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Often I start the commentary off saying something witty, but I couldn’t think of anything clever so I thought I’d suggest you take a look at this video about seat belts (also embedded below). It is making the rounds, and with good reason.

Why Rates Won’t Rise On March 31
The Federal Reserve has a little more than ten business days to complete their well-publicized purchase of agency mortgage-backed securities (MBS). Last week it bought $10 billion, breaking their 3-week streak of $11 billion. Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are/were eligible assets for the program. Everyone knows that the end of the program is imminent. more…

Rates Up This Morning, Slow Economic Week
Last week rates were moved around by economic data. By Friday rates had improved slightly, and locks appeared to be picking up a little, but then a better-than-expected employment number pushed them higher. Fortunately for mortgage rates, the spread between them and the 10-yr Treasury (still a benchmark, in spite of actual rates more closely tracking 5-yr and 7-yr notes) is the lowest it has ever been. This week won’t have as much to chew on: the Trade Balance & Jobless Claims will be released on Thursday, and Retail Sales, Consumer Sentiment, and Business Inventories come out Friday. And on Tuesday, Wednesday, and Thursday the US Government will be selling securities to finance its activities: $74 billion broken down by $40 billion in three-year notes, $21 billion in 10-year notes and $13 billion in 30-year bonds. Ahead of this the 10-yr yield is up to 3.72% and mortgage prices are worse by between .125 and .250 in price.

Four More Banks Fail
When I was a kid, I used to pray every night for a new bike. Then I realized that God doesn’t work that way. So instead I stole a bike and asked Him to forgive me. Neither strategy worked for four more banks, as the FDIC shut them down Friday (without finding buyers for two of them leading to losses for depositors who had balances exceeding the agency’s insurance limits). Sun American’s (FL) deposits and assets were acquired by First-Citizens Bank (NC) at a cost to the FDIC of $103 million. The Bank of Illinois was “absorbed” by Heartland Bank (IL) at a cost to the FDIC of about $54 million. Waterfield Bank (MD), at a cost to the FDIC $51 million, and Utah’s Centennial Bank are now being run by the FDIC, with the help of Zion’s Bank, at a cost of about $96 million. more…

Mortgage Markets After March 31
For the week that just ended for the Fed, their MBS purchases totaled $17.6 billion, and they sold $6.6 billion, netting out that magical $11 billion weekly total. They are right on target to end this in about a month. After March 31st, the program ceases. People will still buy homes, mortgages will continue to be originated, but will some of the dire production predictions come true? Everyone in the business is hoping not, but the large investors would prefer not to wait to find out. Big investors have cut profit margins and prices, resulting in some very good (relatively speaking) mortgage rates for borrowers. Investors, account executives, production managers may be already worried that they won’t hit their numbers for the year, and appear to be doing what they can to move a little ahead of the pack prior during the first quarter. Because after March 31st, it’s anyone’s ball game. And keep in mind that any loans that fund and are placed into securities settling in March had better close sooner than later due to lag times. Make hay while the sun shines.

Should Foreclosures Be Run By Government?
Should foreclosures be run by the government? Lordy lordy… the Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program. Bloomberg reported that the proposal was reviewed by lenders last week on a White House conference call, “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed,” according to a Treasury Department document outlining the plan. At present, lenders can initiate foreclosure proceedings on any loan that hasn’t been submitted for HAMP eligibility. Under current HAMP rules, foreclosure litigation can proceed while borrowers are under review for the program or even in a trial modification. The proposed changes would prohibit lenders from initiating new foreclosure actions before loan screening by HAMP and would require lenders to halt existing proceedings for borrowers once they are in a trial repayment plan. more…

What Are Covered Bonds, And Can They Help Housing?
Lately there has been some talk in the investor community about using covered bonds to supplement or replace mortgage-backed securities, therefore helping the secondary market for mortgages, which in turn would help originators. What is a “covered bond”? In this case, covered bonds are debt securities backed by the cash flows from mortgages, and recourse to a pool of mortgages secures (”covers”) the bond in case the issuer becomes insolvent. Covered bond assets remain on the issuer’s consolidated balance sheet, which comforts end-investors, since they are held on the issuers’ books and the interest is paid from an identifiable source. (Current MBS’s are not held on the issuers’ books.) This type of security has been popular in Europe, but not here in the US. New accounting rules, however, require issuers to carry collateral on their balance sheets even for securitized products such as mortgage bonds, a key feature of covered bonds, and there may be some legislation brewing regarding the FDIC taking over an issuer (in the event of a collapse) that would make it easier to issue them. In the event of default, the investor has recourse to both the pool and the issuer.

Mortgage Delinquencies Down
The Mortgage Bankers Association of America (MBAA) released its “National Delinquency Survey” for the fourth quarter. A glimmer of good news shone forth as total mortgage delinquency rates, seasonally adjusted, were down 17 basis points during the fourth quarter. If only we could ignore the fact that they were up year-over-year by 159 basis points. At this point, reports the MBAA who recently sold their headquarters, 9.47% of all mortgages on one- to four-family homes are now in some state of delinquency. more…

GOP Senator’s Mortgage Company Closed. 53k Mortgage Companies in 2004 vs. 15k Now.
Homeland Federal Mortgage, out of Oklahoma, was a mortgage broker until they recently shut down. Why is this worth mentioning? Interestingly, the owner is Republican state senator Dan Newberry who wrote, “Recent federal legislative initiatives that favor big banks have made it increasingly difficult for small family-owned businesses like ours to survive. Their actions have led to reductions in available funds to lend, approvable borrowers, and a significant increase in the time it takes to close a home loan. This combined with a weakening economy has forced us to close our company.” David Olson, with Access Research & Consulting Inc., estimates that the number of mortgage brokerage firms is down from a peak of 53,000 in 2004 to less than 15,000 now.

Growing Loan Repurchase Pressure
One of the repercussions of the Freddie & Fannie announcements last week was the observation that repurchase requests will increase. It is common knowledge that repurchase requests from the large investors negotiate based on individual loan merits, or at times satisfied with market-share agreements – not so with the agencies. The pressure for originators to repurchase loans will grow. The more loans that the agencies buy back, the more loans will get pushed back to the originator. Apparently there are between 4-5 million loans out there that could fall into this bucket. One growth area will be firms that assist mortgage originators in handling these buybacks, either from compliance or a legal perspective. One of the leaders in this arena is The Prieston Group. In building any kind of relationship with a firm such as The Prieston Group, it is best to begin early as they put their prospective clients through a rigorous, but worthwhile, testing process prior to signing an agreement. more…

Cash-Out vs. Cash-In Refi Stats
Remember when cash-out refinancing was the bulk of our business, and any investor who would tweak their price slightly on this product would either see all or none of the business? Four or five years ago, that category of loan hit 88%, which, according to Freddie Mac, put another way, means that 9 out of 10 refi borrowers were increasing their loan balance! Now, however, the trend has moved in the opposite direction: in Freddie’s latest quarterly survey of refinancings, 33% of homeowners put cash into the deal to lower their mortgage balances, which was the highest ever, and cash-out refi’s are down to 27%. And why not, IF you have the cash – you’re certainly not earning much on it in the bank – and if you’d like to qualify for a better rate by lowering your LTV. Columnist Ken Harney points out that it is one form of savings plan – just like it used to be!

Treasury Auctions Watering Down Bond Market
Fixed income securities weren’t helped by the $81 billion of securities to be sold this week, on top of the weather issues. The 3-yr auction was yesterday, 10’s today, 30’s tomorrow. The only scheduled news for today is the Trade Balance numbers. more…

Still Hard Times For Jumbo MBS
Why wouldn’t investors want to gobble up securities made up of jumbo loans? Well, how about delinquencies? In a story out of Business Week, “US prime jumbo mortgages at least 60 days late backing securities reached 9.6% in January from 9.2% in December, the 32nd straight increase for “serious delinquencies,” according to Fitch Ratings.” This is almost 3x the rate in 2008. Folks in the business know that non-agency securities don’t have the guarantees/insurance of Freddie, Fannie or Ginnie Mae. So where do these beasts trade? According to the article, last March they hit a low of .63 (so a loss of almost 40 cents on the dollar versus the original principal balance) but are now up into the low 80’s.

This raises the question “Why would an investor buy a pool of mortgages?” In the past, banks, who were, and still are, making fees on originating the loans, didn’t have to hold on to them, but instead could pool them and make them attractive to buyers. The buyers did not hold the individual mortgages, but parts of huge packages of them. Kind of like thinking about how delicious the Orange Chicken is at Panda Express and not having to think about how it got there. On top of that, the rating agencies told investors that the pools were safe, especially so in light of recent appreciation trends. Unfortunately now the rating agencies can’t quite say that, and are having difficulty trying to figure out how to rate any pool of mortgages. more…

I thought about taking today off from the commentary to celebrate, since yesterday I won all 4 quarters of my office’s Super Bowl pool! And then I remembered that I was the only one in the pool, don’t really have an office, and that the net effect of my $50 a square winnings was about the same as the US Government buying back their own securities. Oh well.

Bernanke’s Bailout Exit Strategy
On Wednesday at 10AM EST, Federal Reserve Chairman Bernanke plans to testify before the House Financial Services on that day about the central bank’s plans to withdraw emergency stimulus from the U.S. economy. No one believes that the goal of the Fed is to mess up the markets, or the recover, but the Fed has options in unwinding emergency aid “while not causing inflationary fears, hurting job growth or stunting the fragile economy recovery underway.” We already know that they will keep overnight rates near 0% for quite some time. And in fact late last week a Fed official (the president of the Federal Reserve Bank of New York) said the Fed might reconsider ending the mortgage buying program if rates rose sharply. more…

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

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

First Bank Failure of 2010
The first bank to fail this year is Horizon Bank (WA), with 18 branches that are now being run by Washington Federal Savings and Loan Association, who also assumed all of Horizon’s $1.1 billion of deposits.

More On Friday’s Jobs Report
As you can imagine, the economists spent the weekend dissecting the job’s number, and the other economic releases, from last week: that’s what economists do. In December the US lost 85,000 jobs, but November showed a gain for the first time in two years. Still, the markets believe that the Fed will keep overnight rates close to 0% for quite some time – we’re not out of the woods yet. November Pending Home Sales fell 16% from October, but the decline followed nine straight months of increases and November Pending Home Sales were 15% higher than one year ago. more…