Finreg Summary For Lenders
The Financial Reform Bill passed the Senate, and will no doubt be signed by President Obama. It is 2,300 pages. From my limited view, there are hundreds of thousands of questions for regulators and investors to answer in the next several months (at least), and most large mortgage companies are doing their best to tell clients that “they just don’t know yet” what the answers are to many questions. Certainly nothing will happen overnight. I know very little, but here is a 15 page synopsis by the Mortgage Bankers Association which may be of some help with the lender-specific topics.

Many mortgage lenders are very concerned with the compensation portion of the bill, or at least how regulators interpret the guidance. As one industry veteran wrote to me, “There already is no Origination Fee/Point, Discount Fee/Point, Yield Spread Premium – they were all done away with the GFE RESPA changes last year. There is now only “Origination Charge” in Box 1, on the new 3 page GFE (the total in Box 1 & Box 2 encompasses all of the former Origination Fee, Discount Fee, Yield Spread Premium). The Origination Charge is a flat dollar charge. The new legislation actually just catches up to the new RESPA GFE changes.”

FDIC’s Take On Finreg
FDIC Chairman Sheila Bair said, reflecting the government’s stand, “The responsibility now shifts to regulators to implement this law in a manner that is aligned with its principles. To this end, the FDIC will move swiftly and deliberately through the various rulemakings and studies required under the bill. We will do so in an open, transparent and collaborative fashion…I am also very pleased that the bill will strengthen the capital requirements of the U.S. banking system. For the first time, bank holding companies will be subject to the same standards as insured banks for Tier 1 capital. Excess leverage and thin capital cushions were primary drivers of the financial crisis, which resulted in severe, sudden contractions in credit and led to the loss of millions of jobs. This provision will bring stability to the financial system, allowing it to support real, sustainable, long-term growth in the real economy.”

Goldman Settles With SEC
On this day in 1941, prior to the US’s entry into World War II, Joe DiMaggio set the American League’s (and professional baseball’s) record for hitting in consecutive games: 56. The National League’s record was set in 1897 (45) by Wee Willie Keeler. Those are big numbers – so is the $550 million that Goldman Sachs has agreed to pay in order to settle federal claims that it misled investors in a subprime mortgage product as the housing market began to collapse. A judge is expected to approve the deal, but many say it is “peanuts” compared to Goldman’s $13.39 billion in profit last year. Heck, it is even less than the supposed amount Tiger Woods will pay Elin Nordegren: $750 million.

Bank Earnings Roundup
JPMorgan Chase’s earnings were better than expected yesterday, and today, so far, GE’s, Bank of America’s, and CitiGroup’s were better than expected as well (although Google’s was weaker than expected). For the 2nd quarter, BofA’s earnings per share were 27 cents versus 22 cents expected; revenue came in at $29.15 billion, and BofA had $8.1 billion set aside for credit losses. Overall BofA said it had lower credit costs. Generally speaking, the funds involved by banks reducing reserves, by bringing them back “in house”, are not viewed as long term income. So it is good news that the money is not being spent on losses, but not viewed as much good news either. CitiGroup released its earnings: 9 cents per share versus 5 cents expected. Revenue came in as expected at about $22.1 billion for the 2nd quarter. Overall – fewer credit problems but very low loan growth from the banks.

Mortgage Insurance Tax Deductions
Way back when, the US Congress passed legislation extending a tax provision that allows homeowners to deduct the cost of mortgage insurance premiums from their federal income tax returns through 2010. Borrowers with adjusted gross incomes below $100,000 were, and are, able to deduct 100% of their mortgage insurance premiums, although deductions are phased out in 10% increments for borrowers with adjusted gross incomes between $100,000 and $109,000. But… this ends at the end of this year. I have heard of no plans to extend this, or not extend it. Although I would expect that Congress will extend it, the very real possibility exists that legislators will wait until the last minute, just as they have for items like flood insurance.

No Inflation, Weak Manufacturing Lead To More Low Rates
A slow economy and no inflation usually don’t lead to higher rates – unless one starts thinking about the amount of debt out there. But for now, few people have been complaining about mortgage rates, and interest rates in general, and with good reason. Few have claimed that our economy is doing well enough to support higher rates, nor see any reason for rates to rise much in the near future. Housing and jobs continue to shuffle along. The Fed minutes from the June meeting confirmed that earlier this week: growth was downgraded, there is lingering high unemployment, no threat of inflation, etc.

Yesterday’s Empire Manufacturing number and the “Philly Fed” number were weak, which over-shadowed a strong Initial Jobless Claims report. (Claims are often distorted in July due to seasonal shut-downs in the auto industry related to retooling for the new model year as temporarily laid-off workers file for unemployment. Seasonal adjustment factors attempt to account for this, but since the schedules change every year, and GM recently reported that they were not shutting as many assembly plants as usual due to demand for various models, it seemed no one knew quite what to make of the number.) The 30-yr bond auction went well, and the demand continues to be solid for mortgage-backed securities. Selling and buying were a little light at $1.7 billion, with a smattering of 3.5% securities, some 4%, but still mostly 4.5% MBS’s trading hands – very liquid coupons for hedging. Even our friend the 10-yr Treasury note dropped below 3% for the first time in a few weeks, and stocks were about unchanged.

The June Consumer Price Index number dropped .1%, with the core rate +.2% – still no inflation. Year-over-year, the CPI is only up 1.1%. (Later in the morning, to close out the week, we have the University of Michigan Consumer Sentiment Survey.) Yesterday mortgage prices ended the day almost .375 better in price, and the yield on the 10-yr went back below 3%, although after the news this morning we find the 10-yr back up to 3.00%, and mortgage prices are slightly worse.

Daily Humor
Jacob, age 92, and Rebecca, age 89, living in Miami, are all excited about their decision to get married. They go for a stroll to discuss the wedding, and on the way they pass a drugstore. Jacob suggests they go in.

Jacob addresses the man behind the counter: “Are you the owner?”

The pharmacist answers, “Yes.”

Jacob: “We’re about to get married. Do you sell heart medication?” Pharmacist: “Of course, we do.”

Jacob: “How about medicine for circulation?” Pharmacist: “All kinds.”

Jacob: “Medicine for rheumatism?” Pharmacist: “Definitely.”

Jacob: “How about suppositories?” Pharmacist: “You bet!”

Jacob: “Medicine for memory problems, arthritis and Alzheimer’s?” Pharmacist: “Yes, a large variety. The works.”

Jacob: “What about vitamins, sleeping pills, Geritol, antidotes for Parkinson’s disease?” Pharmacist: “Absolutely.”

Jacob: “Everything for heartburn and indigestion?” Pharmacist: “We sure do.”

Jacob: “You sell wheelchairs and walkers and canes?” Pharmacist: “All speeds and sizes.”

Jacob: “Adult diapers?” Pharmacist: “Sure.”

Jacob: “We’d like to use this store as our Bridal Registry.”

Fed’s Consumer Credit Card Search Site
Looking for a credit card? Knock yourself out on this Federal Reserve website. In an intersting move by the Federal Reserve, they have placed 300 credit card compnay agreements (mostly companies with 10,000 or more open credit card accounts) online in a searchable database for public viewing. Can something for mortgages be far behind?

Rates Low But Refis Still Tough
Rates certainly continue to surprise folks who expected higher rates by this time in 2010. The 10-yr neared 3.10%, closed at the lowest yield in over a year and some were beginning to yap about the 10-yr down into the 2%’s. We have a different story today, as hedging mortgage pipelines continues to be difficult, as the 10-yr yield has shot back up into the 3.20%’s. Overall the news yesterday helped bonds: continued European fears, the Euro hitting an 8-year low versus the yen, Korean fears, the Case-Shiller index lower, Consumer Confidence slightly higher. We also had a $42 billion 2-yr auction, which is now under water. At one point the DOW was down over 300 points and the 10-yr was up a point. Mortgage prices did well, relative to Treasury prices, as servicers apparently have been buying pools. Large servicers and investors are, of course, worried about prepayment risk of recently originated loans.

Of course, one can argue that everyone who could possibly refinance and prepay their mortgage already has—meaning low rates don’t help homeowners underwater, in default, or headed for foreclosure (whether intentionally or not) because tight loan approval guidelines won’t allow for a refinance. Keep in mind that there is a large amount (in the trillions) of good quality mortgages at higher rates who may be interested in refinancing at no cost. Regardless, new origination being seen in MBS’s seems to be running at about $1.5 billion a day.

Purchase Loan Applications Lowest Since 1997
Today we have already seen the report on mortgage applications for last week. Apps were up over 11%, with refinancing (no surprise at these rates) up 17%, but purchase applications are at their lowest levels since 1997. Of total applications, refinancing accounted for over 72%! Later this morning we will have New Home Sales for April, expected to increase. We also have a $40 billion 5-yr auction, which typically goes pretty well. Durable Goods came out at +2.9%, with a back-month revision higher from -1.3% to unchanged. But ex-transportation the number was down, so cars and planes played a big role in this number. Stocks are pointing to a higher opening, the 10-yr is up to 3.21%, and down between .125-.250.

Less Loss For Toll Brothers
Toll Brothers, known as a builder in the luxury home market, reported that losses for the second quarter (through April) had narrowed. But still, homebuilder red ink flows: Toll Brothers lost $40 million in the quarter. Revenue fell 22% to $311.3 million from $398.3 million. Write-downs in the latest quarter were $42.3 million, a bit more than a third of the $119.6 million a year earlier.

Daily Humor
A Catholic priest, a doctor, a rich businessman and a mortgage banker were waiting one morning for a particularly slow group of golfers in front of them.

The mortgage banker fumed, “What’s with those jerks? We’re waiting fifteen minutes between shots!”

The doctor chimed in, “I don’t know, but I’ve never seen such poor golf!”

The rich businessman called out, “Move it, time is money!”

The Catholic priest said,”Here comes the greens keeper. Let’s have a word with him. Excuse me, sir! What’s wrong with that group ahead of us? They’re rather slow, aren’t they?”

The greens keeper replied, “Oh, yes. That’s a group of blind fire fighters. They lost their sight saving our clubhouse from a fire last year, so we always let them play for free anytime.”

The group fell silent for a moment.

The Catholic priest said, “That’s so sad. I think I will say a special prayer for them tonight.”
The doctor said, “Good idea. I’m going to contact my ophthalmologist colleague and see if there’s anything that he might be able to do for them.”

The rich businessman replied, “I think I’ll donate $50,000 to the fire fighters union in honor of these brave souls!”

The mortgage banker said, “Why the heck can’t they play at night?”

Greece’s Impact On U.S. Mortgage Rates
Turning to Greece, since that situation is certainly impacting our markets, the fear that a) the problems will spread beyond Greece, b) Greece may leave the 11-yr old single currency “euro-zone, or c) this is the beginning of the entire euro experiment are causing a drop in the value of the euro and a rally in the dollar. (Not that the dollar should be in great shape, but hey, we’ll take what we can get.) A general strike shut down Greek airports, tourist sites and public services and some 50,000 demonstrators marched against the planned public spending cuts and tax rises, demanding that tax cheats and corrupt politicians be put on trial. Off with their heads!

So what does it mean to our mortgage business (rates) if Europe “tightens its belt”? This would actually continue to help our rates since it would slow the recovery in Europe, reduce the chance of inflation around the world, and allow our Fed to keep short-term rates low (monetary policy to be more accommodative) for longer than expected. A stronger US dollar is good for keeping inflation down.

What Does Negative Bond Convexity Mean?
It is a fact of life that after Monday and Tuesday even the calendar says “W T F…” It is Thursday, which means Jobless Claims. But for mortgages yesterday, they “widened”, and there was some “convexity related buying” as 10-yr yields moved down near 3.50%. What does “negative convexity” actually mean? With price volatility increasing, it helps to know. In the past, mortgage prices would compress into rallies and expand into sell-offs, relative to US Treasury prices. Yesterday, for example, current coupons mortgages were “wider” versus Treasuries.

Remember that for fixed income instruments, when rates go up, prices go down, and if rates go down, prices go up – simple! But if the bond is “callable”, meaning that the issuer can pay it off, like a borrower and a mortgage, as interest rates fall, the incentive for the issuer to call the bond at par increases; therefore, its price will not rise as quickly as the price of a non-callable bond. In fact, the price of a callable bond (like a mortgage) might actually drop as the likelihood that the bond will be called increases. This is why the shape of a callable bond’s curve of price with respect to yield is concave, or “negatively convex.” A very simple way to explain it is that mortgages pay off when rates drop, just when servicers and investors don’t want them to pay off, so mortgage prices don’t improve as much in a rally as, say, a Treasury bond.

U.S. Bonds News Summary
On Wednesday the flight to quality, fortunately of holders of US debt, continued with our fixed income securities rallying in price and dropping in rates to December levels. Notes and bonds rose .5 in price by day-end, and mortgages improved by .250. As a quick aside, the U.S. Treasury cuts its debt offerings for the first time in three years and reduced its overall planned sales for its upcoming quarterly refunding due to a growing economy. Next week’s quarterly refunding was cut to $78 billion from $81 billion in the previous quarter: $38 billion of 3-yr notes, $24 billion 10-year notes, and $16 billion of 30-year bonds. The frequency of auctions of 10-year TIPS will increase from four to six to meet increased market demand.

Freddie Mac Reports Loss
Freddie Mac reported a net loss of $6.7 billion in the 1st quarter of 2010 (compared to a loss of $9.9 billion a year ago) and needs an additional $10.6 billion in assistance from U.S. taxpayers. Freddie has gone for three straight quarters in not needing any cash infusions from the Treasury. Analysts point to a change in accounting rules whereby starting this year companies like Freddie are required to move all mortgages they guarantee – but don’t own – onto their books. This shift alone caused Freddie’s equity to drop by $11.7 billion, and when combined with the firm’s loss and a $1.3 billion dividend payment to the Treasury, led to the red ink.

Job Report Preview
Turning to our employment picture, yesterday we had the ADP National Employment report, which measures private sector employment, today we had Initial Claims, and tomorrow we Non-farm Payroll numbers. The ADP number has always had a reputation for being a dubious predictor of the Non-farm Payroll number (under or overestimating it for long stretches) although it was pretty accurate from Dec-Feb. The four-week moving average of Initial Claims yesterday, generally thought to be a better measure since it irons out weekly volatility, are much better than they were a year ago but still high on a relative basis. Deutsche Bank reminds us that other employment measures are improving: employee tax receipts, corporate profits per worker, lay-offs have decreased, temporary hiring has picked up, etc. Forecasts for tomorrow’s April number seem to be running around+225k or +150k excluding census workers, with the unemployment rate perhaps moving lower to 9.6% versus 9.7% in March.

Economic Stat Roundup
Today we will have another day of credit crisis hearings in Washington DC, along with a number of Fed speakers. The economic news scheduled is pretty much limited to Initial Claims for Unemployment and a Productivity/Unit Labor Cost number, both already out. Initial Claims were expected to drop slightly. Jobless Claims indeed came in at 444,000, with Continuing Claims dropping somewhat, and the 4-week moving average dropped by 4,750. Productivity rose to a level +3.6%, and Unit Labor Costs were reported as declining. After this news the yield on the 10-yr is at 3.56%, and mortgage prices are better by between .125 and .250, depending on coupon.

Daily Humor
A man dies and goes to hell. There he finds that there is a different hell for each country.
He goes to the German hell and asks, “What do they do here?”

He is told, “First they put you in an electric chair for an hour. Then they lay you on a bed of nails for another hour. Then the German devil comes in and whips you for the rest of the day.”

The man does not like the sound of that at all, so he moves on.

He checks out the American hell, as well as the Russian hell and many more. He discovers that they are all more or less the same as the German hell.

Then he comes to the Greek hell and finds that there is a long line of people from all nationalities waiting to get in. Amazed, he asks, “What do they do here?”

He is told, “First they put you in an electric chair for an hour. Then they lay you on a bed of nails for another hour. Then the Greek devil comes in and whips you for the rest of the day.”

But that is exactly the same as all the other hells. Why are there so many people waiting to get in?”

He is told, “Because the maintenance crew is always on strike, there is no electricity so the electric chair doesn’t work; Albanians have stolen all the nails from the bed; and the Greek devil is a former Greek government employee, so he comes in, signs the register, and then goes to have his kafethaki (coffee) and eat kourabiethes (cookies) all day.”

Rates Benefit on Stock Weakness
The drop in the equity markets yesterday, and possibly again today, certainly helped the flow of funds into “safer” investments – such as Treasuries and MBS’s. But we also had some economic news of note, the first being Pending Home Sales. The index was up 5.3% in March, with sales in the South up 13%, up 2% in the West, up 1% in the Midwest, but fell 3.3% in the Northeast. Second, Factory Orders here in the US were up 1.3% in March. And the Federal Reserve released its “Senior Loan Officer Survey” which showed that banks kept their lending standards tight during the first quarter – no surprise there, huh? There may have been a little movement in commercial and industrial loans to large and medium-size firms.

Greece Bailout Is Like US Needing 10x TARP Funds
Returning to the Greek issue for a moment, some believe that this will be the end of the Euro currency, at least in Greece. Let them print their own currency! The odds of sharp recession have increased, obviously, and naysayers are skeptical about any bailout plan based on the recession-stricken Portuguese and Spanish contributing billions of Euros to the cause. We have the ECB adopting a pure bailout strategy by accepting all Greek collateral and have seen almost $150 billion in potential economic aid offered to the Greeks. This figure is almost 50% of Greek GDP, and is the equivalent of the United States needing 10x the TARP funds! Greece’s GDP is only about 2% of US GDP and slightly less than that of Eurozone GDP, and one analyst likened it to Ohio going bankrupt and taking the entire US economic system with it.

Bond Yields Hit 4 Month Lows
In our market, yields hit their lowest level in more than four months due to the continued “concern” that European governments haven’t yet overcome the region’s debt crisis boosted demand for the safest assets, although there are continued worries about the debt situation in our own country. The difference in yield, however, between Fannie Mae & Freddie Mac mortgage securities and Treasury yields climbed to its highest level in several months. Spreads have not skyrocketed, but have moved up on increased volatility and since investors are very much preferring the safest of Treasury securities. “If Greece could default, couldn’t Fannie or Freddie?” Fortunately for possible borrowers, all rates have dropped, masking the difference. (Greater volatility harms mortgage-bond prices because it makes bigger rises or drops in rates more likely, pushing refinancing and other sources of prepayments on the underlying loans either much higher or lower than expected.)

Mortgage Apps Up, ADP Jobs +32k
This morning we learned what locks desks already knew about last week: mortgage applications rose 4% after declining 2.9% during the previous week. Refinancing apps were down 2.1% from the previous week but purchases increased 13.0% from one week earlier – there’s that homebuyer tax credit at work. In fact, purchase applications were up almost 24% over the last month. We also had the ADP private-payroll number for April which showed job growth coming in at 32,000. After these, and in the face of further stock sell-offs, the yield on the 10-yr is down to 3.55% and mortgage prices are better by between .125 and .250.

Follow Up On Mortgage Fraud Categories Comment
A reader made a good point on an article that I mentioned yesterday which stated, “Next were frauds related to appraisal and valuation misrepresentation, which increased from 22% of reported misrepresentation in 2008 to 33%. With an 11% increase, this is the most notable increase in reported fraud types in 2009. Thank you HVCC.” Vicky (from Valuation Management Group) wrote to point out, “The reported fraud was reported in 2009, but most likely took place in the years prior to 2009. HVCC was not in place until 5/2009, so the results of this will not be realized until the 2011 or 2012 reports.”

PennyMac Earnings
PennyMac Mortgage Investment Trust reported net income for the first quarter of $1.3 million on total net investment income of $3.9 million. During the first quarter the company acquired five residential mortgage whole loan pools valued at $115 million in aggregate, with unpaid principal balances at the time of purchase of $208 million, of which 86% of the loans were either 90 days or more delinquent, or in the foreclosure process.

FDIC Selling 40% Of Silverton Bank Subsidiary
In a related but unrelated matter, the FDIC announced a bid confirmation letter to sell a 40% equity interest in a limited liability company created to hold assets of SFG, a subsidiary of Silverton Bank (GA) to Square Mile Capital Management LLC. The FDIC will initially hold the remaining 60 percent equity interest in the LLC. The assets are mostly performing hospitality loans and loan participations with an unpaid principal balance of approximately $421 million.

Lending Effects of Nashville Flooding
Effective immediately, due to the present flooding activity in the Nashville TN area, Flagstar Bank will be temporarily suspending loan fundings in Davidson County. And when funding resumes, a satisfactory re-inspection will be required (as it already is for Cheatham, Rutherford, Sumner, Williamson, and Wilson counties) that include a statement from the appraiser that the subject property has not sustained any damage, a statement from the appraiser on the neighborhood conditions as they relate to any flooding or mudslide damage, and a photograph of the subject property.

Treasury Tries To Help Force More Loan Modifications
An American Banker article by Kate Berry states that “the Treasury Department is threatening to deny or even claw back incentive payments to mortgage servicers that are not modifying loans according to the administration’s guidelines.” Some say that noncompliance is rampant in the voluntary Home Affordable Modification Program (HAMP), mostly in the area of communications with borrowers about their rights surrounding foreclosure. The Treasury Department pays $1,000 for each completed permanent modification for a delinquent borrower and $500 for each modification given to a current borrower, along with $1,000 per year for borrowers who stay current after being modified. So far, servicer payments have totaled $68.4 million to the 109 servicers who are participating in the program and through March 31st only 230,801 borrowers had received permanent loan modifications and more than a million borrowers were in trial modifications. Given that the program is voluntary, too many penalties can cause servicers to drop out of the program – contractually, there is very little to compel the banks and servicers to do anything.

Loan Modification Comment From Trenches
In a related word from the trenches:

“Large investors and servicers are receiving incentives to modify loans, and then they can turn around and pass the loss portion onto the originator. The most frustrating part is that while the loans were underwritten responsibly (reasonable income, not inflated with a strong likelihood of the income continuing), the servicers are now contacting borrowers or employers and verifying the past income – but how they are getting the authorization from the borrower to do so when there is no loan modification in progress? If there is a discrepancy in income, the result is a repurchase request with complete disregard to the fact that it was their product design that you had to comply with, requiring ‘when verifying employment, no income may be disclosed’. I am sure that there are borrowers that inflated income levels, but on the loans I have reviewed, this does not appear to be the case. I am trying to figure out how this scenario is supposed to be acceptable to those who responsibly played by the rules!”

Daily Humor
Most people don’t know that in 1912, Hellmann’s mayonnaise was manufactured in England.

In fact, the Titanic was carrying 12,000 jars of the condiment scheduled for delivery in Vera Cruz, Mexico, which was to have been the next port of call for the great ship after its stop in New York.

This would have been the largest single shipment of mayonnaise ever delivered to Mexico. But as we know, the great ship did not make it to New York. The ship hit an iceberg and sank, and the cargo was lost forever.
The people of Mexico, who were crazy about mayonnaise, and were eagerly awaiting its delivery, were disconsolate at the loss. Their anguish was so great that they declared a National Day of Mourning, which they still observe to this day.

The National Day of Mourning occurs each year on May 5th and is known, of course, as Sinko de Mayo.

Reshuffling Of Fed Members
Is the economy really in good enough shape for the Fed to start selling their $1.25 trillion of mortgage-backed securities? I don’t think so, but maybe the press doesn’t have enough else to talk about, so the Fed possibly lightning up on their balance sheet has been receiving some publicity. Federal Reserve Vice Chairman Donald Kohn declared on March 1 that he was planning to retire, and SF Federal Reserve’s Janet Yellen was immediately mentioned. But the nomination still hasn’t been made. In a story from the Washington Post, not only is that spot unresolved, but there have been two seats on the seven-member Fed board of governors that have been unfilled this year! MIT economist Peter Diamond and Maryland bank regulator Sarah Raskin have been mentioned. But unlike vacancies in the Supreme Court, open spots on the Fed don’t seem to garner many headlines in spite of the Fed determining short term interest rates, the pace of job creation and employment, even mortgage rates over the last year or two.

57 Failed Banks YTD
It’s Monday, so that means I get to write about the FDIC closing down banks. (We’re up to 57 this year compared to 140 for all of 2009.) In this case Illinois got whacked with seven banks from that state eliminated, with their mugs and t-shirts becoming collector’s items. The FDIC took over four banks in Chicago: New Century Bank, Citizens Bank & Trust, Broadway Bank, and Lincoln Park Savings. And just so the rest of the state didn’t feel left out, Amcore Bank (Rockford, IL), Peotone Bank and Trust Company (Peotone, IL), and Wheatland Bank (Naperville, IL) were shut down. MB Financial Bank agreed to acquire the deposits of both Broadway and New Century, Republic Bank (IL) assumed Citizens’ deposits, and Harris National Association (IL) agreed to acquire Amcore Bank’s deposits. Northbrook Bank and Trust Company took Lincoln Park Savings’ deposits; First Midwest Bank of Itasca agreed to assume Peotone Bank and Trust’s, while Wheaton Bank & Trust will acquire the deposits of Wheatland Bank.

FHA & VA Loans Going Strong
Recent statistics are showing continued strength in FHA and VA production volumes. Maybe not Streamline Refinances, but for purchases and non-streamline refi’s. With the reduction of lenders offering subprime loans at decent rates, the reliance on FHA/VA loans is now easily exceeding the experience of the 1990s or early-2000s. Any agent will tell you that there are currently only three options for borrowers: Very clean and well documented non-agency borrowing with low LTV’s, clean GSE loans with FICO’s well above 700 and LTV’s generally less than 80%, and FHA & VA often as a choice of last resort. Yes, everyone is excited about the Redwood/Citi deal coming to the market, but we have a ways to go until non-agency securities are welcomed by investors and non-portfolio lenders.

Mortgage Insurance Company Earnings
Wall Street has been pleased with the earnings of the MI companies, although cynics would say that they are still losing money. MGIC lost $150 million in the first quarter versus a loss of $185 million a year ago. RMIC had a net income of $25 million last quarter versus a loss of $54 million for the same period last year. And PMI lost $649 million for all of 2009 versus a loss in 2008 of $929 million.

Parsing The FOMC Statement
Do you think that, years from now, we’ll be telling our grandkids how analysts and traders would analyze every word of the Fed statement that was produced after they met just to look for microscopic clues on the markets? And how prehistoric that seems? This week we’ll hear from the Fed, and most expect that the Fed is seeing the same thing many are: slow but sustained economic growth, lagging consumer spending, tight credit, a muddling housing market, and little sign of inflation. The committee will likely conclude that conditions continue to warrant leaving rates “exceptionally low” for an “extended period.”

More on +27% New Home Sales
New Home Sales were up 26.9% in March. Granted, February was a pretty light number, but still it appears that the business is seeing yet another wave of folks taking advantage of the tax credits that won’t exist after this week. The South and Northeast posted the strongest gains, with sales in the South rising 43.5% in March, 35.7% in the Northeast, 4.3% in the Midwest and 5.7% in the West. March’s new home sales figure is up 23.8% from a year earlier even though new home sales growth has been sluggish. In March, the median price (half below, half above) for a new home increased 4.3% on a year-over-year basis to $214,000. In looking at home sales sorted by price, in the first quarter 45% of new home sales were below $200,000, while only 13% were above $400k. That certainly helps the argument that FHA/VA, Fannie/Freddie will dominate for most, if not all, of 2010 and possibly beyond.

Who’s Buying Mortgage Bonds?
Which entities were buying mortgages Friday, without the Fed? Asian investors, banks, hedge funds, and money managers were all reported to be in sniffing around. And originators were happy to oblige by selling an estimated $1.5 billion to them. And with a lot of Treasury supply coming in most every week, there’s a school of thought that suggests that investors buy mortgages rather than Treasuries. The mortgages being originated now are cleaner, better documented, and of better quality than in the last several years. Besides, with the Fed keeping short term rates near 0%, funds can earn 1% in 2-yr USTs, 2.5% in 5-yr Treasury notes… why not pick up a little yield by earning 5.25% on some 60% LTV full doc loan?

Economic Preview For Week
Greece actually requesting financial help, along with that solid New Home Sales figure and the thought of more auctions this week pushed rates higher on Friday. (One can argue that no one knows exactly what moves markets, but it was easiest to blame those factors.) This week presents us a mixed-bag of economic releases, on top of the auction. Today we have Building Permits. Tomorrow we have the S&P/Case-Shiller Price Index, along with Consumer Confidence. Wednesday is the Fed meeting mentioned above, Thursday is Initial Claims and the Chicago Fed numbers, and on the last day of April we have the GDP numbers, the Employment Cost Index, and Chicago Purchasing Managers’ numbers. Currently the 10-yr yield is 3.80% and the 5-yr Treasury and mortgage prices are both better by about .125.

Daily Humor
The local news station was interviewing an 80 year old lady, because she had just gotten married for the fourth time. The interviewer asked her questions about her life, about what it felt like to be marrying again at 80 and then about her new husband’s occupation!

“He’s a funeral director,” she answered.

“Interesting,” the newsman thought. He then asked her if she wouldn’t mind telling him a little about her first three husbands and what they did for a living.

She paused for a few moments, needing time to reflect on all those years. After a short time, a smile came to her face and she answered proudly, explaining that she had first married a banker when she was in her early 20′s, then a circus ringmaster when in her 40′s, and a preacher when in her 60′s, and now in her 80′s, a funeral director.
Astonished, the interviewer looked at her and asked, “Why did you marry four men with such diverse careers?”
She smiled and explained, “I married one for the money, two for the show, three to get ready and four to go.”

Interpreting Latest Existing Home Sales Data
Everyone has an opinion about home sales. But most agree that new home sales are at record lows and will be slow to recover until inventory of existing homes and the foreclosure overhang are worked off in many locations around the US. Some indicators for existing home sales, however, including pending home sales and purchase applications, are showing small signs of a pickup, at least on a regional basis. The ending of the Fed’s MBS purchase program did not lead to a skyrocketing of mortgage rates, and it does appear that economic conditions are improving. The MBAA’s economist believes that the recession ended in June 2009. Heck, nobody told me!

But existing home sales have shown signs of weakness in recent months. Housing sales fell 0.6% in February, the third consecutive monthly decline, which boosted the number of months’ supply to 8.6 months. Tomorrow we will have some sales numbers, and an expectation that they will remain in the recently established narrow range increasing to a 5.25 million unit pace in March. Sales will likely continue to gain positive momentum in coming months due to the spring home buying season and the second scheduled expiration of the tax incentives in late April.

Mortgage Apps Up Most in 7 Weeks
The housing market is “hanging in there”, at least based on applications taken last week. Mortgage applications in the U.S. rose by the most in seven weeks, up 13.6%, which analysts attributed to the approaching end of the homebuyer tax credit. The MBAA’s index of purchases climbed 10.1%, and refinancing shot up 15.8%, the first gain since the end of February.

Wells Fargo & Suntrust Earnings
The earnings train continues to roll. SunTrust reported a much smaller first-quarter net loss and beat analysts’ expectations as its loan problems showed early signs of stabilizing. Its net loss narrowed by 74% to $229 million versus a year-earlier $875 million. Revenue declined 14% to $1.9 billion; non-interest income declined 38% to $698 million, amid lower mortgage origination, and was partially offset by a net interest income increase of 10% to $1.2 billion. Wells Fargo’s stock is under some pressure this morning after its earnings were announced (although it is up almost 80% in the last year). First quarter earnings dropped 16%: Wells reported a profit of $2.55 billion versus the $3.05 billion it earned a year ago. Revenue was up 2% to $21.45 billion. Wells’ non-performing assets increased to 3.49% from 1.25% a year ago and 3.12% the prior quarter. Lastly, Morgan Stanley earnings-per-share beat expectations at 78 cents versus 57 cents. Its net income was $1.4 billion versus a loss of $578 million a year ago, and net revenue was $9.1 billion.

Fraud Insurance For Lenders
The Prieston Group (TPG) has teamed up with First American CoreLogic to offer a comprehensive fraud prevention and insurance program to mortgage lenders. First American CoreLogic’s fraud tool apparently is combined with TPG’s risk management services, indemnity programs and training. The result is that TPG will help lenders establish business rules and guidelines and employ the First American CoreLogic LoanSafe Fraud Manager tool to enforce those policies in the lender’s daily operations, and lenders who use this joint solution will be insured against fraud losses by Lloyd’s of London.

Which Lenders Can and Can’t Do FHA Loans
HUD officially published the “Final Rule”, which after May 20 no longer requires loan correspondents (mortgage brokers) to obtain FHA-approval to participate in FHA loan programs, but instead will need to be sponsored by FHA-approved mortgagees. The “Final Rule”, entitled, “FHA: Continuation of FHA Reform-Strengthening Risk Management through Responsible FHA Approved Lenders,” will also increase net worth requirements from $250,000 to $1 million ($500,000 for small businesses). (Let me go on the record here that personally, I take “small businesses” to be less than 500 employees, but it is best to check with HUD over what they mean by it.) “2009 audited financials are not required to continue originating loans, however all current FHA-approved mortgage brokers must recertify and pay the applicable fee through FHA Connection to maintain FHA-approval through December 31, 2010, as made acceptable in the Final Rule.” Here’s the summary and here’s the actual ruling.

Homebuyer Tax Credit Deadlines Fast Approaching
As a reminder, the first time homebuyer credit of $8,000 and existing homebuyer’s credit of $6,500 are nearing the mandatory program expiration date: the homebuyer must enter into a binding contract to purchase a home no later than April 30 and they must close the loan no later than June 30. Many investors, such as US Bank, are letting correspondents and brokers know that they are not going to guarantee closing any loan prior to June 30. Period. So borrowers are better off being informed of the deadlines. Here’s a link to the details for Fed and CA tax credits, and also here’s a link about why CA tax credit may run out in a few weeks.

Market Recap
Yesterday, by most accounts, was a pretty quiet day in mortgage-land. Mortgage yields widened out a little on Monday as mortgage banker selling picked up, but yesterday that spread was stable. For the time being, the 10-yr seems content around 3.79%, and it helps that the continuing Treasury auctions are in a lull period, and there is little news from the Fed since we are within the one-week “quiet period” ahead of the meeting next week. Today there is little news, and tomorrow we have the usual Initial Jobless Claims. The 10-yr is hovering around 3.78% and mortgage prices are better by about .125.

Daily Humor
One day my housework-challenged husband decided to wash his sweatshirt. Seconds after he stepped into the laundry room, he shouted to me, “What setting do I use on the washing machine?”

“It depends,” I replied. “What does it say on your shirt?”

He yelled back, “OHIO STATE!”

Citi Revenue $25b in Quarter
Citgroup announced earnings this morning with earnings per share of 15 cents versus a $0 expected. Revenue was $25 billion versus $21 billion anticipated. Like BofA’s, and Chase’s, these are solid results, but unfortunately overshadowed.

FDIC’s Bank Failure Update
The FDIC closed down several more banks on Friday. Tamalpais Bank (CA) is now under Union Bank (CA). TD Bank (FL) acquired the banking operations, including all the deposits, of three Florida-based institutions: AmericanFirst Bank, First Federal Bank, and Riverside National Bank. Butler Bank (MA) has new signs on its branches saying People’s United Bank (CT). Lakeside Community Bank (MI) is now part of First Michigan Bank. Innovative Bank (CA) was maybe too innovative, and was taken over by the FDIC and a purchase and assumption agreement was signed with Center Bank (CA). City Bank (WA) is now part of Whidbey Island Bank (WA).

Feds Investigating Countrywide
The Wall Street Journal reported that federal authorities are picking up the pace in a criminal investigation of Countrywide Financial Corp. and its role in the meltdown in 2007 and 2008 of the U.S. housing and finance industries. The paper didn’t offer details on what charges could emerge, but said a grand jury began hearing testimony about Countrywide last year. No criminal charges have been filed against corporate leaders in the larger federal probe.

.25% Fed Funds Through August?
The Goldman news was enough to shake up the markets, and fixed-rate securities improved in price and dropped in rate. The 10-yr Treasury yield dropped to 3.78% although mortgage spreads widened out slightly, so did not improve quite as much. The futures market is pricing in an 83% chance that the Fed keeps rates at .25% through August – so don’t look for a change.

Economic Preview For Week
The press is certainly consumed with the Goldman Sachs news, but that doesn’t mean that scheduled news comes to a halt. Things are pretty slow this week for the first few days, although we do have Leading Economic Indicators later this morning (expected to be up 1.3% for March, which would be the largest increase in nine months). On Thursday we have the Producer Price Index (PPI), Existing Home Sales, and Initial Jobless Claims. Friday we have Durable Goods, an important indicator of economic activity, and New Home Sales. Currently the yield on the 10-yr is at 3.78% and the 5-yr & mortgage prices are unchanged, maybe worse a tad.

Financials Down On SEC’s Goldman Suit
Numbers can play tricks. Just ask Goldman Sachs. The SEC claims that Goldman Sachs had marketed a packages of mortgages put together by a hedge fund that would profit if the mortgages fell in value. The mortgages did indeed fall in value with the bulk defaulting, and the SEC claims that Goldman neglected to fully disclose the role of the hedge fund in putting together the package of mortgages. So on Friday, for example, in spite of companies like Bank of America (and today Citi) having great earnings, financial stocks, and the stock market in general, fell, and rates dropped due to the flight to quality. Goldman Sachs misstated and omitted key facts about a financial product tied to subprime mortgages as the U.S. housing market was starting to falter, per the SEC. Was it one of the last deals done by a struggling industry? Let’s hope so.

Recap of Goldman Issues
The issue is Goldman’s lack of disclosure, and once again where the rating agencies were in all of this. Analysts during the dot-com bubble recommended stocks of banking clients they actually believed were highly overvalued, and the same thing happened. Financial companies should not be allowed to mislead investors or take on leverage that can jeopardize everyone else. From 2004 through 2007 Goldman Sachs created 23 financial transactions called “Abacus”, with critics saying that the bank used the deals to off-load the risk of mostly subprime home loans and commercial mortgages to investors. There were $7.8 billion of Abacus notes but the risk passed to investors was multiples higher since the Abacus transactions were synthetic collateralized debt obligations and credit default swaps. These swaps are used to transfer the risk of losses on debt, and securitization, used to slice the risk in a pool of assets into various new securities, and Goldman’s deals were filled with default swaps that offered payouts to Goldman Sachs if certain mortgage bonds didn’t pay as promised, in return for regular premiums from the bank.

Hedge fund Paulson & Co. (John Paulson, not Henry Paulson, and is not accused of any wrongdoing) helped pick the underlying securities and also bet the CDO would default. Paulson was proved correct, and his hedge fund eventually turned a $1 billion profit and CDO investors lost a similar amount, according to the SEC. It is the first big case, but probably not the last, that examines investment banker’s role in the subprime mortgage mess, and of course other issuers of mortgage securities, such as Deutsche Bank, Credit Suisse, etc., are caught up in the news and its implications. No matter what happens, don’t expect less financial regulation as a result.

Daily Humor
Dear Tide:
I am writing to say what an excellent product you have.

I’ve used it all of my married life, as my Mom always told me it was the best.

Now that I am in my fifties I find it even better!

In fact, about a month ago, I spilled some red wine on my new white blouse. My inconsiderate and uncaring husband started to belittle me about how clumsy I was, and generally started becoming a pain in the neck. One thing led to another and somehow I ended up with his blood on my new white blouse!

I grabbed my bottle of Tide with bleach alternative, to my surprise and satisfaction, all of the stains came out!

In fact, the stains came out so well the detectives who came by yesterday told me that the DNA tests on my blouse were negative and then my attorney called and said that I was no longer considered a suspect in the disappearance of my husband.

What a relief! Going through menopause is bad enough without being a murder suspect!

I thank you, once again, for having a great product.

Well, gotta go, have to write to the Hefty bag people.

Lawmakers Solicit Consumer Comments On 7 Financial & Housing Reform Topics
Do you want some input in financial reform? There are many ways to do this, and here is another. The public will have the opportunity to submit written responses to seven questions that will be published in the federal register online at www.regulations.gov. The administration also plans a series of public forums across the country on housing finance reform. The questions are:

1. How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy?

2. What role should the federal government play in supporting a stable, well-functioning housing finance system and what risks, if any, should the federal government bear in meeting its housing finance objectives?

3. Should the government approach differ across different segments of the market, and if so, how?

4. How should the current organization of the housing finance system be improved?

5. How should the housing finance system support sound market practices?

6. What is the best way for the housing finance system to help ensure consumers are protected from unfair, abusive or deceptive practices?

7. Do housing finance systems in other countries offer insights that can help inform US reform choices?

Top U.S. Loan Agents
“A husband is someone who, after taking the trash out, gives the impression that he just cleaned the whole house.” I think that quote is pretty funny, but it does have a correlation with the mortgage industry. I have heard repeatedly that in the current environment, brokers are doing three times the work for one third the pay compared to past years. Say what you want about this being justified or not, but you might see some names that you recognize on a nationally published list of top originators. The Scotsman Guide has ranked the nation’s top-producing mortgage professionals: Yournamehere?

Organized Bank Protesters
Who says that protesters aren’t organized? Protestors at Syracuse are planning on greeting JPMorgan Chase’s Jamie Dimon, who is speaking there. And protesters have an actual website for activities at the Wells Fargo shareholders meeting, complete with entertainment, food, the groups involved, etc.

Bank of America Earnings
At Bank of America, just like at JPMorgan Chase, credit and income is improving! Bank of America Corporation reported first-quarter net income of $3.2 billion compared with a net loss of $194 million in the fourth quarter and net income of $4.2 billion a year earlier. The company earned $0.28 per diluted share in the first quarter, up from a loss of $0.60 per share in the fourth quarter and earnings of $0.44 per share in the first quarter of 2009. All in all, analysts were pleased with the results, and the stock has improved on the news in pre-market trading. Interestingly, according to BofA’s president, core loan demand from consumers is slow – smaller companies are not hiring yet. Banks have money to lend, and are willing to do so, but certainly are not loosening up their underwriting criteria.

China Is Largest U.S. Debt Holder At $877b
The Treasury released its “International Capital” report yesterday, nicknamed TIC. China continues to be the largest owner of debt of the United States, although their holdings fell by over $11 billion to $877 billion. Overall, foreigners were net buyers of long-term U.S. financial assets in February.

Does Anyone Believe Rates Are Going To Drop?
If an agent or company is having trouble originating loans in this interest rate environment, the rest of the year might not be much better. We’ve been in a 45 basis point range in the 10-year Treasury for nearly 4 months (3.54-3.99%), and mortgage prices have also been in a narrow range. It seems that a 4% yield on the 10-yr gets us about a 5.25% 30-yr mortgage rate. Does anyone believe that rates are going to drop? The Fed, however, certainly has no reason to raise short term rates, given the current job, housing, and inflation situation here in the US – so don’t look for too much of a move toward the upside.

Philly Fed & Capacity Utilization
Thursday we had the Philly Fed (up from 18.9 to 20.2), Industrial Production (+.9%) and Capacity Utilization after the Initial Jobless Claims number. The reports were mixed, though the back months saw nice upward revisions and Capacity Utilization, a traditional Fed barometer, did well at +.2% to 73.2%.

Housing Starts Better Than Expected
Today had New Home Construction and will have the University of Michigan Sentiment Survey. Housing Starts for March were better than expected, up 1.6%. March Building Permits were up 7.5% from 637,000 to 685,000 on an annualized rate. It is nice to see the economic activity associated with housing, but don’t we already have a pretty good inventory of existing housing stock in many locales? After these housing stats the 10-yr is at 3.80% and mortgage prices are better by .125-.250.

Appraisal Rules For Fannie Mae & HUD
Here’s a quiz: “Lender B originates a loan using an appraisal transferred from Lender A, who provided Lender B with written assurances that the appraisal was obtained in a manner consistent with the Code. Will Fannie Mae hold Lender B liable for remedies if it is discovered after the transfer that Lender A committed a Code violation?” You may not care about the answer, but the HVCC topic is still critical for lenders. Recently Fannie released a revised set of “Frequently Asked Questions” on the subject: Fannie Appraisal FAQ

There are a new set of HUD Frequently Asked Questions (FAQs) that address issues surrounding Appraisal Management Companies, reasonable and customary fees and appraisal turnaround times posted on FHA’s Lenders webpage and Roster Appraisers page. To read the new FAQs please visit: HUD FAQ Lenders or HUD FAQ Appraisers

Government Loan Modification Program Slow Going
Investors, and housing market analysts, are concerned about the numbers for the Making Home Affordable Program (HAMP). HAMP numbers improved substantially during March according to the Treasury Department. Designed to decrease the foreclosure rate by HUD and the Treasury Department, HAMP has not been the huge success for which some had hoped. During March, however, over 60,000 homeowners enrolled in the three month trial period required by the program were converted into permanent modifications. This brings the cumulative total of permanent loan modifications to 230,801, a 3.5-fold rise in permanent modifications since the first of the year. Analysts believe, however, that HAMP “trials started” continue to slump due to a shift in program requirements that require more paperwork to get a trial started and the fact that servicers have already run through the most likely mod candidates.

Reports show that the average LTV in HAMP modifications actually increases, from 135% to 143%, due to capitalization of arrears and escrow requirements. According to Congressional testimony, in only 28% of cases is this mitigated by principal forbearance; for these, the average principal forborne was $67 K. On top of that, average post-modification DTI’s for borrowers range from 61% to 70%, so these borrowers are already struggling with debt levels that are above current guidelines.

Wells Fargo, for example, has modified 523,336 mortgages as of March 31st, and has made modifications of about 380,000 under its own private programs since the beginning of 2009. Wells, like other lenders, use HAMP as the starting point, but also implement other workout options when a customer is not eligible for HAMP.

Daily Humor
A young monk arrives at the monastery. He is assigned to helping the other monks in copying the old canons and laws of the church by hand. He notices, however, that all of the monks are copying from copies, not from the original manuscript.

So, the new monk goes to the head abbot to question this, pointing out that if someone made even a small error in the first copy, it would never be picked up! In fact, that error would be continued in all the subsequent copies.

The head monk, says, “We have been copying from the copies for centuries, but you make a good point, my son.”

He goes down into the dark caves underneath the monastery where the original manuscripts are held as archives in a locked vault that hasn’t been opened for hundreds of years.

Hours and hours pass and nobody sees the old abbot.

So, the young monk gets worried and goes down to look for him. He sees him banging his head against the wall and wailing!!!

“We missed the R. We missed the R!!! We missed the R!!!!!!!!!”

His forehead is bloody and bruised and he is crying uncontrollably.

The young monk asks the abbot, “What’s wrong, father?”

With a choking voice, the old abbot replies, “The word was ‘CELEBRATE’!!!!”

How Credit Scores Are Calculated
FICO, like Band-Aid or Kleenex, has become a generic symbol of credit worthiness. Scores can range from 300-850 and is a statistical calculation which is based upon payment history (35%), credit utilization (30%), length of history (15%), credit type (10%), and recent credit checks (10%). Items stick around for seven years; bankruptcy for ten. Maxing out a card, a 30-day late payment, debt settlement, foreclosure (150 point ding) or bankruptcy (150-200 point hit) all negatively impact FICO. Sometimes folks wonder about whether or not a short sale hurts your credit score as much as a foreclosure, and apparently it depends on whether the borrower stays current on their payments and how the lender reports the sale (try for “debt repaid in full”).

Comments From Mortgage Trenches
What are folks saying in the trenches out there?

“Things in my area are good since we didn’t take the value hits that other areas have. Business has been volatile during the last two quarters, but as compared to the record production year we had in 2009 any normal production environment would be off.”

“In specific regions where employment is more stable and values have leveled off, purchase activity has picked up relative to recent months.”

“Purchase deals are slow moving. Prospective homebuyers are requesting prequels, but many of them are being rejected leading to lots of frustrated, hungry loan officers fighting it out for every deal.”

“The industry has become so competitive at the moment – rates rose quickly and borrowers started to panic. This likely resulted in an increased amount of ‘rate shopping’ which forced loan officers to lower their costs to save the deal. Either that or loan officers did not want to re-work GFE’s so they cut points charged to keep APR from rising.”

Chase Net Income $3.3b, Angry Borrowers Mob Chase Exec
JPMorgan Chase was in the news today, for two reasons. First, the company’s earnings were better than expected with net income of $3.3 billion and earnings-per-share 10 cents higher. It had Tier 1 capital of $131 billion. But David Lowman, who runs Chase’s home mortgage business, was “mobbed by angry borrowers” yesterday during a congressional hearing. He was asked by a lawmaker who borrowers could turn to if they felt his bank’s employees were not helping them, and he invited customers to speak to him. As if on cue, 50 borrowers burst from the audience and presented Lowman with a 6-page document alleging his bank reneged on a pledge to help struggling homeowners.

HUD’s Most-Asked Mortgage Questions
Be sure to check out HUD’s website for the revised frequently asked questions. I mentioned this Friday, but though it was important enough to re-mention. There is quite a bit of relevant information in those 62 pages!

Mortgage Applications Down
The MBAA reported that applications fell by 9.6% last week and hitting the same volume levels as last June. Is your company ready for what analysts have been predicting about volumes this year? Refinance activity fell 9% in the latest week and accounted for about 59% of all retail residential applications. The four-week moving average for all mortgage applications fell 6.2%. It appears, however, that locks have increased lately.

Market/Economic News Roundup
Volatility picked up a little bit yesterday in the markets, with mortgage investor prices both improving and worsening during the day. Yields, however, hit their lowest levels since March. Can the economy rebound with no inflation? That would be nice… The day started off slowly from an origination point-of-view (estimated to be less than $1 billion). But as the day wore on, buyers “faded away” according to one trader, and origination doubled in size from levels we saw late last week to $2.5 billion. Mortgage spreads widened to Treasury securities, especially higher coupon mortgages, and if Treasury rates drop much one can expect mortgage prices to lag somewhat.

This morning we had a spate of economic news. Prior to the news the 10-yr was at 3.84%. CPI for March was +.1%, with the core rate (ex-food & energy, for whatever that is worth) unchanged. The CPI was up 2.3% year over year. This is certainly within expectations, and within the Fed’s targeted inflation rate. We also had Retail Sales, doing well recently, for March +1.6% and last month’s figures were revised higher. After the news the 10-yr went to 3.82% and mortgage prices are roughly unchanged to “worse by .125″.

Daily Humor
A man is watching a game of golf on TV. But he keeps switching channels to a dirty movie featuring a lusty couple having raucous sex.

“I don’t know whether to watch them or the game,” he says to his wife.

“For Heaven’s sake, watch them,” his wife says. “You already know how to play golf!”

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.

Ripple Effects of Weak Consumer Confidence
The S&P Case-Shiller US National Home Price Index, besides claiming the longest name for an economic release, showed a 2.5% decrease in the fourth quarter from a year earlier. This was much less of a decrease than in previous quarters, and only a slight decrease from the prior month. In addition, Consumer Confidence slipped dramatically in February, going back to April ’09 levels. And if a consumer is not confident, don’t look for them to rush out and buy that new 3-D television! In fact, concerns about the economy and the labor market pushed an “index of current conditions” to its lowest level in 27 years and helped push the stock markets down. So not only did the bond market have those two items to help it rally, but there is renewed thinking that Greece’s fiscal crisis may spread to other nations, so there was some “safe haven” buying of U.S. government debt.

So the markets saw declining stocks, improving rates, still-slow (but improving) origination from mortgage companies, and a decent $44 billion 2-yr Treasury note auction. (This is the fifth consecutive month that the 2-yr sale has been $44 billion, and in the last month 2-yr yields have ranged from .72% up to .97% last Friday.) The Fed and money managers were in doing their usual buying. Generally speaking, continued global sovereign risk issues will continue to be a larger issue than, say, what last month’s economic news was, and thus investors may very well return to buying debt issues by the United States. And when folks like Federal Reserve Bank of San Francisco President Janet Yellen say that the U.S. economy will operate below potential this year and next and still needs low interest rates to gain strength that helps interest rates.

Revised Discount Rate Terms
Today we have New Home Sales, a 5-yr auction, and Ben Bernanke’s testimony for the Federal Reserve’s semi-annual monetary policy report to Congress. Last week the Fed raised the discount rate by 0.25 point to 0.75 percent, said the term of these direct loans to banks will revert to overnight next month from 28 days currently, and left Fed Funds unchanged at 0-.25%. There has been nothing to suggest an extension or expansion of the MBS purchase program, which ends March 31st, so it will be interesting to see what he says. Currently the 10-yr yield is at 3.70% and mortgage prices are a shade better.

New Private Mortgage Insurance Rules
Mortgage insurance company MGIC announced a set of pricing and criteria changes to be rolled out in March, most likely in response to losing market share to FHA loans and also to keep their #1 position among MI companies. The changes are set to occur in March, and the new pricing scale will use borrowers’ credit scores to set premium rates with lower prices for borrowers with the best credit history and higher premiums for those with worse scores. MGIC has lost money for ten straight quarters, so the company hopes this new grid will not only increase revenue but also shift their book of business toward borrowers with FICO’s above 720. For all markets and origination sources, MGIC will require a minimum of 3 tradelines evaluated for 12 months – otherwise the loan must meet MGIC’s nontraditional credit guidelines. More pricing and criteria here.

Quarterly Losses Narrow for Radian (a mortgage Insurance Company)
Speaking of MI companies, Radian said its fourth-quarter loss narrowed to $1.12 a share, better than the $1.69-a-share loss predicted by some, and the firm said it expects to have “excess liquidity” through 2012. Radian and others are seeing lower delinquencies with the newer product, as one would expect given tighter guidelines and less housing price depreciation.

Daily Humor
Three blondes were all applying for the last available position on the Texas Highway Patrol. The detective conducting the interview looked at the three of them and said, “So y’all want to be cops, huh?” The blondes all nodded.

The detective got up, opened a file drawer, and pulled out a folder. Sitting back down, he opened it, pulled out a picture, and said, “To be a detective, you have to be able to detect. You must be able to notice things such as distinguishing features and oddities like scars and so forth.”

So saying, he stuck the photo in the face of the first blonde and withdrew it after about two seconds, “Now,” he said, “did you notice any distinguishing features about this man?”

The blonde immediately said, “Yes, I did. He has only one eye!”

The detective shook his head and said, “Of course he has only one eye in this picture! It’s a profile of his face! You’re dismissed!”

The first blonde hung her head and walked out of the office.

The detective then turned to the second blonde, stuck the photo in her face for two seconds, pulled it back, and said, “What about you? Notice anything unusual or outstanding about this man?”

“Yes! He only has one ear!”

The detective put his head in his hands and exclaimed, “Didn’t you hear what I just told the other lady? This is a profile of the man’s face! Of course you can only see one ear! You’re excused too!”

The second blonde sheepishly walked out of the office.

The detective turned his attention to the third and last blonde and said, “This is probably a waste of time, but…” He flashed the photo in her face for a couple of seconds and withdrew it, saying, “All right, did you notice anything distinguishing or unusual about this man?”

The blonde said, “I sure did. This man wears contact lenses.”

The detective frowned, took another look at the picture, and began looking at some of the papers in the folder. He looked up at the blonde with a puzzled expression and said, “You’re absolutely right! His bio says he wears contacts! How in the world could you tell that by looking at his picture?”

The blonde rolled her eyes and said, “Well, Hellooooooooooooo! With only one eye and one ear, he certainly can’t wear glasses.”