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No More MBS Buying From Fed
Rates continue to trend lower, helped yesterday by the release of the FOMC meeting’s minutes which alluded to the possibility of the Fed reinvesting in MBS’s. (But heck, as one trader told me, low mortgage rates are helping agency-qualified borrowers, not others in the economy like renters who can’t qualify, not those that don’t have jobs or those that simply pay cash for houses.) “A few members worried that reinvesting principal from agency debt and MBS in Treasury securities could send an inappropriate signal to investors about the Committee’s readiness to resume large-scale asset purchases,” the Fed said in the report, referring to mortgage-backed securities. The minutes from the August 10 meeting made it clear that the Fed is far from ready to restart Quantitative Easing Round 2.

FDIC Banks Report $22b Aggregate Profit
“It’s hard to make a comeback when you haven’t been anywhere.” Conversely, banks have certainly made a comeback: FDIC-insured institutions reported an aggregate profit of almost $22 billion in the second quarter of 2010, a $26 billion improvement from the $4 billion net loss the industry posted in the second quarter of 2009. This is the highest quarterly earnings total since the third quarter of 2007. Earnings remain low, however; the primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses. more…

A few days ago the FDIC announced the creation of a new office to help implement ‘Too Big To Fail’ provisions of the 2300 page Dodd-Frank Finreg bill: The Office of Complex Financial Institutions. Seems redundant—isn’t the root of their job to oversee a complex system? Even if the office is focused on understanding firms above a certain size (described in press release below), this name misses their goal of simplification.

The FDIC Board of Directors today approved the creation of a new Office of Complex Financial Institutions (CFI) and Division of Depositor and Consumer Protection (DCP) to help carry out its responsibilities under the Dodd-Frank Wall Street Reform and Consumer Protection Act. more…

The FDIC has closed 96 banks so far in 2010, including 6 on Friday. Here’s the FDIC Failed Bank List which shows which banks failed outright, depleting bank-funded FDIC reserves, and which were fully or partially taken over by other banks. When WAMU became the biggest-ever bank failure in the heat of the crisis, the FDIC realized their fund would disappear quickly so they and other bank regulators have become investment bankers of sorts, brokering deals for healthy banks to take over assets (loans) and/or deposits of the failing banks—in that case, the FDIC let JP Morgan Chase take over WAMU for a mere $2b. The Failed Bank List details all of these deals. For healthy banks, this is a golden era to cherry pick healthy loan books and/or pre-existing branch networks at deep discounts.

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…

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…

Current Financial Reform Bill Status
The House-Senate conference committee is where the action will be on the Financial Reform Bill. Several key issues will have to be resolved there, including restrictions on derivatives trading by banks, mortgage broker compensation and yield spread premium, the proposed liquidation fund to be financed by financial firms and the relationship between the Fed and the new consumer financial protection agency. One can expect a vote by the July 4th recess.

73 Banks Failed Year To Date
The FDIC “only” took over one bank Friday: Pinehurst Bank (MN) is now owned, lock, stock, and barrel, by Coulee Bank, based in La Crosse, Wisconsin. The failure of Pinehurst Bank, #73 this year, double the pace of 2009, is expected to cost the deposit insurance fund about $6 million. more…

Are You On Global Rich List?
You’re richer than you think, I hope. The Global Rich List website generates a wealth ranking for its users based on their annual income. The median income in the United States in 2009 (half above, half below) was $52,000 and if that was your income you are the 58,252,719th richest person in the world (or in the top 0.97 percentile of all moneymakers). Poke, the owner of the site, assumes that the world’s total population is 6 billion and the average worldwide annual income is $5,000.

Which Banks Own Most Mortgage Bonds?
The National Information Center has just released consolidated financial statements for bank holding companies for the first quarter. The top 50 bank holding companies “shed” $25 billion in residential mortgage-backed securities between January and March. Among the top 10, only two increased their holdings. The top 5 bank holding companies, in terms of assets, are Bank of America, JPMorgan Chase (didn’t James Pierpont Morgan put periods and spaces between his initials?), CitiGroup, Wells Fargo, and Goldman Sachs. Wells Fargo, despite being the largest originator of mortgages, declined the most: $13 billion in three months. Whether that is due to an accounting change, a move into whole loans instead of securities, the strategy of “since the Fed’s buying, let’s sell”, or “once the Fed stops buying, mortgage rates are going to go up so let’s sell”, down their holdings went. And if anyone thinks that there is not cash out there, the top 50 banks increased their holdings of US Treasuries by $51 billion. Top50 more…

How To Get A Quick 5-Point Credit Score Gain
Here’s a tip of the day: if a borrower needs an additional 1-5 pts on a FICO score to qualify for a particular home loan program, with the borrower’s permission use the painless 5 year electronic opt-out on www.OptOutPrescreen.com. Apparently it has a positive impact on FICO scores after about a week.

Price, Risk & Ratings Agencies
Prices are certainly a great mechanism for showing the relative value of different things. This was the focus recently of some commentary in Bloomberg by Caroline Baum regarding the Goldman Sachs hearings. Even a purple Ford Pinto has a price, so if Goldman was selling “bad securities” to buyers, just as buyers invest in distressed debt, junk bonds, foreclosed properties, etc., then the price should reflect the risk. Regardless of social value, Ms. Baum points out that “Price is the mechanism through which savings are allocated to the most productive uses in a market economy. It’s the way consumers convey what goods and services they want to buy. It’s what prompts producers to hedge and speculators to speculate.” It didn’t help, of course, that the rating agencies gave AAA ratings to many securities that were not AAA – even Enron carried an investment-grade rating days before it collapsed. more…

7 More Bank Failures
The FDIC, seemingly in the news more and more, sent out an announcement with a listing of its recent enforcement decisions, including final orders or cease and desist orders. No one likes to see their employer on the list.

The FDIC also announced the “shuttering” of seven banks on Friday, with three in Puerto Rico. (I didn’t even know that the FDIC guaranteed deposits in Puerto Rico.) The three Puerto Rican banks closed were Eurobank, R-G Premier Bank, and Westernbank. Eurobank reopened as Oriental Bank and Trust, R-G Premier Bank as Scotiabank de Puerto Rico, and Westernbank as Banco Popular de Puerto Rico (remember eLoan?). Within our shores, CF Bancorp (MI) is gone, and replaced with First Michigan Bank. Champion Bank of Missouri has been incorporated BankLiberty, also of Missouri. BC National Banks is part of a purchase and assumption agreement with Community First Bank, also of Missouri. And Frontier Bank (WA) is now part of Union Bank, National Association (CA). more…

Bank & Credit Union Closures
The FDIC shut down Beach First National Bank, and the branches have re-opened this morning as Bank of North Carolina. Per the press release, Beach First was heavily invested in coastal real estate development. But banks are not the only savings institutions that are shut down. Connecticut’s South End Mutual Benefit Association, which has been around since 1945, has passed a resolution to cease operation and terminate its business, and has petitioned the National Credit Union Administration (NCUA) as receiver. With a credit union, accounts are insured up to at least $250,000 by the National Credit Union Share Insurance Fund (NCUSIF) – a federal fund managed by NCUA and backed by the full faith and credit of the U.S. government.

Mortgage Insurance Requirements Easing
Starting today, Genworth has removed FL, CA, AZ, NV & MI from its declining market list, aside from saying that cash-out refi’s are not allowed in Florida, and still not allowing condos or attached housing in that state. In a related statement, Genworth also introduced “new definitions” for retail and non-retail originations which in effect removes its existing Third Party Origination definition. “For a loan to qualify as a Retail Origination, the entity that orders the mortgage insurance coverage (the Insured) must have performed all of the following loan tasks: taking the loan application, processing the loan application, underwriting the loan application for MI eligibility, and funding & closing of the loan. Check with Genworth for other requirements, such as “loans must be funded from a warehouse line in the lender’s name or from the lender’s own funds – table-funded loans are considered Non-Retail.” more…