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.

Critics, taking a 30,000 foot view, say many countries have high levels of homeownership without the government playing such an important role in housing. Canada, not exactly a world economic powerhouse, does not have the equivalent of Fannie & Freddie, nor does it allow the deduction of mortgage interest from taxes. There has been no need for government bail outs of banks in Canada, which has 33 million people – about the size of Florida and Illinois combined. Fannie and Freddie could be combined – they are both under the auspices of the FHFA anyway – and then slowly liquidated with the securitization of mortgages going back into private companies. Or they could be kept in place, and charge a higher guarantee fee – like .5. Obama administration has already removed private intermediaries from the student loan business. No matter what happens, at this point, given the reliance of “the system” on Fannie & Freddie, it would require massive re-engineering of all of that and it’s by no means a straightforward thing to do.

From an investor point of view, many believe that the two will be combined, in which case investors will have to differentiate between the old bonds and the new bonds since a combination of the two would meld underwriting, remittance, servicing, etc., etc., and investors will want to know the “rules” for new pools and price them accordingly. The “accumulators” like Wells, Citi, Chase, and BofA usually sell to both, but often have strategic relationships with one or the other.

On a micro, loan originator level, when comparing Freddie versus Fannie many originators believe that Fannie is a better loan, with DTI capped at 45%, and no excess MIP charges to the borrower. But compared to a few years ago, the differences between DU and LP are much fewer. If they were combined, ironing out the differences at the production level might be relatively easy: figure out what servicing and underwriting characteristics gave them the lowest delinquency rates, and use those. Loans underwritten since the government takeover are among the cleanest in history. But consumers like a choice, probably more than just an FHA loan and a private bank’s loan product. No one expects the government’s work on Fannie & Freddie to shoot the US housing market in the foot, but we’ll have to stay tuned – everyone has an opinion.

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.

Currently, the Federal Reserve Board is engaged in a comprehensive revision of the mortgage disclosures required under the Truth in Lending Act to improve the effectiveness of mortgage disclosure forms for all loans. These new forms were developed through consumer testing, including focus groups and detailed surveys, to ensure that they provide information that is useful and understandable to consumers. These disclosures are designed to better focus consumer attention on mortgage features, such as variable rates, that might be appropriate for some consumers, but potentially risky for others. And we have proposed to ban compensation methods that give originators incentives to steer borrowers to loans with higher rates or disadvantageous terms.

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.

Rates are great, but how are those mandatory mark-to-market positions looking? You know, the ones where you guaranteed delivery to an investor of the Smith loan, and now prices are a few points better and/or the rate is much lower? As borrowers Mr. & Mrs. Smith are wondering the same thing, perhaps, although with all the hurdles that originators jump through now the process tends to “set the hook” a little more firmly. But large investors are concerned about mandatory mark-to-markets, since all these loans are possibly hundreds of basis points under water, or in the money, depending on how one views them. If the client disappears, an investor is “out” those loans and will lose on its existing hedges.

Countrywide Settles $108m FTC Fee Gouging Charges
One down, I don’t know how many to go… The FTC announced that two Countrywide mortgage servicing subsidiaries have agreed to pay $108 million to borrowers to settle allegations that the companies charged excessive servicing fees to defaulting mortgage borrowers. While most mortgage servicers hire third party vendors directly, Countrywide funneled the default services (inspection, maintenance, etc.) through its two subsidiaries that then marked up the fees, resulting in increased profits for Countrywide. The FTC also alleged that Countrywide unfairly targeted borrowers who had filed for Chapter 13 bankruptcy, misrepresenting to these borrowers the status of their loans, and then tried to collect amounts owed after the bankruptcy case closed and the borrowers could no longer look to the bankruptcy court for protection.

UBS Looking For Mortgage Officers
Ah, what a time to be a loan officer. Many companies are searching for loan agents to produce loans to help mortgage companies support their internal operations staff, and cover overhead. And I guess big companies are doing the same, with UBS Wealth Management Americas trying to hire mortgage “consultants” for its branch offices as it bulks up its lending services business. In this company’s case, the agents will be selling mortgages to wealthy clients, especially since they often have several homes.

Reverse Mortgage Defaults
In a story from Reverse Mortgage Daily, there is concern about reverse mortgage defaults. The article mentions that Fannie “reportedly has been reminding reverse servicers they must follow HUD guidelines regarding tax and insurance defaults for HECM customers” instead of allowing servicers not to have servicers follow these established guidelines as it has in the past. “Now, however, servicers have been instructed to submit troubled loans to HUD to get approval to start the foreclosure process. Once approved, a demand letter is sent to the borrower(s) who has six months to cure the default. After that, the servicer must start the foreclosure process – one exception is when a borrower refuses to take necessary curative action, at which time the foreclosure process begins immediately.”

Rates Slightly Worse Ahead of 3yr Treasury Auction
Yesterday we had the same ol’ story: stocks faded at the end of the day, the dollar rallied versus the euro (helping college students heading to Europe) and interest rates stayed low given the flight to quality from around the world. So worries over Europe’s fiscal crisis (Greece, and now Hungary – can Germany support them all?) kept up a safety bid for bonds despite this week’s $70 billion auction, starting with $36 billion in 3-yr notes being sold today. (Treasury will also sell $21 billion in 10-yr notes tomorrow and $13 billion in 30-yr bonds on Thursday.) But Monday 10-yr Treasury notes improved by more than .5 in price, moving down to 3.14%. Mortgages did well. Today there is no scheduled news, and we find the 10-yr at 3.18% and mortgages about .125 worse in price.

How Loan Regs Will Impact Consumers, Lenders
As the time approaches when the House and Senate financial reform bills must be reconciled, many mortgage professionals are wondering not only what will happen to current underwriting and compensation parameters but also whether anything be done to influence the final bill. The Mortgage Bankers Association is officially opposed to the Merkley amendment, for example, but is mostly focused on changes to the underwriting portion and not the compensation piece.

“MBA is extremely concerned that the YSP provisions will markedly lessen the range of mortgage financing options available to consumers. Moreover, the new underwriting provisions will markedly tighten credit so that only the lowest risk borrowers will qualify, and they will increase the rate and costs to consumers of mortgage loans.”

Here’s the MBA’s stance on loan officer and broker compensation. In addition, NAMB has posted a “call to action” for its broker members. Brokers are being urged to write to their representatives to voice objections to current proposed legislation.

Daily Humor
A husband is at home watching a football game when his wife interrupts.

“Honey, could you fix the light in the hallway? It’s been flickering for weeks now.”

He looks at her and angrily says, “Fix the lights now? Does it look like I have ‘GE’ written on my forehead? I don’t think so.”

“Fine.” Then the wife asks, “Well then, could you fix the fridge door? It won’t close right.”

To which he replies, “Fix the fridge door? Does it look like I have ‘Westinghouse’ written on my forehead? I don’t think so.”

“Fine.” She says, “Then, could you at least fix the steps to the front door? They are about to break.”

“I’m not a carpenter and I don’t want to fix the steps – does it look like I have ‘Ace Hardware’ written on my forehead? I don’t think so – I’m heading to the bar!”

So he goes to the bar and drinks for a couple of hours. He begins to feel guilty about how he treated his wife, as he should, and decides to go home. As he walks into the house he notices that the steps are already fixed. As he enters the house, he sees the hall light is working, and when he goes to get another beer, he notices that the door on the refrigerator is working.

“Honey?” he asks. “How’d all this get fixed?”

The wife replies, “Well, when you left I sat outside and cried. Just then a nice young man asked me what was wrong, and I told him. He offered to do all the repairs, and all I had to do was either go to bed with him or bake a cake.”

He says, “So what kind of cake did you bake?”

She replies, “Do you see ‘Betty Crocker’ written on my forehead?”

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?

Anyone interested in learning more about the study can visit the MBA/STRATMOR website.

Treasuries Highest In 2 Weeks
What difference does it make that after the commentary went out yesterday, the market saw Factory Orders come out at +1.2%, lower than expected? Or that the ISM Non-Manufacturing Index was steady at 55.5 for May – still expansionary. Yesterday the decent news pushed the 10-year note’s yield to its highest level in two weeks, and mortgage selling really picked up yesterday, especially while the Treasury market was rallying. Traders estimate about $1.5 billion of new production came through their phone lines, but buyers were waiting and mortgage prices did well relative to Treasury prices. Not that this impacts current-coupon originators, but 5.5%-6.5% MBS’s hit record high prices of 107, 108, and 109! Where’s the prepay risk?

Is Census Cooking Books On Job Count?
Everyone seemed to think that Nonfarm Payrolls were going to increase significantly. Census hiring, a big wild card in this government-sponsored era, has fallen way below the bureau’s original estimate of 700-800,000 jobs, and is probably less than 200,000. But even the Census Bureau numbers have been called into question lately. The New York Post reports that although this hiring has been decent over the last few months, the Labor Department

“doesn’t check the Census hiring figure or whether the jobs are actually new or recycled. It considers a new job to have been created if someone is hired to work at least one hour a month. One hour! A month! So, if a worker is terminated after only one hour and another is hired in her place, then a second new job can apparently be reported.”

Poor Jobs Report
Non-Farm Payrolls were up 431,000, but the private sector was up only 41,000. In fact, the census workers accounted for 411,000. Although there were March and April revisions, this is a weak number, and stock market numbers plunged on the news. The unemployment rate fell to 9.7% from 9.9% – certain to make the headlines tomorrow. Hourly Earnings were up 0.3%. A jobless recovery anyone? The 10-yr. is down to 3.24% after being above 3.40% yesterday and 30-yr mortgage prices are better by around .5. Yesterday not only did rates go up, but the stock market fell as well. What a difference a day makes, as today we are seeing stocks tumble after a weak jobs number, but fixed-income prices improve nicely. You can read all the flowery language you want, but it boils down to a poor job market continuing to show that our economy is sluggish, leading to a lower stock market and continued lower rates.

Daily Humor
(As always, the joke does not necessarily reflect the view of the author.)

A woman, married three times, walked into a bridal shop one day and told the sales clerk that she was looking for a wedding gown for her fourth wedding.

“Of course, madam,” replied the sales clerk, “exactly what type and color are you looking for?”
The bride to be said: “A long frilly white dress with a veil.”

The sales clerk hesitated a bit, then said, “Please don’t take this the wrong way, but gowns of that nature are considered more appropriate for brides who are being married the first time – for
those who are a bit more innocent, if you know what I mean. Perhaps ivory or sky blue would be nice?”

“Well,” replied the customer, a little peeved at the clerk’s directness, “I can assure you that a white gown would be quite appropriate. Believe it or not, despite all my marriages, I remain as
innocent as a first time bride. You see, my first husband was so excited about our wedding; he died as we were checking into our hotel. My second husband and I got into such a terrible fight in the limo on our way to our honeymoon that we had that wedding annulled immediately and
never spoke to each other again.”

“What about your third husband?” asked the sales clerk.

“That one was a Democrat,” said the woman, “and every night for four years, he just sat on the edge of the bed and told me how good it was going to be, but nothing ever happened.”

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.

In the lending business, few believe that lending is becoming easier, that property values moving steadily higher, or that potential borrowers are suddenly in better qualifying shape. Part of the picture, of course, is the continued high unemployment rate, and many economists feel that the employment picture here in the US has begun to improve. Maybe it isn’t in the weekly Initial Jobless Claims, but improvement is being seen in areas such as “withholding tax receipts”. Tax receipts are volatile but an important forecasting input for the labor market, because they are timely and not subject to revision. And lately they have turned positive (up 6% year-over-year), which tells us that employment income is expanding due to higher wages, more hours worked by the existing workforce and an influx of new workers.

FDIC Selling $1b In Non-Performing Mortgages
The FDIC is looking to sell $1 billion worth of mostly nonperforming residential whole loans that belonged to the now-defunct AmTrust Bank of Cleveland through a structured sale. Although the mortgage company continues on, AmTrust’s thrift failed late last year and was taken over by New York Community Bank. But NYCB did not want the thrift’s servicing portfolio or NPLs so the $23 billion in servicing will also be sold.

Barclays Sells Loan Servicing Business To Ocwen
Barclays Bank will be selling off its HomEq Servicing business, which is the servicing operation owned by Barclays here in the US, to Ocwen Financial. (“Ocwen” is “Newco” spelled backwards, for mortgage trivia experts.) Barclays bought HomEq four years ago, and is selling it for $1.3 billion (and providing $1 billion in financing to help things along). Barclays may not want to be in the servicing business, but it will continue trading and issuing mortgage securities. And thus Ocwen finds its servicing portfolio larger by 190,000 loans, bringing its total to 590,000.

Latest Loan Scam
I have a money making idea! I will put an ad out there, stating that mortgages are unconstitutional and guaranteeing to do away with everyone’s home loan – for only a non-refundable fee of $25! Oh, wait a minute – someone named Scott Wright beat me to the punch. I am sure that he is tired of people in the mortgage business having bad reputations, and has only the best intentions. This is great news, since if he is correct, trillions of dollars of home loans are worthless, and now all properties will be purchased with 100% cash. But something tells me Wright is wrong, in spite of the wording, “This is not a scam.”

ING’s Neverending Mortgages
Homebuyers in Australia may be offered “never-ending” mortgages from ING, the fifth largest lender Down Under. This loan program offers loans that have no fixed term and no requirement to repay any capital along the way. The original press release, from ING Direct’s CEO, stated that Australians need more affordable options, and that borrowers should be able to choose whether they want to repay the capital, or not. Borrowers would carry the IO loan on the property for a long period of time, then sell their property for a big enough profit to pay off the original loan and buy a smaller place outright, leaving them mortgage-free. Or, they could keep the mortgage going and repay the original capital from their estate, after death, as they do in the UK and Europe. Critics, as you might imagine, are quick to point out that if the person living in the house never pays off the principal, they never really own the home – they’re more like tenants. Borrowers can come out ahead if they take the money saved from the difference between an IO and an amortizing mortgage and invest it – often not the case. There is no equity as a buffer, and the (in effect) forced savings plan from an amortizing mortgage is gone. As one writer noted, “A generational shift has occurred. My parents’ bank manager encouraged them to pay off their mortgage as quickly as possible. Today my bank’s customer service center may provide me with strategies to encourage me to never pay it back.” Sound familiar?

Construction Spending Up
Construction Spending, which is announced today and was up slightly for March, is expected to show a slight drop. Recently public spending has increased, and single-family construction also rose as homebuilders rushed to beat the first-time homebuyers’ credit deadline. But private residential and nonresidential outlays, however, continued to show weakness and are down about 30% since late 2008. Office, warehouse and retail construction have already declined more than during the 2001 recession – just look at all the empty space for sale or lease in any office complex or drive down Main Street.

Jobs Report & Other Economic News Preview
On Friday we will have the usual “first Friday of every month” employment data, and estimates are already running around a gain of nearly 500,000 jobs. This seems a little high, given recent Thursday Initial Claims numbers and April’s Nonfarm Payroll being up less than 300,000. But census hiring is expected to kick in, and private sector job growth is showing an upward trend. This Friday’s jobs report will be the last ahead of the June 22-23 Fed meeting, but a few more or less people working here in the United States is easily overshadowed by problems in Europe and the sovereign credit risks and equity market volatility. (In other words, don’t look for any change in overnight rates from the Fed in three weeks.)

It is a semi-busy week for news. Today (Tuesday!) we have Construction Spending (discussed above) and ISM (look for continued expansion with a number above 50), tomorrow is Pending Home Sales, Thursday Initial Claims, Productivity, Factory Orders, and then on Friday, as mentioned above, all the employment data. Last Friday, as you may recall, just when folks were hoping for a quiet Friday we received news that Spain had its credit rating lowered by Fitch from AAA to AA+ (“outlook stable”). Moody’s still has Spain at AAA (stable); S&P had already gone to AA (outlook negative). Stocks dropped, rates improved, and this appears to be continuing this morning as the 10-yr yield is down to 3.23% and mortgage prices are better by about .250.

Daily Humor
A couple was celebrating their golden wedding anniversary on the beaches in Montego Bay, Jamaica. Their domestic tranquility had long been the talk of the town. People would say, “What a peaceful & loving couple.”

The local newspaper reporter was inquiring as to the secret of their long and happy marriage. The husband replied, “Well, it dates back to our honeymoon in America. We visited the Grand Canyon, in Arizona, and took a trip down to the bottom of the canyon, by horse. We hadn’t gone too far when my wife’s horse stumbled and she almost fell off.

“My wife looked down at the horse and quietly said, ‘That’s once.’

“We proceeded a little further and her horse stumbled again. Again my wife quietly said, ‘That’s twice.’

“We hadn’t gone a half-mile when the horse stumbled for the third time my wife quietly removed a revolver from her purse and shot the horse dead.”

The man continued, “I shouted at her, ‘What’s wrong with you, woman?! Why did you shoot the poor animal like that, are you *%&#@$ crazy!?’

She looked at me, and quietly said, ‘That’s once.’

And from that moment we have lived happily ever after.”

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?”

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.

With FNMA 4.5′s around 102 (a 2 point premium) and FNMA 4′s trading near par, everyone is in uncharted territory – and the mortgage market is roiled. Low coupon product, now trading near par, has not yet been originated in any kind of volume that helps liquidity. News yesterday out of Spain, that Spain’s central bank had to prop up a regional bank, did not help the stock market, and stock prices are back down to early February levels. Bond prices also worsened, with traders attributing that to some profit taking by investors. And this morning the markets are not only spooked by Europe, but now also by some tension coming out of Korea – just what we need. The 10-yr is down to 3.11% ahead of the $42 billion 2-yr auction ($40 billion 5-yr’s tomorrow, $31 billion 7-yr’s Thursday) and mortgages are better by about .250.

Debate On Loan Officer Pay
In 1930, during the Great Depression, Babe Ruth was earning a salary of $80,000 a year. A reporter suggested that perhaps he was overpaid, since Herbert Hoover, the president of the United States, was only earning $75,000. Ruth replied, “Why not? I had a better year than he did.” If Congress can set loan officer compensation on a per loan basis, many are asking, “Why shouldn’t they set the pay for doctors, lawyers, title company officers, etc.?” Some expect the ability for Congress to set maximum compensation levels to be challenged in court, since the government is not setting limits on Realtors, heart procedures, dog grooming fees, boat rigging work, etc., etc.

FDIC Sells $233m In Commercial Notes
Helped by Barclays, the FDIC closed a sale of notes backed by commercial real estate loans from twenty-two financial institutions, the fourth such sale of structured notes by them since the early 1990′s and the fourth backed by the full faith and credit of the United States. The $233 million of notes are backed by performing and non-performing commercial real estate loans with a related aggregate unpaid balance of approximately $1.0 billion. The FDIC still retains its 60% equity interest issued by the LLC, and ColFin DB Funding, formed by entities affiliated with Colony Capital, still owns the 40% equity interest sold to it by the FDIC in January 2010. The notes don’t pay interest, but were sold at a discount like a T-bill.

Primer On Case Shiller Home Price Index
What Is the Case-Shiller Index? The Case-Shiller Index, which showed mixed results this morning, was developed in the 1980s by three economists: Allan Weiss, Karl Case and Robert Shiller, and distributed by Standard & Poor’s. The index includes foreclosures and is actually not one index, but 23! The national home price index, which covers nine major census divisions, is calculated quarterly and published on the last Tuesday of February, May, August and November. The 10-city composite index covers Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington, DC. The 20-city composite index includes all of the above cities plus Atlanta, Charlotte, Cleveland, Dallas, Detroit, Minneapolis, Phoenix, Portland (Oregon), Seattle and Tampa. Twenty individual metro area indexes for each of the cities listed above. The indices, aside from the national index, are published on the last Tuesday of each month at 9AM EST. There is a two-month lag time in the data that is reported, so the report issued in May only covers home sales through March. Each index measures changes in the prices of single-family, detached residences using the repeat-sales method, which compares the arm-length sale prices of the same properties over time (so there is no new construction).

NAR: Existing Home Sales Up 7.6%
Yesterday we learned from NAR that Existing Home Sales data for April 2010 rose 7.6% due to the tax credit, improving consumer confidence and favorable affordability conditions. The pace of sales is almost 23% higher than April 2009. Is the housing market going to be saved by a strengthening economy and improving labor market? Honestly, I kind of doubt it – but what do I know? The inventory of existing homes for sale in April jumped 11.5 percent to 4.04 million units, the highest since July, and over an 8 month supply although the national median home price rose 4 percent from April last year to $173,100 — the highest since September.

Market Early Close Friday
Pre-Memorial Day bond market note: this Friday is the last early close for the bond market until Thanksgiving.

Daily Basis
Nancy and her husband Peter went for counseling after 43 years of marriage. When asked what the problem was, Nancy went into a passionate, painful tirade listing every problem they had ever had in the 43 years they had been married.

She went on and on and on: neglect, lack of intimacy, emptiness, loneliness, feeling unloved and unlovable, an entire laundry list of unmet needs she had endured over the course of their marriage.
Finally, after allowing this to go on for a sufficient length of time, the therapist got up, walked around the desk and after asking Nancy to stand, embraced her, and proceeded to eventually “have his way with her” for 30 minutes all the while kissing her passionately, as her husband Pete watched with a raised eyebrows!

Nancy shut up, buttoned up her blouse, and quietly sat down while basking in the glow of the event.

The therapist turned to Pete and said, “This is what your wife needs at least three times a week. Can you do this?”

Pete thought for a moment and replied, “Well, I can drop her off here on Mondays and Wednesdays, but on Fridays, I play golf.”