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State of Mortgage Industry
Let’s start off with two basic premises. First, there has always been a range of borrowers (credit & risk-wise) that need home loans at rates that match the risk. Second, there have always been investors out there with varying degrees of appetite for risk, and demand more return for higher risk. For prime borrowers, the end of the Fed’s MBS program is in sight: 5 weeks, $55 billion, that’s $11 billion a week. After which, of course, mortgage rates zoom out of reach, everyone still left in the business will have nothing to do, all refi’s and purchases will end, and I will fill the commentary every day with the worst puns and one-liners imaginable. Seriously, what is going to happen?

Based on anecdotal evidence, it appears that many mortgage companies had great Decembers, then January volumes of about half of December’s, and expect February to be somewhere between January and December’s volume levels. And although 2009 profits tended to make up for 2008 losses, profit margins also appear to be coming down as the realization sinks in that companies will want the production to support staffs. more…

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

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

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

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

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

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

The CEOs of Goldman, Bank Of America, JP Morgan Chase, and Morgan Stanley went before the Congressional Financial Crisis Inquiry Commission today to revisit what happened during the heat of the financial crisis in 2008. Yesterday the NYT published a good list of questions that should be asked. Some are populist propaganda, but many are relevant and legitimate. Perhaps the best question of all, that gets at the root of the entire issue, was offered by David Stockman, OMB Director under President Reagan. The question is below, but unfortunately the political pitchfork waving in a key election year will likely overshadow the ability to get to the root of that question. And even if Congress can get to the root of the banking problems, take a look at this picture of the testifying CEOs. Do these expressions (especially Blankfein and Dimon, the two on the left) look remotely contrite or willing to play ball?

Without the Troubled Asset Relief Program, Wall Street banks would not have survived the shock to the financial system that occurred in September 2008. Nor would they have subsequently accrued large profits and bonus pools in 2009. Shouldn’t a substantial share of those bonus pools be sequestered on bank balance sheets for several years to increase the banks’ capital levels and shield taxpayers against another bailout?/blockquote>

Treasury’s Unlimited Fannie/Freddie Backing
Regardless of whether or not it is good or bad for our industry, or the debate about the timing of the announcement, on Christmas Eve the U.S. Treasury agreed to provide Fannie & Freddie unlimited capital as needed over the next three years. It is an effort to reassure the investors who bought their debt – not the securities backed by mortgages. But the Treasury also said that it would stop buying the F&F’s mortgage-backed securities and end a short-term-liquidity facility set up for both companies and for the Federal Home Loan Banks. (This does not impact the ongoing Fed purchase program.) The government took over both companies 15 months ago, and has put $60 billion into Fannie and $51 billion into Freddie versus the “old” caps of $200 billion each. Opponents say it gives F&F a blank check with no real end, but supporters say it gives mortgage investors assurance and stability.

Warren Buffett To Buy Mortgage Co?
In a story making the rounds over the weekend, Warren Buffett and his staff, along with other holders of Res Cap debt, are rumored to be in talks to buy Residential Capital, the mortgage business owned by GMAC, General Motor’s finance division. Res Cap does have quite a servicing portfolio, but still has lost $9.2 billion over the past eight quarters. Res Cap’s losses were one of the main drivers behind GMAC’s $12.5 billion government bailout. more…

Bank of America announced that Brian T. Moynihan, 50, head of the bank’s consumer and small business banking unit will replace Ken Lewis as president and CEO effective January 1. Prior to this announcement, it was rumored that Bank of New York chief Robert Kelly was in talks. Moynihan joined FleetBoston Financial in 1993 as deputy general counsel, and Fleet was acquired by Bank of America in 2004. Bank of America says the existing unit he heads has relationships with 53 million consumers and businesses.

His compensation wasn’t disclosed by BofA, but he wasn’t one of the top five highest paid execs in his previous role. Here’s a link to Moynihan’s bio. He takes over for Ken Lewis who took lots of criticism for his acquisition of Merrill Lynch, a struggling firm that still paid $3.6b in bonuses, during the heat of the credit crisis Fall 2008.

Rates were up slightly this week but still holding close to pre-Thanksgiving record lows despite mortgage bond markets getting worse. Bonds have been selling off (which causes rates to rise) on generally good news that started with last Friday’s much better than expected jobs report showing unemployment improving … to 10% from 10.2% but an improvement nevertheless, and the first since January 2008.

Other positive market news included Bank of America repaying their $45b TARP obligation in full, Citigroup looking to raise $20b through equity issuance to chip away at their $45b TARP debt, and the best retail sales number (+1.3% for November) since August—retail sales have now improved three of the last four months. The main technical factor adversely affecting mortgage bonds was long-dated Treasury auctions this week that weren’t so well received and hurt the whole bond complex. more…

Bloomberg reports that Bank of New York chief Robert Kelly is in talks with Bank of America to take the CEO slot from Ken Lewis. Regardless of whether Kelly takes it, it’s easy on the one hand to understand why this slot has been so hard to fill. But on the other hand, as JW wrote to us when he sent this link: “how bad could it be? even if it’s only a short-term gig (which they usually are for these CEOs), they make 8 figures per year.”

Employees at a pizzeria in Ireland were fired for watching porn on the job. Isn’t that disgusting? Irish people attempting to make pizza!

Small to Mid Size Mortgage Companies Expanding
What isn’t disgusting is the number of mortgage companies which are interested in expanding. For example, First Centennial Mortgage, out of Illinois, is sending out e-mails looking for originators. First Priority Financial, a retail shop out of California, announced that they were buying Austin Perry Financial, a wholesaler also based in California. CMG Mortgage has been expanding, as has Opes Advisors, Stearns Lending, American Pacific, etc., etc. – the list goes on. This is an interesting trend, as perhaps small to mid-size bankers are indeed seeing the origination “pie” shrinking in 2010, and are looking to maintain volumes and increase market share. And the hiring is not only taking place in the loan officer arena, but also operations and back office support.

Weak Treasury Auction, Jobless Claims Up, Trade Balance Narrowed
Rates were not the mortgage banker’s friend yesterday. The 10-yr auction was not the best, with a bid/cover ratio slightly less than other recent auctions, less foreign demand, and one trader said it was “somewhat sloppy”. This morning we’ve seen Jobless Claims and the Trade numbers – and that does it for news. The U.S. trade deficit narrowed unexpectedly in October by over 7% due to the weak dollar helping boost exports while demand for imported oil fell to its lowest daily level since January 2000. In fact, U.S. exports of goods and services were the highest since November 2008 and imports the highest since December 2008. This is good news for the economy, not so good for rates. Jobless Claims, however, rose more than expected last week, and was up 17,000 to a seasonally adjusted 474,000 in the week ended Dec. 5 from 457,000 in the prior week, the Labor Department said. This is bad news for the economy, good for rates. The new 10-yr yield is currently 3.46% and mortgage prices are worse by between .125 and .250. more…