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.

Commercial Real Estate Update
“Commercial real estate markets showed surprising resiliency during the second quarter, with property transactions rising solidly and leasing activity holding up better than expected. We remain cautious in our outlook for commercial real estate and construction.” So states Wells Fargo’s economics department. “The rise in delinquency rates in recent years was mostly caused by the sharp contraction in employment, retail sales and the rate of household formation growth. The apparent improvement in demand may be overstated, as many firms are taking advantage of soft market conditions to upgrade space and locations. The larger immediate issues with commercial real estate continue to be the overhang of commercial real estate loans coming due over the next few years and the large number of development projects that have been partially completed or less, which continue to weigh on community bank portfolios. After showing some resiliency earlier this year, commercial real estate prices fell sharply in June.”

Mortgage Apps Up, ADP Employment Down
Today we’ve already had the MBA’s application index (apps were up 2.7% last week, with refi’s up 2.8% and purchases up 1.8%), and the ADP numbers which were down 10,000 but notoriously questionable about predicting overall employment data (the ADP # does not include government hiring).

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.

“The FDIC plans to vigorously implement its new authorities under the Dodd-Frank Act, which ends the presumption of ‘too big to fail’ for the largest and most complex financial institutions,” FDIC Chairman Sheila C. Bair stated. “The creation of our new Office of Complex Financial Institutions is a critical first step in this process.

The CFI will perform continuous review and oversight of bank holding companies with more than $100 billion in assets as well as non-bank financial companies designated as systemically important by the new Financial Stability Oversight Council. CFI will also be responsible for carrying out the FDIC’s new authority under the Act to implement orderly liquidations of bank holding companies and non-bank financial companies that fail. The absence of such authority exacerbated the recent financial crisis, when such firms as AIG, Lehman Brothers, and Bear Stearns became insolvent.

The establishment of a new division dedicated to depositor and consumer protection will provide increased visibility to the FDIC’s compliance examination and enforcement program. That program ensures that banks comply with a myriad of consumer protection and fair lending statutes and regulations. While Congress established the new bureau to promulgate consumer protection rules, the FDIC maintains the responsibility to enforce those rules for banks with $10 billion or less in assets and to perform its traditional depositor protection function. The new Division will also house FDIC staff and resources devoted to answering questions and promoting public understanding of deposit insurance and use of FDIC-insured bank accounts.

“Our depositor protection and compliance examination and enforcement responsibilities are integral to our unique responsibilities as deposit insurer and supervisor of thousands of community banks,” said Chairman Bair. “The creation of this new division emphasizes the importance we place on these responsibilities and is directly responsive to Congress’s intent in the new legislation. DCP will also complement the activities of the new Consumer Financial Protection Bureau that is being established within the Federal Reserve. The FDIC supports the CFPB, and we are committed to doing our part in carrying out the consumer responsibilities Congress has entrusted to us.”

# # #

Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation’s banking system. The FDIC insures deposits at the nation’s 7,932 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. The FDIC receives no federal tax dollars – insured financial institutions fund its operations.

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.

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.”

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.”

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.

FDIC Settle WAMU Suit
In other FDIC news, the Board of Directors of the FDIC approved a global settlement of the bankruptcy case involving Washington Mutual (for which FDIC was appointed receiver in September, 2008). The FDIC is a participant in the global settlement because of claims and counterclaims involving the company resulting from its role as receiver. The agreement also settles claims between WMI and JPMorgan Chase, the acquirer of the failed Washington Mutual Bank. The FDIC also announced that commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $18.0 billion in the first quarter of 2010, a $12.5 billion improvement from the $5.6 billion the industry earned in the first quarter of 2009. More than 52% reported year-over-year improvements in their quarterly net income, and about 19% reported net losses for the quarter, compared to 22.3 percent a year earlier. Check out the entire report.

10yr Yields At Same Levels As When Lehman Failed
Volatility is in everyone’s vocabulary after last week’s roller coaster in both the fixed income and equity markets. Looking at the entire week, however, 10-yr yields dropped 25 basis points, and 30-yr current coupon MBS’s improved 15 basis points in yield. This puts the yield on the 10-yr back to where it was in late 2008, right after Lehman Brothers failed. But given where other key indices are trading, current yields reflect slow economic growth and low inflation rather than a real panic – nice to hear. Economists everywhere are changing their rate forecasts, believing that rates will stay low for the remainder of 2010. There is no inflation – in fact the CPI’s year-over-year core rate had the lowest reading in 40 years.

Student Loans As Part of Healthcare Bill?
How do politics work? The recently enacted federal health-care overhaul prohibits private lenders from making federal student loans after June 30. Don’t ask me how a health care bill impacts student loans, but going forward the overhaul ends the current program that subsidizes banks and other financial institutions for issuing loans, instead “allowing” students to borrow directly from the federal government. Starting July 1, all new federal student loans will be delivered and collected by private companies under performance-based contracts with the Department of Education. It is no surprise that Wells Fargo, and probably others, announced that it is starting a student loan for parents or other sponsors, allowing college students access to more funds to cover educational expenses without increasing their own debt.

Quick Market Week Preview
Mortgages have done pretty well, although as usual in any kind of rally they will lag Treasury price movements due to prepayment risk. The current coupon is now thought of as 4.0% MBS’s, made up of 3.25-4.625% mortgages, but there has been little issuance of that security ($190 billion in conventional 4.0s outstanding versus $661 billion of 4.5′s and $738 billion of 5.0′s), so because of the small issuance don’t look for hedging companies to use Fannie or Freddie 4′s to hedge. This week we have another set of auctions with which to grapple. $42 billion in 2-year notes, $40 billion of 5-yr, and $31 billion of 7-yr. notes. We have Existing Home Sales today and New Home Sales on Wednesday. Durable Good is on Wednesday, and on Thursday one of the usual GDP revisions for the 1st quarter (old news). The Chicago PMI manufacturing index and Personal Income & Consumption are scheduled for Friday. The current 10-yr is at 3.21% and mortgage prices are worse by about .250.

Daily Humor
A 75 year old lady calls her local hospital and this conversation follows:

“Hello, I’d like some information on a patient, Mrs. Tiptree. She was admitted last week with chest pains and I just want to know if her condition has deteriorated, stabilized or improved?”

“Do you know which ward she is in?”

“Yes, ward P, room 2B.”

“I’ll just put you through to the nurse station.”

“Hello, ward P, how can I help?”

“I would just like some information on a patient, Mrs. Tiptree, I was wondering if her condition had deteriorated, stabilized or improved?”

“I’ll just check her notes. I’m pleased to say that Mrs. Tiptree’s conditioned has improved. She has regained her appetite, her temperature has steadied and after some routine checks tonight, she should be well enough to go home tomorrow.”

“Oh that’s wonderful news, I’m so happy, thank you ever so much!”

“You seem very relieved, are you a close friend or relative?”

“No, I’m Mrs. Tiptree in room 2B. Nobody tells you anything around here.”

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

Obama Pressures Fannie/Freddie To Reduce Loan Balances
When I borrowed money to buy my house, of course I expected the lender to just forgive part of my debt. (Ok, maybe not – why should I?) Pressure is mounting on loan servicers and investors to reduce troubled homeowners’ loan balances, but Fannie and Freddie do not lower the principal on the loans they back, instead opting for interest rate reductions and term extensions when modifying loans. There is continued press about Fannie and Freddie under pressure to reduce loan balances (pressure coming from the Obama Administration).

Four Banks Failed Last Week
It’s Monday, which these days includes a post-mortem accounting of Friday’s FDIC moves. One thing to note – continued small bank closures don’t make large mortgage investors really want to increase their exposure in that sector. Why would it? Southwest Community Bank (MO) is now part of Simmons First National Bank (AR). Midwest Bank and Trust Company (IL) is now part of FirstMerit Bank (OH). Satilla Community Bank (GA) was taken over by the FDIC and Ameris Bank (also of Georgia). Liberty Bank (MI) has changed its logo to Bank of Ann Arbor’s.

Fed Report: Banks More Willing To Lend
Last week the Federal Reserve released its quarterly Senior Loan Officer Survey. Banks are becoming increasingly willing to lend to consumers as well as to medium and large firms, credit conditions for residential and commercial remain restrictive. This is no surprise to mortgage bankers, but there are some signs of loosening in some guidelines and geographic areas. At least underwriters are not being barraged with tightening guidelines every week, as they were in the past, and some believe that lending standards in this area of the economy will eventually begin easing outright. According to the survey, with respect to commercial real estate loans, the net percentage of banks tightening standards is down to +12.5% versus a peak of +87.0% in Q4 2008. The current pace of tightening is at its slowest rate since Q3 2006 (+10.7%). Only 1.9% of net respondents to the Fed’s survey are reporting tighter standards for prime mortgages, the lowest reading for the history of the series which dates back about 3 years. Nontraditional mortgages, like ARM’s and Alt-A, are experiencing ne tightening of just +4.8%, also the lowest reading in the brief history for which they have data.

Accounting vs. Economics
I can’t tell which is more interesting, accounting or economics. The Golden Gate Bridge District is contemplating yet another toll increase not only to fund revenue losses in the local ferry service, but because commuter traffic across the bridge is down resulting in a decline in revenue. So let’s charge the remaining drivers more! In New York, the Department of Banking has changed its fee structure, in some cases tripling assessments for supervising brokers and increasing renewal fees. Some lenders feel that the Department is increasing the number of hours billed per lender in an effort to maintain their workforce and not lay off employees; the Department claims that with volumes dropping, fees must increase for regulation and supervision, especially of smaller lenders. Even though the Department of Banking has fewer companies to regulate, its costs have gone up.

Rates Looking Great
Returning to the economy, there is overall consensus that the US is on some type of recovery. Even GM reported a profit this morning. Last week’s news confirmed that: the trade numbers showed growth, retail sales were up, industrial production and capacity utilization were up, and initial jobless claims were down. On Friday, bond prices improved and rates dropped, primarily based on continued European problems. These problems are not going to go away any time soon, so look for more volatility. Can 30-yr rates reach 4.75% – enough to attract refi attention? Increasing volatility and lower rates is an interesting situation, as are rising gold prices, the rising dollar, and declining oil prices. Mortgage rates have definitely lagged Treasury rates as yields head down – why would an investor or servicer want to pay a high premium for a loan that may not be on their books for a decent amount of time?

Economic Preview For Week
There are a couple of important releases this week, although, as I have mentioned, what difference does a monthly number being up or down a few tenths versus estimates make if there are gigantic problems in Europe? What exciting drama does the economic news hold for this week? Today we already had the Empire State Manufacturing Survey, assuming that there is still manufacturing in New York: “19.1″. Tomorrow we have Residential Construction with Housing Starts and Building Permits, and the Producer Price Index. Wednesday we have the Consumer Price Index, to check just how much of the increase or decrease in PPI is being passed along to us consumers, and the release of the April Fed meeting. Thursday is Initial Jobless Claims, the Philly Fed Survey, and Leading Economic Indicators. Friday zip. So far this morning the 10-yr is down to 3.43% and mortgage prices are once again better by .125-.250.

Daily Humor
A blonde gal decides to go shoe shopping, and stops in at many fashionable stores with no luck. No one seemed to have what she was looking for, which was a pair of alligator shoes.

After becoming very frustrated with the attitude of one of the shopkeepers, the young blonde declared, “Well, then, maybe I’ll just go out and catch my own alligator and get a pair of alligator shoes for free!”
The shopkeeper replied with a sly smile, “Well, little lady, why don’t you go on and give it a try?”

The blonde headed off to the swamp, determined to catch an alligator. Later in the day, as the shopkeeper was driving home, he spotted the same young woman standing waist deep in the murky water, shotgun in hand.

As he brought his car to a stop, he saw a huge 9-foot gator swimming rapidly toward her. With lightning reflexes, the blonde took aim, shot the creature, and hauled it up onto the slippery bank. Nearby were 7 more dead gators all lying belly up. The shopkeeper stood on the bank, watching in silent amazement as the blonde struggled mightily and barely managed to flip the gator onto its back.

Then, rolling her eyes heavenward, she screamed in frustration, “Darn it! This one’s barefoot too!”

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.

5% Reserve For Mortgage Bond Issuers?
Most people in the mortgage business know that if companies were required to hold reserves of 5% of every mortgage security they issued, no one would securitize anything. Convincing lawmakers of that is another thing. The FDIC “approved a Notice of Proposed Rulemaking (NPR) to clarify the safe harbor protection in a conservatorship or receivership for financial assets transferred by an insured depository institution (IDI) in connection with a securitization or participation.” After the standard 60 day comment period, the FDIC has proposed some changes to the standards in the NPR but has retained a clear focus on improved transparency and a better alignment of incentives for strong underwriting in the securitization process.

“The FDIC is proposing:

1) a 5% reserve fund for RMBS in order to cover potential put backs during the first year of the securitization, rather than the prior 12 month seasoning requirement;

2) required disclosure of any competing ownership interests held by the servicer, or its affiliates, in other loans secured by the same property; and

3) requiring deferred compensation only for rating agencies, rather than all service providers.”

The FDIC’s proposed disclosure and risk retention requirements are very close to the SEC’s proposals.

The FDIC apparently believes that the 5% rule is necessary to restore investor confidence. The public comment period ended Feb. 22 (you wrote in, right?) after the House passed a bill that included the 5% risk-retention language. At this point there is continued discussion about not having the 5% apply to securities made up of Freddie, Fannie, or FHA/VA loans, or only allowing loans to be securitized on home loans that are less than a year old or don’t document borrower income. Given that the SEC is also involved in the decision making process, along with the FDIC and Congress, it is somewhat confusing. RiskRetention

And the FDIC did not stop there. On another topic, “The FDIC today issued for public comment a proposed rule that would require certain identified insured depository institutions (“IDIs”) that are subsidiaries of large and complex financial parent companies to submit to the FDIC analysis, information, and contingent resolution plans that address and demonstrate the IDI’s ability to be separated from its parent structure, and to be wound down or resolved in an orderly fashion.” This won’t impact smaller companies, since the proposal “would apply only to IDIs with greater than $10 billion in total assets that are owned or controlled by parent companies with more than $100 billion in total assets.” The government wants to be able to figure out how to deal with large, complex financial institutions in the event of another credit crisis. “The comment period will be open for 60 days following publication in the in the Federal Register.”

New Buyers For Mortgage Loans
Mortgage banks looking for new investors for their loans have new options. PennyMac is in the market, and Redwood Trust (the company behind the recent securitization using Citi loans) announced that it is purchasing prime residential mortgage loans from banking companies and other selected originators. The flow purchase program is currently operating with a small number of mortgage loan originators that have national platforms. Aside from knowing that Brett Nicholas is the Chief Investment Officer at the Mill Valley, CA firm, I don’t know anyone to call there for more information.

Housing Supply Shortage?
How is it possible that there aren’t enough houses to sell out there? All real estate is local, and as it turns out in some markets (Denver, San Francisco) real estate agents are complaining that they don’t have enough homes to sell.

Mortgage Bonds Better, Loan Apps Up
Investors in mortgage bonds stepped up yesterday, especially given the lower origination volumes, steep yield curve, and relatively low interest rates. There is certainly no lack of cash “waiting” on the sidelines, and mortgages “tightened” to Treasury securities nicely, helping mortgage rates on a relative basis. Traders reported buying from foreign and domestic money managers, banks, funds, and insurance companies. Traders estimated origination volume to be about $2 billion that was sold into the secondary markets. But lock desks were a little busier last week. The number of mortgage applications in the U.S. rose last week by 3.9%, with refinancing up 15% and the purchase index down 9.5% after the end of the first-time home buyer tax credit.

Today is the third day of no scheduled economic news of much consequence, although we do have some Trade Balance data (which are included in the GDP data) and the weekly mortgage application survey that the MBAA is kind enough to provide the industry (noted above), along with some speakers from the FOMC. Yesterday, after rates were up a little in the morning, a few investors improved pricing after a decent $38 billion 3-yr auction and as stocks sold off somewhat. Today we have the $24 billion 10-yr Treasury note sale ($16 billion in 30-yr’s tomorrow). With not much going on, stocks are pointing toward the upside, the current yield on the 10-yr is at 3.56% and mortgages are better by about .250.

Daily Humor
(Warning: PG rated.)
A man walks into a bar and takes a seat next to a very attractive woman. He gives her a quick glance then casually looks at his watch for a moment.
The woman notices this and asks, “Is your date running late?”
“No,” he replies, “I bought this state-of the-art watch, and I was just testing it.”
The intrigued woman asks, “A state-of-the-art watch – what’s so special about it?”
The man explains, “It uses alpha waves to talk to me telepathically.”
The lady smiles and says, “What’s it telling you now?”
“Well, it says you’re not wearing any panties.”
The woman giggles and replies, “Well it must be broken because I am wearing panties!”
The man smiles, taps his watch and says, “Darn thing’s an hour fast!”

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).

Greece Aid Package, Consumer Spending
April was a good month, and the US Treasury’s 10-year notes saw their first monthly gain since January. Much of this improvement was seen as a flight to quality given Greece’s fiscal crisis, although this morning it is reported that the 11 million people in Greece will be receiving $147 billion in aid. U.S. consumer spending increased as expected in March for a sixth straight month (+.6%, as expected) and Personal Income rose 0.3 percent following a 0.1 percent gain in February. With consumers increasingly tapping their savings to fund consumption, savings fell to 2.7%, an annual rate of $303.9 billion and the lowest level since September 2008. After this news we find the 10-yr yield at 3.70% and mortgage prices worse by .125-.250.

Ritz Carlton Tahoe Defaults
“All real estate is local” as they say. How is the Lake Tahoe market in California? Well, for starters, the new Ritz Carlton has received a notice of default. The NOD came about a month after its developer put almost $1 billion worth of other real estate development in that area (Northstar) into bankruptcy – over-building in a luxury market. Units are being sold at steep discounts, and the hotel property (not the Ritz company) is behind on almost $19 million in payments. PuttinontheRitz And speaking of foreclosures, celebrities are not immune.

CA, NV, FL, AZ Have Highest Foreclosures
What do California, Florida, Nevada, and Arizona have in common? All 20 of the large metropolitan areas with the highest rates of foreclosures during the first quarter were located in these states. RealtyTrac’s research showed that the four each had at least one metropolitan area with a population of 200,000 at the top of the 206 city list. California accounted for ten positions, Florida seven, Nevada two and Arizona one. On the “good news” side, however, 14 of the top 20 areas and eight of the top ten reported a decrease in foreclosure activity from the same quarter in 2009, mostly due to government intervention and other non-market influences.

Delinquencies Fall
Freddie’s single family serious delinquency rate fell in March, marking the first month-month decline since 2007. In many pools containing loans from 2005-2008 90-day delinquencies and 120-day delinquencies were down. Analysts will wait for Fannie’s numbers before declaring any kind of trend, but at least investors believe that this indicates a continuation of slow prepayments on higher-coupon Freddie securities (Golds).

Rates Steady and Low
Are mortgage rates really the problem in originating any loan? Probably not, as underwriting guidelines and a lack of equity continue to hinder brokers and agents. If you look at 30-yr rates now versus a week ago, or a month ago, they are about the same. Yes, they are about .250% higher than a year ago, but the impact of that is pretty minimal. What did the end of last week tell us about the economy? Real GDP grew during the first quarter, consumer confidence rose in April, and weekly first-time unemployment claims fell. On the flip side, Greece continues to be a huge credit problem which has ramifications for other countries, and here in the US our debt continues to grow as does overall unemployment (hovering around 10%).

Economic Preview For Week
This week shows quite a bit of news. We start today with Personal Income & Consumption (Spending) – see below, the ISM Manufacturing Index, and Construction Spending. Tomorrow we have Pending Home Sales, Wednesday the ISM Services number and ADP private-sector employment figures. Thursday is Initial Jobless Claims and some productivity and costs numbers. Friday is the biggest economic event with the employment report containing Non-farm Payroll, the Unemployment Rate, Hourly Earnings, etc.

ISM Shows Strength
The Institute for Supply Management’s (ISM) number out this morning has been showing signs of economic strength. Any reading above “50″ is expansionary, and last month it was 59.6. Regional manufacturing surveys rose in April, suggesting headline ISM will remain in expansionary territory, and analysts are expecting something around 60 for April. Later this week the Non-farm Payroll data, which last month showed an actual increase of 162,000 jobs, is expected to show another increase of around 200,000 jobs. Census hiring is impacting the numbers, but most analysts believe that private sector hiring should do well.

Daily Humor
An elderly couple, having their 50th wedding anniversary dinner, starts reminiscing about their life together. The husband confesses that he had never cheated on her and asks: “Have you ever cheated on me?”

She confesses: “Yes I have. 3 times, but they were for your benefit.”

Taken back he asks, “For my benefit, how could that be?”

She replies, “Remember when we first started out and couldn’t make the mortgage payment? Well, I met with the banker and after that we weren’t behind.

“The second time, you had the heart attack and we couldn’t pay the hospital. Well I met with the doctor and after that we were behind.”

He says, “Well I see how that was for me, for us. I forgive you. And the third time?”

“Remember when you needed 29 votes to become the president of the realtor board?

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.”

Long Live Monopolies
Monopolies are not dead. Once a week our garbage is picked up, usually early in the morning. (Sometimes, if I go outside, the garbage man will ask me what I am doing up at 4:30AM. Rather than embarrass myself by telling him that I write a commentary about the mortgage industry, I tell him I’m still liquored up.) In San Francisco, the cost for this service is $37 per can per week. That seemed pretty steep to one contractor, who canceled his service, had his neighbor do the same, and then took their garbage to the dump and paid $40. Word spread, and soon many neighbors were paying the guy $10 per household for him to take their garbage, saving everyone over a thousand a year. Unfortunately for free enterprise, the local garbage company and the union found out what was happening, and convinced the city to pass a law banning this type of activity.

Double Dip For Mortgage Industry?
Overall, few economists disagree that here in the US we’ve come off the bottom. It is odd, however, that the recovery is not being led by a rebound in housing and consumer durable spending, or by much job growth. And don’t we need job growth to create more borrowers to either refinance or to buy houses? If the economy really takes off and jobs don’t, the mortgage industry could be hit by the famous “double whammy” of higher interest rates and fewer qualified borrowers. Uh oh.

Economic Recap of Last Week, Looking Forward This Week
Last week we had a very limited amount of economic news, so bonds were pushed around by the auction results. When the yield on the 10-yr hit 4%, it seems to have attracted investors, so we “bounced”. Overall the auctions were okay; although there is continued nervousness about whether or not the US will see others support our deficit. Regardless, mortgage rates actually ended the week on a decent note – certainly no disaster has occurred since the Fed stopped buying MBS’s – and are following Treasury rates. Money managers, insurance companies, and pension funds are buyers of mortgages, and although there are weekly volume fluctuations, most indicators still point to a slower year in 2010 than 2009. And if production (supply) is down, and demand steady…

This week we have a little more substantive economic news, including Wednesday’s Consumer Price Index (CPI), Retail Sales report, and Beige Book. Tomorrow we’ll see some trade balance figures. Industrial Production & Capacity Utilization and the Philly Fed survey are announced on Thursday (after Initial Jobless Claims come out). Housing Starts (“New Residential Construction”) are on for Friday. Inflation certainly appears under control and the March CPI is expected to be +.3% with the core rate only up .1% (which the Fed likes). And March’s Retail Sales figure is expected to be +1.8%, probably due to strong auto sales. Ahead of all that, the 10-yr is at 3.88% and mortgage prices are better by about .125.

Daily Humor
A distinguished young woman on a flight from Ireland asked the priest sitting beside her, “Father, may I ask a favor?”

“Of course, child. What may I do for you?”

“Well, I bought an expensive electronic hair dryer for my mother’s birthday. It is well over the Customs limits and I’m afraid they’ll confiscate it. Is there any way you could carry it through Customs for me…under your robe, perhaps?”

“I would love to help you, dear, but I must warn you … I will not lie.”

“With your honest face, Father, no one will question you.”

When they got to Customs, the woman let the priest go ahead of her.

The official asked, “Father, do you have anything to declare?”

“From the top of my head down to my waist, I have nothing to declare.”

The official thought this answer strange, so asked, “And what do you have to declare from your waist to the floor?”

“I have a marvelous instrument designed to be used on a woman, but which is, to date, unused.”

Roaring with laughter, the official said, “Go ahead, Father. Next!