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Here’s an NYT op-ed with some useful history of the 30yr mortgage. It also discusses some ideas about flexible mortgages, where for example, a borrower can have a 30yr fixed that could have interim periods of interest-only when a borrower needs it. These ideas are not new. Robert Shiller, of Case Shiller home price index fame, has been talking about these concepts for years. But Shiller and the author of this post, a UCLA law professor, never discuss the fact that any ‘flexible’ mortgage would also have flexible pricing—meaning that rates will be higher on mortgages with more options. And let’s not forget the current regulatory wave is precisely to limit flexibility in mortgage products and pricing. So theory about a newer, better mortgage to replace the 30yr fixed is one thing. Market and regulatory reality is another.

About 15 months ago actor Kal Penn joined the White House Office of Public Engagement, and 2 months ago he returned to Hollywood to make a third installment of the “Harold & Kumar” cult-favorite stoner movie series. In the last installment of the movie, Penn’s character Kumar smoked a joint with George W. Bush. And below is the last installment of Penn’s White House duties: a financial reform consumer ‘education’ video voiced by Penn … which raises the question: Is the Obama administration high? Politicians brag about how smart our country is, but this is what they really think about The American People’s ability to understand market basics.

Out of the 2,300 pages in the soon-to-be-law financial reform bill, none of them attempt to reform Freddie or Fannie – most say because F&F deserve their own reform bill and that will happen in 2011 after the U.S. Treasury completes its study. Fannie was created in 1938 to help buy mortgages from financial institutions and free up capital that could, in turn, be lent to consumers by banks, and Freddie was created in 1970 to do the same for S&L’s and to keep Fannie from being a monopoly. Investors – foreign and domestic – had the belief that loans backed by Freddie and Fannie carry an implicit US government guarantee. These two GSEs functioned as quasi-private companies that bought, bundled and securitized trillions of dollars of mortgages, in the form of mortgage-backed securities, and currently hold or guarantee more than $5 trillion of them. (There are others GSE’s – Government Sponsored Enterprises – like the Federal Home Loan Banks, the Farm Credit System, and Farmer Mac. Of course there is HUD & the FHA, and the VA program.)

The problem is, of course, that taxpayers, through the US government, have put up about $150 billion to keep them afloat, their value (and the value of the stock) has plunged, and analysts expect many more billions will be required to keep them solvent. The 25 basis point “guarantee fee”, added to the interest rate of the borrower, is not enough. Foreign investors who own their debt are concerned about the safety of their holdings, in turn requiring a higher return on their money for the additional risk – and to lower the risk we have effectively nationalized the two companies although their debt is not included on the government’s balance sheet. In fact, the Congressional Budget Office cannot audit either one, and if one combines the government bailout money of F&F with the existing budget deficit, it totals about $16 trillion, over 100% of our GDP. more…

Not sure when but the National Association of Mortgage Brokers has changed the logo on their homepage to read “National Association of Mortgage Professionals,” but still with the NAMB abbreviation. And no press release (that we saw) to explain it. They’re a good industry group that fights for responsible mortgage loan originators, but as messengers for the industry, they need to keep their own message straight. Branding 101: if rebranding is in the works, keep the existing brand until a full rollout is ready.

Fed Board of Governors member Elizabeth Duke gave a speech today at the Consumer Banker’s Association annual conference in Hollywood, and like a lot of other content emerging from that region, her comments about mortgage lending were “based on true events” but far from reality. Here’s the full speech, and below is an excerpt about mortgage disclosure reform that most regulators keep saying without really realizing the unintended consequences of new mortgage disclosures they’ve created.

This glosses over the fact that the new 3-page Good Faith Estimate that replaced the previous one-page Good Faith Estimate no longer itemizes which costs are paid by buyer vs. seller, and also doesn’t allow for borrowers to fully take advantage of any large seller credits they might negotiate during a home purchase transaction. These are just two examples of unintended negative consequences for consumers with the new disclosures. The new Good Faith Estimate is quite a bit less clear than the old one, and the new rules that go along with it punish the consumer for certain common elements of a transaction such as negotiating seller credits. more…

Subprime Investment Comeback?
As an investor would you rather own IBM or Pepsi stock, or subprime loans? Think hard… and buy them while you can? Apparently, subprime loans are making a comeback (investing, not originating). Remember that these older subprime loans are like old cars: the new ones are better, but the old ones that are still working have a place too. Those in the business know that credit risk, appropriately ascertained and valued, is typically a good investment.

Managing Mortgage Trades When Rates Drop
From the point of view of anyone originating mortgages, what is occurring in the investor ranks is not too interesting. Any A-paper pools of loans being bought or sold at prices near 107 or 108 or 109, as 30-yr 5.75%-and-above mortgages are, don’t impact current rate sheets. But investors are grappling with carry and prepayment projections, along with convexity issue. Overall MBS volume was below “normal” although Freddie Mac security volumes have increased recently as Freddie’s prepayment speeds have diverged from those of Fannie’s. more…

Survey: Which Lenders Are Most Profitable
With all of the talk in the past two years about owning a bank or not owning a bank, it is interesting to keep in mind some recent findings of the semi-annual MBA/STRATMOR Peer Group Survey. The study divided mid-level retail mortgage originators into two groups, one owned by banks and the other independent mortgage bankers. Most every mortgage bank had a grand year in 2009, but the study found that bank-owned lenders were the top earners by a rather large margin due to lower expense levels and higher net interest spreads. The next profitable group, earning a margin 20% less than their bank-owned brethren, was net branch lenders. This group actually saw higher revenues, but had the highest expense levels. Standard branch independents came in third, about 20% less in profits than net branch lenders.

The MBA/STRATMOR study raises some interesting questions, fine for me to raise but far above my pay-grade to answer. Can the bank-owned lenders sustain their cost advantage in 2010 with lower industry volumes? Is some of this cost advantage due to the bank exemption from state and LO licensing requirements, and if so will it continue under consumer protection legislation? Do these results validate the net branch business model in comparison to the corporate branch model? And, if the mortgage industry ever has a “normal” year, will standard branch lenders fare relatively better or worse? more…

78 Failed Banks In 2010
Five more banks disappeared Friday, bringing the total to 78. Bank of Florida Corp.’s three lenders were closed by regulators today who sold about $1.2 billion in deposits to EverBank Financial. Out west, City National (Los Angeles) enveloped Sun West Bank (Las Vegas), and in Sacramento Granite Community Bank became part of Tri Counties Bank (CA). The three lenders run by Bank of Florida all received “prompt corrective action” notices from the FDIC in March requiring them to raise capital within 30 days, so it is worth paying attention to those corrective action bulletins.

Can U.S. Recovery Overcome Europe’s Problems?
Is this recovery we’re seeing here in the US enough to overcome Europe’s problems? The bond and stock markets remain dubious. Last week stocks were roughly unchanged, but the S&P 500 was still down about 8% for May. Here consumer confidence, durable goods orders, and various other measures showed improvement, but GDP and home price figures were not great. There are two ways by which sovereign debt issues in Europe can affect the U.S. economy: fiscal tightening in Europe can restrain U.S. export growth (probably a small impact), and also (and more importantly) the tightening in bank funding markets. LIBOR is moving higher, and that is what worries analysts – another credit crunch would have a very negative effect not only on the U.S. economy, but on the global economy as well. more…

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. more…

Which Bonds Are Mortgage Rates Tied To?
Rates on mortgage loans up to $417k and up to $729k are tied to trading in “agency” mortgage-backed bonds—meaning bonds issued by Fannie Mae, Freddie Mac, and Ginnie Mae. So while many look to the 10yr Treasury Note for clues on mortgage rates, they should be looking at mortgage bonds. And specifically, there are different duration mortgage bonds to watch during different times in the market to predict what rates might do, and how to properly lock a rate at the best time.

Prices on agency mortgage bonds have been slightly abnormal lately, so we have to look at the security price difference between a 4% and a 4.5% security to see what’s going on. Historically, on average, price differences between .125% for a 30-yr mortgage is about .5 in price, or 2 points for .5%. This relationship, however, has gotten out of whack with the latest volatility and prepayment fears in the mortgage-backed security sector. Currently the price difference between a 4.0% security and a 4.5% security is now 2.75 in price (instead of 2.00), so therefore the difference in price between a 4.75% loan, which would typically be slotted into a 4.50% security, and a 4.625% loan, which would go into a 4.00% security, same impounds, same LTV, same credit score, is now much greater. more…