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Often I start the commentary off saying something witty, but I couldn’t think of anything clever so I thought I’d suggest you take a look at this video about seat belts (also embedded below). It is making the rounds, and with good reason.

Why Rates Won’t Rise On March 31
The Federal Reserve has a little more than ten business days to complete their well-publicized purchase of agency mortgage-backed securities (MBS). Last week it bought $10 billion, breaking their 3-week streak of $11 billion. Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are/were eligible assets for the program. Everyone knows that the end of the program is imminent. more…

Rates Up This Morning, Slow Economic Week
Last week rates were moved around by economic data. By Friday rates had improved slightly, and locks appeared to be picking up a little, but then a better-than-expected employment number pushed them higher. Fortunately for mortgage rates, the spread between them and the 10-yr Treasury (still a benchmark, in spite of actual rates more closely tracking 5-yr and 7-yr notes) is the lowest it has ever been. This week won’t have as much to chew on: the Trade Balance & Jobless Claims will be released on Thursday, and Retail Sales, Consumer Sentiment, and Business Inventories come out Friday. And on Tuesday, Wednesday, and Thursday the US Government will be selling securities to finance its activities: $74 billion broken down by $40 billion in three-year notes, $21 billion in 10-year notes and $13 billion in 30-year bonds. Ahead of this the 10-yr yield is up to 3.72% and mortgage prices are worse by between .125 and .250 in price.

Four More Banks Fail
When I was a kid, I used to pray every night for a new bike. Then I realized that God doesn’t work that way. So instead I stole a bike and asked Him to forgive me. Neither strategy worked for four more banks, as the FDIC shut them down Friday (without finding buyers for two of them leading to losses for depositors who had balances exceeding the agency’s insurance limits). Sun American’s (FL) deposits and assets were acquired by First-Citizens Bank (NC) at a cost to the FDIC of $103 million. The Bank of Illinois was “absorbed” by Heartland Bank (IL) at a cost to the FDIC of about $54 million. Waterfield Bank (MD), at a cost to the FDIC $51 million, and Utah’s Centennial Bank are now being run by the FDIC, with the help of Zion’s Bank, at a cost of about $96 million. more…

Mortgage Markets After March 31
For the week that just ended for the Fed, their MBS purchases totaled $17.6 billion, and they sold $6.6 billion, netting out that magical $11 billion weekly total. They are right on target to end this in about a month. After March 31st, the program ceases. People will still buy homes, mortgages will continue to be originated, but will some of the dire production predictions come true? Everyone in the business is hoping not, but the large investors would prefer not to wait to find out. Big investors have cut profit margins and prices, resulting in some very good (relatively speaking) mortgage rates for borrowers. Investors, account executives, production managers may be already worried that they won’t hit their numbers for the year, and appear to be doing what they can to move a little ahead of the pack prior during the first quarter. Because after March 31st, it’s anyone’s ball game. And keep in mind that any loans that fund and are placed into securities settling in March had better close sooner than later due to lag times. Make hay while the sun shines.

Should Foreclosures Be Run By Government?
Should foreclosures be run by the government? Lordy lordy… the Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program. Bloomberg reported that the proposal was reviewed by lenders last week on a White House conference call, “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed,” according to a Treasury Department document outlining the plan. At present, lenders can initiate foreclosure proceedings on any loan that hasn’t been submitted for HAMP eligibility. Under current HAMP rules, foreclosure litigation can proceed while borrowers are under review for the program or even in a trial modification. The proposed changes would prohibit lenders from initiating new foreclosure actions before loan screening by HAMP and would require lenders to halt existing proceedings for borrowers once they are in a trial repayment plan. more…

What Are Covered Bonds, And Can They Help Housing?
Lately there has been some talk in the investor community about using covered bonds to supplement or replace mortgage-backed securities, therefore helping the secondary market for mortgages, which in turn would help originators. What is a “covered bond”? In this case, covered bonds are debt securities backed by the cash flows from mortgages, and recourse to a pool of mortgages secures (”covers”) the bond in case the issuer becomes insolvent. Covered bond assets remain on the issuer’s consolidated balance sheet, which comforts end-investors, since they are held on the issuers’ books and the interest is paid from an identifiable source. (Current MBS’s are not held on the issuers’ books.) This type of security has been popular in Europe, but not here in the US. New accounting rules, however, require issuers to carry collateral on their balance sheets even for securitized products such as mortgage bonds, a key feature of covered bonds, and there may be some legislation brewing regarding the FDIC taking over an issuer (in the event of a collapse) that would make it easier to issue them. In the event of default, the investor has recourse to both the pool and the issuer.

Mortgage Delinquencies Down
The Mortgage Bankers Association of America (MBAA) released its “National Delinquency Survey” for the fourth quarter. A glimmer of good news shone forth as total mortgage delinquency rates, seasonally adjusted, were down 17 basis points during the fourth quarter. If only we could ignore the fact that they were up year-over-year by 159 basis points. At this point, reports the MBAA who recently sold their headquarters, 9.47% of all mortgages on one- to four-family homes are now in some state of delinquency. more…

Here’s a deep bTunes album for those on The Street who are down. It’s Funhouse, the 1970 second album by the Iggy Pop fronted Stooges, and it’s hailed by most reputable most rock aficionados as the dawn of punk. But it’s way cooler and complex than most punk. If you don’t spring for the whole album, you can’t be a self-respecting music fan—or Wall Street aficionado for that matter—without at least owning the album’s opener Down on The Street. Which will send your dome into a tailspin just like the markets … you won’t know whether to boogie down or throw some devil horns in the air, but you’ll come back for more nevertheless.

The Stooges: Funhouse|album [iTunes] [Amazon MP3]

Still Hard Times For Jumbo MBS
Why wouldn’t investors want to gobble up securities made up of jumbo loans? Well, how about delinquencies? In a story out of Business Week, “US prime jumbo mortgages at least 60 days late backing securities reached 9.6% in January from 9.2% in December, the 32nd straight increase for “serious delinquencies,” according to Fitch Ratings.” This is almost 3x the rate in 2008. Folks in the business know that non-agency securities don’t have the guarantees/insurance of Freddie, Fannie or Ginnie Mae. So where do these beasts trade? According to the article, last March they hit a low of .63 (so a loss of almost 40 cents on the dollar versus the original principal balance) but are now up into the low 80’s.

This raises the question “Why would an investor buy a pool of mortgages?” In the past, banks, who were, and still are, making fees on originating the loans, didn’t have to hold on to them, but instead could pool them and make them attractive to buyers. The buyers did not hold the individual mortgages, but parts of huge packages of them. Kind of like thinking about how delicious the Orange Chicken is at Panda Express and not having to think about how it got there. On top of that, the rating agencies told investors that the pools were safe, especially so in light of recent appreciation trends. Unfortunately now the rating agencies can’t quite say that, and are having difficulty trying to figure out how to rate any pool of mortgages. more…

Economic Worries
Yesterday’s stock market drop dominated the financial news. And a slowing economy helps rates and mortgage loan agents, right? (It’s a two-edged sword.) So the markets did not pay much attention to Non-Farm Productivity increasing over 6% during the fourth quarter of 2009. Efficiency in the last nine months of 2009 soared at the fastest pace since 1966 as companies cut worker hours even after sales stabilized. Factory Orders for November were up 1%, better than expected. And 4Q09 GDP was 5.7% at the first reading last week. But the focus, and one of the reasons given for stocks taking a beating, was on Jobless Claims which hit a 7-week high.

There is certainly a lot to be nervous about. There is the concern that around-the-world budget deficits will need to be financed by issuing more debt. California, with the 8th largest economy in the world, is continuing to have budget problems. On top of all that, oil prices declined over 5% while gold prices also fell, down over 4%. The dollar was weaker to the yen, but firmer to the euro as the risk aversion trade returned, and this helped Treasuries and mortgage security prices, dropping rates to December levels. more…

Comeback For Jumbo Loans
What is the American Securitization Forum? Darned if I know, exactly, but they were meeting in Washington DC and came out with a statement conjecturing that non-agency product (a $1.2 trillion market 4-5 years ago, $25 billion in ‘08 and $44 billion in ‘09) may start to be securitized again later this year. The reason? There’s more talk about it this year than last! Right now, however, jumbo loan production is pretty small, and profit margins are pretty slim since jumbo rates aren’t all that much higher than agency rates. (I have an idea! Let’s split the pools into tranches, and then have Wall Street work with the rating agencies… oh, never mind, I guess we tried that.) As I mentioned yesterday, banks are holding onto this product, but if other buyers materialize and the loans can be sold at profits, things could loosen up. Whole loan packages and syndications of interests in pools of loans may be steps in the right direction.

More on the return of Jumbo mortgages and mortgage securitization overall from this Bloomberg report. more…

New Bank Definition
I thought I knew what a bank was, until those clever folks at the internet gave me something else to contemplate.

Groundhog Day Predictions Worse Than Coin Toss
Happy Groundhog Day. Few offices outside of Punxsutawney, PA use this as a holiday, whereby since 1887 if the groundhog (Punxsutawney Phil) sees his shadow we have six more weeks of winter. If he doesn’t see his shadow, we will have an early spring. (Never to be outdone, the Great State of Texas chose its state mammal, an armadillo, to predict the weather for their first Armadillo Day.) The National Climatic Data Center reports that Phil’s predictions have been correct only 39% of the time. Worse than a coin toss!

Fed Report of Credit Standards
Do we really need, in the United States, a return to more lenient credit? Self-employed borrowers aside, probably not, as many believe that it helped contribute to the credit issues we have now. Yet the press makes a big deal out of banks in the United States not loosening the flow of credit to consumers and businesses. It is truly a “supply and demand thing”, the credit markets are, and a recent report by the Federal Reserve shows banks aren’t tightening credit standards as much as they were a year or two ago, but they haven’t yet loosened the flow of credit to consumers or businesses. “The net percentage of banks that were tightening standards was close to zero but positive for most types of loans,” the Fed said in its quarterly survey of senior loan officers at 55 U.S. banks and 23 foreign banks doing business in the country. In the January survey, most banks reported that demand for most types of loans is still weakening further, the Fed reported. more…

This CNBC report from the World Economic Forum in Davos this week has some comments worth calling out from Bank of America CEO Brian Moynihan and Barclays President Bob Diamond. Highlights from each below:

BRIAN MOYNIHAN, BofA CEO
“Bank of America is not too big. Big by definition is not the question, it’s a question of how you conduct your activities, how you manage activities and how you manage risk.” more…