the last 12 months. Late payments are defined as any 30-day or greater mortgage late.

Are we having fun yet?

Wells Fargo, with their stock down dramatically in recent weeks, will extend its mortgage modification program to customers of Wachovia. 478,000 Wachovia customers, with loans totaling about $120 billion, will have access to the program, and the customers within this portfolio that are being referred to foreclosure or are in foreclosure will receive an extension until Feb. 28 so they can apply for the modification program which includes the goal of reducing mortgage payments to about 38 percent of the size of a customer's income.

Yesterday we had some interesting economic news. The Conference Board’s Leading Economic Index rose .3%, which is the first gain in six months. Four of the 10 indicators the report were positive, unfortunately led by a 0.99 percent increase in the money supply adjusted for inflation, which is due to increased lending and purchases of securities by the Federal Reserve to unclog credit markets and ease borrowing costs. We also had Existing Home Sales unexpectedly rise 6.5% in December, mostly attributed to prices being down and a brisk market in foreclosures.

What is weighing prices down, and keeping rates relatively high given the current state of the economy, is the supply coming on to the market. On top of the $2-3 billion or so of daily mortgage origination, we have a record $40 billion 2-yr note auction today and a record 5-yr note auction Thursday. There are always worries about who will soak up the supply, and the holiday in Asia tends to add to this consternation. The Fed’s meeting today and tomorrow is expected to result in no change to their 0-.25% overnight rates, but analysts will be watching for any change to their language in the post-meeting wrap up. They are exploring the purchase of longer-dated Treasury securities in an effort to push up their price and bring down their yield in order to reduce long-term borrowing costs at a time when the Fed can’t lower short-term interest rates any further because they are effectively at zero. Speaking of rates, the 10-yr is at 2.63% and mortgages are roughly unchanged.

Rob Chrisman

So apparently things are not as bad as they may seem. JPMorgan Chase has posted a surprise profit for 2008. Huh??? A bank that actually posted a profit for 08? Wall Street was shocked by the bank's radical business plan that included not paying out $100 million in bonuses to failed executives and only lending money to people who could pay it back. Wow, what a concept!

As happy as I am to hear that banks are out there posting profits, I remain skeptical as to the authenticity of these figures. The reality is that most of the industry reform did not take place until 07/08 and there is no way a major lender like Chase could be immune. Something is screwy if you ask me. Maybe some of the accountants from Arthur Anderson (Enron debacle) have resurfaced to help “bail” them out.

Ryan Ogata
Senior Mortgage Consultant

From: Rob Chrisman Subject: Jan 22: a look at our friend the bank, almost as good at keeping money as a mattress.

Yesterday Fifth Third Bancorp, Ohio’s second largest bank, announced that they had lost $2.1 billion in the 4th quarter, they’re third consecutive quarterly loss. They have suspended bonuses, cut the quarterly dividend to 1 cent (so as to not force selling of its shares by funds required to own dividend paying institutions) and sold $3.4 billion in preferred shares to the U.S. government’s TARP. Their stock closed below $4 per share, an 18-yr low, and has lost 80% of its value in the last year.

And while we’re speaking of Ohio banks, KeyCorp also announced their third straight quarterly loss, losing $524 million. Like Fifth Third, KeyCorp cut its dividend, has $2.5 billion of capital from TARP, and its shares are down 72% in the last year.

What is up with banks around the world? Analysts are questioning their viability. If a bank has $100 million in assets and $90 million in liabilities, giving it a net worth of $10 million, but the assets include more than $10 million of bad mortgages, or can’t even be priced, and suddenly the net worth is negative. What are their options? Banks can stay in business and hope for a bailout or other government intervention, hope for a merger or takeover with a stronger bank, hope they muddle through, or go out of business. Some variation of the “Good Bank, Bad Bank” plan continues to gain momentum, which is what happened to the S&L business in the 1980’s. Shareholders were wiped out (the big fear now) and the assets were transferred to the Resolution Trust Corporation.

Tuesday this all reared its ugly head, with many big banks losing 20% of their value, and although yesterday financial stocks rallied (can our largest banks really have no value in the market?) the banks and government are still dealing with this issue. Until the Obama plan is unveiled, investors appear to be bracing for the worst-case scenario, and bank stocks may continue downward. Policy makers are now looking for alternatives to preferred-share investments to help banks build up their equity to give them confidence to begin lending again. What about the 12 regional Federal Home-Loan Banks? They are a big source of funding for thousands of commercial banks, thrifts and credit unions across the country. But several of the home-loan banks have suspended their dividends or warned that they may fall short of capital requirements, which in turn would slow down or stop their lending.

The New York Fed continues to buy mortgage-backed securities, although today’s amount is not known. Origination still appears to be in the $1-2 billion/day range. Certainly this has helped keep conventional mortgage rates somewhat low, although the market wonders if they government is the only buyer out there. Mortgage security prices are back to where they were two weeks ago, at best, but investors have changed margins to slow down lock volumes, or make up some profit ground for losses suffered in 2008. As one Wall Street firm put it, “The current MBS market is not about convexity or extension issues. It's about the Fed's commitment to keep the 30yr mortgage rate as close to 4.50-5.00% as possible for as long as possible…if Treasury rates climb, the Fed will be forced to buy $10-12BB a couple days in a row vs. their recent pace of $3-5BB per day.”

The US Mortgage Applications Index dropped by -9.8% last week, with refinance activity -12.0% and purchases -2.5%. Interestingly, many companies seem fine with this as they are grappling with huge lock volumes from previous weeks. We also had the weekly Jobless Claims, which shot up, and Housing Starts and Building Permits, which shot down. Initial Jobless Claims hit 589,000, higher than expected, and continuing jobless claims also rose, which both point to a weak jobs number in early February. Housing Starts were -15.5% in December, Building Permits were -10.7% in December, hitting their lowest levels in the 50 years of tracking these statistics. Building contractors, and mortgage brokers, would be doing themselves a disservice if they ignored these numbers, or thought that everything was “rosy”. These numbers reminded everyone that the economy stinks, and the 10-yr is chopping around 2.50% and mortgages are better by .250.

Rob Chrisman

The Wall Street Bailout

Once upon a time a man appeared in a village and announced to the villagers that he would buy monkeys for $10 each.

The villagers, knowing that there were plenty of monkeys around, went to the forest and started catching them. The man bought thousands at $10 each. As supply started to diminish, the villagers stopped their effort.

The man then announced that he would buy monkeys at $20 each. This renewed the villagers efforts and they started catching monkeys again.

Soon the supply diminished and people started going back to their farms. The offer was increased to $25 each and the supply of monkeys became so scarce it became an effort to even find a monkey, let alone catch it!

The man then announced that he would buy monkeys at $50 each! However, since he had to go to the city on some business, his assistant would buy them on his behalf.

The assistant told the villagers: "Look at all these monkeys in the big cage that my boss has already collected. I will sell them to you at $35 and when my boss returns, you can sell them to him for $50."

The villagers rounded up all their savings and bought all the monkeys for 700 billion dollars. They never saw the man or his assistant again, only lots and lots of monkeys!

Now you have a better understanding of how the Wall Street “BAILOUT” plan works.

Ryan Ogata
Senior Mortgage Consultant

From: Rob Chrisman Subject: Jan 21 - a reminder of Fannie's fee increases, along with loan-level identifiers for originators and appraisers

Anyone who owns stocks in financial companies got whacked yesterday. Citigroup, Bank of America, Wells Fargo - no one was immune from losing a large percentage of their value in one day. Is Wells Fargo really worth 25% less than it was last Friday? The overall stock market was down about 4%, and the S&P 500 is already down 11% in the last two weeks! Is this helping interest rates? At some level, yes, although both Treasury and mortgage rates are not doing as well as one would expect given the general economic picture. In fact, this morning the 10-yr is up to 2.46% and mortgage prices are worse by about .250. Generally speaking, investors are questioning whether or not banks’ assets, which contribute toward net worth and stock price, are really worth what banks say they are.

Mortgages continue to be viewed as risky, and even if the base rate is acceptable, loan-level fees are on the rise. For example, effective April 1 Fannie Mae is raising its loan fees. The change was announced December 19, 2008, and impacts risk-based fees known as “loan-level pricing adjustments”. LLPAs aren't just limited to credit score and LTV, and the new Fannie Mae guidelines impact three other loan characteristics: Condo and co-op mortgages over 75% LTV - add 0.750 percent to fee; Interest only mortgages - add 0.250 percent to fee for ARMs, 0.750 for fixed rate; Mortgages under 75% LTV with subordinate financing - add up to 0.500 percent to fee. The loan fees don't have to be paid in the form of cash due at closing, but instead can be financed in the mortgage rate at roughly .25% for every 1 point in fee.

US Bank’s Correspondent Division, for example, will implement these fees beginning tomorrow in spite of Fannie not requiring them until April. Their pricing changes impact FICO/LTV fees, Cashout Refinance fees, IO ARM fees and now specific Condominium fees, and one should expect to pay more for transactions with an LTV > 60% and FICO score <> 90%, and additional .250 point in fee, and condominiums with LTV > 75% will be charged an additional .750 pt. fee.

James B. Lockhart, director of the Federal Housing Finance Agency (FHFA), announced that with mortgage applications taken on or after Jan. 1, 2010, Freddie Mac and Fannie Mae are required to obtain loan-level identifiers for the loan originator, loan origination company, field appraiser and supervisory appraiser. This is the result of Title V of the Housing and Economic Recovery Act of 2008, the S.A.F.E. Mortgage Licensing Act through which Congress required the creation of a nationwide mortgage Licensing system and registry. With enactment of the S.A.F.E. Mortgage Licensing Act, identifiers will now be available for each individual loan originator.

Rob Chrisman

I have been asked by many people why the pricing on “conforming jumbo” ($417k - $625k) has such large price swings. Keep in mind that only 10 percent of a mortgage backed security pool (MBS) comprised of Fannie/Freddie product can have conforming jumbo within the pool. Right now, there is more loan volume than the market can handle so based on supply/demand loans are being priced higher. When investors lower the price for conforming-jumbo, it is because they are looking to “fill up” a pool so you see them quickly go in and out of the market.

Also, keep in mind that loan applications are currently running at 2003 levels (Ahh the good old days…) and only 1/3 of the industry is still in the business!

So, aside from Obama taking office, Chrysler inking a deal with FIAT, and oil hitting $33 per barrel, let’s move on to something more relevant to mortgage banking. Enjoy the daily market update.

Ryan Ogata
Senior Mortgage Consultant

From: Rob Chrisman Subject: Jan 20 - industry news, and rates creep up while everyone is focused on the inauguration

Regions Financial lost over $6 billion in the 4th quarter as it took a $6 billion goodwill write-down and sharply raised loan-loss provisions, although non-performing assets fell slightly amid the continuing disposal of problem assets. Regions, located in the Southeast, received $3.5 billion in November from the U.S. Treasury under the Troubled Asset Relief Program.

GMAC will implement a 1.50% price adjustment to FHA High Balance loans.

Banks are racing to modify million of loans by reducing interest rates or lengthening terms. J.P. Morgan Chase is expanding its program to modify mortgages to include not only mortgages the bank owns but also more than $1 trillion of loans the bank sold to investors.

While Freddie and Fannie Mae have suspended sales of foreclosed properties and aren’t locking people out of their homes, they are continuing to initiate court cases against homeowners and pursue existing cases. Freddie is also still filing eviction proceedings against renters, while Fannie says it has suspended all action against tenants living in repossessed homes.

Why don’t the words “cram down” ever have a good connotation? Wednesday afternoon Barclays Capital hosted a conference call for investors to discuss the basics of current bankruptcy laws, developments around proposed bankruptcy cram down legislation and the implications (both intended and unintended) of this bankruptcy reform effort. The proposed changes would enable bankruptcy judges to place the principal value of mortgages down to the value of the underlying property (a power that they do not currently have), leaving all previously secured claims as an unsecured claim that may or may not be extinguished by the judge. Barclays expects that the change could “lead to a surge in bankruptcies that raises estimates for credit card charge-offs from 10% in 2009 to 12%-14%”.

Freddie Mac’s weekly survey showed that average mortgages rates fell below 5.0% for the first time – they came in at 4.96%. Whoever is complaining about mortgage rates should note that it was the 11th consecutive weekly decline and the lowest rate since Freddie started the survey in 1971. In a yield curve lesson, 5-yr hybrid ARM rates are 5.25%; 1-yr Treasury ARM’s averaged 4.89%, and 15-year fixed-rate mortgages edged up to 4.65% from 4.62% a week ago. Brokers know that the two fixed-rate loans required the payment of an average 0.7 point to achieve the interest rate.

How about the current economy? Late last week we saw Industrial Production fall 2.0% for December, but Consumer Sentiment improved slightly in the University of Michigan survey. Economic news releases for the week few and far between. In fact, there is little until Thursday, which at this point is already the day after tomorrow, when we have Housing Starts, Building Permits, and Jobless Claims. Probably more importantly, the Treasury announces three and six month bill, 2-yr and 5-yr note auctions. Interest rates have worsened ahead of this, with the 10-yr up to 2.46% and mortgages worse by .250-.375 in price.

Rob Chrisman

What is going on with interest rates? All the indicators are pointing to the fact that mortgage rates should be lower, in fact, much lower than where they currently are. The Jumbo programs aside, conforming pricing now seems to be arbitrary, based on how much profit the lender is looking to make. Maybe this is payback for all the losses incurred during the subprime days. Maybe it’s just greed. Sooner or later however, things are going to have to come back to normal.

Ryan Ogata
Senior Mortgage Consultant

From: Rob Chrisman Subject: Jan 16: Citi's loss, Fannie's PERS, is the Fed the only one buying mortgages? Bond market closing early, extending locks?

This morning, the Labor Department announced that U.S. consumer prices (CPI) fell by a slightly smaller-than-expected margin in December. CPI was -.7%, and the annual pace of price increases was the slowest in more than 50 years. Core prices, which exclude food and energy items, were flat for the second month in a row in December. That compared to analysts' prediction for a 0.1 percent increase. During the last year consumer prices rose only 0.1 percent, which doesn’t help Social Security recipients and others who have fixed income payments tied to the index. After the news, and even before the news, the 10-yr is at 2.35% and mortgage prices are worse by between .125 and .250.

Citigroup Inc. posted an $8.29 billion fourth-quarter loss, completing its worst year, as the credit crisis eroded mortgage-bond prices and customers missed more loan payments. The U.S. government agreed to invest $20 billion more in Bank of America, using TARP funds, along with guaranteeing an additional $118 billion of their assets.

It would appear that the Fed has been the only real buyer of mortgage-backed securities recently. Will that be enough? Unfortunately, as many agents have seen, mortgages have moved “wider” this week, meaning that mortgage rates are worsening relative to Treasury rates. Nationwide origination has been strong all week at $2.5 to $3 billion per day, and although the Fed has tremendous resources, the market is not convinced that mortgages are the place to put its money. And the market is also worried about the supply of Treasury securities that will need to be sold in order to finance this effort.

I remember when PERS stood for “Public Employees Retirement System”. Now Fannie has introduced PERS: “Project Eligibility Review Service”. In support of Announcement 08-34 - Project Eligibility Review Service and Changes to Condominium and Cooperative Project Policies – Fannie has launched the new Project Eligibility Review Service (PERS) which allows lenders to submit attached condo projects to Fannie Mae to determine eligibility. Lenders are required to use PERS, submitting the information electronically, for all new and newly converted attached condo projects located in Florida.

Rob Chrisman

Just when I thought we were beginning to see the light... This economic mess continues to unfold as the US taxpayer is now the victim of the largest fraud ever conceived. What happened to the "bailout"???

READ ON...

Ryan Ogata
Senior Mortgage Consultant

From: Rob Chrisman Subject: Jan 15 - ripples from Chase. Banks in the news, and not in a good way...

How are banks doing out there? For big banks, things are not good. B of A is having difficulty absorbing Merrill Lynch, and may soon ask the US Government for more money to aid the process. JP Morgan's earnings for the 4th quarter dropped 76%, although it was apparently better than anticipated. And Citi is breaking itself up. Barclays published their view on bank earnings. Focusing on asset quality, securities write-downs, goodwill impairments, and capitalization, Barclays expects financial performance to be weak due to deteriorating loan quality, continued losses on risky securities, and goodwill impairments. "Economic conditions will cause problems in loan portfolios to migrate from residential-related products to credit cards and commercial real estate, leading to materially higher nonperforming assets and exposing the inadequacy of loan loss reserves, in our opinion".Barclays does go on to say that banks should be ok as long as government intervention continues, especially for Bank of America, JP Morgan, and Wells Fargo, "three banks that have exceptional systemic importance, in our opinion. We remain cautious on regional banks given the continued deterioration in asset quality".

Speaking of deterioration, our housing market is pretty grim. This morning's RealtyTrac report on foreclosures shows an 81% increase for '08, with the December level at 303k -- up 41% year-over-year. RealtyTrac's CEO notes that foreclosure prevention programs offered by banks and some legal delays "have not had any real success in slowing down this foreclosure tsunami." And folks wonder why Treasury rates go down while mortgage rates do not.

This morning we have already seen the Labor Department's Producer Price Index fall for a 5th straight month, -1.9% in December after dropping 2.2% the previous month. Core producer prices, for people who do not heat their homes or eat, increased by 0.2 percent in December. Core producer prices were up 4.3 percent over the last 12 months. Gasoline, which accounts for about 7.4 percent of PPI, fell more than 25%. Jobless Claims shot up by 54,000 to 524k from 470k the week before. The four-week moving average for continuing claims, at 4.498 million, was the highest in 26 years. We still have some news ahead of us later this morning, but for right now the 10-yr is wallowing around 2.22% and mortgages are, once again, roughly unchanged.

Rob Chrisman