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One of the big differences in bonds backed by the U.S. Government and those backed by first liens is that when rates decline, US Treasury securities don’t pay off. Borrowers historically do refinance, and many a loan agent has a book of business based on refinancing. This time around, however, things may be different. Although mortgage rates are approaching the levels in 2002/03, unfortunately refinancings should be significantly lower. First, jumbo loan (and alternative documentation) availability is very limited due to underwriting guidelines, securitization economics, and bank balance sheet constraints. Second, even with FNMA & FHLMC, the soft housing market and increasing guarantee fees should keep refinancings slower than in previous years. The good news is that investors are more interested in owning securities backed by mortgages than they were in the past due to a lower fear of refinancing! Once again, let’s hope for an increase in loan limits, and finding borrowers with equity and that can qualify is job #1.

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What happens when the Fed cuts rates? Well, yesterday was practically one for the record books, with two-day volatility not seen since the late 1980’s. In spite of yesterday’s move, the market is pricing in further cuts at the meeting Tuesday & Wednesday. Rates have dropped since the beginning of 2008, and looked absolutely fantastic Tuesday and first thing yesterday morning. But then the tide turned, impacting those who waited to lock for whatever reason. The stock market underwent a 600 point swing, mortgage securities worsened in price between 1 and 2 points, depending on the coupon. Franklin American sent out 6 different rate sheets, Taylor Bean sent out 4. Chase worsened their rates by .375%. The speed of changes were lightning fast, and lenders across the nation underwent numerous changes, with some investors basically pricing themselves out of the market in mortgages regardless of the actual mortgage-backed securities market. This morning after a basically unchanged Jobless Claims number the 10-yr stands at 3.57% and mortgage prices have stabilized.

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According the AP, French bank Societe Generale said Thursday it has uncovered a $7.14 billion fraud by a single futures trader who orchestrated a series of bogus transactions. One of history’s largest, the fraud destabilized a major bank already exposed to the subprime crisis. France ’s second largest bank by market value said it must seek $8 billion in new capital, and the chief executive offered to resign. “Off with his head!”

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Company news:

• Effective Feb. 1, 2008, Wells Fargo Funding will no longer purchase Desktop Underwriter loans that received an Expanded Approval recommendation or Freddie Mac LP A-minus loans approved either under the Seller’s Delegated Underwriting authority or via Third Party Contract Underwriting and Prior Approval.
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• MGIC of Milwaukee is projecting incurred losses for the fourth quarter of around $1.3 billion.

What is the latest on broker business? JP Morgan released a study (that I have only heard of) saying that delinquencies on broker-originated loans are three times higher than on loans originated in-house. Countrywide is very active in wholesale lending with brokers, and they have repeated that they are committed to it. But BofA closed wholesale last year, and brokers are hoping that it was due to their position in Countrywide. BofA’s Ken Lewis has said that they aren’t attracted to the mortgage industry’s business model. "We like the product, but we don’t like the business," he said. And with borrowers acutely aware of yield spread premiums on their closing docs, the ability to get rate quotes on-line, and the bad press from a few bad brokers resulting in potential governmental action, brokers are feeling pinched. And, of course, brokers have to disclose the yield spread premium, whereas agents from mortgage banks, such as NL Inc., and banks don’t have to disclose it. But, as we all know, the YSP often times help borrowers find a lower rate.