housing and the stock market – The Rubber Hits the Road – John P. Hussman, Ph.D. – … From the pattern we observed during the round of sub-prime resets, delinquencies tended to follow the resets within about 3 months, and foreclosure actions within about 6 months. Although the 2010 peak in the Alt-A / Option-ARM reset schedule doesn’t occur until July, with a much larger peak in mid-2011, a small initial round of resets is already in progress, having started about November of last year. I would expect that if we are indeed at risk of a second wave of mortgage defaults and credit strains, it will show up first as a surprising jump in 30-day mortgage delinquencies in the data we see over the next 2-4 months … – Hussman Funds

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Fighting the Headwind in Housing – Special Housing Market Edition – by Diane Swonk, Chief Economist, Mesirow Financial 

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3 NEAR-TERM RISKS TO THE (STOCK) MARKET – 1) Complacency  2) Catalysts  3) China  -   has charts and commentary – The Pragmatic Capitalist

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new term -   REVERSE FORECLOSURE – Desperate condo, homeowner associations thrown a lifeline – A new maneuver called reverse foreclosure helps condo and homeowner associations collect badly needed overdue maintenance fees. – BY RACHAEL LEE CO – … Under a reverse foreclosure, the association files its own foreclosure notice and takes title, which is its right after the homeowner stops paying maintenance fees. The association can’t sell because of the bank’s lien. But it can renounce its claim on the property in court and ask the judge to give the title back to the bank. Then the bank has to pay the fees.. … – Miami Herald

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4 Biggest Lies in Real Estate – by Ilyce Glink -  CBS Moneywatch

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RESPA legacy? – No More Pre-approval Letters, Say Lenders – By Peter G. Miller – As a result of the new mortgage borrower protections that took effect January 1st, some lenders are now saying they can no longer provide pre-approval letters … – thanks Peter – OurBroker.com 

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Mortgage Principal Writedown Won’t Save Housing – By: Diana Olick – CNBC

Testing the Rate Barrier – Every few months I draw the spotlight on long-term US interest rates as they approach a long held barrier.  Thirty year treasury yields have not been above 4.8% since the fall of 2007 but have tested the 4.7% level about 10 times since then.  I consistently draw attention to long-term interest rates because they are intimately tied to housing affordability and the cost of servicing debt. … – Surly Trader

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contract abrogatiopn ahead? – has slide show – A Preview: California’s Coming War On Banks And Pre-Crisis Swaps – Joe Weisenthal and Gus Lubin -  Clusterstock at
Business Insider

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3 must watch videos: Video From the “Make Markets Be Markets”  Conference Online – Simon Johnson, Elizabeth Warren, Frank Partnoy -  RortyBomb Blog

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Jim Rogers is long the euro – Tim Iacono – Famed investor Jim Rogers talked to Damien Hoffman at Wall Street Cheat Sheet and shared his thoughts about the future of the common currency in this interview:  …. " Either way, I think there’s probably a rally coming. There’s a huge short position in the Euro and whenever there’s been a huge short position in anything, it’s sometimes profitable to go to the other side. So, I am long the Euro because I think there are too many pessimists." … – The Mess That Greenspan Made

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What Gen Y-ers Will Need to Retire – Breaking down Gen Y’s $2 million retirement price tag – By Carla Fried – CBS Moneywatch

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Morgan Stanley: The 15 Must-See Charts That Explain The Global Economy – Vince Veneziani – … Inside the 88-page report is a section called "Charts You Can’t Miss." It’s broken down in the following order of countries: Global economy, Europe, Asia (excluding Japan), and Japan. These charts focus on the underlying issues that truly affect our economy. … – Money Game at Business Insider

At the last company Christmas party the loan agents lined up on one side of the room and the underwriters on the other side. The loan agents throw fire cracker at the underwriters…and the underwriters lit them and threw them back.

A long-time underwriter wrote to me and opined, “Consumers always want more than what they can afford and we gave them exactly what they wanted for the last 10 years (without any prudent financial advice). I actually like the guideline changes and feel it is necessary to eradicate some of the broker mentality that I hear in some underwriter’s voices.  Manufacturing quality is still a problem for the Agencies, and originating mortgage companies are still closing loans that are not 100% purchasable by the aggregators upon delivery.  Fannie and Freddie have technology in place to turn the lender’s cash immediately, and then are rejecting the loans once they figure out all the doctoring that happened to make a square peg fit a round hole.”

Another wrote saying, “I oversee the Secondary desk at our company and I also originate loans. [Interesting.] As difficult as the last three years have been, I am still seeing mistakes due to a lack of educated and qualified workers in our industry.  Unfortunately some of those people are compensated on a per loan basis, possibly even the underwriter.  So until quality becomes a part of our DNA, expect more of the same for the next few years.”

Yesterday I mentioned how the spread between mortgage rates and Treasury rates were the lowest (tightest) they’d ever been. (Remember that any difference is due to a number of factors, including the higher risk in owning mortgages, the possible difference in duration, etc.) Mortgages continued to tighten yesterday – so even if Treasury rates moved higher, mortgage rates might stay the same. Investors want to “own yield”. The usual suspects were in buying: the Fed, money managers, and hedge funds, and it would appear that production volumes are lagging. So although traders were fretting over swap and roll levels, originators are more consumed with the general level of rates, which really hasn’t moved that much in quite some time.

Fair Isaac Company, known as FICO, reported that credit score trends indicate that mortgage default risk for consumers with high FICO scores is now moving toward exceeding their credit card default risk, in spite of the fact that credit cards are generally unsecured and mortgages are secured by real estate. In 2005 bankcard accounts were more than three times more likely to become 90 days delinquent, but in the last few years this has dropped to only 1.6 times more likely. And FICO reports for borrowers scoring high on the FICO score’s range (300-850) the level of repayment risk actually has become greater for real estate loans than for bankcards! And for more fun with numbers, in 2005, 46% of consumers who opened a new mortgage had a FICO score less than 700. In 2008 this percentage had dropped to 25% of the newly booked mortgage population. Fair Isaac reports that borrowers in the Northeast continue to present the least amount of default risk nationally for real estate loans.

Wells correspondent customers were reminded that if at any time a new GFE is required per RESPA regulation, “Wells Fargo will require closed loans submitted for purchase to contain Changed Circumstance documentation explaining the reason for the new GFE.” Wells requires “the initial GFE and any subsequent GFE(s) re-disclosed as a result of RESPA compliance to be included, in the closed loan file, in order of date” and sellers are suggested to use “documentation generated by their own systems and process, or use the optional Changed Circumstance Detail Form 30 (Seller Guide Form 30).”

A new test allows men to check their sperm count at home. At least that’s what the men say they are doing… (This has nothing to do with mortgages, but figured I’d throw it in to see if folks actually read this.)

We began the year believing that rates were heading higher, with the Fed “tightening” and making credit costs higher – but this tightening cycle will be different. There are two policy decisions for the FOMC to make, the first being increasing short term rates, but also having to deal with its asset holdings (all those securities it owns). Obviously some mortgages pay off, but the Fed doesn’t necessarily want to own mortgage-backed securities or agency debt until their maturity in 30 years – they prefer Treasury securities. Watch for selling to start this summer – which could lead to mortgage spreads increasing. One scenario I’d read about stated that if the Fed chooses to leave $1 trillion of 4.5% mortgages on its books as it starts to raise rates, and inflation really picks up, the Fed could find itself paying out 10% or more as interest on excess reserves and receiving only 4.5% on the assets. This, in turn, would lead to $55 billion of annual losses (and $300 billion in mark-to-market losses) will set them up as a politically weak inflation fighting central bank.

How are rate lock periods determined? Companies certainly don’t want to run up against GFE and RESPA issues, for one thing, in setting deadlines. On the investor side, for brokers, Wells Fargo reminded them that “We’re serious about closing purchase deals on time!” Wells will “provide an initial decision within two business days of receipt of the complete file for all first mortgage purchase loans. If you submit your loan with a Wells Fargo Home Equity Line of Credit product, it will also be decisioned within two business days of the first mortgage approval. We can meet the closing date if the loan has been locked and all prior to close conditions (including all pre-close documents) are received at least 10 business days prior to the closing date.” Wells doesn’t outright tell brokers that it will close a loan within whatever lock period the broker sets, but it is almost the other way around. Wells goes on to tell brokers what pre-close documents are needed, how many days ahead of closing brokers should submit a complete file (20 business days), etc.

The MBAA released its weekly survey of applications for the previous week. Apps were up slightly versus the previous week, with refinancing was down 1.5% but purchases showed some life and increased 5.7%.

Yesterday’s 3-yr T-note auction of $40 billion was the fifth consecutive month of this size, and the auction went well. If you think about it, the short end of the Treasury market continues to be well supported with the ongoing sovereign debt issues (there is still some flight-to-quality bid) and outlook of rates. We’ve had three days (including today) of no real economic news, so supply (mortgage selling and the Treasury auctions) is continuing to be the main driver in the market. We have $21 billion of 10-yr notes to buy today. The current 10-yr is yielding 3.72%, and mortgage prices are about unchanged from Tuesday’s close.

Father Murphy walks into a pub in Donegal, and asks the first man he meets, “Do you want to go to heaven?”
The man said, “I do, Father.”
The priest said, “Then stand over there against the wall.”
Then the priest asked the second man, “Do you want to go to heaven?”
“Certainly, Father,” the man replied.
“Then stand over there against the wall,” said the priest.
Then Father Murphy walked up to O’Toole and asked, “Do you want to go to heaven?”
O’Toole said, “No, I don’t Father.”
The priest said, “I don’t believe this. You mean to tell me that when you die you don’t want to go to heaven?”
O’Toole said, “Oh, when I die, yes. I thought you were getting a group together to go right now.”

Rob

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

To Our Clients, Colleagues and Friends,

• California’s General Obligation bonds yield about the same as bonds from Greece , but anyway, 30-year California G.O.’s are paying 6%.  Because they’re exempt from state and federal taxes, higher-income Californians in a 40% combined federal and state tax rate get the equivalent of a 10% yield. Not bad.
  
• Audited financials are starting to come in, and they’re confirming what we saw all year.  Top performing mortgage bankers made 90-100 bps per loan.  That means that for every $100 million you closed, you should have (and could have) earned $900,000 to $1 million.  If you didn’t make this much, you need to look carefully at why you didn’t.  Or call us for a FOCIS-plus diagnostic to see what you can do to boost earnings per loan.
  
• The top quintile of companies we saw during the year all made over 100 bps per loan, with the top performer making 121 bps. For every $100 million they closed, they made $1.21 million.
  
• We got a tidal wave of Cult Movie nominations.  These were the top vote getters:

Rocky Horror Picture Show was the runaway favorite, but the rest are not listed in any particular order.  The Great Lebowski was a big favorite, and Night of the Living Dead just barely missed. For those of you new to this newsletter, Rocky Horror is a musical about an innocent couple that stumbles upon a castle filled with transvestite vampires.  This was one of Susan Sarandon’s first movies.

• What most mortgage company Boards are somewhat clueless about is their earnings broken down into bps per loan.  We see companies that did, say, $1 billion last year and earned 35 bps per loan.  Although that makes the company a big underperformer, Directors or outside investors go “Gee, how about that, we made $3.5 million. Hot damn!”  The reality is that they could have made at least 90 bps, which translates into $9 million! 
  
• Last week we noted that there are 200 billion stars in our own galaxy, and we asked just how many galaxies there are.  In response, someone sent us this fascinating video clip .    Watching it makes you wonder about all those things like just how big the universe is, does it have an end, if it ends, what’s on the other side, and, hey, aren’t there some Love Boat re-runs on TV right now?
  

• What do you think of mortgage companies that use the word Bancorp in their name?   It’s illegal to use the word bank unless you’re a real bank, but using the word Bancorp is legal.  We know some very decent people that have Bancorp in their name, but we think it’s deceptive. If you’re not a bank, you shouldn’t use language to imply that you are one.

• This is depressing: We just read Time magazine, the one with Tom Hanks on the cover, and it has only 60 pages.  We still have the November 6, 1989 Time which featured the breaking apart of the Soviet Union , and that issue was 119 pages. The latest issue of People magazine is 164 pages.  We don’t even want to know what this says about our culture.
• We knew Marion Berry was a crack head, but we didn’t know what a comedian he is.  He was recently stripped of his committee chairmanship on the Washington , D.C. City Council for illegallly funneling city money to his girlfriend.  Anyway, his response was “You can take away my committee Chairmanship, but you can’t take away my dignity.”  What?   His dignity? This is the mayor who was caught on tape snorting crack, and he’s defending his dignity? This guy should do stand-up comedy. 
  
• If you worry that there will be no one left to refinance soon, you should know that about 37% of all people with a mortgage have loans at 6% or higher.  That’s $1.2 trillion sitting out there, and yes, many can’t be refinanced, but many can.
• And how about good old Suburban Federal Savings ( Crofton , Maryland ) with a 614% Texas Ratio?  Does their President ever get a good night’s sleep?
• A year ago, everyone thought the world was coming to an end and that stocks were going to zero, but that was precisely when things bottomed out and started to turn around.  Here are the top performs of the past 12 months.

A few others: Microsoft (88%), IBM (52%), Coca-Cola (38%), McDonalds (63%) and Wal-Mart (47%).

• When you look at how Fannie Mae and Freddie Mac have changed things, one of the biggest changes is making refinancing much, much easier.  Pre-1986, there was no premium pricing, and thus, there was no such thing as a no-points or no-cost loan.  In about 1986, the two agencies started buying loans at prices above par, and the 1-2 point rebate allowed lenders to pay the loan officer’s commission and some of all of the closing costs.  Prior to this, a refinance would cost the borrower points plus costs, and as a result, it didn’t make sense to refinance unless you could lower your rate by 2.0 points!  Overnight, borrowers could refinance to save an eighth.

• The New Jersey Nets of the NBA are 7-56 for a .111 winning percentage.  If you extrapolate that onto a baseball over a full season, their record would be 18-144.  Even the Washington Nationals aren’t that bad.
• We were talking to a friend at lunch recently and somehow the topic came up of how much safer the world used to be. We’d read that crime rates have been dropping dramatically, so we looked up some FBI data on murder.  
  

This chart shows that the homicide rate is about where it was in 1950.  Here’s a graph going all the way back to 1910.  Look at how close 2008 and 1950 are.

A lot of why we think crime is higher is that the media plays up violent crimes more than in the past. The 24-hour news cycle means that editors are constantly looking for items to fill the hour, so even smaller crimes of violence get bigger play.

• We had a good response to the Steve Dalkowski item, so here’s one more tidbit.  At the end of his career he had a season with a really low ERA.  Manager Earl Weaver had his IQ tested, and when he learned that Dalkowski had an extremely low IQ, he figured out the problem.  Dalkowski just got too mentally flustered trying to handle a fastball low and inside followed by a curve low and away. Weaver told him to only throw one pitch the whole game, all fastballs right down the middle. His theory was that it didn’t matter if the hitter knew what was coming.  At 110 mph, no one was going to hit the ball anyway. See the attached article for more.
• With so many banks re-capitalizing, we remember what Allan Garrett (1917-1992) told us.  He said you should never invest when a company does a recap.  “Always wait for their second offering.”  His view was that most companies underestimate how bad things are and will have to come back to the market at least once more. The guys in the first recap will get diluted, so wait till the second one.

• Have you ever wondered which members get to vote for the Academy awards?  There are 5,777 people who get to vote, broken down per the following.

Can you actually get an Oscar for hair?

• Mike Abdelaaty of Islamic-oriented Bank of Whittier sent us a copy of the Qur’an (Koran) and we finally got around to reading it. It seems very respectful of the Jewish and Christian Bibles, and in some ways, it seems a continuation of both. Prophets such as Moses and John the Baptist are treated with great respect, and it seems to believe in the God of Abraham as well as of Jesus.  There is a popular belief that the Koran preaches violence and intolerance, and we have to tell you, we didn’t see any of that.
• From micro-cap bank newsletter The Vulture’s Roost: “When the FDIC has gotten rid of all its nasty little banks, and the banks that have struggled but didn’t get closed are cleaned up, we think there will be more banks for sale than you can shake a stick at. The Directors and management will be sick of banking. Directors join Boards of banks to hang with their buddies, eat lunch, and fall asleep while management recites its boring litany. They join Boards to be big shots in their communities, but the Directors of problem banks end up being worthless dogs who have lost money for their shareholders and who have to call in the loans of friends. Therefore, we predict that there will be a ton of banks that are ready to sell….”  What’-his-name at the Vulture’s Roost is a sharp bank analyst and a great writer.
• And three cheers for tiny Saint’s Mary’s College here in California .  They finished the season at 26-5 and are headed for the NCAA championships.  Go Gaels!

• The Combined Ratio is a good way to measure insurance companies, and it seems to be just as meaningful for mortgage insurers.  If the number is under 100, you’re making money. If you’re over 100, you’re losing money.

The M.I. companies are going through very difficult times, but the mortgage industry needs them more than ever, and they’ll come back strong.                           
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Garrett, Watts & Co.

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

• Mike McAuley   (MMcAuley@GarrettWatts.com )
• Corky Watts      (CWatts@GarrettWatts.com) 
• Joe Garrett      (JGarrett@GarrettWatts.com )