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Jumpy Rate Market Response To GDP & Home Sales Reports
Rates dropped 0.2% early last week then rose Friday to end the week even. The $109b in Treasury auctions throughout last week caused mortgage bonds to sell off slightly, and July’s record low New Home Sales (down 32.4% year-over-year) and Existing Home Sales (down 25.5% year-over-year) helped mortgages rally— rates rise on bond selloffs and drop on rallies. But then two factors caused a huge 59 basis point selloff Friday:

(1) The second of three 2Q2010 GDP readings showed the economy grew at 1.6% versus expectations of 1.4%. This was a big drop from both the first 2Q reading of 2.4% and the final 1Q reading of 3.7%. Normally economic weakness of this magnitude would cause a mortgage bond rally, bringing rates down. But the opposite happened because traders didn’t think the 1.6% number was weak enough. more…

Short Sales Take 6-13 Months
A study put out by Deutsche Bank ranked GMAC ranked as the top servicer among all prime mortgage servicers based on short sale timelines – six months! The investment bank’s survey showed that a short sale generated a higher recovery than an REO sale. For “prime” short sales, GMAC was the fastest, followed by CitiMortgage (7.5 months) and Wells (8 months). DB’s study showed that BofA was the slowest with a 13 month short sale timeline. For “subprime” Wells came in first (15 months), followed by HomEq and then Saxon. Option ARM short sale speedsters were EMC, Aurora, and GMAC.

Can Foreclosed Borrowers Get New Loans?
Fannie Mae issued a bulletin on Underwriting Borrowers with a Prior Foreclosure, to modify the waiting period that must elapse before a borrower is eligible for a new mortgage loan after a foreclosure. Originally a seven-year waiting period after a prior foreclosure will apply for all borrowers, unless the foreclosure was the result of documented extenuating circumstances, which requires a three-year waiting period with additional eligibility requirements. Fannie also includes a maximum LTV ratio of the lesser of 90% or the LTV ratio per the Eligibility Matrix for all transactions – best to check their grid. more…

Mortgage Bond Market Update
Yesterday we saw yet another improvement, with lower coupon (current production) prices doing the best. At the close of business yesterday, the spread between a Fannie 4.5% security and a Fannie 5.0% security was 2.5 points. (So .5 in rate equates to 2.5 points, or about .625 points for every .125% move.) As it turns out, apparently some dealers are quoting Fannie 30-yr 3.5% security prices. Although when a new security starts trading, it is very illiquid, but the price drop is about 3 points from a Fannie 4.0% security, or .75 in price for every .125%.

FOMC and Economic Preview
Today the FOMC wraps up its two-day meeting. Looking at the big picture, the economy is projected to expand 3.2% this year and slightly less in 2011, with the jobless rate staying above 9% for the foreseeable future. With no inflation, housing and employment scraping by, and European problems, there is no need for overnight rate hikes by the Fed. Many feel that although many areas are stable or improving housing-wise, but in many there are signs of some renewed weakening in home prices. Foreclosures continue (although 70% of them are concentrated in 11 states), bank repossessions hit a record monthly high for the second month in a row in May, and existing home inventories are increasing – none of which help home prices. On the flip side, housing starts are down. Of course, why build more when there are plenty of “used” houses around? more…

Why You Shouldn’t Give Out Your Social Security Number On The Radio
Does the name “Todd Davis” ring a bell? He is the CEO of a company called LifeLock, and he made the news a while back by broadcasting his Social Security Number in radio ads to show confidence that his identity couldn’t be stolen. Phoenix New Times reported that, based on police reports, Davis appeared to be the victim of identity theft at least 13 times, which was 12 more times than previously known. LifeLock’s current ad slogan is “Real Protection. Real Peace of Mind.” But folks apparently rose to the challenge of using his identity! The article is a little sensationalized, but the moral of the story seems to be what I tell my kids: Don’t give out your social security number on the radio.

Reinventing Ratings Agencies
Lookout Moody’s, S&P, and Fitch – there’s a new kid on the street. Jules Kroll, founder of Kroll and current principal of K2 Global Partners, plans to launch Kroll Bond Rating this summer. The man credited with modernizing the intelligence and security sectors will target mortgage-backed securities (MBS). For those playing at home, there has been 1 (one) non-agency MBS issued in 2010. His plan is that instead of relying on the issuer-paid model for running the rating agency, a consortium of institutional investors will own 30% to 40% of the company and before investing in a product will require a Kroll bond rating. Institutional investors would include public pension funds, corporate pension funds, endowments and universities, with each owning a small segment of the company. Issuers such as Redwood Trust will have to pay for the rating up front, with the actual rating based more on due diligence and auditing rather than basic assumptions used in the past by existing rating agencies. more…

Rates Up On New Home Sales & Durable Goods Numbers
Today we had Durable Goods (very volatile) and a big New Home Sales number. Durable Goods were expected to be +.3% for March and originally reported as +.5% in February, the third consecutive monthly increase (although most of the gain in February’s number was due to a 4.7% monthly increase in machinery bookings). New Home Sales surged 27% in March, fueled by the Federal homebuyer tax credit which expires April 30. Mortgage bonds are currently down about 25 basis points on these better than expected economic reports. More on why rates are moving up in the last section below.

Varying Home Sales Data
Existing Home Sales rose 6.8% in March to an annualized pace that is the fastest since December. Total housing inventory is now at an 8 month supply. The median price was $170,700 in March, up 0.4% from March 2009. Distressed homes accounted for 35% of sales last month – unchanged from February. Sales have been above year-ago levels for nine straight months, and inventory has trended down from year-ago levels for 20 straight months. But FHFA’s Purchase-Only House Price Index (it covers only conforming loans) fell 0.2% in February and is down by 3.4% from its level in February 2009. The regional indices came in mixed, with declines in the South Atlantic, New England, and West North Central divisions offsetting moderate increases in the Middle Atlantic, Pacific, and West South Central regions. more…

Does A Loan Originator Have To Buy Back A Bad Loan Even After It’s Modified?
Yesterday I mentioned the question about whether or not modified loans could still be forced back to the seller for buybacks. Freddie Mac does indeed say that the seller would still need to buy it back after a modification. At the current time, however, there is the belief that sellers continue to be successful in challenging these because most contracts don’t specifically allow the servicers to modify the loans. And in fact several national law firms are making a run at challenging the large servicers, who find themselves caught between not being able to modify a loan and being forced to modify it by the GSE’s and HAMP. Servicers claim that the reps and warrants stay with the seller, and especially if the loan is modified due to fraud or material misrepresentation then the seller may have to indemnify the loan with some deposit of money to the investor.

BofA To Select Certain Loans To Modify
Bank of America will soon begin offering, by invitation only, loan modifications based on a reduction of the mortgage principal to some of its borrowers. Borrowers with principal balances of 120% or more of the home’s market value or who are confronted with endlessly increasing balances on negative amortization loans will be the target (they must meet the basic qualifications of HAMP), and stories reported that BofA will forgive up to 30% of the mortgage loan balance in two stages: the bank will offer an interest-free forbearance of up to 30% of the principal balance for five years, and if the homeowner stays current on mortgage payments for the period of time, then the amount will be forgiven. Urged by the US Government to do more, we may see that other banks are willing to take some losses now to avoid much greater losses later if the housing markets begin to drop again. Industry observers say that it is a variation on the implementation of HAMP, rather than a new alt-HAMP or HAMP-light program. Say what you want, HAMP volumes have been disappointing, especially for Pay-Option ARMs. Bank of America estimates that 45,000 loans will be affected for about $3 billion in principal reductions ($67,000 per loan). more…

Treasury Auctions Weigh on Markets
Yesterday’s $42 billion 5-yr auction did not go well. It goes back to the “What if we held an auction and nobody bid?” Indirect bids, which in the past indicated a level of interest from foreign entities but in the last year became a little convoluted, have been on a roller coaster: Tuesday’s 2-yr hit over 53% of the auction while yesterday’s was the lowest since July at 40%. Not good. The Bernanke testimony (rates need to remain low), along with the much worse-than-expected New Homes Sales data, muddled the picture somewhat for investors yesterday. The good news for mortgage folks is that dealers are reporting heavy selling, and selling is often powered by locks, so current locks must be picking up.

New Home Sales Down 11%
The New Home Sales data was particularly bad. In January sales dropped 11%, the worst on record and erasing all the gains from last year. Nationwide, inventory represents over a 9 month supply – the highest in almost a year. And year-over-year the median price for a new home fell in January by 2.4%, to $203,500 from $208,600 a year ago. Regionally, January new-home sales dropped 35.1% in the Northeast, 11.9% in the West, and 9.5% in the South. Sales rose 2.1% in the Midwest. more…

ARMs Only 3% Of Total Agency Loans In 2009
An annual report on the ARM market published by Freddie Mac shows adjustable-rate mortgages accounted for just 3 percent of all conventional home purchase loans in 2009. That’s the smallest percentage for ARMs since at least 1982.

Market & Economic News Update
Yes, today we have the 7-yr Treasury Note auction. Yesterday’s 5-yr was “fair-to-pretty-good”. The auction came in at 2.37%, with “indirect buyers” nabbing 53% of it and a strong 2.80 bid-to-cover ratio. And for market news today, we had Jobless Claims and Durable Goods. New orders for durable goods were +.3% in December, less than expected but still better than the -.4% in November. Durable goods orders are a leading indicator of manufacturing activity & a good measure for overall business health, and for 2009 fell a record 20.2 percent. Jobless Claims dropped 8,000, which is good, but the drop was less than expected, which is bad. With these two pieces of news we find the yield on the 10-yr back up to 3.67% and mortgage worse by between .125 and .250. more…

Sales of new (as opposed to existing) single family homes for November occurred at a seasonally adjusted rate of 355,000 according to joint estimates by the US Census Bureau and HUD. This is 11.3% below the October numbers, which were revised to 400,000, and is 9% below the November 2008 estimate of 390,000. Median new home prices for homes sold in November was $217,000 and average sale price was $280,300. There are an estimated 235,000 new homes for sale at the end of November, representing a 7.9 month supply at current sales rates.

These data, released by the Commerce Department, get reaction from markets and media, but they’re always subject to major revisions over the month that follow. For example, even the official release of today’s numbers show massive margin for error. The -11.3% number is cited with +/-11% margin for error, and the -9% number is cited with +/-15.3% margin for error. With margins this wide, interpretation is equally wide. For example, yesterday’s existing home sales from NAR were up 7.4% and the original November expiration of the tax credit was cited as a big contributor to this gain. Then today, the expiration of the credit was also cited for today’s big loss on new home sales. As with any statistics, one could argue any point of view (see any of our national cable news networks for reference), but the unreliability of these statistics in their early form just makes the issue more pronounced.

According to the police, a Texas woman lived in an apartment with her dead boyfriend for a week. Know why he didn’t marry her? Cold feet. And speaking of cold, here we are at the World Series…baseball in November in the Northeast. Lots of folks in mortgage banking like numbers and statistics, so here is one question (totally un-mortgage related) that is interesting: how many baseballs does a major league team use per season? It turns out that, on average, a ball only lasts 3-4 pitches (foul balls, scuffs, home runs, end of inning, etc.) so each game consumes roughly 100 balls. So with 30 teams, 162 games, the approximate usage is 220,000 balls per year! The ones that don’t end up on fan’s shelves are used for batting practice, or by minor league teams.

Price Bubbles 101
Most economists believe that although the internet bubble took its toll on stock prices and the stock market in general, the housing bubble has had more of an impact on our sense of well-being. It seems to remind us that, for whatever reason you attribute to the dramatic rise in housing prices (low interest rates, a government mandate to make loans to unqualified buyers, Wall Street, etc.), that the faster something goes up, the faster it comes down. Any time the price that people will pay today depends on the belief that other people will pay even more tomorrow, you have a potential price bubble. more…