The WSJ reports that the Obama administration will roll out an expanded program this week to help home owners whose home values are less than their mortgages (excerpts below). Banks that reduce loan balances will have more flexibility in refinancing existing loans into new FHA-insured loans. Hats off to the administration for trying to help, but FHA loans come with mortgage insurance, and the FHA will be increasing that monthly mortgage insurance from .55% to 1.45% effective Monday, October 4.

Let’s say this program allows someone with existing financing of $350,000 at 6.25% with no mortgage insurance to refinance to $300,000 at 4.25% with mortgage insurance. The politicians and press would say this 2% rate improvement and lower loan amount would save $679 per month, which if true, would indeed be enough savings for a borrower who qualified for the refi (under FHA loan approval standards) to keep their home. But it isn’t true. When you factor in the new FHA mortgage insurance rates, the savings is $298, or 56% less savings than projected. Which means less chance that such a change would be a long-term fix.

But the FHA absolutely must raise insurance premiums because their ability to back loans that go bad is funded from FHA mortgage insurance premiums. And the fund has been depleted due to rising foreclosures in the past few years. It’s an extremely tough problem that either political party is going to face despite any election results.

Officials say between 500,000 and 1.5 million so-called underwater loans could be modified through the program, the first initiative to target homeowners who are current on their mortgage payments but are at risk of default because they have no equity in their homes. Some experts are warning, however, that the same knots that tied up prior initiatives could do so again.

Under the new “short refinance” program, banks and other creditors that write down mortgages to less than the value of the property can essentially hand off the reduced loan to the government. The process involves refinancing borrowers into loans backed by the Federal Housing Administration.

While the program puts taxpayers at risk—officials estimate one in five loans in the program could default—the government has set aside $14 billion previously earmarked for housing aid from the Troubled Asset Relief Program to cover losses.

Guns & Mortgages
This story speaks for itself, here’s the link and the epic lead paragraph below: Prosecutors: Mortgage Worker Got Drunk, Shot Computer Server

A Salt Lake City mortgage company employee allegedly got drunk, opened fired on his firm’s computer server with a .45-caliber automatic, and then told police someone had stolen his gun and caused the damage.

Effective Rate of All Mortgages is 6%
Jefferies, and other Wall Street firm’s analysts, have recently pointed out that the effective rate of interest on all US mortgage debt outstanding (about $11 trillion – more than US Treasury and corporate debt combined) has barely budged in recent years at just over 6%. Like a kid looking through the window at candy, originators know this, and that the overwhelming number of households, on average, are paying the same rate they have for quite some time, and funding conditions “for the largest and most important part of the US economy – the consumer sector – continue to be bad. And if a borrower can’t refinance, and lower their monthly payment, they tend to hunker down and put the money into savings – which often time is invested by banks into Treasuries. And of course this serves to push rates down even more.

Analysts believe that if overall rates drop by 1% for all borrowers, it may translate into potential annual savings of more than $30 billion in lower monthly payments. (No, I didn’t run the numbers myself.) This transfer would shift money away from investors and money managers and into the pockets of borrowers – the fabled consumer sector, which has been lagging. And it follows that this desperately needed money would help stimulate the economy, right? But as we all know, origination capacity remains a bottleneck either through regulation or through lack of equity/credit. Investors would probably rather have their holdings of 6% (on average) mortgages ratchet down to 5% then go to 4%. And so the conjecture about a massive government-led refi wave continues.

Government Loan Modifications Struggling
But few people, if any, who follow mortgage statistics are arguing that any of the government’s modification plans are working. In fact, few, if any, of the people with whom I have spoken who are actually in the front lines doing the modifications say that it is going well. Even the US Treasury, in its latest report on 17-month old HAMP, noted that “the percentage of homeowners dropping out of the Obama administration’s premier housing rescue program rose in July to nearly half of participants, as owners receiving aid continued to struggle with documenting their eligibility.” According to the Treasury Department, about 48% of the 1.3 million homeowners who started a mortgage modification through July have dropped out, up from the 41% noted in June. Modification trials offered in the program prior to June 1 did not require up-front documentation of income or eligibility, and many trials are now being canceled. As a result, Treasury said 100,114 participants dropped out of the program in July — more than four times the 24,577 new modification trials started. Overall, the Treasury said HAMP has lowered payments for a total of 1.3 million homeowners that received trial modifications since the program was launched.

Wells Ramping Up CMBS Team
In a story out of Bloomberg Businessweek, Wells Fargo & Co. is plunging back into the commercial mortgage-backed securities market by adding more than 20 bankers and support personnel during the past three months to increase loan originations and bundle them into CMBS. (I sure hope that they know what they’re doing, since every time I drive by a shopping center or office building I see plenty of “for rent” signs.) Wachovia, now owned by Wells, was the #1 underwriter of CMBS’s from 2005 to 2007, and then had over $2 billion in losses in 2007 and 2008. As we know, commercial property values have declined 39 percent from the 2007 peak, according to Moody’s Investors Service. The decline has made underwriting loans less risky, and banks can dictate more conservative terms and choose the most creditworthy borrowers.

Record Low Existing Home Sales
The stock and bond markets were somewhat quiet yesterday until NAR’s Existing Home Sales number “hit the tape”, plunging 27.2% to sales’ lowest levels since 1995 and setting a new record low for this series which goes back to 1999. In addition, the data was revised to show a bigger drop of 7.1% in June, which was the last month that homebuyers were able to receive the homebuyer tax credit, and pushes out the housing inventory to over a year. The national median home price rose 0.7 percent from July last year to $182,600, but why build a new house when there is a year’s inventory at current sales rates, and the huge overhang of foreclosures that are set to enter the market as re-sales over the next several years?

Market Reaction To Home Sales Data
As we saw, rates dropped and fixed-income prices improved. Two-year Treasury yields hit another record low, 10-year notes rose 29/32 to yield 2.50% from 2.60%, and mortgage securities were better by a solid .375 in price (some portion of which made its way onto rate sheets for originators). (Sometimes economists, when they are feeling their most dour, compare the US economy to Japan’s. As a point of reference, Japan’s 10-yr note first closed below 2.00% in the autumn of 1997, and since that time it’s averaged 1.48%) Reuters released a poll showing that 72% of Americans are “very concerned” about unemployment and more people now disapprove of President Barack Obama than approve of him – more evidence of a slowing economy and the consumer hunkering down.

Market Roundup
This morning we have already learned from the MBA what lock desks already knew – that mortgage applications up 4.9% to highest level since May 2009. Refi applications were up 5.7% while purchase only increased .6%. And we have already had the Durable Goods number for July. (In the debatable recovery from March 2009 through April 2010, durable goods orders rose more than 20 %.) Durable Goods were expected to be up between 2 and 3%, but were only up .3%, and ex-Transportation they were down almost 4%. Once again, stocks dropped, and bonds rallied. The 10-yr yield is now at 2.42%, and current coupon mortgage security prices are better by roughly .250 in price. Perhaps we really are headed for a 4% 30-yr fixed rate world on rate sheets. We still have a $36 billion 5-yr. Note auction ahead of us, along with New Home Sales.

What Do Manufacturing & Inflation Stats Mean?
Economic stats often point to different economic trends, depending on one’s viewpoint. What difference do numbers like Industrial Production, Capacity Utilization, Producer Price Index, etc., mean for anyone in the mortgage business? Aside from moving rates around, last week we saw strength in manufacturing production (pushing commodity prices higher), weakness in final demand, and negligible inflation. The Consumer and Producer Price Indices have fallen for two months in a row. CPI is now up just 2% over the past year, but the PPI is up 5.3% over the past year. This leads us to believe that companies cannot pass along their higher costs to their end consumers, which in turns suggests that profit margins in coming quarters will be impacted. The same applies to mortgage banks – many would prefer to increase their profit margins, but don’t want to risk any market share so are forced to keep things slim.

Another Failed Bank & Summer Solstice
Nevada Security Bank wasn’t so secure, and on Friday Umpqua Bank, through the FDIC, assumed all its deposits. The bank didn’t make it to see the summer solstice, which occurred this morning at 7:28AM EST. (From here on, the days will become shorter here in the Northern Hemisphere.)

National Flood Insurance Still Not Approved By Congress
Fannie Mae issued guidance on its stance on the lapse in issuance of flood insurance policies. The Agency issued a Lender Letter describing purchase conditions for delivery to Fannie Mae of loans closed during the NFIP lapse. Originators are advised to read the actual letter, since investors will probably follow it if they haven’t already, but “Until evidence of active flood insurance is obtained, a lender may deliver a mortgage loan to Fannie Mae on the condition that the borrower can provide acceptable evidence of a completed application for flood insurance and a copy of a check or the final HUD-1 Settlement Statement reflecting payment of the initial premium, or the assignment of an existing flood insurance policy from the property seller to the purchaser. Lenders must have a process in place to identify mortgaged properties securing loans sold to Fannie Mae that do not have proper evidence of active flood insurance, take all steps (insofar as permitted by applicable law) necessary to facilitate the issuance of coverage once the NFIP insurance authority is renewed, and retain documentation to support acceptable evidence of flood insurance.”

Update On Loan Modifications
Freddie Mac sent out a bulletin addressing “an extended set of requirements for the temporary Freddie Mac HAMP Backup Modification and the Cap-to-Reinstate modification for Home Affordable Modification program (HAMP)-ineligible borrowers.” Freddie expanded the eligibility requirements for these solutions in order to assist a larger population of distressed borrowers avoid foreclosure, and also extended the eligibility timeline to now include borrowers with stated income Trial Period Plan effective dates on or before May 1 instead of April 1.

Projected Range of 10yr Notes
What seems to be pushing rates around right now? There is some feeling out there that bonds are once again paying attention to growth and inflation rather than the latest crisis. And, of course, there is little or no inflation, which leaves the growth aspects of the US economy front & center. Paul Jacob from Bank of Manhattan, for example, believes that the new 10-yr yield range is 3.15% to 3.40-3.50%. The “real” 10-year Treasury yield measured against the 1-year change in core CPI is 2.25%, almost precisely equal to its average level since 2000.

Economic Preview For Week
In terms of economic news, there is nothing today. Tomorrow we have some “10AM EST numbers”, long thought to be not as important as the “8:30AM EST numbers”, with Existing Home Sales, FHFA Home Purchase Index, and the Richmond Fed Index. Wednesday is New Home Sales, but later on we’ll have the end of the Federal Reserve’s FOMC meeting. (No matter how much the press wants to talk about the meeting, there will be no change to overnight rates, and little, if any, change to the actual announcement.) Thursday we have Initial Jobless Claims and Durable Goods. Friday is GDP, and the University of Michigan Consumer Sentiment Survey. And in order to finance activities of the US government, the Treasury will auction $40B in 2-, $38B 5- and $30B 7-year notes beginning tomorrow. The 10-yr is back up to 3.30% and current coupon 30-yr MBS prices are down about .250.

Daily Humor
“Husband Down”

A husband and wife are shopping in their local Wal-Mart. The husband picks up a case of Budweiser and puts it in their cart.

“What do you think you’re doing?” asks the wife.

“They’re on sale, only $10 for 24 cans”, he replies.

“Put them back, we can’t afford them,” demands the wife, and so they carry on shopping.

A few aisles further on along the woman picks up a $20 jar of face cream and puts it in the basket.

“What do you think you’re doing?” asks the husband.

“It’s my face cream. It makes me look beautiful,’ replies the wife.

Her husband retorts, “So does 24 cans of Budweiser and it’s half the price.”

On the PA system: “Cleanup on Aisle 25, we have a husband down.”

Fannie Mae Relief For Homeowners Near Oil Spill
CitiMortgage will suspend all foreclosure sales and filings for 90 days on its 1st mortgages within 25 miles of the Gulf coast. Fannie Mae said that servicers of Fannie-backed loans may immediately suspend or lower payments on mortgages for borrowers whose income or property were affected by the spill. Under the Fannie Mae program, servicers can offer to postpone or lower payments for up to 90 days, during which the servicer is expected to verify the borrower’s income loss or the damage the oil spill may have done to their property. Freddie Mac will grant up to six months forbearance to victims of the oil spill.

Re-Defaults of Modified Loans
Fitch Ratings forecasts that most borrowers who get lower mortgage payments under a federal government program will default within 12 months. This is not much of a surprise to anyone involved in modifying mortgages, but in a story by WSJ’s James Hagerty:

“among those with loans that aren’t backed by any federal agency, the re-default rate within a year is likely to be 65% to 75% under HAMP.”

Almost all of those who got loan modifications have already defaulted once. HAMP impacted borrowers still have, on average, a median ratio of total debt payments to pretax income of 64% – run that through your AU system. The news is a little old, however, being based on the performance of non-HAMP loans that were modified in the first quarter of 2009. But it does take time to see the results of the program – most analysts believe that the results of the $50 billion HAMP program are mixed.

Short Sale Pitfalls
In an article from Managing REO, California Real Estate commissioner Jeff Davi issued a consumer alert warning consumers and real estate agents about the “perils and potential pitfalls” of short sales. The alert educates consumers and real estate agents to recognize the elements of a fraudulent or questionable deal. Most define a short sale as one that involves the sale of a property wherein a seller receives an offer from a buyer that is less than the amount of the mortgage loan on the property, and the lender is asked to accept less than what is owed in order to allow the transaction to close. The DRE warns in some instances a seller may be required to pay taxes on the forgiven debt, and warned of unscrupulous agents and straw buyers. Short sale negotiators must be licensed real estate brokers (or a licensed real estate salesperson where that person is working under the supervision of his or her broker). Any and all payments must be fully disclosed and made part of the escrow documents. If there are any fees to be paid “outside” of escrow, this may be the red flag that the payment is illegal.

Failed Mortgage Bank CEO Arrested for TARP Fraud
Taylor, Bean & Whitaker is in the news again. The SEC has charged the company’s former CEO and chairman Lee Farkas, who was arrested in his gym, with fraud in a scheme intended to scam at least $1.5 billion from private investors and the U.S. Treasury’s Troubled Asset Relief Program (TARP). The charge says something about “engaged in a pattern of fraudulent conduct for the purpose of selling at least $1.5 billion of fictitious and impaired residential mortgage loans to Colonial Bank. Those loans were then falsely reported by Colonial to the investing public as high-quality, liquid assets, which allowed Colonial Bank to misrepresent that it had satisfied a prerequisite necessary to qualify for TARP funds.” TBW began to experience cash flow problems in 2002 and to cover the shortfall, the members misappropriated funds from Colonial Bank and from Ocala Funding LLC – both controlled by Farkas. In addition to conspiracy, he is being charged with bank, wire and securities fraud.

Closing Extension For Tax Credit
Investors are plainly backlogged in the processing of loans to be purchased, in part due to the tsunami of loans originated due to the first time home buyer tax credit. These loans must fund by June 30th and this closing deadline has not been extended. It may be, however, through the potential approval of an amendment to the Tax Extenders Bill. Under the amendment, borrowers who signed purchase contracts by April 30 would be given three extra months to close their loan and still qualify for the homebuyer tax credit. The new deadline would be September 30, 2010.

Consumer Inflation Flat, Other Economic Updates
This morning’s Consumer Price Index came out as expected, -.2%, with its core rate +.1%, year-over-year numbers as expected. Initial Claims were up 12,000 from the revised number from the previous week, and continuing claims also rose. Inflation is not an issue. We still have Leading Economic Indicators and the Philly Fed numbers (expected up .5% and slipping slightly, respectively) possibly moving rates a little. We also have next week’s 2-yr, 5-yr, and 7-yr auction amounts announcement. But after this news, the 10-yr is still sitting around 3.25% and MBS prices are better by between .125 and .250.

Mortgage Bond (MBS) Volume Increasing
The supply of mortgages hitting trading desks has picked up a little recently. It is nice to see, although 2010′s volumes are still expected to be significantly less than 2009′s. And some believe that the selling is coming more from money managers and servicers. No originator is complaining about mortgage rates, really, since their energies are focused on the inordinate amount of time and energy is spent in processing the loan and dealing with appraisal issues. That aside, mortgage prices improved nicely yesterday, as were other US fixed-income security prices, after the housing starts & producer price index information was released. After the FHFA directed both FNMA and FHLMC to delist their common and preferred shares, some interest shifted to FHA & VA loans, which go into Ginnie Mae securities. FHA & VA loans, of course, have their own demons to grapple with, but the GNMA bid picked up a little relative to conventional MBS’s.

Rent-Buyback Scams Rising
The FTC has warned us that “Rent-buyback” schemes are on the upswing. Underwriters and law enforcement officials are on the watch for anything that looks like the con artist offers to take title to the property and simultaneously provide an official-looking rental agreement or lease-option contract that purports to give the owner the right to repurchase the house after they regain their financial footing Rentbuyback. Firms like The Prieston Group, however, through its repurchase insurance program, are covering clients from losses.

Daily Humor
A man wanted a $500 loan. He approached his local banker, who asked what he planned to do with the money.

“I’m going to take some jewelry to the city and sell it,” the man replied.

“What do you have for collateral?”

“I don’t know what collateral means.”

“It’s something of value that would cover the cost of the loan. Do you have any vehicles?”

“Yes. I have a 1949 Chevy truck.”

The banker shook his head. “Any livestock?”

“I have a horse.”

“How old is it?” the banker asked.

“I don’t know. It has no teeth.”

Reluctantly, the banker decided to OK the loan.

Several weeks later, the man returned to the bank with a roll of bills. “Here’s the money to pay the loan,” he said, handing over $500 plus interest.

“What are you going to do with the rest of that money?” the banker asked.

“Put it in my pocket,” the man replied.

“Why don’t you deposit it in our bank?”

“I don’t know what deposit means.”

“You put the money in our bank and we take care of it for you. When you want to use it, you can withdraw it.”

The man looked suspiciously at the banker and asked, “What do you have for collateral?”

Mortgage News vs. Industry Advocacy
The other day a reader wrote to me and said, “I keep wondering why you continually defend mortgage brokers and bankers. Hopefully the changes that are coming from Congress should go a long way to reducing the fraud, abuse and overcharging that brokers and some bankers have been doing for years. What we’ll be left with will be a smaller but more honest mortgage banking industry.” This is a valid question, valid points, and I appreciate the input. I try to not let my opinions enter into the commentary too much, and keep it “newsy.”

That being said, however, I think that brokers and bankers entered this business because they wanted to help others, and to make good money. The order of those two varies, but wherever one places the blame many decent brokers and bankers have either left the business or are barely hanging on. Just like the credit pendulum 3 years ago had swung too far to one side, many feel that it has swung too far the other, and will eventually come back to the middle. And honest people in the business are in favor of measures that eliminate fraud and overcharging, and any measures mortgage lenders can take to protect themselves from both of those should be encouraged.

Loan Modification Update
Mortgage rate levels are historically attractive, but these rate levels have been seen many times already and refinancing activity drops each time. Just like some people believe that most everyone who can refinance has refinanced, others are starting to say that most everyone who can have their loans modified has had their loan modified. The monthly HAMP modification report reveals that “HAMP trials started” continue to shrink, especially in the last few months. April’s 37,000 trials started were down 75% from the peak run rate of Aug-Oct 2009. Completions are up, but that’s simply a reflection of loans already in the pipeline. The reality is that just 299,000 HAMP mods have been completed so far, with only 29% receiving principal forbearance.

QuickenLoans Loan Servicing
Quicken Loans, headquartered in Michigan and the nation’s fourth largest retail lender, has created “Quicken Loans Mortgage Services”. QLMS is a new division servicing the home financing needs of community banks and credit unions across the country. Kind of sounds like Taylor Bean. Smaller banks and credit unions don’t want to incur the cost of originating home loans, and can use this service. Quicken is hoping to use its position as the largest on-line lender to leverage this relationship.

Failed Lender Fallout
And while we’re talking about Taylor Bean, in a story out of the Wall Street Journal, former Taylor Bean & Whitaker Chairman Lee Farkas allegedly ‘”siphoned more than $50 million from the Florida mortgage lender for his own ‘personal financial gain,’ according to a bankruptcy court filing. Taylor Bean said Mr. Farkas, the Florida businessman who built Taylor Bean from a small mortgage company into the nation’s largest mortgage lender not owned by a bank, ‘withdrew substantial sums of money from TBW for his own personal benefit or for the benefit of business ventures that he owns or controls.’”

Record Foreign Treasury Investment
Data released by the US Treasury Department yesterday showed that foreign investors set a record for purchases of long-term U.S. securities in March. The United States’ debt market certainly has benefited from its safe-haven status (the long-run picture is much more cloudy, however), and China remained the largest holder of Treasury debt and added to its holdings for the first time in seven months. Net Treasury purchases by all foreign investors jumped by $108.47 billion in March from $48.1 billion in February, with net purchases being $140 billion.

Inflation Watch (continued in PPI section below)
Tomorrow we will have the minutes from the late April FOMC meeting. So what? Analysts will be looking for any change in the opinion of the Board with regard to the direction of the economy, and any potential change in overnight rates. It is unlikely: inflation is not currently a big problem (down the road is whole ‘nother issue). But this week we have the PPI and CPI, and economists are not forecasting much of a jump in either number, confirming the Fed’s view. In fact recently look at how the price of oil has gone from $80 a barrel down to $70 a barrel based on European issues. Considering that the US economy is now likely entering the third consecutive quarter of above-trend growth, inflation could start to pick up a little.

Rates Down The Up Monday
Monday rates started off well, and in fact Treasuries tried to make new highs in price. But the late recovery in the Euro translated into a rebound in stocks and an abrupt halt to the bond market’s improvement. Stocks rallied back, bond prices fell, and investors sent out rate changes for the worse. The current thinking is that weakness in the Euro reflects expectations of slower Euro-area growth and a less competitive US dollar, both of which are bad for our growth prospects and good for keeping inflation low. Anyone looking to invest here in the US appears to have been putting sums of money into short term US debt, much of it in the 2-5 year maturity area.

Producer Prices Show Tame Inflation
This country has some economic news to chew on this morning in the form of Housing Starts, Building Permits, and the Producer Price Index. Homebuilder confidence has been strengthening, perhaps in part because psychologically they were tired of being unconfident but also perhaps because the home buyer tax credit boosted sales. Housing Starts were projected to increase 3.8% to 650k, while permits are seen 7.3% lower to 680k. And Producer Prices were expected to increase just 0.1% following a 0.7% jump in March; core is also anticipated at 0.1%, unchanged from previous. PPI declined .1%, with the core rate +.2%. Housing Starts were up 5.8%, but Building Permits were down 11.5%. The 10-yr is hovering around 3.48% and mortgage prices are slightly worse than yesterday afternoon.

Daily Humor
An unmarried 25-year old Jewish girl tells her Mom that she knows she is pregnant by accident. Shouting and crying, the mother asks, “Who was the pig that did this to you? I want to know!”

Without answering, the girl picks up the phone and makes a call.

Half an hour later, a Mercedes stops in front of their house. A mature and distinguished man with gray hair and wearing a yarmulke steps out of the car and enters the house.

He sits in the living room with the father, mother, and the girl and says, “Good morning. Your daughter has informed me of the problem. I can’t marry her because of my personal family situation but I’ll take care of everything. I will pay all costs and provide for your daughter for the rest of her life. Additionally, if a girl is born, I will bequeath two retail furniture stores, a deli, a condo in Miami, and a $1,000,000 bank account.”

“If a boy is born, my legacy will be a chain of jewelry stores and a $25,000,000 bank account.

“However, if there is a miscarriage, I’m not sure what to do. What do you suggest?”

Overcome with emotion this point, the mother, who had remained silent until now, places a hand firmly on the man’s shoulder and gently says, “So, you’ll try again.”

Reporter Passes Out
It is not often that one is able to watch a financial newscaster pass out while on the job. And don’t ask me what relevancy a keyboard-playing cat has with any of it.

Fed Continues Reign Over Small Banks
Well, let’s not beat around the bush. According to the popular press, the Federal Reserve scored a victory and mortgage bankers suffered a defeat yesterday when the Senate approved an amendment by a 90-9 vote to preserve Fed supervision of hundreds of smaller banks, instead of transferring them to other regulators.

Do Lawmakers Know Economics 101?
Also, the Senate voted 63 to 36 to approve the Merkley amendment and end mortgage kickbacks and “liar loans.” Sometimes one wonders if politicians know basic economic principals – bond math economic dictate that an investor will pay more for a higher yielding instrument, other things being equal. Regardless of my opinion, yield spread premiums are believed to have encouraged brokers to steer consumers into risky, high-interest loans even if they qualified for cheaper loans. And liar loans let consumers qualify for loans they could not possibly repay if they opted to simply state their income or other assets, rather than waiting for verification. The Merkley amendment is here.

As a result of the Merkley amendment, mortgage lenders and loan originators would be banned from accepting payments based on the interest rate and other terms of the loan, which effectively wipes out loan steering, and as I mentioned kills off the yield spread premium – often a key part of broker’s compensation. Proponents say that the amendment will protect homeowners by prohibiting mortgage lenders and loan originators from receiving hidden payments when they steer homeowners into high-cost loans and will create strong underwriting standards to ensure borrowers have the ability to repay their loans. Opponents say that if this passes, it will spell the end of mortgage banking as we know it, and that borrowers should be allowed to cover their closing costs by accepting a higher interest rate loan.

The Senate also voted to keep a measure in the bill, opposed by the mortgage industry, which would require lenders who securitize to retain at least a 5 percent stake in their products. Not even the large lenders can do that if the law applies to conforming product. Democrats on Tuesday defeated a Republican amendment that would have ended government control of the Fannie & Freddie, arguing that the issue should be dealt with separately next year.

Final approval of the Senate bill could come next week. These amendments and the law are not final, and remember that the House bill does not have this language so even if they pass the Senate, there will still need to be reconciliation with the House. There are more than 200 amendments filed on the Senate bill. Any legislation that clears the Senate must be reconciled with a reform bill that passed the House of Representatives in December before Obama can sign it into law. (The Senate unanimously adopted a measure that clarifies that small businesses like jewelers and orthodontists that extend credit to customers would be exempt.) Trade organizations are recommending that members pick up the phone and call their elected officials.

Loan Modification Update
Counselors working with HAMP Modification applications have a shiny new tool to use: the HOPE LoanPort, a new web portal tool. Launched by the HOPE NOW Alliance, along with HUD, this new web portal will allow counselors to collect the necessary documents from homeowners, upload the completed package, submit the completed package directly to servicers, and track the status of a borrower’s application. Designers hope it will stop lost documents, enforce complete HAMP applications, and improve efficiency and transparency. But don’t take their word for it – check out http://www.hopeloanportal.org/.

Lending Industry Sheds 1500 Jobs In March
Anyone who still has a job in the crazy business should know that according to the Bureau of Labor Statistics the mortgage banker and broker sector eliminated 1,500 full-time jobs in March as loan production continued to slow, after adding 4,400 full-time employees in February. An estimated 252,500 full-time workers were employed by the mortgage industry in March, down from 254,000 the prior month. However, employment was down only 6.7 percent from March 2009, compared to a 21.6 percent decline over the previous 12-month period

Gold Rally Continues
Due to several gold teeth, my 87-year old Dad’s mouth is becoming more valuable with each passing week. Gold prices continue to move higher on both global economic uncertainty and inflation fears, hitting yet another high of over $1,230 an ounce. (Why are people always so much more concerned with inflation instead of deflation?) Overall, yesterday the stage belonged to stocks, which are back to pre-Greece crisis levels. Mortgages did ok, however, and improved slightly. For those tracking spreads, current coupon bonds yielded about 140 basis points more than a blend of 5- and 10-year Treasuries, versus 150-160 basis points prior to the Fed’s 15-month $1.25 trillion MBS purchase campaign. And according to a report from Barclays, the Fed owns 32% of the outstanding 30-year fixed rate mortgages, most in the form of 4 & 4½% percent bonds! The $24 billion 10-yr auction went swimmingly. Today we finish off the auctions with a $16 billion 30-yr bond auction. We will also have Initial Jobless Claims and Import Prices for April, both at 8:30. Initial Claims are expected to drop slightly, and Import Prices are projected slightly higher. Ahead of that news the 10-yr is at 3.57% and mortgages are quiet.

Daily Humor
Where do red-headed babies come from?

After their baby was born, the panicked father went to see the Obstetrician.

“Doctor,” the man said, “I don’t mind telling you, but I’m a little upset because my daughter has red hair. She can’t possibly be mine!”

“Nonsense,” the doctor said. “Even though you and your wife both have black hair, one of your ancestors may have contributed red hair to the gene pool.”

“It isn’t possible,” the man insisted. “This can’t be, our families on both sides had jet-black hair for generations.”

“Well,” said the doctor, “let me ask you this. How often are you ‘intimate’?”

The man seemed a bit ashamed. “I’ve been working very hard for the past year. We only made love once or twice every few months.”

“Well, there you have it!” the doctor said confidently. “It’s rust.”

Rates Benefit on Stock Weakness
The drop in the equity markets yesterday, and possibly again today, certainly helped the flow of funds into “safer” investments – such as Treasuries and MBS’s. But we also had some economic news of note, the first being Pending Home Sales. The index was up 5.3% in March, with sales in the South up 13%, up 2% in the West, up 1% in the Midwest, but fell 3.3% in the Northeast. Second, Factory Orders here in the US were up 1.3% in March. And the Federal Reserve released its “Senior Loan Officer Survey” which showed that banks kept their lending standards tight during the first quarter – no surprise there, huh? There may have been a little movement in commercial and industrial loans to large and medium-size firms.

Greece Bailout Is Like US Needing 10x TARP Funds
Returning to the Greek issue for a moment, some believe that this will be the end of the Euro currency, at least in Greece. Let them print their own currency! The odds of sharp recession have increased, obviously, and naysayers are skeptical about any bailout plan based on the recession-stricken Portuguese and Spanish contributing billions of Euros to the cause. We have the ECB adopting a pure bailout strategy by accepting all Greek collateral and have seen almost $150 billion in potential economic aid offered to the Greeks. This figure is almost 50% of Greek GDP, and is the equivalent of the United States needing 10x the TARP funds! Greece’s GDP is only about 2% of US GDP and slightly less than that of Eurozone GDP, and one analyst likened it to Ohio going bankrupt and taking the entire US economic system with it.

Bond Yields Hit 4 Month Lows
In our market, yields hit their lowest level in more than four months due to the continued “concern” that European governments haven’t yet overcome the region’s debt crisis boosted demand for the safest assets, although there are continued worries about the debt situation in our own country. The difference in yield, however, between Fannie Mae & Freddie Mac mortgage securities and Treasury yields climbed to its highest level in several months. Spreads have not skyrocketed, but have moved up on increased volatility and since investors are very much preferring the safest of Treasury securities. “If Greece could default, couldn’t Fannie or Freddie?” Fortunately for possible borrowers, all rates have dropped, masking the difference. (Greater volatility harms mortgage-bond prices because it makes bigger rises or drops in rates more likely, pushing refinancing and other sources of prepayments on the underlying loans either much higher or lower than expected.)

Mortgage Apps Up, ADP Jobs +32k
This morning we learned what locks desks already knew about last week: mortgage applications rose 4% after declining 2.9% during the previous week. Refinancing apps were down 2.1% from the previous week but purchases increased 13.0% from one week earlier – there’s that homebuyer tax credit at work. In fact, purchase applications were up almost 24% over the last month. We also had the ADP private-payroll number for April which showed job growth coming in at 32,000. After these, and in the face of further stock sell-offs, the yield on the 10-yr is down to 3.55% and mortgage prices are better by between .125 and .250.

Follow Up On Mortgage Fraud Categories Comment
A reader made a good point on an article that I mentioned yesterday which stated, “Next were frauds related to appraisal and valuation misrepresentation, which increased from 22% of reported misrepresentation in 2008 to 33%. With an 11% increase, this is the most notable increase in reported fraud types in 2009. Thank you HVCC.” Vicky (from Valuation Management Group) wrote to point out, “The reported fraud was reported in 2009, but most likely took place in the years prior to 2009. HVCC was not in place until 5/2009, so the results of this will not be realized until the 2011 or 2012 reports.”

PennyMac Earnings
PennyMac Mortgage Investment Trust reported net income for the first quarter of $1.3 million on total net investment income of $3.9 million. During the first quarter the company acquired five residential mortgage whole loan pools valued at $115 million in aggregate, with unpaid principal balances at the time of purchase of $208 million, of which 86% of the loans were either 90 days or more delinquent, or in the foreclosure process.

FDIC Selling 40% Of Silverton Bank Subsidiary
In a related but unrelated matter, the FDIC announced a bid confirmation letter to sell a 40% equity interest in a limited liability company created to hold assets of SFG, a subsidiary of Silverton Bank (GA) to Square Mile Capital Management LLC. The FDIC will initially hold the remaining 60 percent equity interest in the LLC. The assets are mostly performing hospitality loans and loan participations with an unpaid principal balance of approximately $421 million.

Lending Effects of Nashville Flooding
Effective immediately, due to the present flooding activity in the Nashville TN area, Flagstar Bank will be temporarily suspending loan fundings in Davidson County. And when funding resumes, a satisfactory re-inspection will be required (as it already is for Cheatham, Rutherford, Sumner, Williamson, and Wilson counties) that include a statement from the appraiser that the subject property has not sustained any damage, a statement from the appraiser on the neighborhood conditions as they relate to any flooding or mudslide damage, and a photograph of the subject property.

Treasury Tries To Help Force More Loan Modifications
An American Banker article by Kate Berry states that “the Treasury Department is threatening to deny or even claw back incentive payments to mortgage servicers that are not modifying loans according to the administration’s guidelines.” Some say that noncompliance is rampant in the voluntary Home Affordable Modification Program (HAMP), mostly in the area of communications with borrowers about their rights surrounding foreclosure. The Treasury Department pays $1,000 for each completed permanent modification for a delinquent borrower and $500 for each modification given to a current borrower, along with $1,000 per year for borrowers who stay current after being modified. So far, servicer payments have totaled $68.4 million to the 109 servicers who are participating in the program and through March 31st only 230,801 borrowers had received permanent loan modifications and more than a million borrowers were in trial modifications. Given that the program is voluntary, too many penalties can cause servicers to drop out of the program – contractually, there is very little to compel the banks and servicers to do anything.

Loan Modification Comment From Trenches
In a related word from the trenches:

“Large investors and servicers are receiving incentives to modify loans, and then they can turn around and pass the loss portion onto the originator. The most frustrating part is that while the loans were underwritten responsibly (reasonable income, not inflated with a strong likelihood of the income continuing), the servicers are now contacting borrowers or employers and verifying the past income – but how they are getting the authorization from the borrower to do so when there is no loan modification in progress? If there is a discrepancy in income, the result is a repurchase request with complete disregard to the fact that it was their product design that you had to comply with, requiring ‘when verifying employment, no income may be disclosed’. I am sure that there are borrowers that inflated income levels, but on the loans I have reviewed, this does not appear to be the case. I am trying to figure out how this scenario is supposed to be acceptable to those who responsibly played by the rules!”

Daily Humor
Most people don’t know that in 1912, Hellmann’s mayonnaise was manufactured in England.

In fact, the Titanic was carrying 12,000 jars of the condiment scheduled for delivery in Vera Cruz, Mexico, which was to have been the next port of call for the great ship after its stop in New York.

This would have been the largest single shipment of mayonnaise ever delivered to Mexico. But as we know, the great ship did not make it to New York. The ship hit an iceberg and sank, and the cargo was lost forever.
The people of Mexico, who were crazy about mayonnaise, and were eagerly awaiting its delivery, were disconsolate at the loss. Their anguish was so great that they declared a National Day of Mourning, which they still observe to this day.

The National Day of Mourning occurs each year on May 5th and is known, of course, as Sinko de Mayo.

Lawmakers Solicit Consumer Comments On 7 Financial & Housing Reform Topics
Do you want some input in financial reform? There are many ways to do this, and here is another. The public will have the opportunity to submit written responses to seven questions that will be published in the federal register online at www.regulations.gov. The administration also plans a series of public forums across the country on housing finance reform. The questions are:

1. How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy?

2. What role should the federal government play in supporting a stable, well-functioning housing finance system and what risks, if any, should the federal government bear in meeting its housing finance objectives?

3. Should the government approach differ across different segments of the market, and if so, how?

4. How should the current organization of the housing finance system be improved?

5. How should the housing finance system support sound market practices?

6. What is the best way for the housing finance system to help ensure consumers are protected from unfair, abusive or deceptive practices?

7. Do housing finance systems in other countries offer insights that can help inform US reform choices?

Top U.S. Loan Agents
“A husband is someone who, after taking the trash out, gives the impression that he just cleaned the whole house.” I think that quote is pretty funny, but it does have a correlation with the mortgage industry. I have heard repeatedly that in the current environment, brokers are doing three times the work for one third the pay compared to past years. Say what you want about this being justified or not, but you might see some names that you recognize on a nationally published list of top originators. The Scotsman Guide has ranked the nation’s top-producing mortgage professionals: Yournamehere?

Organized Bank Protesters
Who says that protesters aren’t organized? Protestors at Syracuse are planning on greeting JPMorgan Chase’s Jamie Dimon, who is speaking there. And protesters have an actual website for activities at the Wells Fargo shareholders meeting, complete with entertainment, food, the groups involved, etc.

Bank of America Earnings
At Bank of America, just like at JPMorgan Chase, credit and income is improving! Bank of America Corporation reported first-quarter net income of $3.2 billion compared with a net loss of $194 million in the fourth quarter and net income of $4.2 billion a year earlier. The company earned $0.28 per diluted share in the first quarter, up from a loss of $0.60 per share in the fourth quarter and earnings of $0.44 per share in the first quarter of 2009. All in all, analysts were pleased with the results, and the stock has improved on the news in pre-market trading. Interestingly, according to BofA’s president, core loan demand from consumers is slow – smaller companies are not hiring yet. Banks have money to lend, and are willing to do so, but certainly are not loosening up their underwriting criteria.

China Is Largest U.S. Debt Holder At $877b
The Treasury released its “International Capital” report yesterday, nicknamed TIC. China continues to be the largest owner of debt of the United States, although their holdings fell by over $11 billion to $877 billion. Overall, foreigners were net buyers of long-term U.S. financial assets in February.

Does Anyone Believe Rates Are Going To Drop?
If an agent or company is having trouble originating loans in this interest rate environment, the rest of the year might not be much better. We’ve been in a 45 basis point range in the 10-year Treasury for nearly 4 months (3.54-3.99%), and mortgage prices have also been in a narrow range. It seems that a 4% yield on the 10-yr gets us about a 5.25% 30-yr mortgage rate. Does anyone believe that rates are going to drop? The Fed, however, certainly has no reason to raise short term rates, given the current job, housing, and inflation situation here in the US – so don’t look for too much of a move toward the upside.

Philly Fed & Capacity Utilization
Thursday we had the Philly Fed (up from 18.9 to 20.2), Industrial Production (+.9%) and Capacity Utilization after the Initial Jobless Claims number. The reports were mixed, though the back months saw nice upward revisions and Capacity Utilization, a traditional Fed barometer, did well at +.2% to 73.2%.

Housing Starts Better Than Expected
Today had New Home Construction and will have the University of Michigan Sentiment Survey. Housing Starts for March were better than expected, up 1.6%. March Building Permits were up 7.5% from 637,000 to 685,000 on an annualized rate. It is nice to see the economic activity associated with housing, but don’t we already have a pretty good inventory of existing housing stock in many locales? After these housing stats the 10-yr is at 3.80% and mortgage prices are better by .125-.250.

Appraisal Rules For Fannie Mae & HUD
Here’s a quiz: “Lender B originates a loan using an appraisal transferred from Lender A, who provided Lender B with written assurances that the appraisal was obtained in a manner consistent with the Code. Will Fannie Mae hold Lender B liable for remedies if it is discovered after the transfer that Lender A committed a Code violation?” You may not care about the answer, but the HVCC topic is still critical for lenders. Recently Fannie released a revised set of “Frequently Asked Questions” on the subject: Fannie Appraisal FAQ

There are a new set of HUD Frequently Asked Questions (FAQs) that address issues surrounding Appraisal Management Companies, reasonable and customary fees and appraisal turnaround times posted on FHA’s Lenders webpage and Roster Appraisers page. To read the new FAQs please visit: HUD FAQ Lenders or HUD FAQ Appraisers

Government Loan Modification Program Slow Going
Investors, and housing market analysts, are concerned about the numbers for the Making Home Affordable Program (HAMP). HAMP numbers improved substantially during March according to the Treasury Department. Designed to decrease the foreclosure rate by HUD and the Treasury Department, HAMP has not been the huge success for which some had hoped. During March, however, over 60,000 homeowners enrolled in the three month trial period required by the program were converted into permanent modifications. This brings the cumulative total of permanent loan modifications to 230,801, a 3.5-fold rise in permanent modifications since the first of the year. Analysts believe, however, that HAMP “trials started” continue to slump due to a shift in program requirements that require more paperwork to get a trial started and the fact that servicers have already run through the most likely mod candidates.

Reports show that the average LTV in HAMP modifications actually increases, from 135% to 143%, due to capitalization of arrears and escrow requirements. According to Congressional testimony, in only 28% of cases is this mitigated by principal forbearance; for these, the average principal forborne was $67 K. On top of that, average post-modification DTI’s for borrowers range from 61% to 70%, so these borrowers are already struggling with debt levels that are above current guidelines.

Wells Fargo, for example, has modified 523,336 mortgages as of March 31st, and has made modifications of about 380,000 under its own private programs since the beginning of 2009. Wells, like other lenders, use HAMP as the starting point, but also implement other workout options when a customer is not eligible for HAMP.

Daily Humor
A young monk arrives at the monastery. He is assigned to helping the other monks in copying the old canons and laws of the church by hand. He notices, however, that all of the monks are copying from copies, not from the original manuscript.

So, the new monk goes to the head abbot to question this, pointing out that if someone made even a small error in the first copy, it would never be picked up! In fact, that error would be continued in all the subsequent copies.

The head monk, says, “We have been copying from the copies for centuries, but you make a good point, my son.”

He goes down into the dark caves underneath the monastery where the original manuscripts are held as archives in a locked vault that hasn’t been opened for hundreds of years.

Hours and hours pass and nobody sees the old abbot.

So, the young monk gets worried and goes down to look for him. He sees him banging his head against the wall and wailing!!!

“We missed the R. We missed the R!!! We missed the R!!!!!!!!!”

His forehead is bloody and bruised and he is crying uncontrollably.

The young monk asks the abbot, “What’s wrong, father?”

With a choking voice, the old abbot replies, “The word was ‘CELEBRATE’!!!!”

Are You Smarter Than A Congressman?
If you are ever feeling down about yourself, or that you’re just not performing at the top of your game and need a boost, you can watch this for 90 seconds and compare yourself to this $174,000 a year employee. And then there’s some development in yet another well-known mortgage fraud case in Sacramento involving properties in six states.

Seller Financing
Any broker will typically recommend seller financing when other lending avenues are exhausted. In fact, in the last 5-10 years, investors have offered programs that usually didn’t require the buyer to obtain a loan from the seller, and one has to go back to the 80′s, when rates were very high, to see just how popular the practice was. But now the industry is seeing a reemergence of seller financing. The terms are usually different than a conventional loan, but the loans are usually straightforward. An owner typically agrees to transfer title to the home in exchange for a note and a security interest in the property. The note is paid off like a conventional mortgage, though to the seller instead of a bank. Closing costs may be slightly lower: there’s no need for an appraisal, for instance, because the seller already knows a property’s value. Also, prospective buyers typically cannot qualify for traditional financing unless 70 percent of the building is sold, if it’s a new development, according to Fannie & Freddie Mac.

2nd Mortgage Modifications
An article in the American Banker by Kate Berry illustrates the problems with the latest government program to modify 2nds. The top four holders of 2nds (Wells, Citi, Chase, Bank of America, owning more than $400 billion of these loans) have agreed to go along with the program, details yet to be released, but there are issues. Home equity loans typically are not originated or tracked through the same platforms that banks use for servicing a first mortgage. The even though the Treasury has instructed mortgage companies to rely on internal mechanisms to track it, a bank that holds the first lien may not even know internally that it also holds a second lien! Folks in the industry know that modifications that reduce the payment on a first mortgage without addressing the second can fail because the consumer’s overall debt burden remains too heavy. And holders of the first mortgages are reluctant to take losses unless the second-lien holders do too.

Fannie Survey: Do Homeowners Care Anymore?
Fannie Mae issued the results of its Home Ownership survey, indicating that despite the recent downturn in the housing sector Americans continue to value homeownership and think about their homes in ways that go much deeper than the financial investment. “The survey also found that the public strongly believes in the importance of upholding the financial commitment involved in buying and owning a home, even during these challenging times when home values have fallen.”

Rates Up. Big Surprise?
As expected, rates this year have moved up. Did anyone think that they weren’t? In a cocktail party discussion, it is a quick and easy statement to make: “Well, the economy is doing well, which can be somewhat inflationary and lead to higher rates, and our government keeps auctioning off more debt to finance our spending deficit.” Of course you can go into the details about higher oil and gold prices, the stock market rally, etc. if you like. The yield on the 10-yr hit its highest level since the summer of 2008, and the job numbers are showing some strength. And we all know that the government plans on hiring more census workers in the coming months.

But the economy is still too weak to handle high rates. As Paul Jacob from the Banc of Manhattan noted, this expansion may be different from the last expansion, “which was marked by relatively low rates, low volatility, low inflation and low spreads.” This time around the US deficit situation is much worse, adding supply pressures & some long-term inflation fears, and the economy is worse, with negligible current inflation.

All rates have been going up, but what have spreads between MBS’s and Treasuries been doing since April 1? Fortunately for originators, spreads haven’t done much, and in some cases actually improved. So even though all rates have been going up, mortgage rates, even without the Fed, have not done much on a relative basis – it seems that bank and money manager demand as picked up. It helps, in a convoluted way, that mortgage origination appears to be down, which tends to work in our favor for mortgage rates. No one wants to catch a falling knife, but there is plenty of cash out there waiting to be put to work in buying securities.

Pending Homes Sales Up 8.2%
Yesterday we had the Pending Home Sales Index, a forward-looking indicator based on contracts signed in February, go up 8.2% in February. This measure stands about 17% above where it was a year ago. This data measures contracts signed, not closings, and a lot can happen in the month or two it takes to process a loan. As mentioned, the 10-year note traded through the psychological 4.00% level, although the market liked the strong 10-yr TIPS (Treasury Inflation Protected Security) auction coming at 1.709%, 4bps through the 1PM levels, a record 3.43 bid to cover. Today, however, is another day, and we have $40 billion in 3-year securities to buy. (Tomorrow we have $21 billion in 10′s, and on Thursday $13 billion 30-yr bonds.) And we are seeing a bounce this morning: the 10-yr is down to 3.95% and mortgage prices are better between .250-.50.

Daily Humor
A police officer pulls over a speeding car.

The officer says, “I clocked you at 80 miles per hour, sir.”

The driver says, “Geez, officer, I had it on cruise control at 60, perhaps your radar gun needs calibrating.”

Not looking up from her knitting the wife says, “Now don’t be silly dear, you know that this car doesn’t have cruise control.”

As the officer writes out the ticket, the driver looks over at his wife and growls, “Can’t you please keep your mouth shut for once?”

The wife smiles demurely and says, “You should be thankful your radar detector went off when it did.”

As the officer makes out the second ticket for the illegal radar detector unit, the man glowers at his wife and says through clenched teeth,”Damn it, woman, can’t you keep your mouth shut?”

The officer frowns and says, “And I notice that you’re not wearing your seat belt, sir. That’s an automatic $75 fine.”

The driver says, “Yeah, well, you see officer, I had it on, but took it off when you pulled me over so that I could get my license out of my back pocket.”

The wife says, “Now, dear, you know very well that you didn’t have your seat belt on. You never wear your seat belt when you’re driving.”

And as the police officer is writing out the third ticket the driver turns to his wife and barks, “WHY DON’T you shut the *&^ up??”
The officer looks over at the woman and asks, “Does your husband always talk to you this way, Ma’am?”

“Only when he’s been drinking.”

Mortgage Help For Unemployed Borrowers
The official announcement by the Federal Government is today, but the details came out yesterday, about funding & requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed. Banks and other lenders would have to reduce the payments to no more than 31% of a borrower’s income, which would typically be the amount of unemployment insurance, for three to six months. In some cases, administration officials said, a lender could allow a borrower to skip payments altogether. And for borrowers who owe more than their home is worth, the US government, with its big budget surplus (right?) will be offering financial incentives for the first time to lenders to cut the loan balances of such distressed homeowners.

Are the people who are responsible about making their payments subsidizing those that don’t? (Like the Greek debt issue in Europe, perhaps?) That is a huge argument of course, but those who are still current on their mortgages could get the chance to refinance on better terms into loans backed by the Federal Housing Administration. Officials said the new initiatives will take effect over the next six months and be funded out of $50 billion previously allocated for foreclosure relief in the emergency bailout program for the financial system. No new taxpayer funds will be needed, the officials said.

New California Home Buyer Tax Credit
In Caleeefornia Governor Schwarzenegger signed the Homebuyer Tax Credit into law. AB 183 will provide $200 million for home buyer tax credits, allocating $100 million for qualified first-time home buyers of existing homes and $100 million for purchasers of new, or previously unoccupied, homes. Between May and December of this year the eligible taxpayer who purchases a qualified personal residence, or who purchases a “qualified principal residence” on and after Dec. 31, 2010, and before Aug. 1, 2011, pursuant to an enforceable contract executed on or before Dec. 31, 2010, will be able to take the allowed tax credit. The credit is equal to the lesser of 5% of the purchase price or $10,000, in equal installments over three consecutive years. Under AB 183, purchasers will be required to live in the home for at least two years or forfeit the credit (i.e., repay it to the state).

What Do Swap Spreads Tell Us About Credit Conditions?
The prices in the swap market (exchanging one type of debt or interest income for another) are creating some headlines lately. There is a massive amount of supply of new corporate debt hitting the capital markets in the U.S. and Europe currently, and the cost of exchanging interest payments for 10 years was 0.023 percentage point below low-risk Treasury yields. This implies that investors see more risk in holding triple-A-rated 10-year Treasury notes than in swapping rate payments with private counterparties. At the height of the credit crisis, when investors were in panic-mode about counterparties, that cost shot up to as much as 0.780 percentage point above the 10-year Treasury yield. Tighter swap spreads indicate investors’ confidence (or complacency) about credit risk, and vice versa, but typically the spread is positive relative to Treasuries. But this time, the swaps market reflects demand to receive fixed rates as a hedge, especially by corporations issuing new bonds. That’s resulted in the 10-year swap spread moving to negative 5.5 basis points. It is easy to argue that this is another sign of how far credit markets have recovered: risk premiums in the interest-rate swaps market-in which investors exchange fixed-interest payments for floating payments-turned negative on the 10-year sector for the first time on record. There is one fundamental point, however, and that is market concerns about the US budget are growing as Treasury supply increases.

Fed Buys $8b in MBS
For the second to last time, the Federal Reserve today reported on their weekly purchases of agency MBS’s: a gross total of $8.26 billion agency MBS’s, selling $260 million for technical reasons resulting in a net total of $8.0 billion agency MBS purchases.

Rate Market Commentary
After Wednesday’s drop, fixed-income securities saw some volatility Thursday. The bond market headed south, causing investors to worsen their prices, then bounced back, resulting in some price improvements. The $32 billion 7-yr auction coming in around 3.37% with a bid-to-cover of only 2.61 didn’t help things, but then investors apparently thought, “We like these yields” and back the market came. Traders continued to see selling in 4.5% and 5.0% securities – current coupons, with hedge funds also selling, and banks selling heading into quarter-end. But in the afternoon buyers like private investors, the Fed, pension funds, and money managers started putting some of their cash to work – how exciting!

With the market well off of the lows, the treasury auctions out of the way, originator supply likely to decline, and convexity related mortgage selling finished for the time being, there is some short-term optimism about rates and bond prices. In addition, there is belief that when April rolls around, banks, with their cash, will step in and fill the void left by the Fed and helping current coupon production. Generally speaking, however, why would rates go down with the healthcare package adding to the deficit, questions about China and overseas buyers being increasingly concerned about our exploding deficits, and Bernanke stating he’d like the Fed to get their balance sheet down to its pre-crisis level. Don’t look for overnight Fed Funds to move up soon, but they don’t control long term rates – and many believe that although in the short term rates won’t go up too much, in the long term these factors will definitely push rates higher.

Third and Final 4Q09 GDP Reading Revised Down
Call it old news, but the 4th quarter GDP was revised to 5.6% versus 5.9%, down .3% – about as expected. After the GDP news the yield on the 10-yr is at 3.88%, and mortgage prices appear to be .125-.250 better than Thursday morning’s levels.

Daily Humor
A mortgage broker dies suddenly. He immediately goes to visit St Peter who is sitting in front of the pearly gates.

St Peter tells the broker: “Well, you are a unique case. You haven’t been good enough to go to heaven but you haven’t been bad enough to go to hell. So, just for you, we are going to try something different. We have decided to let you pick. Where would you like to spend eternity, Heaven or Hell?”

Now the broker, being the typical mortgage broker, knows he should just instantly pick Heaven but the thought of being able to see Hell was too much. The broker asked St Peter; “Well, I know I should pick Heaven but can I see both Heaven and Hell before I answer that question.”

St Peter, slightly annoyed, agreed with the broker’s requests.

Immediately, the broker is in Heaven. It is exactly like the stories describe. There are white clouds, golden streets, angels with harps…..its storybook Heaven.

Next, the broker is in Hell. It is nothing like the stories. It is a large “man cave”. In the cave is a large wall of big screen TV’s with every sports event ever recorded. There are recliners all over the cave and Hooters girls brining everyone beer and wings. It’s amazing!

The broker is then returned to St Peter. St Peter again asks: “Where would you like to spend eternity, Heaven or Hell?”

Now, the broker being a typical mortgage broker asks St Peter “Can I think about it and tell you tomorrow?” St Peter, again annoyed, agrees.

The next day, St Peter asks the broker to choose. The broker explains; “Well, I know I should pick Heaven. I’ve lived my entire life thinking about going to Heaven. But honestly, when I saw Hell, I just believe I will fit into that environment better. I need to pick Hell.”

With that the broker is immediately in Hell…..but this time it looks different. It’s still a cave but now the broker is chained to the wall. There are cracks in the floor and walls, each with flames heating the cave to a literal inferno. Across the room is an ice cold glass of water….just barely outside the brokers reach…never to be obtained.

The broker looks up and yells “Hey St Peter, what happened to the TV’s and the Hooter girls?”
And St Peter yells down “You should have locked yesterday”.