“A recession is when your neighbor is out of work, a depression is when you’re out of work.” Economists like to define a recession as, “An extended decline in general business activity, typically two consecutive quarters of falling real gross national product.” But that definition lags real time – what is going on now? Consumer confidence is the lowest it’s been in 5 years, which is easy to understand with food & energy prices heading up, housing in a slump, banks taking losses, and a soft labor market.

U.S. Construction Spending fell 1.7% in January, more than expected, and was the sharpest since a 3.6 percent deceleration in January 1994 and marked the fourth straight monthly drop. The Institute for Supply Management released its manufacturing index, however, which at 48.3 was not as weak as expected. So far this morning things are pretty quiet in Treasury yields (2-yr at 1.64%, 10-yr at 3.55%) but mortgages are worse by roughly .125. There is no scheduled news, but Fed Chairman Ben Bernanke speaks on mortgage foreclosures at the Independent Community Bankers of America’s National Convention Florida, and we also have two other speeches by fed governors speaking later in the day.

The definition of a “margin call” is when a broker, or clearing house, asks a company to increase the margin deposit. Why does anyone need to increase the margin deposit? This would need to be done when the value of the security falls below a certain level. If a borrower bought a house for $100,000 with a 90% LTV loan, and the value of the house decreased to $90,000, then the lender wanted an additional $10,000 to make sure that their loan was secure, that would be a “margin call.” In Thornburg’s case, defaults on their ARM loans are hurting the value of their holdings, as is the general illiquidity of their securities. Investors don’t want to own something that is either difficult to price or may go down in value. They have already come up with $300 million to meet margin calls prior to yesterday, and then yesterday it was announced that Thornburg Mortgage completed a profitable debt sale. The company sold nearly $920 million in adjustable-rate mortgages to investors via collateralized mortgage obligations, a kind of security that offers several levels of risk and reward.

According to a story last week, Merrill Lynch is closing First Franklin, the wholesale subprime lender, and will lay off 400 employees. (Merrill paid $1.3 billion to acquire First Franklin from National City 16 months ago, in a textbook example of bad timing.)

Good news! Remember, HELOC’s can be unfrozen. Faxing them a new appraisal showing your borrower still had almost the same equity, and the property had the same value, as when they got the loan and they may lift the freeze, according to one RPM agent. Also, remind your borrowers that if a lender freezes their HELOC, then the borrower may also want to request the lender have the lien removed from title!

PMI is making guideline changes regarding the A-Minus & Expanded Criteria rates for mortgage insurance next Monday. PMI announced that, “any loan with a FICO score less than 620 is no longer eligible; this includes A-Minus (FICO scores 575 to 619) & Expanded Criteria loans. Any loan with the following DU or LP recommendations are no longer eligible, regardless of FICO score: DU - EA I, EA II, EA III, Refer with Caution, Refer with Caution IV, LP - Caution, Caution 500 Offering A-Minus Eligible. And lastly, to remove all confusion, the A-Minus & Expanded Criteria rate sheet will be removed from PMI’s systems & website next Monday.

OFHEO Director James B. Lockhart announced agreements with OFHEO, New York State, Fannie Mae, and Freddie Mac “to strengthen the independence of the appraisal process.” For mortgages that go to FNMA or FHLMC, there are many significant provisions in the agreements that are designed to strengthen the independence of appraisers, including eliminating broker-ordered appraisals, prohibiting appraiser coercion, and reducing the use of appraisals prepared in-house or through captive appraisal management companies in underwriting mortgages. The agreements also enhance quality control in the appraisal process and establish a complaint hotline for consumers. The Code becomes effective on January 1, 2009.

Dan was a single guy living at home with his father and working in the family business. When he found out he was going to inherit a fortune when his sickly father died, he decided he needed a wife with which to share his fortune. One evening at an investment meeting he spotted the most beautiful woman he had ever seen. Her natural beauty took his breath away.

“I may look like just an ordinary man,” he said to her, “but in just a few years, my father will die, and I’ll inherit 20 million dollars.”
Impressed, the woman obtained his business card and one week later, she became his stepmother.

Women are so much better at estate planning than men.

Rob