Don’t forget to “Spring ahead” this Sunday morning. We lose an hour of sleep, but it will be lighter during barbecuing.

The FDIC made a rare Thursday move and shut down LibertyPointe Bank This bank catered to the Orthodox Jewish community in Manhattan and Brooklyn, and will be taken over by Valley National.

For anyone hedging with securities, there’s a new broker dealer in town. Well, maybe not so new, but Wells Fargo Securities, who apparently is making a market in trading MBS’s, according to news sources will add Kevin Jackson to its residential mortgage-backed securities (MBS) team. Jackson is leaving Merrill Lynch Bank of America to join Wells as part of a broader move to expand that platform.

Did you hear the one about the parrot and Bank of America? A nun and a parrot walked into a branch… never mind. Seriously, last October BofA employee erroneously believed a house in Pennsylvania (state motto: Cook with Coal) was vacant when the borrower defaulted and sent a contractor there with instructions to install a new lock and otherwise “secure” the property” although it turned out that the owner wasn’t in default and the house wasn’t vacant. Regardless, BofA has apologized for its contractor entering the home of a mortgage borrower when she was away, cutting off utilities, padlocking the door, and confiscating her 11-yr old pet parrot, Luke, for over a week. The result was supposedly emotional distress and a prescription medication for anxiety.    Here is the story. 

Janet Yellen, ex-Cal teacher, apparently is expected to accept President Obama’s offer to replace Donald Kohn as Vice Chairman of the Federal Reserve.

Aristotle once wrote in “Politics”, “It remains true that the greatest injustices proceed from those who pursue excess, not from those who are driven by necessity.” “Can a real estate broker who sells homes also do FHA loans?” This question came up yesterday. “I would imagine it would not work when the broker is selling a home and doing the loan in the same transaction, but would it be possible to sell homes and do FHA loans as long as they are not in the same transaction?” As it turns out, HUD does not allow it. A veteran government compliance expert told me, “To do an FHA loan you must be an employee of the lender.  As an employee doing FHA loans you cannot have a second job that is in a real estate related field.  This is spelled out in the HUD mortgagee approval handbook.  Brokers have disregarded this for years but I would not in today’s world. Punishment could be swift and painful.”

Freddie Mac fired off quite a bulletin yesterday, directed at its credit and property eligibility requirements. Recently Freddie has begun adding application date requirements, although smaller lenders should remember that their investors may pad these somewhat to allow for a time cushion. The 50,000 view is that Freddie will no longer purchase Initial Interest Mortgages or any Mortgage with an interest only option, changing the “Minimum Indicator Score” requirements with increases for certain manually underwritten mortgages and adding a Minimum Indicator Score of 620 for non-assumable Rural Housing Service mortgages, amended requirements for “age of credit and capacity documentation, seasoning, and eligible Borrowers for Mortgages for Newly Constructed Homes, and permitting super conforming Mortgages to be sold as a Mortgage for a Newly Constructed Homes,” is requiring sellers to use specified versions of FICO scores, addressed mortgages secured by properties with incomplete improvements and discussed the appraising of leasehold estates.

Freddie had come out with the IO news a few weeks ago, but now we have actual dates: mortgages with applications dated on or after June 13, and for mortgages with settlement dates on or after September 1. Usually I try to make investor updates readable, and condense them, but in this case if you are interested, you should read the actual bulletin to get a head start on what investors will soon be doing:

The trend toward increased documentation is continuing. Recently, for example, SunTrust, for FHA and VA loan applications, stated that it requires an initial Uniform Residential Loan Application (FNMA 1003), as well as “pages one and two of the HUD/VA Addendum to Uniform Residential Loan Application (HUD-92900-A/VA-26-1802a) to be fully executed by all borrowers and the lender’s interviewer prior to submission.” And for conventional loans,SunTrust requires “the initial Uniform Residential Loan Application (FNMA 1003) to be fully executed by all borrowers and the lender’s interviewer prior to submission.”

Although my personal opinion is that mortgage rates won’t skyrocket relative to other rates during that first week in April when the Fed’s purchase program goes away, there are many that believe that mortgage rates will indeed increase relative to Treasury rates. One argument, of course, is that the market has become complacent around the artificially low rates and low spread volatility. The bulk of its purchases have been in 4.5% securities, containing current coupon mortgages, roughly matching current production. Obviously traders have had to take this into account during their daily activities, and when it goes away, “the smartest guys in the room” will have to adjust to a new dynamic. In addition, the spreads between mortgages and Treasuries is the tightest/best/lowest it has ever been – is there any where to go but up? And there is some anticipation, already, that the first Friday of April’s Non-farm Payroll will show some strength, possibly leading to higher rates in general.

But heck, origination isn’t exactly setting records, and mortgage investors who have their delinquent loans bought back by Fannie/Freddie will be buying more in future months. Traders are seeing buying at every dip in price, in spite of spreads being tight. Insurance companies, traditional buyers of some of this stuff, have been creeping back in. The current production of loans is arguably the best in credit quality, most likely to stay on the books, and least likely to give investors problems down the road.

Yesterday’s $13 billion 30-yr (theoretically, 29 year and 11 month, since they “re-opened” last month’s issue) bond sale went pretty well. Almost 24% went to indirect bidders, the bid-to-cover was 2.89:1, and the yield was 4.68%. How ‘bout the ol’ yield curve?  Prior to the auction, the difference between the 2-yr note and the 30-yr bond was 378 basis points (3.78%), close to the all-time high. And the 2-10-year spread was 280 basis points.

This morning’s Retail Sales figure, expected to show a slight decrease, was up .3%, ex-autos were up .8%. Overall, these were strong numbers for a market that hasn’t had much news lately, and should push the equity markets higher. Interest rates, however, as you would expect were not helped by this, and the yield curve has once again steepened – a sign of future strength in the economy. The yield on the 10-yr moved to 3.77%, and mortgage prices are worse, depending on coupon, between .250 and .50.

As a bagpiper, I play many gigs. (Just go along with this, ok?) Recently I was asked by a funeral director to play at a grave side service for a homeless man.  He had no family or friends, so the service was to be at a pauper’s cemetery in the Kentucky back-country. 
As I was not familiar with the backwoods, I got lost; and being a typical man I didn’t stop for directions. I finally arrived an hour late and saw the funeral guy had evidently gone and the hearse was nowhere in sight. 
There were only the diggers and crew left and they were eating lunch .I felt badly and apologized to the men for being late. I went to the side of the grave and looked down and the vault lid was already in place. I didn’t know what else to do, so I started to play. 
The workers put down their lunches and began to gather around. I played out my heart and soul for this man with no family and friends. I played like I’ve never played before for this homeless man.
And as I played “Amazing Grace,” the workers began to weep. They wept, I wept, we all wept together. When I finished I packed up my bagpipes and started for my car.  Though my head hung low my heart was full.
As I was opened the door to my car, I heard one of the workers say, ” I never seen nothin’ like that before and I’ve been putting in septic tanks for twenty years.”

Rob

(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx . For archived commentaries, check www.robchrisman.com  )

Second Lien Writedowns, II -  R.A. (Ryan Avent!) writes in response to my previous entry:  [Mike's thesis] places the government in a bind. If it forces banks to write down worthless second mortgages to clear the way for new modifications, then the banks suddenly look shaky again. If it doesn’t, then lots of homeowners are stuck in loans they can’t modify and may not be able to afford.  … – Rortybomb Blog

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Barney Eats Seconds – Or Blows Smoke – Or Both – Bruce Krasting – Yesterday Barney Frank came out with a letter addressed to some of the big banks putting some muscle on them. He wants them to write off their second lien mortgages. He thinks the seconds are junk. … also has thoughts on performance of GSE subordinated debt – Bruce Krasting Blog

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thoughts on shadow inventories – HOUSING SUPPLY AND DEMAND – Jeff Miller – A Dash of Insight

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Moody’s: No Florida Real Estate Recovery Until the 2030s – Adam Sharp -  Bloomberg BusinessWeek is out with a piece on Florida’s misadventures in real estate. Apparently Eaton Vance is dumping Florida municipal bonds tied to real estate deals at $.26 on the dollar.  Still no need to mark down any of those bank assets, of course. The underlying assets will bounce back, we keep hearing. Well, Moody’s says the Florida RE market might not recover until the 2030s. – Seeking Apha

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Former Rock pitchman launches mortgage company of his own – BY KATHERINE YUNG – Best known for years as the pitchman of Rock Financial before a falling-out with his boss, Dan Gilbert, David Hall has launched a mortgage company in Birmingham called Hall Financial. During his 12 years at Rock Financial, Quicken’s mortgage lending arm in Michigan, Hall, 39, appeared in numerous TV and radio commercials for the company. The superstar salesman rose to become Rock’s senior vice president and chief marketing officer. -  DETROIT FREE PRESS

this is shocking – New York Fed and Treasury Tell Banks to Hold Cash – Posted by Larry Doyle - How often have Americans heard politicians screaming at banks for not providing credit? How often have those same politicians and bank regulators informed us that they are working to have banks inject money into the economy to support Main Street?  Regrettably, America deals with this pandering and posturing from our political leaders and regulators all too often. While Americans are being told one thing, what are the regulators telling the banks? Hold cash.  I am not shocked, but certainly disappointed, that American financial periodicals failed to run this story detailing these recommendations from our bank regulators. – Sense on Cents Blog

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Is The Federal Reserve Insolvent? – Submitted by Tyler Durden -  The ongoing troubles at the GSEs are no secret: … The fact that the mortgage-bond spread has just hit a record tight … , with the sole purpose of keeping rates artificially low, and preventing banks from being forced to take massive writedowns on their entire loan book. This is all well known. What, however, seems to have escaped public attention is what the impact of these delinquencies is on the one largest holder of Mortgage Backed Securities, the Federal Reserve. … – - (goes on to talk about the true value of the MBS owned by the Fed) – Zero Hedge 

speech: Fed’s Brian Sack: "The Fed Will Be Embarking On A Tightening Cycle Like No Other In Its History" – Submitted by Tyler Durden – … Recall that Brian is the de-facto head of the Fed’s "markets group" operation located on the 9th Floor of Liberty 33. If there is indeed a Plunge Protection Team, Brian is likely the PM who runs it.  Remarks at the National Association for Business Economics Policy Conference, Arlington, Virginia … read on … – Zero Hedge

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Thrift Charter-Flipping Just One More Strain for OTS – By Kate Davidson    – A growing number of institutions worried about the Office of Thrift Supervision’s future may switch to a national bank charter, putting even greater pressure on the agency’s budget.   Hudson City Savings Bank, a $60 billion-asset thrift in Paramus, N.J., last week became the latest to announce a charter change amid concern about its regulator. … US-Banker
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FHFA Considers Sliding Scale for Capital Requirements – by JACOB GAFFNEY – … In a white paper released today, titled ‘Automatic Recapitalization Alternatives’ (download here), co-author Robert Collender, a senior policy analyst at the FHFA, and colleagues write that “regulators are seeking ways to reduce the procyclical [where one hit in financials causes another and so on] effect of the current capital regulatory regime and the spillovers associated with financial firm distress. … – HousingWire

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The Mayor Of Detroit’s Radical Plan To Bulldoze One Quarter Of The City – … According to one recent estimate, Detroit has 33,500 empty houses and 91,000 vacant residential lots.  So what can be done when an entire city experiences economic collapse?   Well, Detroit Mayor Dave Bing believes that the answer is to downsize on a massive scale.  Bing believes that Detroit simply cannot continue to pay for police patrols, fire protection and other essential services for areas that resemble ghost towns. … – The Economic Collapse Blog

and
Detroit looks at downsizing to save city – Wants to turn vacant lots into farmland –
The Washington Times

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here we go again – leverage is back! – Freddie Mac Poised to Roll Out MF Mezz Program – By Erika Morphy – … However, she did say that the mezz financing would be provided by a third party and that Freddie Mac would work with several mezz lenders for the program. … Freddie Mac will originate lower-leverage senior debt and then work with one of the mezz lenders in the program to provide additional leverage, up to 85%. … – GlobeSt.com

Who says that numbers aren’t fun? A top muni bond analyst at Wells Fargo sent this to me:

What If Everybody in Canada Flushed At Once?

Sometimes time drags, and sometimes it flies. I came to this brilliant observation yesterday while waiting in the California DMV, waiting for my 15 1/2 year old daughter to obtain her driver’s permit. Time has flown. On the other hand, in the mortgage business, it seems like a lifetime ago when companies were offering stated/stated 90% Neg AM loans. Can anyone seriously push to have those days come back?

That being said, ING notified its brokers that it raised LTV’s and CLTV’s, especially on Jumbo adjustable rate mortgages. US Bank’s wholesale division is pushing its 1/1, 3/1, 5/1, 7/1, 10/1 ARM programs with IO options, cash out, up to $1.5 million. EverBank is “dipping their toe” back into the Jumbo market but with elevated credit guidelines & asset requirements.” For example, its “Preferred ARM” products were tweaked to only include 5/1 & 7/1 Fully Amortizing ARM or 5/1 & 7/1 10 year Interest Only ARM’s, with a maximum LTV/CLTV remaining at 80%, maximum loan amount reduced to $1.5 million. The pricing is rumored to be good, but 1 Unit Single Family Detached & Attached only, including FNMA-eligible Condominiums & PUDs with a minimum FICO of 740 and a minimum reserve requirement of 12 months PITIA .

Wells’ correspondent clients were notified that after April 1st Wells, in response to HOEPA, requires specific interest rate data for higher-priced mortgage loans (HPML) to be reported to HMDA and the Agencies. “In our ongoing effort to ensure regulatory compliance, Wells Fargo Funding will begin requiring and reviewing for documentation of the borrower interest rate set date.” Clients need to include the Borrower Interest Rate Set Date Form, a screen-print of a populated FFIEC rate spread calculator, or a lock agreement with the borrower. Starting now, however, Wells Fargo Funding will now accept signed overnight delivery and courier receipts as proof of receipt of the Truth-in-Lending document by the borrower. There are, of course, policies and procedures to follow – check the actual newsflash for details.

Wells’ wholesale shifted its PUD review requirements in order to meet Agency requirements. “Additional reviews are necessary for Planned Unit Developments (PUDs) with unit-owner responsibility for amenities (specifically golf courses) that are funded by the association” for conforming and non-conforming conventional loans. After March 15th, “If the PUD project is an ineligible project, or if the PUD is associated with a golf course, the Homeowner’s Association budget must be reviewed. If the HOA budget makes a contribution of more than 10% of the HOA dues for the maintenance of the golf course, the loan will be reviewed.”

After March 29th, MGIC will have changed underwriting guidelines, restricted market changes, and new premium plans “for loans originated for and sold to MGIC-Approved State and Local HFAs.” And MGIC’s “HFA Affordability+” rates will be replaced with MGIC’s new national premium plans effective Saturday, May 1, 2010, subject to regulatory approval. But getting back to the changes after the 29th, MGIC has instituted a series of credit changes (minimum of 3 tradelines evaluated for 12 months, loans without valid credit scores must meet MGIC’s Nontraditional Credit guidelines, and Nontraditional Credit maximum 90% LTV), adjusted its DTI and LTV’s for certain FICO scores. Changes, too numerous to list here, also involve minimum borrower contributions, subordinate financing, and restricted market states.

In California (state motto: “By age 30, our women have more plastic than your Honda) last year 47% of all homebuyers were first-time homebuyers, up from 35.9% in 2008. And REO and short sales made up half of the assets sold in the state, up from 36% in 2008, according to the California Association of Realtors. Of those surveyed by CAR, 40% of the homebuyers said they would not have purchased a home without the first time buyer tax credit. Lastly, the higher FHA loan amounts ($729,750 for single family) helped: in 2009 FHA loans accounted for 32% of the market compared to 18.9% in 2008, according to CAR.

HUD issued a new Mortgagee Letter that addressed the validity period for appraisals for HUD’s Real Estate Owned (REO) properties and also announced the conditions for which a second appraisal may be ordered for purchasers of REO properties utilizing FHA financing. After 4/1 all appraisals utilized to establish the listing price on an REO property owned by HUD will be valid for a period of 120 days from the effective date of the appraisal instead of the current 6 months. And effective immediately, with the exception of 203(k) as-repaired appraisals, “when a buyer is using FHA financing to purchase a HUD REO property, the appraisal that was utilized in determining the list price will remain effective for purposes of obtaining the FHA-insured mortgage. A second appraisal may not be ordered simply to support a purchase price that is higher than the value on the current appraisal…only if there are material deficiencies with the current appraisal or the current appraisal will not be valid on the date of contract ratification.”

Mortgage analysts and traders often talk about “negative convexity.” What is that? It is critical to remember that, for fixed income instruments, when rates go up, prices go down. (In a 5% environment, a $100 bond pays $5 per year. But if rates go up to 10%, investors want $10 per year, so the price of the original bond has to go down so that the $5 per year it pays will equal 10% of the purchase price for an investor.) Conversely, if rates go down, prices go up – simple!

But if the bond is “callable”, meaning that the issuer can pay it off, like a mortgage, as interest rates fall, the incentive for the issuer to call the bond at par increases; therefore, its price will not rise as quickly as the price of a non-callable bond. In fact, the price of a callable bond (like a mortgage) might actually drop as the likelihood that the bond will be called increases. This is why the shape of a callable bond’s curve of price with respect to yield is concave, or “negatively convex.” A very simple way to explain it is that mortgages pay off when rates drop, just when servicers and investors don’t want them to pay off, so mortgage prices don’t improve as much in a rally as, say, a Treasury bond!

There is definitely an argument for higher rates over the next few years. Although some analysts believe that the economy is going to head back down, everything I have seen suggests that everyone believes things are better than they were. If the economy is indeed beginning to do better and expand, in the past five-year Treasury rates have tracked fairly closely to nominal growth (growth not adjusted for inflation), and in fact nominal growth and long-term rates tend to converge. So if history is a guide, the 10-year Treasury yield will likely double from the lows of the recession to the end of 2011, due at least in part to much improved economic growth. Of course the good news in this scenario is that more borrowers will actually have jobs, and homes will be appreciating.

But for now, mortgage rates and prices are darn good. In fact, 4.5% securities are above a price of 101 (1 point premium), and if you add the value of servicing onto these 4.75-5.125% 30-yr loans, agents should have a very nice rebate. Origination has indeed picked up to $1.5-2 billion a day, and there is still demand for the product. And there is certainly demand for the Treasury securities – yesterday’s $21 billion 10-yr sale went well. In fact, the bid-to-cover ratio set a record of 3.45:1. Today we have $13 billion of 30-yr bonds to sell, a “re-opening” of the last batch. We have already had the weekly jobless claims and the Trade Balance figures (actually somewhat smaller than expected). Jobless Claims came in at 462,000, down from a revised 468k, but continuing claims were up slightly. The impact on the market of these numbers was nil: the new 10-yr is yielding 3.74% and mortgage prices are worse by about .125.

An Irish priest is driving down to New York and gets stopped for speeding in Connecticut. The state trooper smells alcohol on the priest’s breath and then sees an empty wine bottle on the floor of the car.
He asks, “Father, have you been drinking?”
“Just water,” replies the priest.
The trooper asks, “Then why do I smell wine?”
The priest looks at the bottle, smells it, and exclaims, “Good Lord! He’s done it again!”

Rob
(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx. For archived commentaries, check www.robchrisman.com )

housing and the stock market – The Rubber Hits the Road – John P. Hussman, Ph.D. – … From the pattern we observed during the round of sub-prime resets, delinquencies tended to follow the resets within about 3 months, and foreclosure actions within about 6 months. Although the 2010 peak in the Alt-A / Option-ARM reset schedule doesn’t occur until July, with a much larger peak in mid-2011, a small initial round of resets is already in progress, having started about November of last year. I would expect that if we are indeed at risk of a second wave of mortgage defaults and credit strains, it will show up first as a surprising jump in 30-day mortgage delinquencies in the data we see over the next 2-4 months … – Hussman Funds

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Fighting the Headwind in Housing – Special Housing Market Edition – by Diane Swonk, Chief Economist, Mesirow Financial 

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3 NEAR-TERM RISKS TO THE (STOCK) MARKET – 1) Complacency  2) Catalysts  3) China  -   has charts and commentary – The Pragmatic Capitalist

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new term -   REVERSE FORECLOSURE – Desperate condo, homeowner associations thrown a lifeline – A new maneuver called reverse foreclosure helps condo and homeowner associations collect badly needed overdue maintenance fees. – BY RACHAEL LEE CO – … Under a reverse foreclosure, the association files its own foreclosure notice and takes title, which is its right after the homeowner stops paying maintenance fees. The association can’t sell because of the bank’s lien. But it can renounce its claim on the property in court and ask the judge to give the title back to the bank. Then the bank has to pay the fees.. … – Miami Herald

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4 Biggest Lies in Real Estate – by Ilyce Glink -  CBS Moneywatch

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RESPA legacy? – No More Pre-approval Letters, Say Lenders – By Peter G. Miller – As a result of the new mortgage borrower protections that took effect January 1st, some lenders are now saying they can no longer provide pre-approval letters … – thanks Peter – OurBroker.com 

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Mortgage Principal Writedown Won’t Save Housing – By: Diana Olick – CNBC

Testing the Rate Barrier – Every few months I draw the spotlight on long-term US interest rates as they approach a long held barrier.  Thirty year treasury yields have not been above 4.8% since the fall of 2007 but have tested the 4.7% level about 10 times since then.  I consistently draw attention to long-term interest rates because they are intimately tied to housing affordability and the cost of servicing debt. … – Surly Trader

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contract abrogatiopn ahead? – has slide show – A Preview: California’s Coming War On Banks And Pre-Crisis Swaps – Joe Weisenthal and Gus Lubin -  Clusterstock at
Business Insider

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3 must watch videos: Video From the “Make Markets Be Markets”  Conference Online – Simon Johnson, Elizabeth Warren, Frank Partnoy -  RortyBomb Blog

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Jim Rogers is long the euro – Tim Iacono – Famed investor Jim Rogers talked to Damien Hoffman at Wall Street Cheat Sheet and shared his thoughts about the future of the common currency in this interview:  …. " Either way, I think there’s probably a rally coming. There’s a huge short position in the Euro and whenever there’s been a huge short position in anything, it’s sometimes profitable to go to the other side. So, I am long the Euro because I think there are too many pessimists." … – The Mess That Greenspan Made

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What Gen Y-ers Will Need to Retire – Breaking down Gen Y’s $2 million retirement price tag – By Carla Fried – CBS Moneywatch

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Morgan Stanley: The 15 Must-See Charts That Explain The Global Economy – Vince Veneziani – … Inside the 88-page report is a section called "Charts You Can’t Miss." It’s broken down in the following order of countries: Global economy, Europe, Asia (excluding Japan), and Japan. These charts focus on the underlying issues that truly affect our economy. … – Money Game at Business Insider

At the last company Christmas party the loan agents lined up on one side of the room and the underwriters on the other side. The loan agents throw fire cracker at the underwriters…and the underwriters lit them and threw them back.

A long-time underwriter wrote to me and opined, “Consumers always want more than what they can afford and we gave them exactly what they wanted for the last 10 years (without any prudent financial advice). I actually like the guideline changes and feel it is necessary to eradicate some of the broker mentality that I hear in some underwriter’s voices.  Manufacturing quality is still a problem for the Agencies, and originating mortgage companies are still closing loans that are not 100% purchasable by the aggregators upon delivery.  Fannie and Freddie have technology in place to turn the lender’s cash immediately, and then are rejecting the loans once they figure out all the doctoring that happened to make a square peg fit a round hole.”

Another wrote saying, “I oversee the Secondary desk at our company and I also originate loans. [Interesting.] As difficult as the last three years have been, I am still seeing mistakes due to a lack of educated and qualified workers in our industry.  Unfortunately some of those people are compensated on a per loan basis, possibly even the underwriter.  So until quality becomes a part of our DNA, expect more of the same for the next few years.”

Yesterday I mentioned how the spread between mortgage rates and Treasury rates were the lowest (tightest) they’d ever been. (Remember that any difference is due to a number of factors, including the higher risk in owning mortgages, the possible difference in duration, etc.) Mortgages continued to tighten yesterday – so even if Treasury rates moved higher, mortgage rates might stay the same. Investors want to “own yield”. The usual suspects were in buying: the Fed, money managers, and hedge funds, and it would appear that production volumes are lagging. So although traders were fretting over swap and roll levels, originators are more consumed with the general level of rates, which really hasn’t moved that much in quite some time.

Fair Isaac Company, known as FICO, reported that credit score trends indicate that mortgage default risk for consumers with high FICO scores is now moving toward exceeding their credit card default risk, in spite of the fact that credit cards are generally unsecured and mortgages are secured by real estate. In 2005 bankcard accounts were more than three times more likely to become 90 days delinquent, but in the last few years this has dropped to only 1.6 times more likely. And FICO reports for borrowers scoring high on the FICO score’s range (300-850) the level of repayment risk actually has become greater for real estate loans than for bankcards! And for more fun with numbers, in 2005, 46% of consumers who opened a new mortgage had a FICO score less than 700. In 2008 this percentage had dropped to 25% of the newly booked mortgage population. Fair Isaac reports that borrowers in the Northeast continue to present the least amount of default risk nationally for real estate loans.

Wells correspondent customers were reminded that if at any time a new GFE is required per RESPA regulation, “Wells Fargo will require closed loans submitted for purchase to contain Changed Circumstance documentation explaining the reason for the new GFE.” Wells requires “the initial GFE and any subsequent GFE(s) re-disclosed as a result of RESPA compliance to be included, in the closed loan file, in order of date” and sellers are suggested to use “documentation generated by their own systems and process, or use the optional Changed Circumstance Detail Form 30 (Seller Guide Form 30).”

A new test allows men to check their sperm count at home. At least that’s what the men say they are doing… (This has nothing to do with mortgages, but figured I’d throw it in to see if folks actually read this.)

We began the year believing that rates were heading higher, with the Fed “tightening” and making credit costs higher – but this tightening cycle will be different. There are two policy decisions for the FOMC to make, the first being increasing short term rates, but also having to deal with its asset holdings (all those securities it owns). Obviously some mortgages pay off, but the Fed doesn’t necessarily want to own mortgage-backed securities or agency debt until their maturity in 30 years – they prefer Treasury securities. Watch for selling to start this summer – which could lead to mortgage spreads increasing. One scenario I’d read about stated that if the Fed chooses to leave $1 trillion of 4.5% mortgages on its books as it starts to raise rates, and inflation really picks up, the Fed could find itself paying out 10% or more as interest on excess reserves and receiving only 4.5% on the assets. This, in turn, would lead to $55 billion of annual losses (and $300 billion in mark-to-market losses) will set them up as a politically weak inflation fighting central bank.

How are rate lock periods determined? Companies certainly don’t want to run up against GFE and RESPA issues, for one thing, in setting deadlines. On the investor side, for brokers, Wells Fargo reminded them that “We’re serious about closing purchase deals on time!” Wells will “provide an initial decision within two business days of receipt of the complete file for all first mortgage purchase loans. If you submit your loan with a Wells Fargo Home Equity Line of Credit product, it will also be decisioned within two business days of the first mortgage approval. We can meet the closing date if the loan has been locked and all prior to close conditions (including all pre-close documents) are received at least 10 business days prior to the closing date.” Wells doesn’t outright tell brokers that it will close a loan within whatever lock period the broker sets, but it is almost the other way around. Wells goes on to tell brokers what pre-close documents are needed, how many days ahead of closing brokers should submit a complete file (20 business days), etc.

The MBAA released its weekly survey of applications for the previous week. Apps were up slightly versus the previous week, with refinancing was down 1.5% but purchases showed some life and increased 5.7%.

Yesterday’s 3-yr T-note auction of $40 billion was the fifth consecutive month of this size, and the auction went well. If you think about it, the short end of the Treasury market continues to be well supported with the ongoing sovereign debt issues (there is still some flight-to-quality bid) and outlook of rates. We’ve had three days (including today) of no real economic news, so supply (mortgage selling and the Treasury auctions) is continuing to be the main driver in the market. We have $21 billion of 10-yr notes to buy today. The current 10-yr is yielding 3.72%, and mortgage prices are about unchanged from Tuesday’s close.

Father Murphy walks into a pub in Donegal, and asks the first man he meets, “Do you want to go to heaven?”
The man said, “I do, Father.”
The priest said, “Then stand over there against the wall.”
Then the priest asked the second man, “Do you want to go to heaven?”
“Certainly, Father,” the man replied.
“Then stand over there against the wall,” said the priest.
Then Father Murphy walked up to O’Toole and asked, “Do you want to go to heaven?”
O’Toole said, “No, I don’t Father.”
The priest said, “I don’t believe this. You mean to tell me that when you die you don’t want to go to heaven?”
O’Toole said, “Oh, when I die, yes. I thought you were getting a group together to go right now.”

Rob

(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx. For archived commentaries, check www.robchrisman.com )

To Our Clients, Colleagues and Friends,

• California’s General Obligation bonds yield about the same as bonds from Greece , but anyway, 30-year California G.O.’s are paying 6%.  Because they’re exempt from state and federal taxes, higher-income Californians in a 40% combined federal and state tax rate get the equivalent of a 10% yield. Not bad.
  
• Audited financials are starting to come in, and they’re confirming what we saw all year.  Top performing mortgage bankers made 90-100 bps per loan.  That means that for every $100 million you closed, you should have (and could have) earned $900,000 to $1 million.  If you didn’t make this much, you need to look carefully at why you didn’t.  Or call us for a FOCIS-plus diagnostic to see what you can do to boost earnings per loan.
  
• The top quintile of companies we saw during the year all made over 100 bps per loan, with the top performer making 121 bps. For every $100 million they closed, they made $1.21 million.
  
• We got a tidal wave of Cult Movie nominations.  These were the top vote getters:

Rocky Horror Picture Show was the runaway favorite, but the rest are not listed in any particular order.  The Great Lebowski was a big favorite, and Night of the Living Dead just barely missed. For those of you new to this newsletter, Rocky Horror is a musical about an innocent couple that stumbles upon a castle filled with transvestite vampires.  This was one of Susan Sarandon’s first movies.

• What most mortgage company Boards are somewhat clueless about is their earnings broken down into bps per loan.  We see companies that did, say, $1 billion last year and earned 35 bps per loan.  Although that makes the company a big underperformer, Directors or outside investors go “Gee, how about that, we made $3.5 million. Hot damn!”  The reality is that they could have made at least 90 bps, which translates into $9 million! 
  
• Last week we noted that there are 200 billion stars in our own galaxy, and we asked just how many galaxies there are.  In response, someone sent us this fascinating video clip .    Watching it makes you wonder about all those things like just how big the universe is, does it have an end, if it ends, what’s on the other side, and, hey, aren’t there some Love Boat re-runs on TV right now?
  

• What do you think of mortgage companies that use the word Bancorp in their name?   It’s illegal to use the word bank unless you’re a real bank, but using the word Bancorp is legal.  We know some very decent people that have Bancorp in their name, but we think it’s deceptive. If you’re not a bank, you shouldn’t use language to imply that you are one.

• This is depressing: We just read Time magazine, the one with Tom Hanks on the cover, and it has only 60 pages.  We still have the November 6, 1989 Time which featured the breaking apart of the Soviet Union , and that issue was 119 pages. The latest issue of People magazine is 164 pages.  We don’t even want to know what this says about our culture.
• We knew Marion Berry was a crack head, but we didn’t know what a comedian he is.  He was recently stripped of his committee chairmanship on the Washington , D.C. City Council for illegallly funneling city money to his girlfriend.  Anyway, his response was “You can take away my committee Chairmanship, but you can’t take away my dignity.”  What?   His dignity? This is the mayor who was caught on tape snorting crack, and he’s defending his dignity? This guy should do stand-up comedy. 
  
• If you worry that there will be no one left to refinance soon, you should know that about 37% of all people with a mortgage have loans at 6% or higher.  That’s $1.2 trillion sitting out there, and yes, many can’t be refinanced, but many can.
• And how about good old Suburban Federal Savings ( Crofton , Maryland ) with a 614% Texas Ratio?  Does their President ever get a good night’s sleep?
• A year ago, everyone thought the world was coming to an end and that stocks were going to zero, but that was precisely when things bottomed out and started to turn around.  Here are the top performs of the past 12 months.

A few others: Microsoft (88%), IBM (52%), Coca-Cola (38%), McDonalds (63%) and Wal-Mart (47%).

• When you look at how Fannie Mae and Freddie Mac have changed things, one of the biggest changes is making refinancing much, much easier.  Pre-1986, there was no premium pricing, and thus, there was no such thing as a no-points or no-cost loan.  In about 1986, the two agencies started buying loans at prices above par, and the 1-2 point rebate allowed lenders to pay the loan officer’s commission and some of all of the closing costs.  Prior to this, a refinance would cost the borrower points plus costs, and as a result, it didn’t make sense to refinance unless you could lower your rate by 2.0 points!  Overnight, borrowers could refinance to save an eighth.

• The New Jersey Nets of the NBA are 7-56 for a .111 winning percentage.  If you extrapolate that onto a baseball over a full season, their record would be 18-144.  Even the Washington Nationals aren’t that bad.
• We were talking to a friend at lunch recently and somehow the topic came up of how much safer the world used to be. We’d read that crime rates have been dropping dramatically, so we looked up some FBI data on murder.  
  

This chart shows that the homicide rate is about where it was in 1950.  Here’s a graph going all the way back to 1910.  Look at how close 2008 and 1950 are.

A lot of why we think crime is higher is that the media plays up violent crimes more than in the past. The 24-hour news cycle means that editors are constantly looking for items to fill the hour, so even smaller crimes of violence get bigger play.

• We had a good response to the Steve Dalkowski item, so here’s one more tidbit.  At the end of his career he had a season with a really low ERA.  Manager Earl Weaver had his IQ tested, and when he learned that Dalkowski had an extremely low IQ, he figured out the problem.  Dalkowski just got too mentally flustered trying to handle a fastball low and inside followed by a curve low and away. Weaver told him to only throw one pitch the whole game, all fastballs right down the middle. His theory was that it didn’t matter if the hitter knew what was coming.  At 110 mph, no one was going to hit the ball anyway. See the attached article for more.
• With so many banks re-capitalizing, we remember what Allan Garrett (1917-1992) told us.  He said you should never invest when a company does a recap.  “Always wait for their second offering.”  His view was that most companies underestimate how bad things are and will have to come back to the market at least once more. The guys in the first recap will get diluted, so wait till the second one.

• Have you ever wondered which members get to vote for the Academy awards?  There are 5,777 people who get to vote, broken down per the following.

Can you actually get an Oscar for hair?

• Mike Abdelaaty of Islamic-oriented Bank of Whittier sent us a copy of the Qur’an (Koran) and we finally got around to reading it. It seems very respectful of the Jewish and Christian Bibles, and in some ways, it seems a continuation of both. Prophets such as Moses and John the Baptist are treated with great respect, and it seems to believe in the God of Abraham as well as of Jesus.  There is a popular belief that the Koran preaches violence and intolerance, and we have to tell you, we didn’t see any of that.
• From micro-cap bank newsletter The Vulture’s Roost: “When the FDIC has gotten rid of all its nasty little banks, and the banks that have struggled but didn’t get closed are cleaned up, we think there will be more banks for sale than you can shake a stick at. The Directors and management will be sick of banking. Directors join Boards of banks to hang with their buddies, eat lunch, and fall asleep while management recites its boring litany. They join Boards to be big shots in their communities, but the Directors of problem banks end up being worthless dogs who have lost money for their shareholders and who have to call in the loans of friends. Therefore, we predict that there will be a ton of banks that are ready to sell….”  What’-his-name at the Vulture’s Roost is a sharp bank analyst and a great writer.
• And three cheers for tiny Saint’s Mary’s College here in California .  They finished the season at 26-5 and are headed for the NCAA championships.  Go Gaels!

• The Combined Ratio is a good way to measure insurance companies, and it seems to be just as meaningful for mortgage insurers.  If the number is under 100, you’re making money. If you’re over 100, you’re losing money.

The M.I. companies are going through very difficult times, but the mortgage industry needs them more than ever, and they’ll come back strong.                           
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Garrett, Watts & Co.

Helping lenders increase revenues, control costs, and better manage risk.

• Mike McAuley   (MMcAuley@GarrettWatts.com )
• Corky Watts      (CWatts@GarrettWatts.com) 
• Joe Garrett      (JGarrett@GarrettWatts.com )