On a non-mortgage note, my son asked me, "At what age is it ok to tell a highway that it is adopted? At some point the highway will realize that it doesn't look like the Kiwanis's Club." I would have told him to "keep his day job", except he doesn't have one as he prepares for college. Lots of folks don't have jobs, as re-emphasized by this morning's Initial Jobless Claims number. One industry veteran told me, "The weekly number is just catnip for those who think the economy is limping along," and this morning's numbers came in down 11,000 to 457,000, but continuing claims climbed. Employment is still a huge issue for the economy, but the unemployment situation is certainly helping to keep rates low.

We are not done with implementing the SAFE Act. Several Federal agencies (Office of the Comptroller of the Currency, National Credit Union Administration, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, to name a few) issued final rules requiring residential mortgage loan originators who are employees of national and state banks, savings associations, Farm Credit System institutions, credit unions, and certain of their subsidiaries (agency-regulated institutions) to meet the registration requirements of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (S.A.F.E. Act). The S.A.F.E. Act requires residential mortgage loan originators who are employees of agency-regulated institutions to be registered with the Nationwide Mortgage Licensing System and Registry (registry). Registration includes fingerprints for background checks, and the Act generally prohibits originating residential mortgage loans unless registered (and given a unique "identifier" that remains with you forever).The agencies anticipate that the registry could begin accepting federal registrations as early as January 28, 2011. "Employees of agency-regulated institutions must not register until the agencies instruct them to do so." http://www.fdic.gov/news/news/press/2010/pr10170a.pdf

 

Many investors, and traders, expect mortgage security prices/yields to "grind higher and tighter" compared to Treasury prices/yields. Originators are selling about $2 billion a day, and it is being gobbled up. And why not, since the mortgages backing these securities are so clean and have a US Government guarantee? From an investor's point of view, do they really want to pay 8 points above par (108) for a pool of 6.25% 30-yr mortgages? Will they prepay? And do the pools of newer mortgages (with lower rates) actually have a higher chance of prepaying, given their quality? The inability to refinance these securities is playing havoc on all methods of valuing that risk.

An experience originator wrote to me and said, "The real issues as to why more loans aren't being refinanced include having the big servicers (the top 5 who service 75% of the loans) putting significant credit overlays in place with steep FICO's, DTI's, and many "soft guideline" restrictions that stop borrowers from obtaining a new loan. The MI companies make utilizing Fannie and Freddie's guidelines nearly impossible for any borrower who needs mortgage insurance. Independent of LTV, reducing the debt burden of borrowers will lower the risk of default. Why not let borrowers freely move down in interest rate, continue making payments, and in exchange stop any forgiveness of principal? The GSE's "adverse market fee" (which is really nothing more than a 6 basis point G-fee adder to every issuer) along with the severe LLPA's make the economics of refinancing many folks difficult. And self-employed borrowers... they can't refinance, and that is a significant population. When they start paying taxes, like you and I do, then they'll get a mortgage."

When I think "mortgages" I think of frozen pizza. And vice versa. So I was excited to hear that Chase plans to open new full-service bank branches (including mortgages and business loans) in 22 Albertsons stores in Southern and Central California this year. Several are already functioning, and Chase plans to add a total of 800 branches in the state by year end. That is a heckuva lot of branches. (800 is also, coincidentally, the number of homes in California where the borrower still has equity.)

 

On the "good news, bad news" front, Flagstar Bancorp reported a second quarter 2010 net loss of $97 million. That is worse than its 1st quarter loss of $82 million. But hey - Flagstar had a 26% increase in mortgage originations and a 16% increase in gain on sale margin.

 

For all those servicers out there, Freddie Mac came out with a bulletin announcing a comprehensive update to its Home Affordable Modification Program, "to reflect the changes issued in recent Guide Bulletins 2009-26, 2009-28, 2010-1, and 2010-3, and incorporate certain U.S. Department of the Treasury (Treasury) Supplemental Documentation Frequently Asked Questions (FAQs) into our Guide requirements." http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1017.pdf

CitiMortgage gave its clients a nice 2+ chart of its credit overlays over and above agency guidelines. They are extensive, and clients should look at them in Citi's Correspondent Manual. Items updated from the June CitiMortgage Credit Overlays document include Florida Condos, Cash-Out Refinances, Rental Income, Project Approval (not applicable to FHA/VA loans), verbal VOE's (business days versus calendar days), cash-out refi, etc.

 

Effective immediately, Guild Mortgage will limit the number of loans made to an individual borrower to five.  This includes loans originated by Guild that are sold and serviced elsewhere.  On a case-by-case basis the lender will consider additional loans after the first five (factors contributing to approval would be lower LTV's, high credit scores, etc.).  Guild told brokers that it will enforce a hard cap of 10 loans to an individual borrower.

 

MetLife adjusted its FHA Fixed and ARM guidelines. For flips, the 90-day re-sale requirements cannot be waived if the current sales price is 20% or more than the Seller's acquisition cost. We will still allow for FHA flips under the 20% that are less than 90 days old. (So if someone buys a foreclosure in Detroit for $10,000, and finds a buyer for $12,500, the buyer can't finance it through MetLife - or many other lenders. Let's hope they have cash.) For MetLife, after 8/2 the ratios for manually underwritten DU/LP/loans will change: AUS 36% housing ratio/and 50% DTI ratio regardless of AUS approval; Manual Underwriting: 31% housing ratio/43% DTI ratio; no exceptions to the housing or DTI ratio allowed. For VA fixed and ARM's, after 8/2 AUS: 50% DTI ratio regardless of AUS approval (previously it was determined by the AUS), manual underwriting: 41% DTI ratio, no exceptions allowed (previously, >41% allowed with documented compensating factors).

Goldman Sachs and Citigroup plan to sell $788.5 million of bonds backed by commercial mortgages on 48 properties (78% retail, 10% offices). The commercial market has been basically frozen, with less than $2 billion in commercial securities having been sold so far this year - less than the amount of agency residential mortgages that are sold every day.

 

California could probably learn from lessons from Citi and Goldman, as Governor Arnold Schwarzenegger declared a state of emergency over the state's finances yesterday. The budget is already a month overdue, and currently has a $19 billion shortfall (22% of the $85 billion general fund). Obviously revenue has dropped due to the recession, the housing slump, financial market turmoil and high unemployment. Many states (including NY) don't have budgets yet...across the nation, however, the West Virginia Housing Development Fund announced a new mortgage program where 280 first time home buyer families can qualify for 3.5%, 30-year fixed-rate loans with a zero percent down payment. Financing for the program comes from the sale of $35 million in bonds and a special bond refunding. The program covers new or existing houses, duplexes, townhouses and new doublewide mobile/manufactured homes. It does not cover new or used single- and used doublewide homes. Applications will be taken at banks, mortgage brokers and credit unions.

Tuesday's 2-yr Treasury auction went pretty well, as did yesterday's 5-yr Note sale ("decent" said one trader). It is interesting to note the returns that whoever owns these securities will earn roughly .6% and 1.8% respectively, so in exchange for the safe return of principal someone who has saved up $1 million and invests it in these will earn $6,000 and $18,000 respectively per year. There are, of course, other investment options (like major utility stocks like First Energy or Duke that pay 5-6% dividends, or $50-$60,000 per million, taxable), but such is the price of safety.

Action in the bond market was pretty quiet until the Fed's Beige Book reminded us that the economy is indeed slow, and the 5-yr auction was well received. 10-yr notes rallied .375 in price, closing at about a 3% yield - which is where it is this morning. MBS prices closed higher by almost .250 in price, "tightening" even further. Originators only sold $1.4 billion of mortgage-backed securities.

 

Today the only news has come out already: Initial Claims, which dropped slightly (noted in the first paragraph. Basically, people who don't have jobs don't go out and spend much money, so it is near-impossible for an economy to pick up steam with that staring us in the face. (We did, however, have a little decent housing news earlier this week with the Case-Shiller home price numbers, showing some modest appreciation.) We have the final leg of the latest round of coupon auctions from the Treasury with $29 billion 7-year notes at 1PM EST. The 10-yr is sitting at 3%, and mortgage securities are a shade better.