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NAR’s Proposal for Fannie/Freddie
My daughter and I went through the McDonald’s take-out window and I gave the clerk a $5 bill. Our total was $4.25, so I also handed her a quarter. She said, “You gave me too much money.” I said, “Yes I know, but this way you can just give me a dollar bill back.” She sighed and went to get the manager, who asked me to repeat my request. I did so, and he handed me back the quarter, and said, “We’re sorry but we could not do that kind of thing.” The clerk then proceeded to give me back $1 and 75 cents in change.

Numbers can really be confusing. And when you are dealing with companies that back half of the $11 trillion home loans, things become even more confusing. What would you do about the role of the agencies in the mortgage industry? The National Association of Realtors has put forth a proposal to convert Freddie & Fannie into nonprofit corporations that would largely leave the mortgage-finance giants intact. Of course, the NAR or anyone else just can’t snap their fingers to make this happen: the proposal is likely to meet stiff political resistance because of the bail out money already spent and Congress’s desire to make bold changes. NAR suggests that unlike a federal agency, the new government non-profit authorities will function as self-sustaining organizations, without needing annual appropriations from Congress and without a profit motive but with government backing and guarantees. MI companies would continue to mitigate risk on loans above 80% LTV, and MBS guarantee fees would still be paid by originators. Of course no one wants to endanger the currently fragile housing and credit markets, least of all the NAR and Congress, so look for this process to be a very long and involved one. more…

Mortgage Rate/Lock Update
A small boy swallowed some coins and was taken to a hospital. His grandmother telephoned to ask how he was, a nurse said, “No change yet.” We started off the week with both the stock and bond markets making a little change for investors: both improved. The folks on Wall Street, if there is such a thing anymore, reported that selling was pretty heavy, suggesting that mortgage rate locks picked up as loan agents took advantage of intra-day price improvements. The Fed was in doing the usual MBS buying ($11 billion net last week), as were money managers and hedge funds, and lower coupons tended to do a little better price-wise versus higher coupons. Bonds closed near the highs of the day (lows in rates), and the 10-yr went back down to a yield of 3.66%. Gold was up $30 an ounce… what is wrong with this picture? Currently the futures market is pricing in an 82% chance that the Fed keeps rates somewhere between 0% and .25% through the end of June.

Exports Prices, Housing Starts Both Up
For economic news today we have Housing Starts & Building Permits, Export Prices, and Industrial Production & Capacity Utilization. U.S. import prices rose 1.4% last month, mostly due to oil, and it was the sixth consecutive monthly increase. Export prices gained 0.8 percent in January after a 0.6 percent rise in December. And U.S. housing starts (+2.8%) rebounded more strongly than expected to their highest level in six months in January, while permits fell slightly (-4.9%) less than forecast. Starts for the volatile multifamily segment increased 9.2%. After this news we find the yield on the 10-yr back up to 3.70% and mortgages worse by about .125. more…

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…

Hitler on Home Appraisals
OK, for anyone who deals with appraisals in any form, here’s a great YouTube video: a Hitler rant on new appraisal regulations. One of the better lines is, “Wells Fargo and BofA getting appraisals done by appraisal companies they own – It’s like Michael Jackson running a freaking boys camp! My E&O is going to go through the roof!” Definitely worth 2-3 minutes.

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…

ARMs Only 3% Of Total Agency Loans In 2009
An annual report on the ARM market published by Freddie Mac shows adjustable-rate mortgages accounted for just 3 percent of all conventional home purchase loans in 2009. That’s the smallest percentage for ARMs since at least 1982.

Market & Economic News Update
Yes, today we have the 7-yr Treasury Note auction. Yesterday’s 5-yr was “fair-to-pretty-good”. The auction came in at 2.37%, with “indirect buyers” nabbing 53% of it and a strong 2.80 bid-to-cover ratio. And for market news today, we had Jobless Claims and Durable Goods. New orders for durable goods were +.3% in December, less than expected but still better than the -.4% in November. Durable goods orders are a leading indicator of manufacturing activity & a good measure for overall business health, and for 2009 fell a record 20.2 percent. Jobless Claims dropped 8,000, which is good, but the drop was less than expected, which is bad. With these two pieces of news we find the yield on the 10-yr back up to 3.67% and mortgage worse by between .125 and .250. more…

Warren Buffet Quote on Bank Tax
In an interesting quote, Warren Buffett weighed in on the plan to tax banks. “I don’t understand plans for a bank tax – it just doesn’t make any sense to me that banks should be taxed to cover losses at other bailed-out companies, such as automakers, Fannie Mae, or Freddie Mac.”

Housing Starts Down 4%, Producer Inflation Up
Yesterday was pretty quiet, giving lenders and lock desks a day after the holiday to work on projects, extensions, renegotiations, etc. Dealers reported that mortgage selling was pretty light, with just under $1 billion in supply, and the Fed, money managers, and hedge funds doing the buying. But today we have had a flurry of news. U.S. Housing Starts unexpectedly fell 4% in December, pulled down by a lack of activity for single-family dwellings. Starts for single-family homes fell 6.9 percent last month, but multifamily starts were up over 12%. The Producer Price Index was up for the third month in a row, rising .2% (up 4.4% for the year) versus expectations of being unchanged. The core rate, ex-food & energy, was unchanged, lower than expected. more…

‘The Situation’ On Jersey Investment Fraud
If you ever thought Jersey Shore’s Mike “The Situation” Sorrentino was giving Jersey a bad name, consider this situation: Last week in New Jersey Wayne D. Puff, who ran a huge Ponzi scheme from 1998 through 2005, was sentenced to 18 years in federal prison and ordered to pay more than $100 million in restitution after his company (New Jersey Affordable Homes) accepted $123 million from investors, attracted to the annual returns of 15-20% from his business of buying, renovating and reselling real estate, using the time-honored tradition of fudging applications, having appraisers pump up values, and flipping properties.

Factors Against Housing Improvement
In more “great” news items is news like the kind that is issued by market researcher RealtyTrac, which stated that 2.8 million US properties had foreclosure filings in 2009 in spite of legislative and industry-related delays and loan modifications. The Federal Reserve is scheduled to wind down its MBS purchase program at the end of the first quarter, and tax incentives will expire at the end of April. Many markets still have too many houses for sale and too few buyers, and of course tight underwriting guidelines don’t help the supply & demand issue as appraisers continue to struggle to confirm sales prices. That being said, many markets are seeing stable prices and continued solid interest, especially on the low end. more…