Lenders offering FHA products know that Mortgagee Letter 2010-24 eliminated the unlimited CLTV ratio, and reinstated the requirement that the total of any FHA-insured first mortgage and any subordinate lien may not exceed the applicable FHA loan-to-value and geographical maximum mortgage amount. (Only the FHA-insured first mortgage must be within the FHA maximum mortgage limits.) But lenders may also want to listen in to an FHA “Condo Recertification Industry Call” Q&A session today at 2PM EST. The dial-in number is: 1-877-941-1706 and the confirmation number is: 170410.
Yesterday I discussed SRP’s, and how it may behoove lenders to contemplate either servicing or subservicing these loans themselves since the market is not “adequately” compensating originators for the value. Obviously pipeline management firms use this in their daily pricing & execution strategy. As only one example, someone from MIAC wrote and said, “We have seen many clients where up to 40% of their originations should be sold servicing retained, looking at the daily best-execution numbers. In many cases, large originators should do MBS’s rather than cash desk execution, since selling loans to the cash desk can be up to 30 basis points worse in price – but it’s a moving target.”
It is rumored that one of the Big 4 investors is considering providing a “shelf” for jumbo securities. This is not an offer to purchase the loans, but instead provide mid-size lenders an opportunity to securitize its production – so definitely a step in the right direction. Should a lender wish to originate them, and therefore use this platform, it is rumored that the requirements are somewhat stringent: each lender may need to secure a Rating Agency Originator Review which costs $65,000 a year, each lender will secure a Rating Agency Servicer Review and its cost is independent of the Originator review, and lenders will be required to go through the large investor’s internal counter-party risk review – not a slam dunk. But for some, the rewards may be there. Stay tuned…
Repurchases and buybacks will be with us for quite some time. Barclays released a study estimating that “repurchase requests related to reps and warranties will cost the bank industry $22bn, with the four largest banks absorbing $12bn, split as follows: $4.9bn at Bank of America, $2.9bn at JPMorgan, $2.6bn at Wells Fargo, and $1.1bn at Citigroup.” However, Barclays said, “We believe these amounts are manageable in relation to the $8.3bn of reserves already established by these banks and their $460bn of combined tangible common equity.” And companies such as The Prieston Group, Pyramid Quality Assurance, and Fortace are making a market in helping smaller companies (who don’t have dedicated buy back-handling staffs) deal with the issues.
Fortace, for example, released a set of questions that companies should ask themselves when focusing on the issue. What is the inventory of my company’s identified losses? What products, channels and relationships are the primary causes? What future losses can we expect, and what sets of assumptions should we use? What is my “market position” versus each potential adversary? Am I stuck with the loss or do I have recourse to another party? What effective leverage does my counterparty have in terms of rights to pull servicing, pull financing, realize on collateral, or suspend our company’s approved status? What are the governing terms of the specific contracts and communications between my company and counterparties? What rights and obligations does each party have on the key issues that will determine loss liability and allocation, including definitions and exceptions on fraud, misrepresentation, indemnity and coverage periods? Do we have access to the information we need on loan performance, servicing, documentation, and past communications? Do we have a process to analyze our company’s exposures at the loan and product level? Are we using a comprehensive audit workflow process to make sure we understand either the alleged defect or potential rebuttal on each key issue in the loan file?
In the last few years, there has been plenty of blame to go around for the credit crisis – not the least of which is directed at the rating agencies. But they seem to continue on….http://www.nytimes.com/2010/09/05/business/economy/05gret.html?_r1&srcbusln
Last week Flagstar told its clients that, after October 1, it will no longer warehouse loans being sold to Franklin American. In addition, customers with tangible net worth < $500,000 will be able to warehouse Flagstar loans only. The bank also notified clients that it will follow Freddie’s guidelines for calculating the maximum mortgage amount. “For all pipeline loans, proceeds for the refinance may be used to pay off the 1^st mortgage amount (including only the unpaid principal balance and interest accrued through the date the mortgage being refinanced is paid off), pay actual closing costs, financing costs and prepaids/escrows not to exceed the lesser of 4% of the current unpaid principal balance (UPB) of the Mortgage being refinanced, $5,000 or the actual closing costs and prepaids, any lender credit for closing costs will affect the loan amount calculation. The maximum mortgage amount calculation may not be increased to receive cash back, and borrowers may not receive cash back exceeding $250.”
Flag also updates its credit report requirements: it must list all inquiries that were made in the previous 120 days. All applicants with credit inquiries are required to complete an Undisclosed Debts Acknowledgement and disclose the nature of all credit inquiries. In addition, “Purchase transactions with subject properties located in Florida with four or more mortgage inquiries on the credit report in the last 90 days are not eligible. Inquiries showing any FNMA or FHLMC credit reseller as the credit inquiry will be deemed to be a mortgage inquiry. Other inquiries that cannot be identified as being for purposes other than mortgage (auto, department store, etc) will also count toward the limit” and “Arizona has been removed as an ineligible state for applicants with four or more mortgage credit inquiries. This change is effective immediately and is effective for both conventional and government loan transactions.”
Chase Correspondent has posted an update to its FHA Streamline product line guidelines. Last week, effective this upcoming Monday, Chase raised many of its LTV and CLTV levels – mostly by 5-10% – for several agency amortizing fixed and ARM products. (Minimum FICO’s for agency products remained at 660.) GMAC updated its FHA product guidelines.
CitiMortgage sent out a correction for its “Departing Property” policy due to a further evaluation of Freddie’s policy. Starting Monday “On loans where rental income/signed leases from a departure property (one that’s being converted into an investment property) are used for loan qualification, the borrower must show a 2-year history of managing other investment property. This applies to all processing types (DU, LP and manual as we sell to both Fannie Mae and Freddie Mac).”
U.S. Bank Home Mortgage Wholesale Division, following the recent HUD Mortgagee Letter ML 2010-24, implemented the new CLTV/HCLTV for refi’s: “Rate and Term Refinances maximum CLTV / HCLTV 97.75%, Cash out Refinances maximum CLTV / HCLTV 85%, FHA to FHA Streamline Refinance With or Without Appraisal maximum CLTV / HCLTV 125%.”
Caliber Funding has made changes to its conventional and FHA underwriting guidelines, addressing 2^nd home properties with rental income (if rent is included in their taxes, it is an investment property not a 2^nd home), HELOC’s (“The qualifying monthly payment must be calculated using 1% of the total line amount regardless of the outstanding line amount; including when the HELOC is secured by a property other than the subject property”), and adopting the FHA LTV/CLTV guidelines for R&T refi’s at 97.75%.
One thing that investors don’t want is for a pool of mortgages that they paid a premium for to pay off early. Well, with rates dropping, this is to be expected. Yesterday we learned that 15-yr FNMA prepayment speeds came in faster than expectations. Much of this was from relatively recent production – it would appear that those that could refinance 6 months ago can do it again with lower rates. And going back farther, as one analyst said, “Clearly, the ability to do streamlined refinancing for loans originated before March 2009 is making a significant difference as the lags are shorter for such refinancings.”
The Mortgage Bankers Association’s application index fell 1.5% last week, with refi’s down about 3% and purchases rose over 6%. Mortgage purchase applications for purchase are now down roughly 40% after peaking in late April (given that tax credit deadline rush).
Let’s sum up the market for Tuesday: stocks sold off and interest rates improved (not always the case!) when we found out that the euro bank stress tests were actually not reliable – they excluded large amounts of sovereign debt holdings. (Stunned silence.) Anyway, Europe is still fragile, default risk is still present, and that led to a flight to Treasury security quality over here. We sold $33 billion of 3-yr Treasury notes at less than .80% – and the demand was decent. The 10-year note rose almost a point dropping the yield to 2.61%, and current coupon mortgages improved by about .5. Investors and Wall Street traders who were around on Friday were happy to have accepted rate locks and bought MBS’s on Friday when they were cheap – not so for anyone who locked on a Friday ahead of the holiday weekend.
Today we have the Fed’s Beige Book at 11AM PST providing economic anecdotes from the various districts in preparation for the next FOMC meeting on September 21. We also have the $21 billion 10-yr note auction. Ahead of that the 10-yr is at 2.63% and mortgages are roughly unchanged after yesterday’s multiple-investor price improvements.
Did you ever wonder why earrings became so popular with men?
A man is at work one day when he notices that his co-worker is wearing an earring.
The man knows his co-worker to be a normally conservative fellow, and is curious about his sudden change in “fashion sense”.
The man walks up to him and says, “I didn’t know you were into earrings.”
“Don’t make such a big deal, it’s only an earring,” his friend replies sheepishly.
He falls silent for a few minutes, but then his curiosity prods him to ask, “So, how long have you been wearing one?”
“Ever since my wife found it in my truck.”

Rob

(Check out

http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx. For archived commentaries, go to www.robchrisman.com. Copyright 2010 Rob Chrisman.  All rights reserved.  This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.

Much of life is a balancing act. For example, I eat my Captain Crunch with only low-fat milk because I wouldn’t want unnecessary calories. Underwriting is also a balancing act, matching the risk of the borrower being able to make payments with the desire for the lender to earn a rate of return on the loan commensurate with the risk. In mortgage lending, there is some feeling that the “pendulum” has swung too far to one side here in the last year or two, leaving some borrowers (self-employed and jumbo, to name a quick two) in the lurch. But there are old, and new programs, out there that go back to the “old days”.

But zero down payments – again? A new program from Fannie Mae called Affordable Advantage is available to first-time home buyers in Idaho, Massachusetts, Minnesota and Wisconsin, and created in conjunction with the states’ housing finance agencies. Proponents say that low down payments themselves were not the problem, except when combined with other risk factors like adjustable rates or lax underwriting. Various state agencies have continued to make loans with low down payments to those who may or may not have the best credit. Affordable Advantage loans are 30-year fixed mortgages, with mandatory homeownership counseling, available to people with credit scores of 680 and above (720 in Massachusetts). The buyers have to put in $1,000 and must live in the homes.

In some areas, smaller lenders have lending programs that are similar. In Texas, for example, lenders such as Envoy Mortgage and BBVA Compass offer programs to historically low-risk professions with good payment histories. BBVA, for example, offers a 100% LTV program and the borrowers avoid paying MI. Strictly done through retail, BBVA has offered “professional mortgages” for about ten years to borrowers with occupations such as accountants, physicians, dentists and certain high-level executives at public companies. In 2008, Bank of America stopped making loans with 100 percent financing to doctors, but just resumed the program – slightly modified – this month. BofA’s program is directed at doctors and dentists coming out of medical school who don’t have 20 percent down payments typically required for jumbo loans – those exceeding $417,000. When considering their credit, the bank doesn’t take into account the borrower’s student loan payments.

Another new modification program, announced in March, has begun, the target being underwater loans for homeowners who are current on their mortgage payments. In FHA’s “short refinance” program, banks and other creditors that write down mortgages to less than the value of the property can essentially hand off the reduced loan to FHA. Where is the government finding the money to cover the expected 1 in 5 default risk? It set aside $14 billion previously earmarked for housing aid from the Troubled Asset Relief Program to cover losses. Of course, the bank or investors that own the loan must be willing to write down its value, and the servicer must have the time and manpower to process the loans.

The jumbo market is seeing some continued revival. Redwood Trust is rumored to be coming to market with a $300 million jumbo MBS sometime in the fourth quarter. Five months ago the company put out a $238 million jumbo security backed by 255 prime Citi loans. Late last week Wells Fargo pushed its jumbo rates below 5%, although the big banks seem to be still holding on to their jumbo production and keeping the loans in portfolio.

Speaking of rates and pricing, a reader from ApexAnalytics reports that, “One of my clients is beginning to retain some servicing. I was analyzing the actual SRPs being paid by a major aggregator on a few FNMA loans that they had to sell. The calculation was very basic.  All in price from the aggregator minus the price I could get selling directly to FNMA for cash.  On a FNMA15-yr 4.0% note rate the actual SRP was -.0715 – negative! My client made more profit selling the loan servicing retained for cash.  The “published SRP” for that loan was 1.32.  More mortgage bankers need to get set up with sub-servicers so they can capitalize on this opportunity.  Even FNMA 30yr fixed in the 4.5% range are only getting a servicing multiple of 2!”

Fannie Mae has published the DU Version 8.1 October Update Release Notes, and told the industry that during the weekend of October 16 it will update the DU property risk assessment that determines eligibility for the DU Refi Plus™ property fieldwork waiver.    

HUD and FHA sent out another Mortgagee Letter, in this case introducing new minimum credit scores and loan-to value (LTV) ratio requirements for FHA-insured loans.   

FHFA, the regulator of Fannie Mae and Freddie Mac, issued final rules that will bar those agencies from purchasing mortgage-backed securities to meet affordable-housing goals. The companies can no longer receive affordable-housing credit by purchasing securities backed by commercial and residential mortgages. The FHFA rejected Freddie Mac’s appeal to preserve the option as long as the company conducted “substantial due diligence” on the underlying mortgage collateral – no more undertaking “economically adverse or high-risk activities in support” of the affordable-housing goals. The new goals still require F&F to target a certain amount of their loan purchases for this segment, but FHFA will adjust the rules depending on market conditions.

Any companies servicing FHA loans had some news late last week: the deadline to participate the US Treasury’s FHA-HAMP incentive program is approaching. “FHA Servicers that want to participate in the Treasury program that entitles you to receive incentive payments for successful FHA-HAMP performance must execute a new or amended Servicer Participation Agreement (SPA) and related documentation with Fannie Mae, in its capacity as financial agent for the United States as designated by the Treasury Department.  FHA servicers should submit the Treasury FHA-HAMP registration form no later than Sept. 8, 2010 to ensure the SPA can be executed by the Oct. 3, 2010 deadline as published in ML 10-11.”  To enroll, go here . 

As large lenders go, so do the smaller lenders. Pinnacle – a west coast wholesaler, adopted the recent appraisal guidelines requiring interior photographs, and told its broker clients that “Loans with non-occupant co-borrowers: the owner-occupant must qualify at 35%/43% ratios, regardless of AUS findings, and loans with non-occupant co-borrowers will only be offered fully amortized loan programs. On the credit side of underwriting, “each borrower must have a minimum of 3 trade lines that have been active for a minimum of 12 months, regardless of AUS findings”, and so forth. Pinnacle will require the new FHA Mortgage Insurance Premiums on all loans with case numbers assigned on or after October 4.

For more good news – a tiny amount, last week’s Pending Home Sales picked up a little bit. PHS is signed contracts between buyers and sellers, and they rose in July by about 5%. Sales are still down by 19% versus a year ago. And it was reported that the increase or decrease in values is still very localized. In California, for example, the LA Times reported that the State Board of Equalization stated that the value of properties fell 1.8% to $4.4 trillion. Forty-eight of California’s 58 counties saw totals fall this year, but the decline was less than the -2.4% last year.

Yes, rates are still great, even with the little uptick we saw last week. But interestingly, the effective mortgage rate outstanding on all $11 trillion of US household residential mortgage debt remains basically unchanged at 6%. Originators on the front lines know that even though rates are at all-time lows, a huge proportion of households cannot refinance due to credit or value issues. So unlike previous low-rate cycles, when prepayments increased predictably, this time around is different.

Now that we’re back from the weekend, let’s take a look at the actual bond markets. The Treasury market was hit Friday with the stronger-than-expected employment report. For the week, overall, news was not great for the economy but better than expected, and since the Treasury markets seemed to be priced to a worst case scenario, prices went down and rates up. 10-yr Treasury yields went up more than 30 basis points in 6 business days (2.42% to 2.75%). And not only have we seen decent news, but the markets have supply to grapple with: this week we have 3’s,10’s and 30-yr auctions, and the corporate debt supply calendar looks very heavy this month – both of which compete with mortgage pricing. $2.1 billion hit the market in MBS’s on Friday, and current coupon mortgages were worse about .375.

Besides the $67 billion auction this week, there is not much economic news. Thursday we have Jobless Claims and the international trade numbers. And the Fed’s Beige Book will come out tomorrow. I guess that the financial news networks can focus on the elections, still two months away. This morning’s 10-yr yield is back down to 2.64%, and 30-yr mortgage prices are better by roughly .250.

(Parental discretion advised.)
A farmer decided that he wanted to go to town and see a movie. The ticket agent asked, “Sir, what’s that on your shoulder?”
The old farmer replied, “That’s my pet rooster Chuck. Wherever I go, Chuck goes.”
“I’m sorry sir; we can’t allow animals in the theater.”
The old farmer went around the corner and stuffed Chuck down his overalls. Then he returned to the booth, bought a tick, and entered the theater.
He sat down next to two old widows named Mildred and Marge.
The movie began and the rooster began to squirm. The old farmer unbuttoned his fly so Chuck could stick his head out and watch the movie.
“Marge!” whispered Mildred.
“What?” said Marge.
“I think the guy next to me is a pervert.”
“What makes you think so?”
“He undid his pants and he has his you-know-what out!” whispered Mildred.
“Well, don’t worry about it,” said Marge. “At our age we’ve seen ‘em all.”
“I thought so too”, said Mildred, “But this one’s eating my popcorn!”

Rob

(Check out

http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx. For archived commentaries, go to www.robchrisman.com. Copyright 2010 Rob Chrisman.  All rights reserved.  This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.

• Here’s a trip down memory lane, showing the deposit amounts that FDIC has insured since it was founded in 1934.

While we need to protect the small depositor, we should still have an element of moral hazard, so we like the idea of 100% insurance for the first $25,000, and 95% insurance for everything above that. That probably sounds better in theory than in practice, but society probably works better when people have to make decisions based on their own perception of risk.  A safety net is a good thing, but government can’t and shouldn’t remove all risk from people’s lives.

• We’ve now helped 14 banks set up warehouse lending programs, and we’ve noticed something about those who really grow it and make it into a real money maker.   These banks hire someone who’s 100% dedicated to marketing it.  Having it as a step-child of the commercial lending group doesn’t seem to work as well.
• I’ve been reading three of Harman Kahn’s books on nuclear war lately, and it got me thinking about Iran ’s imminent nuclear capability.  (1) Let’s start with the premise that it would be intolerable for Israel to allow Iran to have that capability. (2) Had there been an Israel in 1941 and had they known about the building of Auschwitz , is there any doubt that they would they have bombed it?  Of course they would have. (3) Just as Auschwitz threatened the very existence of the Jewish people, is there any doubt that an Iranian bomb threatens the very existence of Israel ?  (4) If so, is there any doubt that the Israelis will protect themselves and attack Iran ’s nuclear facilities? 
  Based on the above, I think Israel will bomb Iran ’s nuclear facilities and I think they should.  And here’s how I see it:  The Saudis and most Arab states will be very relieved, at least privately, but the backlash could be extraordinarily serious. To neutralize this blowback, I’d propose that as soon as the bombers return from their mission, Netanyahu should go on TV and announce that (a) the Israeli air force has destroyed Iran’s nuclear capabilities and (b) that the Israeli government now recognizes the West Bank as the independent state of Palestine.
  This would be a double coup, and the world would be relieved to see Iran ’s nuclear weaponry destroyed and for there to finally be Palestinian autonomy.  As for Gaza , it would be up to the new State to include them or not.

• Here’s a marketing idea for Comerica Bank.  The bank was founded in 1849, and California got on the map the same year with the 1849 Gold Rush.  There’s got to be a tie-in there.  “When gold was discovered in California in 1949, we were opening our first accounts,” or something like that.
• From Mike McMahon: “Very funny about David Eisenhower.   This reminds me about the story I read about Hollywood script writers who get back at people who have done them wrong in life by naming bad characters in their scripts after those people.”
• The guy below is Ted St. Martin.  He holds the record for making 5,221 consecutive free throws. This is an 30-year old picture, but at 75 today, he still conducts clinics on free throw shooting.  I saw his website once, and I think he has a money back guarantee if you don’t get up to a 90% of your free throws in.

• A thrift client expressed concern about his pending regulation by the OCC, and my answer was based on personal experience.  My first set of exams was by the OTS, and we were examined by the OCC at my next bank.  Let’s put it this way. Having the OTS in there was like going to the dentist to have your teeth cleaned.  Being examined by the OCC was like going to the dentist to have a root canal.  Both involve going to the dentist, but one’s a whole lot less fun than the other.
• One of the things we do in our FOCIS-plus Report is give mortgage companies a set of templates for the metrics they need to track. In a bull market you’ll make tons of money even without good numbers, but you’ll make better decisions (and more money) with better data.   Here’s Tony LaRussa, the third winningest baseball manager of all time, and no one knows his baseball numbers better.
  

If Tony managed the Cardinals the way most mortgage bankers run their companies, he’d have to make decisions without knowing batting averages, leftie-righty match ups, earned run averages, and so on.  Really, running a mortgage operation without slicing and dividing your data 50 different ways would be like managing a baseball teams without having any statistics on the players.
Here’s a simple test to see if you track enough data or not: Quick, what’s your year-to-date cost to originate in bps, and what was through August last year? People, you’re in the manufacturing business, and good manufacturers know their costs!

• The latest FDIC stats are in, and of our 7,830 FDIC insured institutions, 70.7% were profitable last quarter, up from only 61% a year ago.  A healthy banking system is necessary if you want a healthy economy, so this is good news for everyone.
• We were at a Southeast bank 5-6 months ago, and it was a perfect case of the production tail wagging the balance sheet dog. The bank had a high loans-to-deposit ratio, limited liquidity, and while they were well capitalized, they were looking at some potential write-downs that could lower their capital ratios to an uncomfortable level. The mortgage division was a big and growing wholesale lender, and they had expanded into some new states and were really growing their volume. It was clear that their mortgage volume was too much given the size of the bank, and it was clear that they needed to stop going into new states. We’re not articulating this well, but the point was that the mortgage people were all excited about their growth and were oblivious to the fact that the bank couldn’t really support that growth.
  The message is that loan production efforts must be integrated into the asset-liability and liquidity planning of the bank.  This bank needed to tell the mortgage people “Look, our balance sheet will only support $100 million a month and we don’t care if you can close $200 million a month.”  This is why we have annual budgets, so that the mortgage people will know the maximum they can close in a month.

• The above comment applies to independent mortgage banks as well. Warehouse lines determine the maximum you can close per month, not the energy of your production people.  You need to make it clear to production people what their maximum is.
• We did a project for Bank of Transylvania in Romania several years ago, and someone thought we were just kidding.  Attached is their latest earnings release.
• One of the great things about America is that everyone wants the President, whoever he might be, to do well and have a successful Presidency. For those who worry about Obama’s poor polling numbers, you can look up the polls for Reagan and Clinton just before their first mid-term elections.  Both were dealing with crummy economies and both had polls numbers even lower than Obama’s.
  This photo is from Reagan in Bedtime for Bonzo, a very funny movie. It’s about a college professor raising a chimp as a part of an experiment and all the hi-jinks that ensue.

I once rented about 5-6 of his movies, and he was actually a very good actor.  He was labeled a B-actor, but my view is that he was an A-actor who just happened to get roles in B-movies.  By the way, a movie so good I bought it is Harry and the Hendersons about a Bigfoot that secretly movies in with a Seattle family.  A great scene is when Harry (the Bigfoot) is watching Bedtime for Bonzo on TV and laughing so hard he almost cries. When Bonzo throws his oatmeal right in Reagan’s face, Harry goes bananas and throws his food at Reagan’s face on the TV.

                                                            *          *

We’re embarrassed to admit we waited this long, but we just joined the MBA.  This is a great organization, and those of you who aren’t members should at least look into it.  Also, this week’s cartoon is for everyone who has a sophomore in college who’s thinking of taking the junior year abroad.

Garrett, Watts & Co.

“Helping lenders increase revenues, control costs, and better manage risk.”

• Mike McAuley   (281-250-2536)
• Corky Watts  (408-395-5504)
• Joe Garrett   (510-469-8633)

A statistician is someone who is good with numbers but lacks the personality to be an accountant.

What’s wrong with this picture: Rates are unbelievable, yet there are many companies out there who are barely doing any loans. Investors are backlogged and swamped, yet mortgage banking employment numbers are down significantly from only a year or two ago. In many markets lenders and investors are fighting over back-office talent, yet in others mortgage professionals go jobless. One wizened mortgage banker wrote, “This persistent rally is killing margins. You can’t push any volume through the baleen filter we call compliance and pre-purchase investor due diligence. So loans stall worse than a Cessna 152 on take-off and eventually get renegotiated. Investors are drinking from fire hoses; so they step on price. This further exacerbates the pain. Loan agents who don’t understand the concept of pair-off or roll charges and think mortgage banks are sitting on massive amounts of cash.”

Another broker wrote, “Look at the difference between the mortgage security prices and rate sheet prices. Companies are keeping their profit margins high to cover the added expense – it takes 3x as much time and energy to do a ‘vanilla loan’ these days. And who is paying the price? The consumer is the one paying the price. And us lenders are paying the price for the indiscretions of those who have, for the most part, already gotten out of the business.”

Why aren’t large depository banks loosening their credit guidelines and lending more money? Market watchers suggest that one reason is the buy-back issue:  FNMA & FHLMC have sizable losses on bad loans and are considering forcing eleven large lenders (the biggest being BofA and Chase) to buy back loans which would result in losses of over $100 billion. Not only are banks grappling with that potential issue, but there may also be a lack of confidence in the health of our economy banks, businesses, and consumers. No one wants to borrow money to buy a house or expand their business if they aren’t confident about their job or more optimistic about the economy. And right now, as there often is, investors can’t seem to decide if the bond market (which is pointing toward further weakness) or the stock market (pointing toward stability and moderate growth) is more correct about predicting the future health of the US economy.

Stated loans, like the ones a few years ago, have either gone away entirely or are in the realm of private money lending. Many originators agree, however, that the FHA Streamline refi is a pretty close substitute. There is no appraisal, lenders typically don’t calculate ratios, and the borrower only has to show they have enough money to cover any closing costs. Of course the original loan must be insured by the FHA, but even if the borrower owes more money than the property is worth, the refi can be done. Usually the lender is paying for the nonrecurring costs and the borrower is bringing in money for impounds and interest.

Under the heading, “The more things change, the more they stay the same”, investment banks and “vulture funds” are garnering headlines for securitizing and selling troubled loans. The good news, of course, is that it helps keep the talk of a private mortgage bond market alive, and give servicers an outlet for their bad loans. The bad news, if you want to call it that, is that the pools are made up of delinquent loans rather than original liens. One can expect to see more news about companies with names like Penny Mac, Kondaur Capital, Allonhill, Residential Credit Solutions, Arch Bay Capital, Carrington Mortgage, Equifin Capital, etc., and probably ratings provided by the usual Fitch, Standard & Poors, and Moody’s. The process is more conservative this time around (although I don’t know precise details), with supposedly issuers having to set aside half or more of their assets as a cushion from loss, while the cash flow goes to the investors.

On the origination side, lending to “subprime borrowers” – non-agency, less than prime, whatever the politically correct term is these days – has either ceased to exist or move to private, individual lenders. The yields have moved higher, which is more commensurate with the risk involved. One may see some of the old subprime players such as Aames, Impac, Option One, Beneficial, etc., spring up when the secondary markets for this product return. And certainly if there is money to be made, probably with lower LTV’s and CLTV’s, institutional investors will, once again, take a keen interest.

Rates have an inverse relationship with fixed-income prices, meaning that when bond prices go up, rates go down. With the major drop in rates in the last several months comes talk of a “bond market bubble”. Most economists do not feel that we’re in a bond market bubble where there is a disconnect between prices and fundamental reality, but it is still worth talking about. All bubbles follow a common pattern, whether it concerns high-tech stocks, tulip bulbs, or real estate. Initially prices increase when a new opportunity presents itself with the prospect of good returns. Investors become more optimistic and lenders become less risk-averse. Suddenly everyone is chasing prices regardless of fundamental values, expectations become unrealistic, and speculators who are more concerned with short term gains rather than long term returns flood the market. But clearer minds begin to prevail, and insiders start to sell. Asset prices stop rising, panic sets in, and investors rush to unload positions before the next guy, and prices crash.

In the current case of fixed-income securities, however, fixed-income instruments like Treasuries are not new. There have been good returns, but any excitement is certainly tempered by the fact that the federal government will record a $1.3 trillion budget deficit in 2010, with fiscal year 2010 (ending 9/30) seeing Treasury debt issuance of about $2.3 trillion of which net issuance is about $1.7 trillion. At this point it appears that investors are buying bonds out of fear and from being defensive rather than being excited about bond prices rallying and rates dropping. And as we all know, there is little in the way of credit truly expanding – banks are holding onto their capital. Cash continues to be king – maybe the Fed should charge banks for holding onto capital.

Let’s turn our focus to securities and pipeline hedging for a moment. What’s the scoop on 3.5% securities becoming more active? After all, the 4% coupon (which contains, basically, 4.25-4.625% mortgages) is trading around 103. 3.5% securities are near par. And when you throw some servicing value on there, whether it is .5 point or 1.5 points, it should present a rebate on the rate sheet for 30-yr mortgages around 4%. But this is not being reflected on the rate sheets, and the production is not there yet enough to calm fears of non-delivery issues. Volume in 3.5% securities has been steadily creeping up, and becoming more liquid, but seller’s are still timid of any kind of “short squeeze” if they sell 3.5’s out in November or December, and then rates slide up and they don’t have the production. On top of that, production is still in the mid-4’s, which goes into a 4% security. When profit margins start dropping a little, 3.5% volume should increase.

Thursday started off somewhat quietly, but by the end of the day mortgage securities filled with rate sheet current coupon mortgages were better in price by .375. Just as there were numerous prices changes for the worse on Wednesday, the MBS market got it all back Thursday – woe to anyone who locked Wednesday instead of Thursday. And not only did all rates drop, but mortgages “tightened”, meaning they improved more than Treasury securities did. The $29 billion 7-yr auction went well (coming in at less than 2%!) at the same time that the stock market began to falter. Soon traders saw that investors interested in buying mortgages outnumbered sellers, with only $1.3 billion being sold.

We’ll see what happens later this morning when the Bureau of Economic Analysis (BEA), comes out with its 2^nd Quarter GDP revision. (The group does not have all of the previous quarter’s data at the time of the first publication, and so it estimates the components for which it does not yet have hard data until it does, which accounts for the revisions.). Economists believe that the BEA overshot its estimates for both trade and inventories, and therefore the markets are now looking for a significant downward adjustment today from +2.4% down into the low 1% range. We not only have that but also Personal Consumption & Consumption, the U. of Michigan’s Consumer Confidence survey, AND Ben Bernanke’s speech from Jackson Hole. That speech could really move stock and bond prices! Ahead of that we find the 10-yr around 2.51% and mortgages roughly unchanged.

As the bus stopped and it was her turn to get on, Jill became aware that her skirt was too tight to allow her leg to come up to the height of the first step of the bus.
Slightly embarrassed and with a quick smile to the bus driver, she reached behind her to unzip her skirt a little, thinking that this would give her enough slack to raise her leg. Jill tried to take the step, only to discover that she couldn’t.
So, a little more embarrassed, she once again reached behind her to unzip her skirt a little more, and for the second time attempted the step.
Once again, much to her chagrin, Jill could not raise her leg. With a little smile to the driver, she again reached behind to unzip a little more and again was unable to take the step.
About this time, a large Texan who was standing behind her picked her up easily by the waist and placed her gently on the step of the bus.
She went ballistic and turned to the would-be Samaritan and yelled, “How dare you touch my body!  I don’t even know who you are!”
The Texan smiled and drawled, “Well, ma’am, normally I would agree with you, but after you unzipped my fly three times, I kinda figured we was friends.”

Rob

(Check out

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Gee, whenever I have too much to drink in Utah and find myself around a mortgage company’s computer server, I feel like opening fire. I guess I’m not alone. http://www.sltrib.com/sltrib/home/50159264-76/campbell-computer-police-server.html.csp

Jefferies, and other Wall Street firm’s analysts, have recently pointed out that the effective rate of interest on all US mortgage debt outstanding (about $11 trillion – more than US Treasury and corporate debt combined) has barely budged in recent years at just over 6%. Like a kid looking through the window at candy, originators know this, and that the overwhelming number of households, on average, are paying the same rate they have for quite some time, and funding conditions “for the largest and most important part of the US economy – the consumer sector – continue to be bad. And if a borrower can’t refinance, and lower their monthly payment, they tend to hunker down and put the money into savings – which often time is invested by banks into Treasuries. And of course this serves to push rates down even more.

Analysts believe that if overall rates drop by 1% for all borrowers, it may translate into potential annual savings of more than $30 billion in lower monthly payments. (No, I didn’t run the numbers myself.) This transfer would shift money away from investors and money managers and into the pockets of borrowers – the fabled consumer sector, which has been lagging. And it follows that this desperately needed money would help stimulate the economy, right? But as we all know, origination capacity remains a bottleneck either through regulation or through lack of equity/credit. Investors would probably rather have their holdings of 6% (on average) mortgages ratchet down to 5% then go to 4%. And so the conjecture about a massive government-led refi wave continues.

But few people, if any, who follow mortgage statistics are arguing that any of the government’s modification plans are working. In fact, few, if any, of the people with whom I have spoken who are actually in the front lines doing the modifications say that it is going well. Even the US Treasury, in its latest report on 17-month old HAMP, noted that “the percentage of homeowners dropping out of the Obama administration’s premier housing rescue program rose in July to nearly half of participants, as owners receiving aid continued to struggle with documenting their eligibility.” According to the Treasury Department, about 48% of the 1.3 million homeowners who started a mortgage modification through July have dropped out, up from the 41% noted in June. Modification trials offered in the program prior to June 1 did not require up-front documentation of income or eligibility, and many trials are now being canceled. As a result, Treasury said 100,114 participants dropped out of the program in July — more than four times the 24,577 new modification trials started. Overall, the Treasury said HAMP has lowered payments for a total of 1.3 million homeowners that received trial modifications since the program was launched.

It’s been a while since CitiMortgage sent out an update to its correspondent clients. But Monday one went out, covering a multitude of changes. Credit policy updates were made to LP (for multiple financed properties), and FHA, along with credit policy changes to general underwriting guidelines along with various “notifications, clarifications, and corrections”.

For Citi’s correspondents, going forward, under LP, “If the property is a second home or investment property, the Underwriter must confirm that each borrower individually and all borrowers collectively have no more than four 1-4 unit properties that are financed, including the subject property. Product for the subject property loan must be a fixed rate, 7/1 or 10/1 ARM. In Citi’s FHA program, starting September 7^th, “the maximum CLTV for a rate/term refinance has been reduced to 97.75%. Additionally, for cash out refinances the subordinate financing may remain in place as long as the CLTV does not exceed 85%.” For FHA Streamline Refinances, “When calculating the maximum loan amount for an owner-occupied property, a maximum of 2 months of interest can be included in the new mortgage calculation.”

Citi’s bulletin goes on to discuss tax transcripts versus returns (“For manually underwritten loans, IRS transcripts may be used in lieu of tax returns; however if any income or information used in the transaction is from a Schedule other than Schedule A or Form 2106, the applicable schedules must be obtained and reviewed by the underwriter. Transcripts in lieu of tax returns may not be used for loans approved via DU/LP”), how acceptable borrowed funds may now be used for the down payment on investment properties as well as primary residences and second homes, updated appraisal photograph policies starting 9/1 per Fannie guidelines, and review appraiser and appraisal standards.

In addition, the bulletin address co-op project review requirements (the co-op project in which the secured unit is located must qualify as a cooperative housing corporation under Section 216 of the Internal Revenue Service Code), updated Area Median Income limits for Freddie and Fannie programs, and reminded clients that Citi expects them to comply with RESPA guidelines regardless of any time that has elapsed since the sale to Citi.

Mountain West Financial told its broker customers that all conventional condominium loans will now require a Fannie Mae Condo approval, or condo Project Manager Certification and MWF’s HOA Cert Form, whether or not the loan has DU or LP automated findings.

Condominiums appear to be the hot topic. HUD notified FHA & VA sellers that Mortgagee Letter 2009-46 B, Section VII, provided basic information regarding condominium recertification requirements , and that these recertification requests may be processed using two options. Sellers may use the HUD Review and Approval Process (HRAP), or the Direct Endorsement Lender Review and Approval process, depending on approval date (prior to January 1, 2000, full project approval will be required, after that then the project is eligible for recertification process).

Nationstar Mortgage (a wholesaler owned by Fortress Investment Group) told brokers that it is now offering a FHA 20-Year fixed-rate fully amortizing mortgage and Freddie Mac’s Open Access program. Nationstar is also implementing MI changes reflecting MGIC’s changes from earlier this month, using a new matrix with adjusted DTI and FICO levels.

For folks who follow policies like private transfer fees, they noted that recently the Federal Housing Finance Agency (FHFA – in charge of Freddie and Fannie) announced a public comment period on new regulations that would restrict F&F, and the Federal Home Loan Banks, from investing in mortgages with private transfer fee covenants. Could this spell the end of private transfer fees before the end of the year? Transfer fees are enabled by covenants on a deed which require a payment to a third party every time property ownership is transferred and are typically 1 percent of the amount of the sale. Stay tuned…

In a story out of Bloomberg Businessweek, Wells Fargo & Co. is plunging back into the commercial mortgage-backed securities market by adding more than 20 bankers and support personnel during the past three months to increase loan originations and bundle them into CMBS. (I sure hope that they know what they’re doing, since every time I drive by a shopping center or office building I see plenty of “for rent” signs.) Wachovia, now owned by Wells, was the #1 underwriter of CMBS’s from 2005 to 2007, and then had over $2 billion in losses in 2007 and 2008. As we know, commercial property values have declined 39 percent from the 2007 peak, according to Moody’s Investors Service. The decline has made underwriting loans less risky, and banks can dictate more conservative terms and choose the most creditworthy borrowers.

The stock and bond markets were somewhat quiet yesterday until NAR’s Existing Home Sales number “hit the tape”, plunging 27.2% to sales’ lowest levels since 1995 and setting a new record low for this series which goes back to 1999. In addition, the data was revised to show a bigger drop of 7.1% in June, which was the last month that homebuyers were able to receive the homebuyer tax credit, and pushes out the housing inventory to over a year. The national median home price rose 0.7 percent from July last year to $182,600, but why build a new house when there is a year’s inventory at current sales rates, and the huge overhang of foreclosures that are set to enter the market as re-sales over the next several years?

As we saw, rates dropped and fixed-income prices improved. Two-year Treasury yields hit another record low, 10-year notes rose 29/32 to yield 2.50% from 2.60%, and mortgage securities were better by a solid .375 in price (some portion of which made its way onto rate sheets for originators). (Sometimes economists, when they are feeling their most dour, compare the US economy to Japan’s. As a point of reference, Japan’s 10-yr note first closed below 2.00% in the autumn of 1997, and since that time it’s averaged 1.48%) Reuters released a poll showing that 72% of Americans are “very concerned” about unemployment and more people now disapprove of President Barack Obama than approve of him – more evidence of a slowing economy and the consumer hunkering down.

This morning we have already learned from the MBA what lock desks already knew – that mortgage applications up 4.9% to highest level since May 2009. Refi applications were up 5.7% while purchase only increased .6%. And we have already had the Durable Goods number for July. (In the debatable recovery from March 2009 through April 2010, durable goods orders rose more than 20 %.) Durable Goods were expected to be up between 2 and 3%, but were only up .3%, and ex-Transportation they were down almost 4%. Once again, stocks dropped, and bonds rallied. The 10-yr yield is now at 2.42%, and current coupon mortgage security prices are better by roughly .250 in price. Perhaps we really are headed for a 4% 30-yr fixed rate world on rate sheets. We still have a $36 billion 5-yr. Note auction ahead of us, along with New Home Sales.

Charley, a new retiree-greeter at Wall-Mart, just couldn’t seem to get to work on time. Every day he was 5, 10, 15 minutes late. But he was a good worker, really tidy, clean-shaven, sharp minded and a real credit to the company and obviously demonstrating their “Older Person Friendly” policies.
One day the boss called him into the office for a talk.
“Charlie, I have to tell you, I like your work ethic, you do a bang up job, but your being late so often is quite bothersome.”
“Yes, I know boss, and I am working on it.”
”Well good, you are a team player. That’s what I like to hear. It’s odd though, you coming in late.
I know you’re retired from the Armed Forces. What did they say if you came in late there?”
”They said, “Good morning Admiral, can I get your coffee, sir?”’

Rob

(Check out

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The interesting thing about “mortgage banking” is that it is not a discipline taught in school to youth. It is not like chemistry or psychology, or animal science, etc., that one can major in. It includes aspects of many different things, like finance, sales, marketing, psychology, accounting, and so forth. The skills and knowledge of a good processor aren’t necessarily those of a good CFO of a mortgage company, and an underwriter’s skills don’t match those of a top loan agent – although both are in the same business. The MBA (Mortgage Bankers Association) has classes in various areas, and many MI companies and investors sometimes offer very specific classes – but it helps to learn a little something about other sides of the biz.

For example, some folks don’t know the difference between a “mortgage” versus a “deed of trust”? A mortgage, used in playing Monopoly or in the securities business, is not used in California – but it is used in many other states. California is a “deed of trust” state. Taking a step back, when a borrower signs a promissory note, he is agreeing to pay the lender a specific amount of money according to certain conditions. The borrower will sign either a mortgage or a deed of trust, securing the note and offering protection to the lender. (Remember that a deed conveys title & ownership of the property.) In “title theory” states, a mortgage is used and it conveys ownership to the lender. A clause in the mortgage provides that title reverts back to the borrower when the loan is paid. In “lien theory” states, the mortgage creates a lien only on the property and the title remains with the borrower. The lien is removed when all the payments have been made.

One basic difference between the mortgage and a Deed of Trust is that in doing a mortgage two parties are involved (the lender and the borrower) whereas with a DOT there are three parties involved:  the borrower, the lender, and a trustee.  In a DOT, the borrower conveys title to a trustee who will hold title to the property for the benefit of the lender. The title remains in trust until the loan is paid off, with a title company, escrow company, or bank usually listed as trustee and issuing a trustee’s reconveyance showing that the lender’s interest has ended upon pay off.

More pertinent now, unfortunately, is the difference in how foreclosures are handled. Servicing companies know that, although state law will determine the method of foreclosure.The rules when using a DOT allow for a faster foreclosure time than with a judicial foreclosure required with a mortgage. Under a Deed of Trust, when the borrower defaults on the loan, the lender delivers the Deed of Trust to the trustee, who then is instructed to sell the property at a trustee’s sale.

Many lenders in and out of Florida have been carefully watching the court opinion of whether or not an underwriter is considered a loan originator, and therefore must be licensed as such starting October 1. They don’t: underwriters did not clearly fit the description of a “loan originator” and the OFR provided a legal opinion. In Florida, the definition of “loan originator” means “An individual who, directly or indirectly, solicits or offers to solicit a mortgage loan, accepts or offers to accept an application for a mortgage loan, negotiates or offers to negotiate the terms or conditions of a new or existing mortgage loan on behalf of a borrower or lender, processes a mortgage loan application, or negotiates or offers to negotiate the sale of an existing mortgage loan to a non-institutional investor for compensation or gain. The term does not include an employee of a mortgage broker or mortgage lender who performs only administrative or clerical tasks, including quoting available interest rates, physically handling a completed application form, or transmitting a completed form to a lender on behalf of a prospective borrower.”

And now for some investor-related news.

Chase told its clients that it is basically adopting Fannie Mae’s Attached PUD requirements. Namely, a project analysis of Fannie Mae Attached PUDs is required to be done and reviewed, confirming the project, within the three months that preceded the date of the Note and Mortgage for the unit. This is to determine the project meets the required eligibility criteria, and that the correspondent is not aware of any changes in circumstances since the review of the project that would result in the project not satisfying Fannie Mae eligibility criteria. Chase also told its correspondents that for Fannie Mae Detached PUDs, “the Delegated Correspondent is not required to warrant Detached PUDs locked and closed under Fannie Mae Fixed Rate market types and Agency ARMs evaluated through DU. However, a Delegated Correspondent must ensure Detached PUDs meet Fannie Mae insurance and appraisal requirements.”

Under Freddie’s rules, however, Chase mentions that “Freddie Mac does not require a full project review for PUDS, but does require an analysis of all PUD transactions (both attached and detached) to confirm the project is a PUD as indicated on the appraisal or title, and that the project meets Freddie Mac insurance requirements. “The appraisal of the subject unit contains the following requirements: the PUD legal name, HOA dues and assessments, if applicable, and Property Rights (such as Fee Simple and Leasehold) are indicated for each comparable sale, and a comparison of those rights with the subject PUD.

Bank of America told its correspondents that it is accepting FHA’s enhancement of the Energy Efficient Mortgage (EEM) program guidelines with a new calculation method allowing an increase in the amount of effective energy improvements that may be added to the base FHA maximum mortgage amount limit. HUD came out with this in June of last year, but “the maximum amount for the portion of the EEM for energy improvements is the lesser of the actual cost of the improvements, or 5% of the value of the property or 115% of the median area price of a single family dwelling or 150% of the conforming Freddie Mac limit. The EEM program allows a borrower to finance up to 100% of the cost-effective energy package when he/she demonstrates the present value of the energy saved over the useful life of the improvements.
The EEM program may be used for all property types, for purchase and refinance transactions, including streamline refinances, or new and existing construction, and in conjunction with the 203(k) and Streamline 203(k) programs.”

Wells Fargo told its brokers that after September 27^th, “When a Homeowners’ Association (HOA) Certification is required on a Conforming or Non-conforming Conventional loan, the applicable Wells Fargo version of the form must be submitted.” So brokers can transfer information from one HOA certification to Wells’ form, but from that date forward both forms must be included in the package.

Starting in 6 days, SunTrust will be implementing revised maximum debt-to-income ratio requirements for Agency DU Refi Plus loan transactions. Lock them in before that date to take advantage of current guidelines, because after that date there will be revised debt-to-income ratio requirements. (There will be no debt-to-income ratio requirements for Agency Plus DU Refi Plus loan transactions.) For SunTrust to SunTrust transactions, DTI will be per DU, except “if the borrower’s proposed mortgage P&I payment increases by more than 20% of the current mortgage P&I (or Interest Only) payment, then the maximum qualifying ratios are 31/45%.” For non-SunTrust to SunTrust transactions, the maximum debt to income ratio is 50.00%. “If the borrower’s proposed mortgage P&I payment increases by more than 20% of the current mortgage P&I (or Interest Only) payment, then the maximum qualifying ratios are 31/45%.”

Also starting next Monday SunTrust is also implementing the following revisions: a minimum 680 credit score on FHA Jumbo loans, purchase transactions and, no Cash-Out with an appraisal (Rate and Term Refinance) transactions, and a 97.75% maximum TLTV on No Cash-Out with an Appraisal (Rate and Term Refinance) for conforming loan amount transactions. As always, check the actual bulletin for specific information!
Lastly, effective September 1, SunTrust will “require bailee letters be submitted with the original Note from warehouse lenders for all closed loans. Correspondent clients, who are financial institutions (banks, savings and loans, credit unions) or who are wholly owned subsidiaries of a financial institution, are not required to attach bailee letters to the original Note.”

Back to the markets…yesterday was a light day for MBS selling: about $1.7 billion hit the screens consisting of mostly 4% securities. Overall it was a pretty quiet day – but in overnight markets in Asia and Europe stocks continued their declines and yields continued to drop. This morning we find stocks down significantly and the 10-yr Treasury yield down to 2.52%! Although mortgage security prices are lagging, especially the higher coupons, look for rate sheet improvements of .125-.250, and perhaps more. Later today we have a $37 billion 2-yr auction, and at 10AM EST we will have some Existing Home Sales numbers, along with a Richmond Fed release. (With prices of new homes very affordable and mortgage rates low, economists predict that the pace of new home sales will not likely slacken as much as existing homes, and look for the 10AM EHS number to come in around 4.6 million.)

Speeding in Oregon:
GOOD: A  Bend, Oregon policeman had a perfect spot to watch for speeders, but wasn’t getting many. Then he discovered the problem: a 12-year-old boy was standing up the road with a hand painted sign, which read “RADAR TRAP AHEAD”. The officer also found the boy had an accomplice who was down the road with a sign reading “TIPS” and a bucket full of money. (And we used to just sell lemonade!)
BETTER: A motorist was mailed a picture of his car speeding through an automated radar post in Pendleton. A $40 speeding ticket was included. Being cute, he sent the police department a picture of $40. The police responded with another mailed photo of handcuffs.
BEST:  A young woman was pulled over for speeding. An Oregon State Trooper walked to her car window, flipping open his ticket book.
She said, “I bet you are going to sell me a ticket to the State Trooper’s Ball.”
He replied, “Oregon State Troopers don’t have balls.”
There was a moment of silence. He then looked into the distance, closed his book, tipped his hat, got back in his patrol car and left.

Rob

(Check out

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To Our Clients, Colleagues and Friends,

• How long does a bank have left to live after it receives a Prompt Corrective Action letter?  If you look at Los Padres Bank, they consented to a PCA letter on July 27^th (they were told to raise capital), and they got seized this past Friday.  That was 24 days. Someone should interview the management and Directors to see if, when it happened, they were actually relieved to get it over with. Do you think people kind of just give up when they get a PCA (Probably Can’t Achieve) letter?
• During his vacation, Mike did lots of sightseeing, hiking, visiting with relatives and relaxing.  The weather wasn’t even all that bad.  Here’s a photo of the town lands where the McAuley family lived only two generations ago in Glangevlin, Co. Cavan in the Republic of Ireland but near the border with No. Ireland (which is actually part of the United Kingdom ):

This photo was taken from a 2,200 ft. mountain called Cuilcagh.  While the countryside is beautiful, the land is boggy and relatively poor (see the solitary sheep grazing?).  Mike’s uncle used to say that “the land there was so poor that it couldn’t feed a snipe,” which is a small bird.  It’s pretty amazing to think that whole generations were raised there.  Fortunately, Mike’s grandfather joined the British Army, traveling to India (where he met Rudyard Kipling) and South Africa (where he was involved with the aftermath of the Boer War).  He married Mike’s grandmother, a local girl who had immigrated to become a maid and nanny at mansions along Fifth Avenue in New York , and they moved to New York , where Mike’s dad and aunt were born in the 1920’s. 
During the Depression and because his grandfather developed multiple sclerosis, they moved back to Ireland while they were children.  While Mike’s dad was drafted during WWII and eventually became a colonel in the U.S. Army, his aunt stayed in Ireland .  Now there are plenty of cousins to visit over there, which makes each visit all the better.

Mike writes: “ Ireland ’s a wonderful place for Americans to visit; and if you do go there, give Northern Ireland a try.  The golf is famous, there are wonderful sites that aren’t as heavily visited as in the Republic and the violence of “the Troubles” is long past.  In fact, the short double-decker tour busses in Belfast go right through the formerly-infamous sectarian neighborhoods.  It’s completely safe now and the remaining murals painted on walls and the stories behind them make for the best guided tour you’ll ever experience.”

• If a stock trades at $100 and has $10 of earnings, you say that it trades at a PE multiple of 10, another way of saying that it would take ten years to earn back your investment through earnings.  If you buy a 30 year TIP (inflation protected) Treasury bond for $100, it yields about 1.6%.  Isn’t that the same as having a 62 PE multiple (that is, you’ll have to earn $1.60 a year for 62 years to get your $100 back)?  And just as buying stocks with a PE multiple of 62 generally would be absurd, doesn’t buying a bond with a 62 year payback also seem absurd?  I understand the flaws in this argument, but I think there’s also some validity to the comparison. What I’m suggesting is that yields on long-term Treasuries are ridiculously low and that buying at these levels seems awfully dangerous.

• How about those clever people in Japan ? They make a computerized TOTO toilet that goes for $5,000. You can program it to play different sounds like waves crashing, so while people in the other room will know that something’s going on in there, they won’t hear something worse. The seat is automatically warmed, and when you’re through, a robotic hose goes into action with a gentle spray.  We’ll skip the details in this family publication, but it finishes with a warm breeze of air that dries things off.  If you have boys at an age where they enjoy toilet humor, this one will give them hours of delight and lots of joke-making opportunities.
  
• Michigan’s Capitol Bancorp saw their tangible capital ratio worsen for the fourteenth consecutive quarter, falling to a scary 0.37%. Their Texas Ratio is about 261%, and we hate to say this, but we see no way they’ll survive. Even raising new capital would seem to be a miracle.
  .
• We recently showed the pictures of the little girl running down the road in Vietnam shrieking in terror, her clothes burned off by a napalm attack, this being the photo that caused millions of Americans to question our involvement in that war. It got me thinking of iconic images, those photographs or drawings which helped change history. There was a lot of bigotry and racial hatred surrounding the integration of schools in the late 1950’s and 1960’s, and when U.S. Marshalls escorted some little black kids to a newly integrated school in Arkansas, this painting by Norman Rockwell captured the nation’s attention and its conscience.  Despite all the hateful rhetoric, it came down to a young girl putting on her best clothes to go to the first day at a new school, carrying her notebook and a ruler, ready to meet new people and a new teacher.  Doesn’t this say it all?   Feel free to send in other photos or images you think captured a moment in history.

• Hannah Garrett caught a plane to fly across the country to start college on Saturday, and it all started about 19 years ago.  My wife and I were in a pregnancy class with 30-40 other parents-to-be, and when I looked to my left, two couples down were Mike and Marie McAuley!  Every time I looked his way, he and Marie were taking lots of notes, and as Mike likes to remind me, I was paying no attention to the speaker and was catching up on some past issues of American Banker. When they were teaching us the deep breathing stuff, I was down on the floor with everyone else rubbing my wife’s back, but I was busy reading some new OTS reg or something.  Mike was amused and astonished about my attitude, and I remember telling him, “Mike, let’s use some common sense here.  When a 6-7 pound baby comes through something that small, breathing deeply just is not going to make the pain go away. No way, Jose.”  For those of you who haven’t yet had a baby, you can forget all the deep breathing stuff. You just need to remember one word:  Epidural.

• Alanna McAuley and Hannah Garrett were born weeks apart and were great friends as little kids. Alanna is a sophomore at Georgetown , and Hannah Garrett starts her freshman year in a few days at Dickinson College in Pennsylvania , where she will join the equestrian team and hopefully attend some classes.  The 18-19 years we have our kids at home goes by far too quickly, but as British Poet Edmund Spenser wrote, “For a brief time, an endless moment.”

• And congratulations to Art Shafer, whose son Jamie is starting his freshman year at Fordham.  I’ve never met him, but I did see his website, and he’s a great photographer.  What if 15-20 years from now, Alanna McAuley, Hannah Garrett, and Jamie Shafer are all bankers? Frightening. Oh, and standing in line at the airport was Mike McMahon taking his son off to college as well. Mike ran warehouse lending at First Interstate Bank and is now with Redwood Trust.  By the way, Fordham is in the Bronx, but unlike NYU and Columbia which are sort of intermingled with the city, Fordham has a beautiful, classic campus.

• According to Steele’s College Football Preview, the beefiest offensive line belongs to the University of Idaho with linemen averaging 338 pounds. Can you imagine?  The next two are the Texas Tech and Arizona boys coming in at 324 pounds. The lightest line is the Air Force Academy at 259 pounds and even that’s awfully huge.
• Tommy Lasorda when he was manager:  “I walk into the clubhouse, and it’s like walking into the Mayo Clinic.  We have four doctors, three therapists, and five trainers.  When I broke in, we had one trainer who carried a bottle of rubbing alcohol – and by the 7^th inning, he had drunk it all.”
  

• Morgan Stanley is being sued by a group of Irish investors who claim they were sold a bunch of crummy derivatives (bonds backed by other bonds) that lost 80% of their value.  The plaintiffs are the Sisters of Charity of Jesus and Mary, The Holy Faith Sisters, and the Irish Veterinary Society.  No way they let this one go before a jury.  Morgan, Stanley has only been a bank holding company for two years, so this should help them understand the concept of Reputation Risk.
• With the thrift industry losing its own regulator in a few months, we should say a prayer for the dead, or at least a prayer for the dying. There was a time when companies like Ahmanson, Great Western, and American Savings played a big role in the growth of the economy, but I just looked at a list of the 100 biggest banking institutions, and only 14 were thrifts.  The biggest, ING bank with $91 billion of assets, is really a Dutch bank, and Charles Schwab Bank ($45 billion) and E-Trade Bank ($44 billion) aren’t traditional thrifts.  That means that only 10 of the top hundred depositories are thrifts in the traditional sense. Rest in Peace.
• For those of you who are historians, you’ll probably agree that FNMA and Freddie Mac killed the thrift industry. By commoditizing mortgages and promoting securitization, there was almost no profit in holding mortgages funded by deposits. So isn’t it ironic that these two GSE’s (a) first killed a once-thriving thrift industry, and (b) then killed themselves?
• Bonus:  Simple vs. Complex

Garrett, Watts & Co.

“Helping lenders increase revenues, control costs, and better manage risk.”

• Corky Watts   (408-395-5504)
• Mike McAuley   (281-250-2536)
• Joe Garrett   (510-469-8633)

One aspect of mortgage banking that can sometimes confuse those on the origination side is what investors like, or don’t like, about a lien or mortgage. One basic question is, “Who wants to pay 102 or 104 (a 2 or 4 point premium) for a loan that pays off in 3 months?” It was reported that both fixed and ARM jumbo speeds increased in July. Investors feel that either prepayments will continue to increase: prepayment speeds are rising, although are constrained by current LTVs and borrower credit constraints.

Barclays reported that “Overall non agency delinquencies were relatively flat with 30.4% of loans 60+ or more delinquent. Subprime delinquencies continued their decline dropping by 0.8% to 43.9%. Alt-A and option ARM delinquencies modestly improved by 0.2% and 1.2%, respectively. Prime delinquencies rose by 0.2% to 10.5%.”

(The rise in GNMA prepayment speeds recently is not only due to refinancing, but also to mass buyouts by Taylor Bean and Whitaker pools. Looking ahead, the FHA annual MIP is scheduled to go up to 85bp from 50bp in October, which should moderately dampen GNMA speeds.)

Barclays continues, “REO and foreclosure inventory have also been declining due to lengthened timelines associated with modifications efforts. Looking at the absolute number of units, taking out the denominator effect of paydowns and defaults, the declines are more pronounced. In non agencies, the number of homes in REO declined to 160k homes from the October 2008 peak of 327k. Since the start of the year, the number of REOs has dropped by 7% while the number of loans in foreclosure has dropped by 12.4%. This supports our view that government efforts and modification programs will keep the liquidation process orderly at a level that can be absorbed by the market without causing a double dip in housing prices.”

The Federal Housing Administration, which is either running out of money or is fine, depending on who you ask, is raising some eyebrows by insuring mortgages for apartments at a 98-unit Gramercy Park development in New York. The insurance enables buyers to make a down payment of as little as 3.5% in a building where apartments are listed at $820,000 to $3 million. Of course the developers of the project think its fine that the FHA, founded during the Great Depression, has the ability to do this. In Southern California, where the median home price is $300,000 (well above the national average), about 40% of the loans in the last 16 months have been insured by the FHA. Critics believe that it is time for HUD to brush off the FHA’s mission statement.

Late last week word broke about the proposed acquisition of NewAlliance Bancshares by First Niagara Financial Group for $1.5 billion – two healthy institutions! (It’s been a while since that happened in any large scale.) But then on Friday the folks at the FDIC were busy, “shuttering” 8 banks and assigning assets to other, hopefully stronger, institutions. This has happened 118 times this year, and Friday four banks were shut down in California, two in Florida and one each in Virginia and Illinois. ShoreBank (IL) went to Urban Partnership Bank (IL). Butte Community Bank, Pacific State Bank, Los Padres Bank, and Sonoma Valley Bank (all CA) were shut down, with Pacific Western Bank taking over Los Padres and Westamerica Bank taking over Sonoma Valley Bank. In Florida Community National Bank and Independent National Bank were folded into CenterState Bank. Lastly, in Virginia Imperial Savings and Loan Association went into River Community Bank.

Flagstar raised the minimum credit score requirements for all its Freddie Mac programs. “The minimum credit score requirements are also being increased on all Agency ARMs with a DTI exceeding 45%, targeted to Freddie Mac. Purchase and rate/term refinance transactions will be subject to a minimum credit score of 660. Cash-out transactions will be subject to a minimum credit score of 680.” This does not, however, apply to the Relief Refinance or the Open Access programs. And starting in a week, Flagstar Bank will be changing the price adjustment on FICOs 640-659 for the Guaranteed Rural Housing program from a hit of .250 to a hit of .50.

U.S. Bank Home Mortgage Wholesale Division applied additional restrictions to transactions involving a non-purchasing spouse (when a married applicant wishes to either buy or refi a property that was previously acquired without the spouse). After 9/1, for loans going to USB, it will be “necessary to have the non-purchasing spouse sign the mortgage/deed of trust (and applicable mortgage riders and disclosures) as a non- purchasing spouse and not as a borrower.  Having the spouse sign the mortgage as a non-purchasing spouse relinquishes the non-purchasing spouse’s marital right to the property and to the mortgage transaction in the event the spouse responsible for the mortgage defaults on the mortgage payments. Typically the non-purchasing spouse’s signature is required only to acknowledge in writing that the spouse has no claim on the property and that the spouse is not a borrower and not required to sign the loan contract. USB’s wholesale group also recently came out with a new Mortgage Loan Origination Agreement, to be signed prior to docs. USB is not requiring credit to be re-pulled prior to funding, but instead has provided clients with a form that is to be signed at application.
Lenders may remember that last month Fannie began requiring sellers & servicers to direct mortgage insurers to provide Fannie Mae with information concerning its insured loans, along with a form to do so. Folks selling to Fannie may know that by October 1, 2010, “each seller must instruct, in writing, each mortgage insurer of mortgage loans it is in the process of selling or may in the future sell to Fannie Mae to provide Fannie Mae with any and all information Fannie Mae may request concerning the mortgage and the insurance.”

The Mortgage Insurance Disclosure Instructions and Release form is available at the eFannieMae.com site. “The new MI reporting and validation requirements do not relieve sellers or servicers of their obligations to report mortgage insurance coverage terms completely and accurately to Fannie Mae, nor do they imply that the mortgage insurer rather than the seller or servicer will be the initial source of this data for Fannie Mae.”
Union Bank, starting Wednesday, is increasing the estimated fee for credit reports pulled by the company to $30 per report.

PHH told its correspondent clients that expanded guidelines will be permitted for loans that exceed PHH product eligibility but are within GSE allowances. (This exception is notpermissible when PHH is ordering MI, and the lender must comply with any declining markets restrictions.) It is available for Conforming Fixed, Conforming P&I ARMs and Conforming Plus Fixed products (loan amounts </$625,500), credit scores down to 660 are permitted, drive-by appraisals are allowed if ok’d by DU/LP, but loans with subordinate financing are not permitted.

Mountain West Financial told its brokers that, “All loans requiring MI with the following characteristics will require prior approval from the MI company: (1) Credit scores below 720 (2) Any LTV’s >90% (3) All Rate and Term Refinance transactions. MI Coverage is only available on Primary Residence Purchase transactions and Rate and Term Refinances. Second Home and Investment Property transactions are not available for MI Coverage. Maximum 41% DTI and 2 months reserves required.”

There will be Treasury auctions tomorrow, Wednesday, and Thursday. But of note are U.S. municipal bond sales this week, expected to total over $13 billion in 149 deals according to Thomson Reuters. Negotiated deals are estimated at $4.0 billion in 52 sales. Sellers such as Build America Bonds, the Southern California Public Power Authority, Windy Point/Windy Flats project, the Government Development Bank of Puerto Rico, and the states of Texas and New Hampshire, among others, are hoping that buyers step up. But these bonds, just like Treasury securities, compete with mortgage debt for investor’s capital.

Friday – both stocks and bonds worsened, mortgages by .375 in price by the end of the day which resulted in numerous rate sheet changes. (There wasn’t much news, but no market goes up or down forever, right?) $3.4 billion in MBS’s crossed the wires, with the lion’s share being 4% securities as U.S. 10-yr Treasury notes fell 12/32 to yield 2.62%. This week’s economic data will begin with housing market reports: the ever popular Existing Home Sales tomorrow and its brother New Home Sales Wednesday. Durable Goods Orders, an important albeit erratic indicator of economic growth, will also be released on Wednesday. And the week wouldn’t be complete without some previous release being revised – in this case 2^ndquarter’s GDP number, due out Friday. Later this week, we have Fed Chairman Bernanke’s speech at the annual Jackson Hole Conference, titled, “The Economic Outlook and the Federal Reserve’s Policy Response.” The 10-yr Treasury is chopping around 2.60% and mortgages are a shade worse.

What A Real Man Does
A real man is a woman’s best friend. He will never stand her up and never let her down. He will reassure her when she feels insecure and comfort her after a bad day.
He will inspire her to do things she never thought she could do; to live without fear and forget regret. He will enable her to express her deepest emotions and give in to her most intimate desires. He will make sure she always feels as though she’s the most beautiful woman in the room and will enable her to be the most confident, sexy, seductive, and invincible……..
No wait… sorry… I’m thinking of bourbon. That’s what bourbon does…
Never mind….

Rob

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