Loan Apps At 9 Month High
The Mortgage Bankers Association reported that apps were up almost 7% last week, hitting a 9-month high mostly due to refinancing. And as one would expect, purchase apps sunk to a 13-year low. Refi’s were up over 9% last week, but purchase apps fell 2%.

Dividend vs. Bond Yields: Time To Buy Stocks?
Here is an interesting investment phenomenon. No one can foretell the future, but currently the dividend yield on the Dow Jones Industrial Average’s 30 stocks is roughly 3%. If you purchased a 10-yr Treasury Note, you would earn a risk-free yield of about 2.92% for the next ten years. So if the Dow’s stocks, and their dividends, go absolutely nowhere over the next 10 years, they will still outperform Treasury notes! Of course, stocks and bonds could both go up or down in price in the next 10 years, but still, stocks are increasingly attractive, on a relative basis, when compared to bonds. Heck, the dividend yield on many utility stocks is between 5-6%, and who doesn’t want to make money every time someone recharges their Blackberry or turns on their air conditioning?

Will New Regs Really Change Lender Rate Sheets?
Assuming the Financial Reform Bill passes next week, what will eventually happen to rate sheets everywhere? How will correspondent and wholesale rate sheets look? Some believe that sheets will only offer rates at a cost to borrowers or a par rate with no rebate. So a broker or loan agent, who is receiving their compensation based on whatever their fee is per loan, will offer a much more limited set of pricing to borrowers. Others believe that rate sheets won’t change much, and that investors and brokers will figure out a way around it. One veteran said, “In the old days I had a Fannie Goldbook on my desk, which showed different prices for different rates. And bond math dictates that, given the same risk, maturity, etc., an investor will pay a higher price for a higher yield.”

Mortgage Bond Markets Continue Higher
Mortgage security prices, whether or not the price improvements are passed along by mortgage accumulators, continue to “grind tighter and even higher”. Recent prepay (early pay off) numbers indicate that older pools of mortgages, filled with 30-yr loans above 5%, are not prepaying very fast, which in turns helps ease prepayment fears. Fannie & Freddie 4.5% & 5% securities (made up of 4.75%-5.625% loans) are deemed the most “refinance-able” due to their strict underwriting and pristine borrower credit scores, but they may be somewhat capped out equity-wise with home values not having changed much since the original loan was funded. This is tough, since 4.5% pools are trading at a price near 104 (4 point rebate!). No one is looking for much, if any, increase in rates through 2010, given the world-wide economic climate.

Just Over 30% of Homes Refinancable
Speaking of refinancing, recent business school graduate analysts estimate that just over 30% of the mortgage universe is “refinanceable” given the tight underwriting standards and poor housing market conditions. They believe mortgage rates to the consumer would have to drop below 4.50%, with the 10-yr yield falling well below 2.80%, to achieve much pick up in the refinancing. And one has to ask – what will our economy look like if it gives rates that much reason to fall to those levels?

Market Summary
Yesterday stocks started off the day with a good bid, attempting to end 7 straight days of being down, and bond prices were relatively flat. That changed as the day progressed, with stock prices sliding and bond prices (including mortgages) improving – leading to many investors offering intra-day price improvements. We learned that the U.S. service sector expanded in June for a sixth straight month but the rate of growth slowed to its lowest pace since February, the latest evidence that the economic recovery is cooling. By the end of the day roughly $2 billion in originations had been sold – “average” – and mortgage prices actually improved relative to Treasury prices due to investor interest. The yield on the 10-yr went down to 2.94% and by the end of the day 30-yr mortgage security prices were better by .375. Will investors pass that along? Anyway, here this morning we find the 10-yr at 2.93% and mortgage prices better by .125-.250.

Daily Humor
Drug companies continue to do research on new drugs, many aimed at women.

DAMNITOL
Take 2 and the rest of the world can go to hell for up to 8 full hours.

EMPTYNESTROGEN
Suppository that eliminates melancholy and loneliness by reminding you of how awful they were as teenagers and how you couldn’t wait till they moved out!

ST. MOMMA’S WORT
Plant extract that treats mom’s depression by rendering preschoolers unconscious for up to two days.

PEPTOBIMBO
Liquid silicone drink for single women. Two full cups swallowed before an evening out increases breast size, decreases intelligence, and prevents conception.

DUMBEROL
When taken with Peptobimbo, can cause dangerously low IQ, resulting in enjoyment of country music and pickup trucks.

FLIPITOR
Increases life expectancy of commuters by controlling road rage and t he urge to flip off other drivers.

MENICILLIN
Potent anti-boy-otic for older women. Increases resistance to such lethal lines as, “You make me want to be a better person”.

JACKASSPIRIN
Relieves headache caused by a man who can’t remember your birthday, anniversary, phone number, or to lift the toilet seat.

ANTI-TALKSIDENT
A spray carried in a purse or wallet to be used on anyone too eager to share their life stories with total strangers in elevators.

BUYAGRA
Injectable stimulant taken prior to shopping. Increases potency, duration, and credit limit of spending spree.

Clever Chase Business Loan Promo
There are some pretty creative folks out there, even in banking. Every once in a while someone will suggest a reward to residential borrowers for making their payment, instead of (what some would say) a reward for not making their payments. In some news out yesterday, Chase announced an incentive that rewards small businesses for each new employee they hire this year. The bank will lower its interest rate on a new Chase Business Line of Credit by 0.5 percentage point for each new hire, up to three, for the life of the loan. It is not a huge amount, but nonetheless helps.

Jan-June Mortgage Securities Volume Of $217.6b Double 2009
We’re halfway done with 2010, and companies are wondering if the dire volume and profit predictions that started off 2010 are going to come true or not. I will opine here and say that given that mortgage employment is thought to be down about 50% from 2008, anyone still in the business should pat themselves on the shoulder. And any company making money and expanding should do the same. U.S. mortgage-backed securities issuance jumped in the first six months of 2010 from the same period a year earlier. Thomson Reuters said U.S. mortgage-backed securities issuance totaled $217.6 billion in the first half of 2010, nearly double the $112.5 billion total in the same period a year earlier. Bank of America was the top underwriter with a 26% market share. Barclays was #2 with about an 11% share, and Goldman Sachs was #3 with a 9.5% share. The survey does not monitor loan production, nor IO or principal-only securities, but instead looks at mortgage bonds backed by whole commercial and residential real estate loans as well as the mortgage-backed securities initially packaged by Fannie Mae, Freddie Mac and Ginnie Mae.

Mortgage Company Profit Stats
A rising tide raises all boats…According to the Mortgage Bankers Association, independent mortgage bankers and subsidiaries made an average profit of $1,135 on each loan they originated in 2009, compared to $305 per loan in 2008. Total loan production expenses dropped to $3,685 per loan from $4,717 per loan in 2008, and per loan income also dropped to $4,820 from $5,023 per loan in 2008. Sixty one (61) basis points is nothing to sneeze out, and certainly beat the 15 basis points from 2008. Per the MBA, the profit for mortgage subsidiaries for bank and thrifts averaged 79.5 basis points per loan, but only 54.9 basis points for independent mortgage companies. Go to MBAA’s site for more stats.

President Should Sign Tax Credit Deadline Extension
We’ve passed the June 30 deadline for extending the tax credit deadline, but finally the U.S. Congress approved a bill extending the closing deadline for homebuyers trying to take advantage of tax credits ($8k for first timers and $6,500 for primary residences). Homebuyers with contracts signed by April 30 who failed to go to closing by the June 30 deadline will now have until September 30 to complete their purchases, assuming that the President signs it.

Financial Reform Passes House
The Financial Reform Bill passed the House, but will not be voted on by the Senate until mid-July. Afterward, one can expect that brokers and agents of mortgage banks won’t be compensated based on any of the terms or conditions of a loan. Originators can be paid only by base salary or by percentage of the loan amount, or from a bonus if the employer chooses. Origination fees may be capped at 3%, and consumers will now decide to pay those fees all up front or have them built into the interest rate. Before, borrowers sometimes had to pay both upfront and the fees embedded into the interest rate. The president of the National Association of Mortgage Brokers said, “We are trying to get language added to that portion so that the consumer has a choice to make a combination of the two,”

Foreclosures Account for 31% of Sales
RealtyTrac told us that foreclosure sales currently account for 31% of all residential sales and have calculated that these homes sell at a 27% discount to the current market. (Uh, but doesn’t the “current market” include these?) Over a quarter million homes sold in the first quarter had a default or auction notice or were seized by banks. Fortunately this number is down slightly from the last quarter of 2009.

Can Rates Possibly Get Lower?
Generally, rates improved Tuesday, and they improved again yesterday with the 10-yr firmly below 3% in yield. But although many fixed-income rates declined, MBS’s and mortgage rates did very little and in fact worsened in some areas, leading to the inevitable questions to rate sheet creators, “Hey, if rates are dropping, how come your prices are hardly budging?” Investors once again fear “negative convexity” in mortgages, whereby if rates drop prepayment fears creep into the market and mortgage prices don’t really tag along with the rally. And at this point, if rates keep dropping, we will find 30-yr mortgages in the low 4% range, and everyone with a mortgage rate higher than 4.75% will be the target for a refinance. I’d tell loan officers to “dust off the rolodex” but it hasn’t even gotten dusty from the last batch of refinancing! That will be an interesting dynamic if much of the $1.25 trillion that the Fed purchased of MBS’s begins to refinance.

Economic News Roundup
Today we have a pretty full calendar. We’ve already had Initial Jobless Claims, later we’ll have Construction Spending for May, the ISM Index, and Pending Home Sales. Tomorrow’s Unemployment Rate is expected to be unchanged at 9.7%. But the Non-farm Payroll number is expected to drop by more than 100,000 jobs in June, driven primarily by lost temporary Census worker positions. Many analysts are hoping for private payrolls to go up; however, even if yesterday’s ADP number was pretty weak. Jobless Claims shot up to 472,000, pushing stocks down even more but rates lower – the 10-yr is down to 2.91% and mortgages are better by ,125-,250,

Daily Humor
She was standing in the kitchen, preparing our usual soft-boiled eggs and toast for breakfast, wearing only the ‘T’ shirt that she normally slept in.

As I walked in, almost awake, she turned to me and said softly, “You’ve got to make love to me this very moment!”

My eyes lit up and I thought, “I am either still dreaming or this is going to be my lucky day!”

Not wanting to lose the moment, I embraced her and then gave it my all; right there on the kitchen table.

Afterward she said, “Thanks,” and returned to the stove, her T-shirt still around her neck.

Happy, but a little puzzled, I asked, “What was that all about?”

She explained, “The egg timer’s broken.”

Subprime Investment Comeback?
As an investor would you rather own IBM or Pepsi stock, or subprime loans? Think hard… and buy them while you can? Apparently, subprime loans are making a comeback (investing, not originating). Remember that these older subprime loans are like old cars: the new ones are better, but the old ones that are still working have a place too. Those in the business know that credit risk, appropriately ascertained and valued, is typically a good investment.

Managing Mortgage Trades When Rates Drop
From the point of view of anyone originating mortgages, what is occurring in the investor ranks is not too interesting. Any A-paper pools of loans being bought or sold at prices near 107 or 108 or 109, as 30-yr 5.75%-and-above mortgages are, don’t impact current rate sheets. But investors are grappling with carry and prepayment projections, along with convexity issue. Overall MBS volume was below “normal” although Freddie Mac security volumes have increased recently as Freddie’s prepayment speeds have diverged from those of Fannie’s.

Rates are great, but how are those mandatory mark-to-market positions looking? You know, the ones where you guaranteed delivery to an investor of the Smith loan, and now prices are a few points better and/or the rate is much lower? As borrowers Mr. & Mrs. Smith are wondering the same thing, perhaps, although with all the hurdles that originators jump through now the process tends to “set the hook” a little more firmly. But large investors are concerned about mandatory mark-to-markets, since all these loans are possibly hundreds of basis points under water, or in the money, depending on how one views them. If the client disappears, an investor is “out” those loans and will lose on its existing hedges.

Countrywide Settles $108m FTC Fee Gouging Charges
One down, I don’t know how many to go… The FTC announced that two Countrywide mortgage servicing subsidiaries have agreed to pay $108 million to borrowers to settle allegations that the companies charged excessive servicing fees to defaulting mortgage borrowers. While most mortgage servicers hire third party vendors directly, Countrywide funneled the default services (inspection, maintenance, etc.) through its two subsidiaries that then marked up the fees, resulting in increased profits for Countrywide. The FTC also alleged that Countrywide unfairly targeted borrowers who had filed for Chapter 13 bankruptcy, misrepresenting to these borrowers the status of their loans, and then tried to collect amounts owed after the bankruptcy case closed and the borrowers could no longer look to the bankruptcy court for protection.

UBS Looking For Mortgage Officers
Ah, what a time to be a loan officer. Many companies are searching for loan agents to produce loans to help mortgage companies support their internal operations staff, and cover overhead. And I guess big companies are doing the same, with UBS Wealth Management Americas trying to hire mortgage “consultants” for its branch offices as it bulks up its lending services business. In this company’s case, the agents will be selling mortgages to wealthy clients, especially since they often have several homes.

Reverse Mortgage Defaults
In a story from Reverse Mortgage Daily, there is concern about reverse mortgage defaults. The article mentions that Fannie “reportedly has been reminding reverse servicers they must follow HUD guidelines regarding tax and insurance defaults for HECM customers” instead of allowing servicers not to have servicers follow these established guidelines as it has in the past. “Now, however, servicers have been instructed to submit troubled loans to HUD to get approval to start the foreclosure process. Once approved, a demand letter is sent to the borrower(s) who has six months to cure the default. After that, the servicer must start the foreclosure process – one exception is when a borrower refuses to take necessary curative action, at which time the foreclosure process begins immediately.”

Rates Slightly Worse Ahead of 3yr Treasury Auction
Yesterday we had the same ol’ story: stocks faded at the end of the day, the dollar rallied versus the euro (helping college students heading to Europe) and interest rates stayed low given the flight to quality from around the world. So worries over Europe’s fiscal crisis (Greece, and now Hungary – can Germany support them all?) kept up a safety bid for bonds despite this week’s $70 billion auction, starting with $36 billion in 3-yr notes being sold today. (Treasury will also sell $21 billion in 10-yr notes tomorrow and $13 billion in 30-yr bonds on Thursday.) But Monday 10-yr Treasury notes improved by more than .5 in price, moving down to 3.14%. Mortgages did well. Today there is no scheduled news, and we find the 10-yr at 3.18% and mortgages about .125 worse in price.

How Loan Regs Will Impact Consumers, Lenders
As the time approaches when the House and Senate financial reform bills must be reconciled, many mortgage professionals are wondering not only what will happen to current underwriting and compensation parameters but also whether anything be done to influence the final bill. The Mortgage Bankers Association is officially opposed to the Merkley amendment, for example, but is mostly focused on changes to the underwriting portion and not the compensation piece.

“MBA is extremely concerned that the YSP provisions will markedly lessen the range of mortgage financing options available to consumers. Moreover, the new underwriting provisions will markedly tighten credit so that only the lowest risk borrowers will qualify, and they will increase the rate and costs to consumers of mortgage loans.”

Here’s the MBA’s stance on loan officer and broker compensation. In addition, NAMB has posted a “call to action” for its broker members. Brokers are being urged to write to their representatives to voice objections to current proposed legislation.

Daily Humor
A husband is at home watching a football game when his wife interrupts.

“Honey, could you fix the light in the hallway? It’s been flickering for weeks now.”

He looks at her and angrily says, “Fix the lights now? Does it look like I have ‘GE’ written on my forehead? I don’t think so.”

“Fine.” Then the wife asks, “Well then, could you fix the fridge door? It won’t close right.”

To which he replies, “Fix the fridge door? Does it look like I have ‘Westinghouse’ written on my forehead? I don’t think so.”

“Fine.” She says, “Then, could you at least fix the steps to the front door? They are about to break.”

“I’m not a carpenter and I don’t want to fix the steps – does it look like I have ‘Ace Hardware’ written on my forehead? I don’t think so – I’m heading to the bar!”

So he goes to the bar and drinks for a couple of hours. He begins to feel guilty about how he treated his wife, as he should, and decides to go home. As he walks into the house he notices that the steps are already fixed. As he enters the house, he sees the hall light is working, and when he goes to get another beer, he notices that the door on the refrigerator is working.

“Honey?” he asks. “How’d all this get fixed?”

The wife replies, “Well, when you left I sat outside and cried. Just then a nice young man asked me what was wrong, and I told him. He offered to do all the repairs, and all I had to do was either go to bed with him or bake a cake.”

He says, “So what kind of cake did you bake?”

She replies, “Do you see ‘Betty Crocker’ written on my forehead?”

Can We Learn Anything From Europe’s Problems?
With all the talk of European debt problems, it’s useful to know how Europe is structured. The European Union is made up of 27 countries, though it may be 28 soon with Croatia. But only 16 countries use the euro, and those 16 make up the “euro zone”. Many potential countries – those that have been considering joining up – are now waiting. These include Poland, the Czechs, and several smaller Eastern European countries. Many of the entry rules and restrictions (like deficit size) are being broken by current members.

EU/Eurozone concerns seem, on the surface, to make it less critical that we address our own problems here in the U.S. Economists point out that with Treasury rates low the expense on debt service is low, but if politicians refuse to adopt fiscal sustainability then the markets will do it for them just like they’ve done in Europe. When markets lose confidence in a country’s bonds, they sell (or short) those bonds which pushes up the yield or rate the country has to pay to investors service that debt. Politicians tend toward surface level, short-term views on most topics, and this threatens U.S. economic health because it means our own austerity measures are ignored. “Austerity measures” is a term used to describe a country’s fiscal decision to cut spending and raise tax revenue, and while markets (and creditors) usually force austerity measures upon profligate countries already in crisis (as we’ve seen in Greece, Spain, and other EU/Eurozone countries), the lesson that the U.S. should take from all of this is to tighten fiscal policy before we reach the same fiscal crisis levels. Unfortunately, this isn’t politically convenient and is therefore unlikely to happen.

Lending Strategy Changes for BB&T, U.S.’s 12th Largest Bank
According to one news source, Liberty Mortgage Corp., a division of Branch, Banking & Trust (BB&T), is exiting the wholesale channel, a move that could change its focus to the bank ramping up both its correspondent and warehouse lending divisions. BB&T ranks 12th in the United States in terms of assets.

Pending Home Sales Up 6%, Home Loan Demand Down
Yesterday morning NAR announced that Pending Existing Home Sales increased by 6% in April, its third gain in a row. A sample of 20% of transactions showed that sales were up 30% in the Northeast, up nicely in the West and Midwest, down a shade in the South. And compared to a year ago, sales were up 25%. Remember that these numbers measure housing sales contract activity – a signed contract is not counted as an actual existing home sale until the deal closes. A sale is listed as “pending” when a contract to purchase an existing home (single-family, condos, and co-ops) has been signed but the transaction has not closed. Combine that with the current demand for home loans falling and you have…confusion. But if the supply of mortgages is down, and demand is strong, look for mortgages to do well.

Mortgage Bonds Worse This Morning
Regardless, rates moved higher, and prices worsened, after this number came out. Fortunately mortgages tightened, meaning that they did not do as poorly, but MBS volumes were still reported as “lower than normal”. Keep in mind that although current rates are in the high 4′s, most trading volume occurs in MBS’s made up of 5.25-6.125% mortgages – those are more liquid and easily tradable. The U.S. 30-year Treasury bond fell to a full point loss and 10-yr Notes were down about .75 in price and up to 3.34% in yield.

ADP Shows +55k Jobs Gained, Jobless Claims Down 10k Last Week
This morning we had the private ADP jobs number, with usually a dubious correlation between this number and the unemployment data which will come out tomorrow. ADP’s report, for example, does not include census hiring (since it is government related), but still showed a gain of 55,000 for its 4th consecutive increase. Tomorrow’s nonfarm number is expected to be up over 500,000, a strong number for the economy. That isn’t to say that rates won’t move higher even if the number comes in as expected – they already are! We also had Initial Jobless Claims out this morning, -10,000, down from a revised 463,000, with the 4-week moving average creeping higher.

Also, 1st Quarter Productivity came out at 2.8% with Labor Costs -1.3%, with little change in rates, and still ahead of us Factory Orders (expected +1.8%), the ISM Nonmanufacturing index (expect unchanged), and the auction amounts for next week’s Treasury sale (expect about $80 billion). With all of this we find the 10-yr up to 3.40% and mortgage prices worse by about .250.

Warehouse Lending Update
In 2009, mortgage lenders were worried about a lack of warehouse lenders. Although most companies are seeing lower volumes, in theory freeing up warehouse capacity, apparently warehouse issues are still present. The Mortgage Bankers Association stated that the number of warehouse lenders has gone from 200 in 2007 to about a dozen last year! (These include firms such as BofA, Wells Fargo, Southeast Securities, Flagstar, ViewPoint Bank, Florida Capital Bank, etc., etc.) And in an associated study, the Reynolds Group reported total commitments by warehouse lenders to mortgage bankers fell from a peak of $2.25 trillion in 2006 to just $340 billion in 2009.

The MBA, whose dedication to smaller lenders has come under question recently, issued a release saying,

“Warehouse lenders going out of business, terminating, or adding restrictions to their warehouse lines of credit are causing independent (non-depository) mortgage lenders to struggle to maintain their ability to serve borrowers by providing funding on schedule and offer consumers options when shopping for a mortgage.”

Some banks issue captive lines, restricted warehouse lines, ceased to issue new lines or stopped increasing existing lines and increased pricing and restricted terms have closed down lines altogether – and anyone looking for a line had better have a good track record, decent profits, be lawsuit free, and a bullet-proof business plan.

Along these lines, the Bank of New York Mellon is working closely with MERS to create eVaults for warehouse lending. The reported goal of this is to improve a model for compliance and speed to deliver warehouse lines of credit. Once a loan is registered through MERS and comes to the custodian, BONY (in this case) can provide the asset on paper or electronically. One official stated, “We use the one custodian to get the risk mitigation without touching paper. When the loan is actually created, and certified the first time, it satisfies the direct deposit, the warehouse and the agency’s requirements. It speeds up sale to the secondary market.” Nice!

Daily Humor
(As always, the joke does not necessarily reflect the views of the writer.)

A man was leaving a convenience store with his morning coffee when he noticed a most unusual funeral procession approaching the nearby cemetery. A long black hearse was followed by a second long black hearse about 50 feet behind the first one. Behind the second hearse was a solitary man walking a dog on a leash. Behind him, a short distance back, were about 200 men walking in single file.

The man was overcome by curiosity. He respectfully approached the man walking the dog and said, “I am so sorry for your loss, and this may be a bad time to disturb you, but I’ve never seen a funeral like this. Whose funeral is it?”

“My wife’s.”

”What happened to her?”

The man replied, “My dog attacked and killed her.”

He inquired further, “But who is in the second hearse?”

The man answered, “My mother-in-law. She was trying to help my wife when the dog turned on her.”

A poignant and thoughtful moment of silence passed between the two men.

“Can I borrow the dog?”

The man replied, “Get in line.”

Are Your Sure Home Prices Don’t Always Rise?
According to a study released by the MBA (or the MBAA, depending on if you use “Mortgage Bankers Association of America”), multiple factors including poor data, incomplete performance metrics, and, short-term focus and unrealistic optimism among senior business managers contributed to the collapse in the US housing and mortgage markets.

“As home prices increased, lenders were pressured to offer innovative products that could help borrowers afford a home. The resulting increase and expansion of risk layering and change in borrower behavior, left risk managers unable to offer reliable risk estimates.”

There was a decline in senior business management’s loss aversion due to the lengthy period of strong home prices and low defaults, which led to relaxed underwriting and high levels of risk layering. When market conditions changed, mortgage performance models proved unstable and default rate increased. Is this late breaking news? Of course, it didn’t help that investors were being pushed by the government to move down the credit curve, or that the rating agencies’ models and credit ratings proved to be inaccurate.

Key findings from the study, which many involved in the business would argue are fairly obvious, including the evidence that subprime loan underwriting criteria along several risk attributes expanded between 1999 and 2006. In particular, combined LTVs increased over time as the percentage of loans with silent 2nd liens attached to the property also increased. Full doc loans declined, large lenders saw a relative lack of geographic and product diversification, etc. A copy of the report is on the RIHA website.

A Word on Market Psychology
I am a huge believer in market psychology. If people are confident, often times it will overcome the reality of not having a job, or having a house underwater. And given that consumer spending makes up 70% of GDP here in the US, confident consumers are important to our economy. Consumer sentiment and confidence surveys hit bottom in late 2008 and early 2009, and have trended higher in the last year. The Unemployment Rate tends to be a concurrent indicator in downturns, but a lagging indicator in recoveries, leading to apparent differences between the actual GDP of the US and consumer confidence. Folks are more likely to react to positive news as economic growth increases, especially if employment is growing.

Consumer confidence is expected to continue to increase, which helps spending. This is always helped by the employment picture, and nonfarm payroll numbers are improving. In fact, it has been up for four months in a row. And core retail sales are on their way up. But economists feel that with spending currently outpacing income growth and the impending wind-down of Census hiring, the current pace in consumer confidence will likely be unsustainable. We’ll see!

Rates Up On China’s Commitment To Europe
How about this market? It certainly makes us appreciate a quiet market, as yesterday we saw more volatility after China calmed everyone down by saying it wouldn’t sell European debt. (It is hard to know if they will or they won’t.) Even oil is volatile, with the price per barrel once again over $75. The best thing one can say about this week’s Treasury auctions is that they are over with. With rates moving up, and bond prices moving down, originators did some selling, and MBS volumes picked up. Traders estimate about $3 billion came out of lenders. Fortunately, as one would expect, mortgage prices did better than Treasury prices. Still, by the end of the day, after many investors changed prices, 30-yr mortgages were worse by more than .5 or .75 (the 10-yr Treasury was worse by well over a point).

Daily Humor
(Warning: PG-rated, I’ll probably get in trouble for this one)

Deep in Louisiana, Gordon walks into a bar with a pet alligator by his side. He puts the gator up on the bar, and turns to the astonished patrons.

“I’ll make you a deal. I’ll open this alligator’s mouth and place my “manhood” inside. Then the gator will close his mouth for one minute. Then he’ll open his mouth and I’ll remove my “unit” unscathed. In return for witnessing this spectacle, each of you will buy me a drink.”

The crowd murmured their approval. Gordon stood up on the bar, dropped his trousers, and placed his “credentials” and related parts in the alligator’s open jaws. The gator closed his mouth and the crowd gasped.

After a minute, Gordon grabbed a bottle of Pabst Blue Ribbon and smacked the alligator really, really hard on the top of its head. The gator opened his mouth and the man removed his genitals unscathed as promised. The crowd cheered, and the first of his free drinks were delivered. The man stood up again and made another offer.

“I’ll pay anyone $100 who’s willing to give it a try.”

A hush fell over the crowd. After a while, a hand went up in the back of the bar. A blond tourist from Minnesota timidly spoke up…”I’ll try it – Just don’t hit me so hard with the beer bottle.”

Interpreting Latest Existing Home Sales Data
Everyone has an opinion about home sales. But most agree that new home sales are at record lows and will be slow to recover until inventory of existing homes and the foreclosure overhang are worked off in many locations around the US. Some indicators for existing home sales, however, including pending home sales and purchase applications, are showing small signs of a pickup, at least on a regional basis. The ending of the Fed’s MBS purchase program did not lead to a skyrocketing of mortgage rates, and it does appear that economic conditions are improving. The MBAA’s economist believes that the recession ended in June 2009. Heck, nobody told me!

But existing home sales have shown signs of weakness in recent months. Housing sales fell 0.6% in February, the third consecutive monthly decline, which boosted the number of months’ supply to 8.6 months. Tomorrow we will have some sales numbers, and an expectation that they will remain in the recently established narrow range increasing to a 5.25 million unit pace in March. Sales will likely continue to gain positive momentum in coming months due to the spring home buying season and the second scheduled expiration of the tax incentives in late April.

Mortgage Apps Up Most in 7 Weeks
The housing market is “hanging in there”, at least based on applications taken last week. Mortgage applications in the U.S. rose by the most in seven weeks, up 13.6%, which analysts attributed to the approaching end of the homebuyer tax credit. The MBAA’s index of purchases climbed 10.1%, and refinancing shot up 15.8%, the first gain since the end of February.

Wells Fargo & Suntrust Earnings
The earnings train continues to roll. SunTrust reported a much smaller first-quarter net loss and beat analysts’ expectations as its loan problems showed early signs of stabilizing. Its net loss narrowed by 74% to $229 million versus a year-earlier $875 million. Revenue declined 14% to $1.9 billion; non-interest income declined 38% to $698 million, amid lower mortgage origination, and was partially offset by a net interest income increase of 10% to $1.2 billion. Wells Fargo’s stock is under some pressure this morning after its earnings were announced (although it is up almost 80% in the last year). First quarter earnings dropped 16%: Wells reported a profit of $2.55 billion versus the $3.05 billion it earned a year ago. Revenue was up 2% to $21.45 billion. Wells’ non-performing assets increased to 3.49% from 1.25% a year ago and 3.12% the prior quarter. Lastly, Morgan Stanley earnings-per-share beat expectations at 78 cents versus 57 cents. Its net income was $1.4 billion versus a loss of $578 million a year ago, and net revenue was $9.1 billion.

Fraud Insurance For Lenders
The Prieston Group (TPG) has teamed up with First American CoreLogic to offer a comprehensive fraud prevention and insurance program to mortgage lenders. First American CoreLogic’s fraud tool apparently is combined with TPG’s risk management services, indemnity programs and training. The result is that TPG will help lenders establish business rules and guidelines and employ the First American CoreLogic LoanSafe Fraud Manager tool to enforce those policies in the lender’s daily operations, and lenders who use this joint solution will be insured against fraud losses by Lloyd’s of London.

Which Lenders Can and Can’t Do FHA Loans
HUD officially published the “Final Rule”, which after May 20 no longer requires loan correspondents (mortgage brokers) to obtain FHA-approval to participate in FHA loan programs, but instead will need to be sponsored by FHA-approved mortgagees. The “Final Rule”, entitled, “FHA: Continuation of FHA Reform-Strengthening Risk Management through Responsible FHA Approved Lenders,” will also increase net worth requirements from $250,000 to $1 million ($500,000 for small businesses). (Let me go on the record here that personally, I take “small businesses” to be less than 500 employees, but it is best to check with HUD over what they mean by it.) “2009 audited financials are not required to continue originating loans, however all current FHA-approved mortgage brokers must recertify and pay the applicable fee through FHA Connection to maintain FHA-approval through December 31, 2010, as made acceptable in the Final Rule.” Here’s the summary and here’s the actual ruling.

Homebuyer Tax Credit Deadlines Fast Approaching
As a reminder, the first time homebuyer credit of $8,000 and existing homebuyer’s credit of $6,500 are nearing the mandatory program expiration date: the homebuyer must enter into a binding contract to purchase a home no later than April 30 and they must close the loan no later than June 30. Many investors, such as US Bank, are letting correspondents and brokers know that they are not going to guarantee closing any loan prior to June 30. Period. So borrowers are better off being informed of the deadlines. Here’s a link to the details for Fed and CA tax credits, and also here’s a link about why CA tax credit may run out in a few weeks.

Market Recap
Yesterday, by most accounts, was a pretty quiet day in mortgage-land. Mortgage yields widened out a little on Monday as mortgage banker selling picked up, but yesterday that spread was stable. For the time being, the 10-yr seems content around 3.79%, and it helps that the continuing Treasury auctions are in a lull period, and there is little news from the Fed since we are within the one-week “quiet period” ahead of the meeting next week. Today there is little news, and tomorrow we have the usual Initial Jobless Claims. The 10-yr is hovering around 3.78% and mortgage prices are better by about .125.

Daily Humor
One day my housework-challenged husband decided to wash his sweatshirt. Seconds after he stepped into the laundry room, he shouted to me, “What setting do I use on the washing machine?”

“It depends,” I replied. “What does it say on your shirt?”

He yelled back, “OHIO STATE!”

How Credit Scores Are Calculated
FICO, like Band-Aid or Kleenex, has become a generic symbol of credit worthiness. Scores can range from 300-850 and is a statistical calculation which is based upon payment history (35%), credit utilization (30%), length of history (15%), credit type (10%), and recent credit checks (10%). Items stick around for seven years; bankruptcy for ten. Maxing out a card, a 30-day late payment, debt settlement, foreclosure (150 point ding) or bankruptcy (150-200 point hit) all negatively impact FICO. Sometimes folks wonder about whether or not a short sale hurts your credit score as much as a foreclosure, and apparently it depends on whether the borrower stays current on their payments and how the lender reports the sale (try for “debt repaid in full”).

Comments From Mortgage Trenches
What are folks saying in the trenches out there?

“Things in my area are good since we didn’t take the value hits that other areas have. Business has been volatile during the last two quarters, but as compared to the record production year we had in 2009 any normal production environment would be off.”

“In specific regions where employment is more stable and values have leveled off, purchase activity has picked up relative to recent months.”

“Purchase deals are slow moving. Prospective homebuyers are requesting prequels, but many of them are being rejected leading to lots of frustrated, hungry loan officers fighting it out for every deal.”

“The industry has become so competitive at the moment – rates rose quickly and borrowers started to panic. This likely resulted in an increased amount of ‘rate shopping’ which forced loan officers to lower their costs to save the deal. Either that or loan officers did not want to re-work GFE’s so they cut points charged to keep APR from rising.”

Chase Net Income $3.3b, Angry Borrowers Mob Chase Exec
JPMorgan Chase was in the news today, for two reasons. First, the company’s earnings were better than expected with net income of $3.3 billion and earnings-per-share 10 cents higher. It had Tier 1 capital of $131 billion. But David Lowman, who runs Chase’s home mortgage business, was “mobbed by angry borrowers” yesterday during a congressional hearing. He was asked by a lawmaker who borrowers could turn to if they felt his bank’s employees were not helping them, and he invited customers to speak to him. As if on cue, 50 borrowers burst from the audience and presented Lowman with a 6-page document alleging his bank reneged on a pledge to help struggling homeowners.

HUD’s Most-Asked Mortgage Questions
Be sure to check out HUD’s website for the revised frequently asked questions. I mentioned this Friday, but though it was important enough to re-mention. There is quite a bit of relevant information in those 62 pages!

Mortgage Applications Down
The MBAA reported that applications fell by 9.6% last week and hitting the same volume levels as last June. Is your company ready for what analysts have been predicting about volumes this year? Refinance activity fell 9% in the latest week and accounted for about 59% of all retail residential applications. The four-week moving average for all mortgage applications fell 6.2%. It appears, however, that locks have increased lately.

Market/Economic News Roundup
Volatility picked up a little bit yesterday in the markets, with mortgage investor prices both improving and worsening during the day. Yields, however, hit their lowest levels since March. Can the economy rebound with no inflation? That would be nice… The day started off slowly from an origination point-of-view (estimated to be less than $1 billion). But as the day wore on, buyers “faded away” according to one trader, and origination doubled in size from levels we saw late last week to $2.5 billion. Mortgage spreads widened to Treasury securities, especially higher coupon mortgages, and if Treasury rates drop much one can expect mortgage prices to lag somewhat.

This morning we had a spate of economic news. Prior to the news the 10-yr was at 3.84%. CPI for March was +.1%, with the core rate (ex-food & energy, for whatever that is worth) unchanged. The CPI was up 2.3% year over year. This is certainly within expectations, and within the Fed’s targeted inflation rate. We also had Retail Sales, doing well recently, for March +1.6% and last month’s figures were revised higher. After the news the 10-yr went to 3.82% and mortgage prices are roughly unchanged to “worse by .125″.

Daily Humor
A man is watching a game of golf on TV. But he keeps switching channels to a dirty movie featuring a lusty couple having raucous sex.

“I don’t know whether to watch them or the game,” he says to his wife.

“For Heaven’s sake, watch them,” his wife says. “You already know how to play golf!”

Mortgage Applications Drop Last Week, Loan Profitability OK
The MBAA reported that mortgage applications in the U.S. declined 11% last week. Refinancing dropped 17% but purchases increased .2%. In fact, the share of applicants seeking to refinance fell to 58.7%, the lowest since August, from 63.2% the week before.

Those loans are still profitable, however, or at least in the 4th quarter they were. The MBAA released its latest study on loan profitability, and independent mortgage bankers and subsidiaries made an average profit of $890 on each loan they originated in the fourth quarter of 2009, down from $902 per loan in the third quarter of 2009, but up from $296 in the fourth quarter of 2008. Apparently strong servicing rights valuations and secondary marketing gains helped profits. But looking ahead, the MBAA believes that “provision expense for repurchase demands may weaken profitability in upcoming quarters. We saw the expense provision double to over 6 basis points from the fourth quarter of 2008.”

Another Lender Fraud Report
Fraud, in Brooklyn and New York? Say it ain’t true!

Rates Better On Greece Woes
Rates improved yesterday – all rates. It appears that Greece “isn’t keen on the IMF being involved in any bailout” which pushed Greek bonds down and caused a bit of a flight to quality here in the US. Say what you will about the credit quality of our debt, on a relative basis it is still safer and more liquid than most. The $40 billion 3-yr note auction went ok, and in fact the market overwhelmingly believes that overnight rates (set by the Fed) will remain near 0% through August. With origination dropping, and buyers buying, mortgage spreads are behaving themselves in spite of a little volatility. Selling is coming from originators, hedge funds, and money managers, but buying is coming from other hedge funds, pension funds, and small & mid-tier banks. In the absence of much news, the 10-yr is steady at 3.95% and mortgage prices are, once again, better by .250-.375 depending on coupon.

Daily Humor
AMAZINGLY SIMPLE HOME REMEDIES (That Really Work!)

1. AVOID CUTTING YOURSELF WHEN SLICING VEGETABLES BY GETTING SOMEONE ELSE TO HOLD THE VEGETABLES WHILE YOU SLICE.

2. AVOID ARGUMENTS WITH THE FEMALES ABOUT LIFTING THE TOILET SEAT BY USING THE SINK.

3. FOR HIGH BLOOD PRESSURE SUFFERERS ~ SIMPLY CUT YOURSELF AND BLEED FOR A FEW MINUTES, THUS REDUCING THE PRESSURE ON YOUR VEINS. REMEMBER TO USE A TIMER.

4. A MOUSE TRAP PLACED ON TOP OF YOUR ALARM CLOCK WILL PREVENT YOU FROM ROLLING OVER AND GOING BACK TO SLEEP AFTER YOU HIT THE SNOOZE BUTTON.

5. IF YOU HAVE A BAD COUGH, TAKE A LARGE DOSE OF LAXATIVES. THEN YOU’LL BE AFRAID TO COUGH.

6. YOU ONLY NEED TWO TOOLS IN LIFE – WD-40 AND DUCT TAPE. IF IT DOESN’T MOVE AND SHOULD, USE THE WD-40. IF IT SHOULDN’T MOVE AND DOES, USE THE DUCT TAPE.

7. IF YOU CAN’T FIX IT WITH A HAMMER, YOU’VE GOT AN ELECTRICAL PROBLEM.

Author Tattoos ‘NYT Bestseller’ On Chest
When was the last time that you got a tattoo? Longtime mortgage and marketing expert Kevin Daum actually committed to his book ROAR!’s success by tattooing “New York Times Best Seller” on his chest backwards so he could see it every morning. We should all be that committed to closing more deals and making more money! Check out the tattoo story and order the book. Here we are all banging our heads trying to figure out how to say the right things to the right people in the right way and the answer has been around for 3,500 years! You have to check out this new Wiley book by Mr. Daum called “ROAR! Get Heard in the Sales and Marketing Jungle”.It’s a great story.

Thoughts On Home Prices
US S&P/Case-Shiller Home Price Index for January was up .3% over December, although it is negative .7% year-over-year. This gives us eight months of, on average, home prices in 20 cities being up on a seasonally-adjusted basis. This data bucks the trend seen by other index trackers, including the NAR median, RadarLogic’s RPX and the FHFA “Purchase-Only” index. One analyst noted that

“economically, housing is an illiquid good with poor price discovery, and major price turns are often preceded by changes in volume as buyers and sellers meet more or less frequently. If home prices are really recovering, we need to see confirmation in rising volume.”

All real estate is local. Florida is struggling, Southern California was a mixed bag for all of 2009, and Northern California has been strong. Las Vegas and Phoenix have been weak, as are Seattle and Portland and Atlanta. New York has not bounced; Boston is doing ok, as is Cleveland, although generally speaking the Midwest is having a tough time. Texas is steady.

Home Purchase Loan Applications Highest Since October
Loan agents and brokers specializing in purchasing are keeping lock desks busy around the nation. The weekly survey by the MBAA showed that mortgage applications for purchases hit their highest level since October. Overall, the index climbed 1.3% in the week ended March 26. Purchase apps rose 6.8%, the fourth gain in five weeks, while its refinancing measure dropped 1.3%. We have one month left until the end of April, the deadline for Americans to sign a contract on a home and qualify for the tax incentive.

Economic Chatter Last Day of Quarter
It is the last day of the quarter. Pundits will be talking about what rates have done, what stocks have done, what jobs have done. Manufacturing obviously impacts job growth, and manufacturing expansion remains firmly in place as we close out the first quarter. Manufacturers here in the US are replenishing low inventories, and we’ve seen some recovery in the global trade markets – both of which are helping. We will soon have the March ISM index, which is expected to show a slight increase from February’s levels.

Last Day of Fed MBS Buying, ADP Lower Than Expected
It is also the last day that the Fed will be buying mortgage-backed securities. Mortgage rates are pretty steady, compared to Treasuries. Rates are holding at the top end of the range and the curve is maintaining a steepening bias. Fannie and Freddie predict that the effect will not be major: a rise of about 25bps in mortgage rates over the next 3 months, or around $30/month more on a $250,000 mortgage. ADP reported that March private payrolls (not including census worker hiring) dropped 23,000, which is a disappointment for the economy – its number was expected to show an increase of 40k. Service-providing industries showed an increase. After the ADP number stocks may have a tough day, but bonds have improved: the 10-yr yield is down to 3.83%, and mortgage prices appear to be .250 better in price.

Daily Humor
Two ladies were talking in Heaven.

1st woman: “Hi! Wanda.”

2nd woman: “Hi! Sylvia. Imagine seeing you here – what happened?”

Sylvia: “I froze to death.”

Wanda: “How horrible!”

Sylvia: “It wasn’t so bad. After I quit shaking from the cold, I began to get warm & sleepy, and finally died a peaceful death. What about you?”

Wanda: “I died of a massive heart attack. I suspected that my husband was cheating, so I came home early to catch him in the act. But instead, I found him all by himself in the den watching TV. ”

Sylvia: “So, what happened?”

Wanda: “I was so sure there was another woman there somewhere that I started running all over the house looking. I ran up into the attic and searched, and down into the basement. Then I went through every closet and checked under all the beds. I kept this up until I had looked everywhere, and finally I became so exhausted that I just keeled over with a heart attack and died.”

Sylvia: “Too bad you didn’t look in the freezer—we’d both still be alive.”

Federal Home Loan Bank of SF Sues Dealers
The Federal Home Loan Bank of San Francisco sued nine securities dealers alleging they misled it about the credit quality and risks of loans behind $19.1 billion in private-label residential mortgage-backed securities. Among several dealers, Credit Suisse, Deutsche Bank, JPMorgan Chase, and Bank of America were named as defendants. The FHLB is seeking to rescind its purchases of the securities, which were rated AAA “based on the information provided by the securities dealers… the dealers made untrue or misleading statements about the characteristics of the mortgage loans underlying the securities…failed to disclose that appraisals were biased upward on properties that secured mortgage loans, that underwriting guidelines were ignored by originators and that loan to property value ratios were exaggerated. The Federal Home Loan Banks of Seattle and Pittsburgh last year sued banks including JPMorgan Chase, Morgan Stanley and Goldman Sachs Group. You can check it out for yourself.

Citi Modified Loans For 128k Borrowers
CitiMortgage, heavily rumored to be undergoing another downsizing on an undetermined scale, worked with nearly 128,000 borrowers last quarter to avoid foreclosure on almost $19 billion in mortgage loans. According to Citi, its loan modifications in the distressed asset portfolios outpaced both foreclosures and delinquencies. Modifications increased 17% in Q409 from the previous quarter. For the entire year of 2009, Citi loan modifications increased 47% from 2008. The US Treasury’s HAMP (Home Affordable Modification Program) began a year ago, and Citi rolled it out a month later.

Mortgage Bonds Better Off Without Fed Buying?
Some mortgage security traders believe that we will all be better off with the Fed out of the MBS business, and that overseas investors and banks are expected to be key new buyers of Agency MBS, thus providing confidence to other investor groups to follow suit. A growing trade deficit and persistently steep yield curve may lead overseas investors and banks to increase MBS holdings.

Foreclosure-to-REO Rates Rise Modestly
In a related issue, “foreclosure to REO transition rates” rose modestly this month across all sectors after falling for two years or more in most cases, as the foreclosure process has been stalled. REO pipelines have grown mildly lately after shrinking in 2009. As homes get pushed through loan modification evaluation, look for a change. Any increase in home prices would be positive, and as most folks in the business know lower priced homes have been performing better than higher ones, a partial cause for the slight improvement in subprime default rates.

Steady Yield Curve Next 3 Months
In fact, many analysts believe that the entire yield curve, short term rates relative to long term rates, to do very little in the next three months. Of course, crystal balls don’t work so well farther out, and in the 6-and 12-month horizons most believe that yields will begin to rise sharply. Not only because the economy is beginning to heat up, but we will have the Fed’s balance sheet contracting quite a bit over the coming 12 month horizon on a combination of pay downs,
redemptions, and buyouts.

PPI Shows Inflation Under Control
For this morning’s market, ahead of the Producer Price Index, rates were down and stock market futures were pointing to yet another improvement. The February PPI was -.6%, mostly due to energy costs; ex-food and energy the core rate was +.1% (as expected). The year-over-year numbers were also satisfactory, and overall it does appear that inflation is not a big deal. After the numbers we find the yield on the 10-yr at 3.63% and both 5-yr Treasury and mortgage prices a shade worse.

Mortgage Apps Up
Lastly, this morning’s report from the Mortgage Bankers Association of America (MBAA) showed that its application index rose last week by .5%. It is nice to see that purchases outpaced refinances +5.7% versus -1.5%.

Mortgage Bond Demand Consistent After Fed Meeting
Yesterday’s Fed announcement, although it was nothing new and left overnight rates unchanged, caused an immediate improvement in stocks and bonds. In mortgages, with originators selling and the Fed, hedge funds, Asian investors, and money managers buying, rates improved and caused several investors to improve prices. One interesting thing to note is that Ginnie Mae securities, made mostly up of FHA and VA loans, are seeing continued interest from domestic and overseas banks for their reinvestment money (from buy backs) adding support to those prices.

Analyzing The Fed’s Statement
The FOMC’s statement didn’t surprise anyone. Since markets don’t like surprises, and there were none, things improved. “Economic activity has continued to strengthen and the labor market is stabilizing…Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit…investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability…inflation is likely to be subdued for some time.”

In the mortgage markets, as expected, “To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.”

Daily Humor
Paddy was driving down the street in a sweat because he had an important meeting and couldn’t find a parking place. Looking up to heaven he said, “Lord take pity on me. If you find me a parking place I will go to Mass every Sunday for the rest of me life and give up me Irish whiskey!”

Miraculously, a parking place appeared.

Paddy looked up again and said, “Never mind, I found one.”

Walking into the bar, Mike said to Charlie the bartender, “Pour me a stiff one – just had another fight with the little woman.”

“Oh yeah?” said Charlie, “And how did this one end?”

“When it was over,” Mike replied, “She came to me on her hands and knees.”

“Really,” said Charles, “Now that’s a switch! What did she say?”

She said, “Come out from under the bed, you little chicken.”