by David Lykken, Managing Partner, Mortgage Banking Solutions a leading consulting firm to the mortgage industry.

HUD’s press release below may seem like “old news” to some, but you may be surprised how many mortgage executives are not getting the message. For this reason, this press release needs to be republished weekly.

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HUD INSPECTOR GENERAL PROBES MORTGAGE COMPANIES WITH SIGNIFICANT CLAIM RATES

WASHINGTON – U.S. Department of Housing and Urban Development (HUD) Inspector General Kenneth M. Donohue and Federal Housing Administration (FHA) Commissioner David H. Stevens announced today an initiative focusing on mortgage companies with significant claim rates against the Federal Housing Administration mortgage insurance program.

To read the full press release, click on the following link.

http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-005

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“Houston, we have a problem” is apropos to this discussion. Folks, HUD is signaling that there is a big problem out there in ‘mortgage-land’ and we need to recognize it. What I find astonishing is the number of mortgage company executives and business owners doing business with HUD that do not know what their company’s HUD compare ratio is. Even more surprising, some don’t even know what a HUD compare ratio is. Ignorance is not a defense. If you don’t know, go to https://entp.hud.gov/sfnw/public/EarlyWarnings.cfm and look up your own compare ratio. And while you are there, you may want to check out the compare ratio of the companies with whom you are doing business or considering doing business. You may be surprised.

Another alarming rational I hear as to why some mortgage executives want to get their company approved by Ginnie Mae is this… “So we can get around the stringent ‘restrictive’ credit overlays of bank correspondent lenders and ‘sell’ directly to Ginnie Mae”. As Mark Twain said, “To ‘succeed’ in life, you need two things: ignorance and confidence.” It would seem that there is some amount of both in our industry today. When Warren Buffett said, “When you combine ignorance and leverage, you get some pretty ‘interesting’ results,” I wonder if he was talking about some of the attitudes present in the mortgage industry today?

Being an optimist, I want to believe it isn’t too late. Yet each week more and more articles are focusing on the future of HUD with a question mark. It seems as if the questions are growing at a rate faster than the answers… not an encouraging trend. The thought of HUD not being there as we have known was unthinkable a short time ago. Yet today, we face the distinct reality that the “unthinkable” is possible, although I want to believe, avoidable. HUD Inspector General Donohue and FHA Commissioner Stevens are doing everything possible to shore up HUD’s foundations and preserve not only our industry but the foundation of our economy… housing!

We all need to get behind what is being done specifically by Commissioner Stevens by: (#1) educating the ignorant, (#2) by publicly supporting Commissioner Stevens initiatives to “raise the bar” on the loans being insured by HUD and (#3) refuse to do business with companies that are refusing to take the necessary steps to make the HUD programs strong again.

With that in mind, I launched a weekly radio program last year where we digest and discuss the hottest and most relevant topics facing our industry each and every week. For example, we discuss regularly the Tsunami of regulations flooding our industry as well as the latest initiatives by HUD to shore up and strengthen the Department.

Please join me each Monday, Noon Central, along with my regular guests, Alice Alvey of Mortgage-U and Joe Farr of MBS Quoteline, as well as other special guests by clicking on this link… http://www.blogtalkradio.com/search/lykken-on-lending/ I welcome your feedback and any “hot topic” suggestions you might have. If you are interested and your topic is relevant, I would welcome having you as a guest on the program. If interested, please e-mail at Dlykken@MortgageBankingSolutions.com or call (512) 977-9900 ext. 101.

Father Murphy waited in line to have his car filled with gas just before a long holiday weekend.
The attendant worked quickly, but there were many cars ahead of him.
Finally, the attendant motioned him toward a vacant pump.
“Father,” said the young man, “I’m so sorry about the delay. It seems as if everyone waits until the last minute to get ready for a long trip.”
The priest laughed, “I know what you mean. It’s the same in my business.”

Markets don’t wait until the last minute, since they are usually driven by fear and greed.Yesterday’s Fed announcement, although it was nothing new and left overnight rates unchanged, caused an immediate improvement in stocks and bonds. In mortgages, with originators selling and the Fed, hedge funds, Asian investors, and money managers buying, rates improved and caused several investors to improve prices. One interesting thing to note is that Ginnie Mae securities, made mostly up of FHA and VA loans, are seeing continued interest from domestic and overseas banks for their reinvestment money (from buy backs) adding support to those prices.

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

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

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

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

Risk and pricing engines out there continue to react to investor changes. ChaseCorrespondent updated its Conventional products product lines. Flagstar’s correspondent channel updated its Fannie & Freddie fixed-rate product lines and Guaranteed Rural Housing product. US Bank National Correspondent updated its VA product line. ING revised several of their submission forms. Plaza Mortgage offering Home Path, Fannie’s fixed-rate, fully amortizing loan that provides financing for properties owned by Fannie Mae through foreclosure or a deed-in-lieu. Caliber told clients originating loans in Texas that “If the property is the borrower’s rural homestead,” it must meet additional requirements.

Some mortgage security traders believe that we will all be better off with the Fed out of the MBS business, and that overseas investors and banks are expected to be key new buyers of Agency MBS, thus providing confidence to other investor groups to follow suit. A growing trade deficit and persistently steep yield curve may lead overseas investors and banks to increase MBS holdings. In a related issue, “foreclosure to REO transition rates” rose modestly this month across all sectors after falling for two years or more in most cases, as the foreclosure process has been stalled. REO pipelines have grown mildly lately after shrinking in 2009. As homes get pushed through loan modification evaluation, look for a change. Any increase in home prices would be positive, and as most folks in the business know lower priced homes have been performing better than higher ones, a partial cause for the slight improvement in subprime default rates.

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

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

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

Paddy was driving down the street in a sweat because he had an important meeting and couldn’t find a parking place. Looking up to heaven he said, “Lord take pity on me. If you find me a parking place I will go to Mass every Sunday for the rest of me life and give up me Irish whiskey!”
Miraculously, a parking place appeared.
Paddy looked up again and said, “Never mind, I found one.”

Walking into the bar, Mike said to Charlie the bartender, “Pour me a stiff one – just had another fight with the little woman.”
“Oh yeah?” said Charlie, “And how did this one end?”
“When it was over,” Mike replied, “She came to me on her hands and knees.”
“Really,” said Charles, “Now that’s a switch! What did she say?”
She said, “Come out from under the bed, you little chicken.”

Rob

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

From March 15, 2010 Chicago’s Top Employers from Crain’s Chicago Business –

1) US Government
2) Chicago Public Schools
3) City of Chicago
4) State of Illinois
5) Cook County
Does anybody see a problem here?  -       hattip Jim Chavoen

+ +

Michael Burry M.D. – the first person to discover the subprime short trade – This Vanity Fair article is long, fascinating, and a must read. – Vanity Fair

and
videos – here is the 60 Minutes piece on Michael Buerry – courtesy of Bary Ritholz’s Big Picture Blog

and
Book Review: Investors Who Saw Crisis Coming – …  Michael Lewis’s new book “The Big Short: Inside the Doomsday Machine.” …l -  NYT Dealbook

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Credit Suisse: The Upcoming ETF Unwind Will Pummel Gold – Vincent Fernando, CFA – - Money Game at Business Insider

and
video: Faber: Time To Ditch U.S. Treasuries - Vincent Fernando – Mr. Marc Faber is pounding the table hard, warning that investors should get out of U.S. bonds: … – Money Game at Business Insider

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The Inflation Myth – By Rana Foroohar – … A recent Bank of America/Merrill Lynch report notes that in 18 of the world’s 30 richest developed economies, core inflation (not including food and energy) is down from its peak in 2008, and continues to fall. High unemployment, empty offices, and shuttered factories have put extra slack in developed economies, meaning there’s little pricing power for anyone, and thus little chance of inflation in the near term. … – NEWSWEEK

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A Quick Reminder: Here’s The Real Problem – Here’s one of the only economic charts that really matters: Total U.S. debt to GDP … – Money Game at Business Insider

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IS CHINA ABOUT TO LEAD US INTO A DOUBLE DIP? – China has been and remains the strongest leg of the economic recovery.  While most other countries remain entangled in a weak recovery or no recovery at all, China’s economy appears to have surged back to its pre-crisis growth rates.  But as the old saying goes, if it seems too good to be true it probably is. – The Pragmatic Capitalist

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Is China’s Politburo spoiling for a showdown with America? – By Ambrose Evans-Pritchard – The long-simmering clash between the world’s two great powers is coming to a head, with dangerous implications for the international system. - China has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy. – Telegraph.co.uk

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CHART OF THE DAY: The 40-Year Hollowing Of American Industry- Joe Weisenthal and Kamelia Angelova – … Bottom line, if historical trends stay in place, capacity utilization won’t even rise to the last level of the last boom. So if we want anything approaching full employment, you better pray for another economy-distorting bubble. … – Clusterstock at Business Insider

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this is not happy – be warned – good article – How a New Jobless Era Will Transform America – By Don Peck – The Great Recession may be over, but this era of high joblessness is probably just beginning. Before it ends, it will likely change the life course and character of a generation of young adults. It will leave an indelible imprint on many blue-collar men. It could cripple marriage as an institution in many communities. It may already be plunging many inner cities into a despair not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years to come. – The Atlantic

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it’s coming – The Magic of Inflation – Gary Tanashian – … How can I be when I am what some would call an ‘inflationist’, meaning I believe inflation is a systematic and willful tide designed to lift as many boats as possible with some boats rising much more than others.  … – Seeking Alpha

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Dollar Will Retain Reserve Role If Markets Stay Sound, S&P Says – By Oliver Biggadike – Bloomberg BusinessWeek

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Fed Getting Ready to Remove Security Blanket for Markets - By: Albert Bozzo – … The big question is how much mortgage rates will rise and how quickly as a result, even if the central bank has kept the door open about reviving the program. … – CNBC