Any of our agents who locked in borrowers prior to the last few days is feeling pretty good. Especially with the 10-yr hitting 3.95% this morning, and mortgage prices worse by another .250. Haven’t you heard? We’re done with the worst of it, the economy is going to pick up speed and great times are ahead! Can we really forget that foreclosure filings for April rose 65% on a year-to-year basis and 4% from March? According to RealtyTrac, there were foreclosure filings on 243,353 properties last month. Nevada had the nation’s highest state rate last month. The highest total foreclosure-filing belongs to California, with 64,683 properties, followed by Florida, Ohio, Arizona and Texas. Merced, Calif., led tracked metropolitan areas in filing rates, trailed by Stockton, Modesto and Riverside-San Bernardino, Calif.; and Cape Coral-Fort Myers, Florida.

This morning we had April’s Consumer Price Index. Expected +.3%, prices only rose 0.2%. Core prices, which exclude volatile food and energy, were up just 0.1%, half the increase analysts had forecast, but energy prices are up 15.9% percent from the same time a year ago. (Later we have the Atlanta and Boston Fed presidents speaking.) Yesterday’s data was really a double-whammy of higher growth and higher inflation, and that’s pushing yields up and leading to a flattening of the curve. Oil reached $126.98 a barrel, a record high. There is a 92% chance the Fed will hold its target lending rate at 2% into the summer, and traders also see a 43% chance the central bank will increase overnight funds to 2.25% by year-end.

First Horizon National Corp. is reportedly considering the sale or elimination of its mortgage business that could happen in the next three to four months, according to a report from Morgan Keegan & Co. Monday. First Horizon’s mortgage business employs more than 3,600 people in 250 locations, and the reduction would impact 230 branches and 2,200 employees. The company has about $4 billion in mortgage loans on the books. Check out the bizjournals article

Last week the House passed legislation that aims to refinance troubled mortgages and increase demand among first-time homebuyers. The President has threatened a veto, and the position of the Senate is unclear.  But, regardless, at some point federal intervention still appears likely. The policy differences aren’t as large as rhetoric implies, and enactment of some type of legislation could slightly help the decline in home prices by reducing the number of foreclosures and increasing demand among first-time homebuyers – at a cost to taxpayers.

There is no agreement on the bill yet as several Republicans view the plans as a bailout for lenders, speculators and irresponsible homeowners. The program involves giving struggling homeowners a new mortgage backed by the FHA. The Democrats believe that it would cost much less compared to the potential government exposure with the Fed’s guarantee in the Bear Stearns case, and as mentioned above the president may veto it. On top of Congressional differences, lies the threat of a White House veto of the bill, asking the question, “Why should the taxpayer, through the program, provide a guarantee of principal if lenders agree to reduce the principal of a borrower’s current mortgage?” This is a volunteer program by which a mortgage company would be required to write-down the value of a delinquent loan by 15% of the home’s current appraised value for borrowers who are 60 days late on their mortgage payments. The bill specifically excludes investors and those that lied about their income on the loan application. The bill also proposes an overhaul of Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks as well as bringing the FHA into the 21st century. Stay tuned as the saga unfolds.

• Last year I received several questions about finding investors for loans in Mexico. For some unexplained reason those questions have gone away, but for anyone interested in where mortgage lending stands in Mexico, check out MexiData.info  
• HSBC announced what they expect for appraisals in soft markets. “In addition to standard appraisal policies, the appraiser will be required to provide the following where a property has been identified as being in a soft or stressed market or the LP findings include an Excessive Value Feature statement. Items include three (3) sales closed within the last six (6) months, one (1), preferably two (2) comparable pending sales validating the market is at least stable, and the appraiser must detail neighborhood marketing data for any changes from the most recent quarter for which data is available.
• Both Chase and Flagstar announced “significant improvements” to Agency Jumbo pricing. Chase, however, went on to announce the elimination or additional requirements for loans with LTV’s >80% in declining markets as a result of continued mortgage insurance industry changes, and the elimination of their Flex97 and Alt97 programs.
• The Mortgage Bankers Association said that mortgage application volume rose 2.9% percent last week. Refinance volume increased 6.5% during the week, while purchase volume fell 0.7 percent, and refinance volume accounted for 48.7% percent of total mortgage applications.

Why I Fired My Secretary…

Last week was my birthday and I didn’t feel very much like waking up that morning. I went downstairs for breakfast hoping my wife would be pleasant and say, “Happy Birthday!” and possibly have a present for me. As it turned out, she barely said good morning, let alone “Happy Birthday.”
I thought… well, that’s marriage for you, but the kids will remember. My kids came to breakfast and didn’t say a word. So when I left for the office I was feeling pretty low and somewhat disappointed. As I walked into my office my secretary Donna said, “Good Morning, Boss, Happy Birthday!” It felt a little better that at least someone had remembered.

I worked until one o’clock and then Donna knocked on my door and said, “You know, it’s such a beautiful day outside, and it’s your birthday, let’s go out to lunch, just you and me.”
I said, “Thanks Donna, that’s the greatest thing I’ve heard all day. We went to lunch, but we didn’t go where we normally would go. We dined instead at a little place with a private table. We had two martinis each and I enjoyed the meal tremendously.
On the way back to the office, Donna said, “You know, it’s such a beautiful day. We don’t need to go back to the office, do we?”
I responded, “I guess not. What do you have in mind?”
She said, “Let’s go to my apartment.”
After arriving at her apartment Donna turned to me and said, “Boss, if you don’t mind, I’m going to step into the bedroom for a moment. I’ll be right back.”
“Ok.” I nervously replied. She went into the bedroom and after a couple of minutes she came out carrying a huge birthday cake…followed by my wife, kids, and dozens of my friends and co-workers; all singing “Happy Birthday.”
And I just sat there…

On the couch…

Naked.

Rob Chrisman

To Our Clients, Colleagues and Friends:    

· P M I lost $274 million for the quarter, but the good news is that the company wrote off the final $103 million in FGIC, and the carrying value of the holding is now zero. We think things will start looking better in a quarter or two.

· Ever wonder what happens when banks fail?  Well, here’s  a pretty good summary: Over the weekend, the OCC shut down ANB Bank and cut a deal with Pulaski Bank to take it over.
(a) Pulaski took over $213 million in FDIC-insured deposits (i.e. those under $100,000) and paid a minuscule 1.091% premium for them, (b) they assume only $2 million in loans, and (c) for the difference in loans that they didn’t take, they got cash.  This was all done over the weekend, with the branches closing Friday as ANB and opening on Monday as Pulaski branches.  What a sweet deal for Pulaski, getting all those deposits and no nasty loans, just cash.

· Ten years ago today, Frank Sinatra died. We happened to be walking along Columbus Avenue on the Upper West Side of New York that evening, and it was the eeriest thing.  Every bar, every restaurant, every boutique had its doors and windows open, and every single one was tuned to the same station playing his songs.  We walked for what seemed like miles listening to his music pour out onto the sidewalks. We wonder if young people ever play his music for that last, slow dance of the evening.

· Michael Jackson’s Neverland Ranch just missed a foreclosure auction last week.  The Ranch was  bought at the last minute by Colony Capital for $20 million, whoever they are.  Interestingly, the lender was Fortress Investment Group.  We wonder what rate they charged.

· At the Bank of America, California & Florida account for 40% of home equity balances, and these two states alone were responsible for 52% of 1^st quarter delinquencies & 62% of net charge offs. Having said that, charge offs were surprisingly low. Smart bank that they are, they say that they like HELOCS  and will start growing them once things settle down.  We like that. We think the BofA is a great bank.

· Are you possibly reading this at breakfast?  Here’s what Winston Churchill had to say about the morning meal.   “ My wife and I tried to have breakfast together once forty years ago, and it was so disagreeable, we decided to never try it again.”  Funny. 

· Travel-tip: Many years ago there was a rock band called the Mothers of Invention, with a scraggly leader named Frank Zappa.  While they received only brief fame in the U.S. , they apparently caught someone’s attention in Lithuania .  The capital, Vilnius , like most East Europeans capitals, has very few public statues.  The reasons is that until 1991 or so, most were statues of Lenin, Marx or Stalin, but they all got torn down in the various revolutions. Well, when you’re walking from Vilnius Banka to the KGB Museum , you see a statue and you realize it’s the first one you’ve seen in days.  So you look up, and it’s a huge statue of Frank Zappa!  How bizarre.  We never did learn what his statue was doing there.

· We are noticing that many clients are playing offense again.  Playing of defense may have been necessary the past 6-9 months, but we like the spirit of those who are adding retail branches, recruiting loan officers, and aggressively growing their business.  For most retail shops, there are few better uses of the CEO’s time and energy than in recruiting top loan agents whose shops may be closing or hurting.
At some point, lenders playing too much defense look a lot like they’re shell-shocked.  Get out there and take your story to the legions of loan officers who are looking for a solid place to work.  They won’t come to you.  You need to woo them.  We see good recruiters succeeding at this every day.  If you’re the CEO, you should be setting aside several hours a day to recruiting good talent to your company.  It may be one of the best uses of your time.

· On May 13,  1912, a small dinner for four was held in Paris :  The four were Marcel Proust, Pablo Picasso, Stravinsky, and James Joyce.   What an interesting group!  By the way, if you could have dinner with anyone in history, who would that be?   

· Who will be the candidates for Vice-President?  One idea goes all the way back to the Democratic ticket of 1956.  With Adlai Stevenson at the top of the ticket, the Democrats shrewdly nominated Senator Estes Kefauver.  Their theory was apparently that if, God forbid, something were to happen to Adlai, the nation would still be led by someone with a funny name.  

· A good example of how maintaining high liquidity can allow you to take advantage of opportunities.  Redwood Trust says that since the beginning of the 2^nd quarter,  it has invested $84 million in highly rated securities which it purchased at 72 cents on the dollar. You’re not only getting a higher yield, but when individual loans backing the securities pay off, you make a nice 28 point gain (100 – 72).

Our Thought for the Day:  Two years ago it was almost impossible to recruit good people.  Now is the time to do it.  Target specific people, and have a plan for winning them over.  But don’t take a shotgun approach. Have specific targets, and as in everything, have a specific plan.

Joe Garrett and Corky Watt  -  Garrett, Watts & Co.

California man losing nine homes in mortgage mess - Dan Whitcomb -  Reuters

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JPMorgan: 1 Million Sq Ft of Office Space ‘will be eliminated’ - CalculatedRisk 

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Why Investors Fail - … will show you a simple way to put yourself in the top 20% of investors. … - John Mauldin’s Weekly E-Letter 

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The Coming Mortgage Crisis Part III: Low Interest Rates Do Not Make Housing More Affordable -   Michael Goode -  Goode Value Investing Blog 

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Asking Prices Stage Rebound in Key Housing Markets - PAUL JACKSON - housingwire

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 Halfway Through the House-Price Bust? - Posted by Barry Ritholtz - The Big Picture

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EXCELLENT: TAKE TIME TO LISTEN TO THIS - I know some of these people - do you? - Podcast - NPR CHicago - 355: thanks to X - The Giant Pool of Money - A special program about the housing crisis. We explain it all to you. What does the housing crisis have to do with the collapse of the investment bank Bear Stearns? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money. - Chicago Public Radio 

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Variations on the Subprime Lawsuit Theme - Kevin LaCroix - … I suspect there are hosts of new variations yet to come, but the most recent subprime-related lawsuits are substantially similar to prior lawsuits. Yet each one, briefly noted below, also involves some interesting additional variations on previously established subprime litigation themes. … - D&O Diary

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HUD Approves Borrower Paid Counseling For Reverse Mortgages - Reverse Mortgage Daily

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PMI Group trims losses to $274 million - Fannie, Freddie seek remediation plan - Inman News 

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The NYT Calls for Unaffordable Housing - The NYT took a strong position on its editorial page today demanding that President Bush join its effort to keep house prices unaffordable for tens of millions of families. That’s right, the NYT wants housing to be unaffordable. - Dean Baker - American Prospect

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Tax Assessors Nightmare - The Atlanta Journal Constitution is writing Tax assessors boggled by housing dip. - For less than the price of a decent used car, you can buy a home in Atlanta today. Actually, real estate agents list a dozen choices for $10,000 or less. Step up in price to $20,000 and your choices expand 10 fold.   - Michael Shedlock - globaleconomicanalysis

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1. Economist Recession Odds Tick Lower - … a chart of recession odds from the monthly Bloomberg economist survey versus the Intrade contract for a recession in 2008 going back to the start of the year.  - Bespoke Investment Group  
1.  Consensus Economist Estimates - another great chart from Bespoke Investment Group 

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Conflicted Agents and Platonic Guardians: Interview with Alex Pollock - The Institutional Risk Analyst 

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Survey of Professional Forecasters -  Forecasters See Home Prices Declining Over the Next Two Years and Rebounding in 2010 - paper at Philadelphia Fed

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What Could I Get for my House? Please, Don’t Ask - Phyllis Korkki - NY Times 

posted by Bill Coppedge

CAROLINE BAUM - Election Year + $124 Crude Oil = Silly Solutions -  Bloomberg

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UK: Market for offloading bad debt balloons as banks free up capital - IHT

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InfoWorld launches drive to save Windows XP - Sign the petition at www.SaveXP.com today 

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Financial Market Tremors: Causes and Responses - Richard W. Fisher -  Federal Reserve Bank of Dallas

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Foreclosure Bargains on the Block - Even in affluent communities, foreclosures often offer a chance to buy a luxury home for as much as 40% or more off the market value - Prashant Gopal -  BusinessWeek

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As Greenwich Goes..? Maybe Rich Aren’t Immune In Housing Crisis - Diana Olick - CNBC 

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PMI Gets Aggressive on Loan Modifications - The PMI Group, Inc. said late Friday that it had loosened its previous restrictions on loan modifications, in a clear effort to empower servicers to do more to keep troubled borrowers in their home…  - housingwire

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Find out if you are financially fit to buy a home - Tumbling prices raise concerns about getting into the real estate market now. Here’s how to judge if you are ready to buy. - Kathleen Connell - CS Monitor

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After subprime fiasco, risk models may weigh human behavior - Quantitative methods remain, but social sciences added to mix  - Marine Cole - thanks Ira Artman -  FinancialWeek

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Homeownership Rates Slipping, Vary By Region - Jonathan J. Miller - Matrix Miller-Samuel

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Reverse Mortgage FHA Modernization Update - John Yedinak - Reverse Mortgage Daily

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Credit lines are vanishing as property values plunge - VIVIEN LOU CHEN - Countrywide suspends almost all home-equity lines in Las Vegas - Bloomberg News - Charlotte Observer

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What if we’d been on the gold standard? - James Hamilton - If the U.S. had decided to go back on the gold standard in 2006, where would we be today? That’s a question my friend Randy Parker recently asked me. Here’s how we both would answer. - Econbrowser

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great idea - read this - Saving the Economy with IRA Funds - Stan Muse - seeking alpha

posted by Bill Coppedge

This morning, we have Fed Chairman Bernanke saying that credit spreads are too wide. But there was certainly good news yesterday, with Fannie’s Capital Markets Sales Desk executing their first MBS Jumbo Conforming trades. Their Desk purchased pools “flat to TBA”, which means at the same price as “To Be Announced” (generic) bonds!

Unfortunately this morning the news was not “rate friendly”. Retail Sales, expected down .2%, were down .2%, but when automobiles are factored out, Retail Sales were actually +.5%, much stronger than expected. We also had Import Prices, +1.8%, and year-over-year +15.4%. So not only is the consumer apparently doing ok, but they’re buying goods impacted by inflation! In fact, Fed Funds futures are pointing to an increasing chance that the Fed will raise rates later this year! We have the Cleveland , San Francisco , Kansas City, and Dallas Fed presidents speaking, in addition to Fed Chairman Ben Bernanke speaking at the Atlanta Fed’s Financial Market Conference. Currently 30-yr mortgage prices are worse by about .375, and the 10-yr yield is up to 3.86%.

Many believe that a credit crunch will prevent the economy from growing in the coming quarters, but given some of the economic numbers recently it would indicate that the main impact has been on the residential and commercial real estate markets and not some of others. Excess supply in the housing market is still growing, vacancy rates are climbing, and home prices are falling, increasing existing LTV’s. (Remember that an investor may have purchased a pool of loans with a 80% LTV a year ago, only to price it now realizing that the LTV may be 90% or higher. An interesting contrast to studies that show 33% of homes are owned free and clear.) Therefore, some analysts believe that write downs will continue. But doe the housing downturn simply represent a shock to housing & credit? Or will it continue to ripple down into other segments of the economy? The stock market’s performance has been relatively stable, all things considered…

MGIC weighed in with more changes, effective with MI applications received June 1, 2008. The following will no longer be eligible for MGIC mortgage insurance:

Expanded Criteria / A-minus loans, Reduced Documentation / Alt-A loans, Investment properties, Cash-out refinances, 3- to 4-unit properties, loans with potential negative amortization, Nonwarrantable condominiums (per GSE definitions) & Condotels.

John was a salesman’s delight when it came to any kind of unusual gimmick. One day he came home with another one of his unusual purchases: a robot that John claimed was actually a lie detector.

It was about 5:30 that afternoon when Tommy, their 11 year old son, returned home from school. Tommy was over 2 hours late.

“Where have you been?  Why are you over 2 hours late getting home?” asked John.

“Several of us went to the library to work on an extra credit project,” said Tommy.

The robot then walked around the table and slapped Tommy, knocking him completely out of his chair.

“Son,” said John, “this robot is a lie detector, now tell us where you really were after school.”

“We went to Bobby’s house and watched a movie,” said Tommy.

“What did you watch?” asked Marsha.

“The Ten Commandments.” answered Tommy. The robot went around to Tommy and once again slapped him, knocking him off his chair once more.

With his lip quivering, Tommy got up, sat down and said, “I am sorry I lied.  We really watched a tape called S– Queen.’’

“I am ashamed of you son,” said John. “When I was your age, I never lied to my parents.”

The robot then walked around to John and delivered a whack that nearly knocked him out of his chair.

Marsha doubled over in laughter, almost in tears and said, “Boy, did you ever ask for that one!  You can’t be too mad with Tommy.  After all, he is your son!”

With that the robot immediately walked around to Marsha and knocked her out of her chair.

Rob Chrisman

The Week Ahead in the Capital Markets

May 12, 2008

“We are closer to the end of this problem than we are to the beginning.” – Treasury Secretary Paulson

I also made some optimistic comments several weeks ago, and paid the price. “You’re crazy – the worst part of the storm is yet to come,” said one friend. “Premature extrapolation!” said another. “Just wait until the baby boomers start to sell their homes. Then we’ll really feel the pain,” said one more.

AN INSIDER’S VIEW FROM THE CAPITAL MARKETS COOPERATIVE TRADING DESK:

“If some say we’re headed for better times, and others fear the worst is yet to come, where can we find an accurate measure of the market? I believe in the wisdom of the market crowd, and the crowd is telling us that while the peak of the crisis may be behind us, the level of risk is still very high and has increased in the past two months.

Evidence of this market sentiment abounds: swap spreads (the difference between LIBOR and Treasury yields) remain at twice the level they were a year ago; daily fed funds volatility is three times its level of a year ago (thanks to Dr. Giles at Columbia Univ for this tidbit); fed funds futures still show a bias towards easing; and the spread between mortgage and Treasury yields, while much narrower than two months ago, is historically wide at 2.45%.

Specifically regarding fed funds, the futures market does not expect any movement from the Fed in the near term. Futures contracts are essentially flat at 2.00% until early 2009. During the first half of 2009, however, the market expects the Fed to begin tightening, taking funds to 2.75% by early fall. Inflation is still a concern. Crude oil jumped 8.3% last week to $126 per barrel, and Barron’s reports that foreclosed houses “sport signs declaring ‘PVC Pipes Only’ to discourage the looting of copper fixtures.”

Certainly the recovery will take a while, and test everyone’s patience along the way. It reminds me of the old Marine Corps command: ‘You, you, and you … Panic. The rest of you, come with me.’

Fannie Mae showed courage in the face of increased credit turmoil last week. They announced broad initiatives titled ‘Keys to Recovery.’ The package is a basket of reforms, including aggressive jumbo pricing and relaxed restrictions on refinance activity. We look forward to the positive effects of these initiatives.” (CMC traders price, hedge, and sell $billions of mortgages for their clients, and offer a front-line perspective on the markets.)

Yeah, not looking good for Hillary. Today, even Yogi Berra said, “It’s over.” – Jay Leno

Thanks for your business and have a good week. – Tom Millon

About Capital Markets Cooperative
Capital Markets Cooperative (CMC) provides mortgage bankers with the economies of scale and the expertise to reduce risk and maximize profit in the secondary market. Regarded as the premiere secondary marketing specialist in the industry, CMC has worked with financial institutions nationwide to break traditional barriers in capital markets and take performance and profits to the next level. To date, CMC executives have managed more than $500 billion of mortgage volume. CMC board members are Tom Millon, Jeff Harry, and Harold Koegler.

For more information about Capital Markets Cooperative, visit www.capmkts.org or call 904.543.0052 or e-mail info@capmkts.org. This e-mail is not a solicitation or investment advice of any kind. You may change your e-mail address, or if this e-mail has reached you in error, or you do not wish to continue receiving it, please let us know by replying to tmillon@capmkts.org.