Fed’s plan for buying conforming mortgage securities may help

Happy New Years tonight! I will be in Manhattan (after visiting Philly and Delaware ) tonight, but probably no where near Times Square when the ball drops – it is supposedly packed. Remember what was going through mortgage banker heads a year ago? It was probably something like, “I hope that I can push off client calls until after I get back from vacation” or “I am sure glad that the ‘experts’ think that we’re in the 7th inning of this crisis.” Well, this year probably neither is happening, and brokers everywhere are sticking around to field calls and are putting pressure on Ops staffs to fund those loans!

The Federal Reserve released implementation details on its previously announced program (dated November 25, 2008) to purchase mortgage-backed securities. This is a new step that the government has taken to demonstrate its resolution to keep mortgage rates low, help the housing market & distressed home owners. Only fixed-rate MBS securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae are eligible for purchase. Other products such as hybrid ARMs, jumbo loans, and structured bonds (CMOs, REMICs, Trust IO/POs, and other derivatives) are excluded. Purchases are expected to begin in early January 2009, and up to $500 billion will be bought, which is in addition to the Treasury’s agency MBS purchase program, which has been running at $20-25bn in recent months. The potential size of the Fed’s purchase program ($500bn) can take down most of the 2009 agency MBS net supply. Therefore, the program may drive conforming mortgage rates even lower, possibly solidly into the 4% range (compared with 5.25% which is about where they are now).

For economic news yesterday we had the Case-Shiller Index showing a decline of 19% in home prices in U.S. Metro Areas (with the worst being in the Sun Belt).  The indexes showed prices in 10 major metropolitan areas fell 19% in October from a year earlier and 3.6% from September. The drop marks the 10-city index’s 13th straight monthly report of a record decline. Phoenix and Las Vegas were again the worst performers, with drops of 33% and 32%, respectively, from a year ago. San Francisco , Miami , Los Angeles and San Diego followed, with declines between 27% and 31%. Consumer Confidence hit a record low of 38, but the Institute of Supply Management index moved up slightly from 33.8 to 34.1.

This poor economic news failed to help our interest rate markets, as investors are worried about the supply that will be coming onto the market to finance the deficit. The government needs to finance a bailout of the banking system and an economic stimulus plan that members of President- elect Barack Obama’s transition team said may cost $850 billion. And speaking of borrowing, FHFA Director James Lockhart said that in spite of the government guaranteeing Fannie and Freddie debt (are they still two separate companies?), their borrowing costs will probably not go down.


Ira Artman’s Sterling Slivers - The 2008 Oscars

Source: US Patent 5,783,263; S. Majetich, M. McHenry, J. Artman, S. Staley - Process for Forming Nanoparticles - Figure 3,  5 Jun 1996. 


Departmental Secretary:
I worked for the late Joseph Artman, who taught physics at Carnegie Mellon University.  Here is his favorite recollection. 

On the first day of a semester, Professor Artman, clad in his usual flannel shirt, work pants, and boots, was cleaning the blackboard.

Two freshmen entered his classroom and took seats. After he finished and without saying a word, Artman proceeded to write out a series of equations for his upcoming class.  One student looked at the other and said, “Wow, this is a tough school! Look, even the janitor knows calculus.”
Source: Reader’s Digest/Topica Teacher’s Lounge - Tough School, 01 Jul 2001

My late father’s middle name was Oscar, and I’d like to announce MY 2008 Oscar nominations in his honor.  These awards reflect what I considered to be my best posts in each of the specified categories.  The competition was fierce, and my judgment is final. Just like Dad.  Recipients receive a  plaque featuring the stylish red and yellow emblem above.

Those of you who are new to my scribbles should enjoy this post more than those who have already read them.   But you never know.

All titles are linked to the original posts at Bill Coppedge’s MortgageNewsClips.com.    I can not thank Bill enough, but I will keep trying. Thanks.  Below are the winners.

Best Comic Post  - Java Jive
What happens AFTER Starbucks becomes a bank.

Most Poetic Description of Mean Reversion - 100 Years of Habitude
100 years of asset returns, according to Deutsche Bank, in only 6 pages.

Best Supporting Aquatic Mammal - Endangered Specie
What happens when you cross a beluga whale with the US banking system.

Best Career Advice - Back To The Future Value
It’s all about the servicing.  Really.

Best Colonial Real Estate Related Crisis - All Philled Up
How colonial real estate acquisitions financed King Philip’s War.

Best Post Containing Sentences All Beginning With Same Letter - Chillin With My G’s
Golly. Guess I’ll have to re-read this one. 

Most Discouraging [Tie] - Dissembly Required & One At A Time
Despite the wholesale bailout efforts, recovery will occur at a retail and glacial pace.

Best Picture - Erode Ahead
Wreck of the American Star, the ship and the industry (finance).

Most PrescientCash Machine
Banking on GMAC.

Best Sherlock Holmes Cameo Appearance - The Dog The Didn’t Bark
If the Fed had not shirked its regulatory responsibilities, things wouldn’t be so ruff.

Most Appreciative of Alan Greenspan - No Place Like Homes
When he told us that housing was important in 2005, he meant it.

Most Spirited - The Housing Dickens
Three ghosts, one night, no waiting.

Best Helicopter Flight - Is It Now Safe To Move About The Cabin?
Up in the air, and only six months too late.

Most Unlikely - Thar She Glows (Whaling and Forestry)
You can learn a lot from history if you don’t forget it.

Best Title - Once They Were Gods
Will the last one out of banking, please remember to turn off the lights?

Most Obvious Way To Fix The Crisis - Way and Means
Sell! Sell! Sell! … rather than Buy! Buy! Buy!

Most Lucrative and Constructive - Rollback
Let banks make money the old fashioned way, by arbing imprecisely specified government regulations.

Most Predictive of Future Woes - Fee Stooges
Nyuk! Nyuk! Nyuk!  Are we really that stoopid? (Yes!)

Best Post - Follow The Money
(Seeking Alpha Editor’s Choice & RiskCenter Top Story)
The little guys always pay for the big guys.

- - - - - - - - - - -  
I used to work with numbers for a living, and next year will continue my search for a new job or my next idea.  Till next time.  Happy New Year. Enjoy the extra second.

MortgageNewsClips: Must Read - Japan and Us, QVM on UST, Obama Plays Poker, Paul McCulley, Richard Bove Sees Hope, Video 2009, Crushed by Refis, Bye FHA Secure, Ray Romano, Only Investors, GMAC Gets $6 Bil, Ira Has 5

    ’08 Was a Helluva Year. Hoping ’09 is better. Happy New Year!    BC

 Northern Trust

MUST READ: History Repeats Itself in Different Hues – Japan vs. United States - by Asha G. Bangalore  - Several questions pertaining to the Japanese economic crisis and quantitative easing have been trickling in as unprecedented economic and financial events unfold in the U.S. This Q&A is a bird’s eye view of the trying period of Japan’s economic history and recent economic and financial developments in the U.S. economy. - Northern Trust - thanks to Prier du Plessis for pointing this out. 

Interest Rates? - many thoughtful comments and charts - Treasuries Will Disappoint — Continued - QVM Group LLC 

Obama Plays Poker With Homeowners, Taxpayers: John F. Wasik - Managing your financial affairs in this season of political transition is like being in a poker game when a stranger shows up. It’s hard to know how to play a hand until you get a sense of the new guy’s strategy. President-elect Barack Obama is now at the table, and he’s got a mountain of chips. - Bloomberg


PIMCO’s December 2008/January 2009 Global Central Bank Focus, “All In” by Paul McCulley, is now available at PIMCO

1.  Analyst Bove: US banking sector’s outlook better than believed - Reuters 

2.  U.S. puts up $6 billion to support auto lender GMAC - Mark Felsenthal - … The Treasury Department said it would buy $5 billion in senior preferred equity with an 8 percent dividend from GMAC as part of an effort to ensure the solvency of a company considered crucial to GM’s survival.  It also said it would lend up to $1 billion to fund GM’s purchase of equity in support of GMAC’s reorganization as a bank holding company.  … -   Reuters


Video Sneak Peek: Global Economy 2009 - Paul Maidment - Fragile economies, excess money, inflation and creative destruction. - Forbes 


Area mortgage lenders getting crushed by refi applications - By BARRY SHLACHTER - Ft. Worth Star Telegram


HUD Kills FHASecure - PAUL JACKSON - Updating an earlier report on HousingWire, the U.S. Department of Housing and Urban Development has issued a formal letter confirming its termination of the FHASecure troubled borrower refinancing program. The mortgagee letter, 2008-41, confirms that the program will be terminated on Dec. 31. “Maintaining the program past the original termination date would have a negative financial impact on the MMI Fund that would have to be offset by either substantial across-the-board single family program .. - housingwire

The other Ray Romano? - Freddie Mac names chief credit officer - Mortgage giant Freddie Mac named Raymond Romano as its chief credit officer Monday. - Sacramento Business Journal


Only Loan Investors Can Drive Recovery Efforts For The Industry - By W. Joseph Caton - good primer - Banks and other lending institutions often sell outstanding loan obligations to investors and buyers who are looking for income streams or other access to cash-flowing assets. - MortgageOrb 


   IRA ARTMAN SECTION - thanks Ira: 

3 Questions: James Poterba on the recession - … In this installment, James Poterba, the Mistui Professor of Economics, discusses the current economic recession and how long it might last. In addition to service as an MIT faculty member, Poterba is president and CEO of the National Bureau of Economic Research (NBER), a private group of leading economists that dates the start and the end of economic downturns. … - MIT News


Did those people at AIG not understand anything about financial risk? - Posted by Justin Fox - Curious Capitalist @ Time.com 


Huge article: Fannie Mae’s Last Stand - Bethany McLean - Many believe the government-backed mortgage giants known as Fannie Mae and Freddie Mac were major culprits in the economic meltdown. But, for decades, Fannie Mae had been under siege from powerful enemies, who resented its privileged status, its hard-driving C.E.O.’s, and its huge profits. Surveying Fannie’s deeply dysfunctional relationships with Congress, the White House, and Wall Street, the author tells of the long, vicious war—involving most of Washington’s top players—that helped propel one of the world’s most successful companies off a cliff. - Vanity Fair


Dubious Statistics of the Day, Toxic Mortgage Edition - Felix Salmon - … Let’s say that a researcher in bed with some pressure group — let’s call him Samuel Bornstein — approaches a very large number of journalists with his silly research. And let’s say that the vast majority of those journalists take one look at his research and ignore it. That’s fine, until Bornstein chances upon Randall Forsyth. Next thing you know, there’s a column in Barron’s giving credence to the research, and anybody reading the article has no indication whatsoever of how weak the research really is. … - Portfolio.com


Federal Reserve announces details of program to purchase mortgage-backed securities - Released by the Board of Governors of the Federal Reserve System

Appraisal morass, Raising the FHA FICO bar, Investor updates, and Be careful out there - Loan level fees going up

In the news, besides Ms. Palin becoming a grandmother up in Alaska (the baby’s name is Tripp), you know how bad the economy is? This week, Exxon Mobil had to lay off 25 congressmen.

Only one event in American history was allocated more money than the Treasury’s TARP program. Do you know what it was? -  See Big Budget Slideshow at CNBC.com

How are the new appraisal procedures working out? One owner of a brokerage wrote to me and said, “I decided to be proactive and use an appraisal management company on 5 deals this month. 4 out of 5 of my appraisals were useless. I had the appraisals reviewed by a current appraiser. He stated that they were very sloppy and if he did them they would have been appraisals that I could have worked with and values that he could stand behind and were not inflated. This should shave off about 30% of the deals going forward not because values aren’t there, but because appraisers are going to now have the work ethics of government employees.” Wells Wholesale implements the new policy as of January 5th.

Since Fannie Mae is increasing the Property Inspection Waiver fee from $50 to $75 with loans delivered to them on or after February 1st, watch for large investors to do the same shortly. For example, Chase sent out an announcement stating that, “all PIW eligible loans using the $50 PIW fee must be delivered to Chase in fundable condition on or before January 5, 2009, regardless of lock expiration.”

Speaking of Fannie, yesterday they announced that, “Effective for whole loans purchased on or after April 1, 2009, and for mortgage loans delivered into MBS with issue dates on or after April 1, 2009, we will implement new and updated loan-level price adjustments (LLPAs) for loans with certain risk characteristics. Updated LLPAs will apply to: A number of LTV/credit score combinations, certain cash-out refinance transactions, loans secured by two-unit properties, and loans with subordinate financing. New LLPAs will apply to: Interest-only loans and loans secured by condominium and cooperative properties.

U.S. Bank Home Mortgage Correspondent Lending Division is discontinuing their remaining My Community Program. Effective close of business tomorrow, USBHM will no longer accept any locks on My Community Mortgage Program #3514. Floating pipeline loans should be locked by tomorrow.

Chase Wholesale will no longer accept the following FHA and VA loan transactions with a representative credit score less than 620: All FHA transactions, including FHA Streamline refinance transactions, and all VA transactions, including VA IRRRL transactions.

Yesterday’s problems in the Middle East not only caused oil prices to rise, but a flight to quality in US Treasuries. Unfortunately mortgage rates didn’t tag along for the ride, and buyers backed off their prices during the day. On today’s economic agenda, October’s composite home price index is expected to decline -17.9%, a new record low, due to the inventory of homes and weak economic conditions. The Chicago PMI is expected to decline -0.8 points to 33.0, far below the neutral level of 50.  We also have Consumer Confidence, expected at 45.7. Ahead of all of that, the 10-yr yield is around 2.16% and mortgage prices are worse by .125-.250 versus yesterday afternoon.

The owner of a mortgage bank in North Carolina was confused about paying an invoice, so he decided to ask his secretary for some mathematical help.
He called her into his office and said, “You graduated from Appalachian State University in North Carolina and I need some help.  If I were to give you $20,000, minus 14%, how much would you take off?”
The secretary thought for a moment, then replied, “Everything but my earrings.”
You gotta love those North Carolina mortgage bankers.


MortgageNewsClips: Let’s Help Nathan, Low Rates Spur Defaults, Sandlers and POAs, John Dugan Speaks, Prepare For Stimulus, 5 Smart People, AIG, Bob Eisenbeis 2009, Paper Trail, Ira has 2

3 Home Mods in progress - …Nathan, an “investor”, has 3 loans he is trying to modify. Here is what he said - “… we stopped making payments on all three homes because we figured we might as well save the money since we don’t know if we will be able to keep he homes.” … Foreclosure Forum at LoanSafe.org 


Low Mortgage Rates to Spur New Wave of Defaults - has reasons loans are not making it out of application stage -   MR Mortgage



On the Sandlers and POAs - The Problem With Option ARMs - Felix Salmon - portfolio.com 


A Mortgage Regulator Speaks Out - John Dugan, the Comptroller of the Currency, suspects that lenders aren’t doing enough to reduce the mortgage burden on homeowners - … Dugan spoke with BusinessWeek Banking Editor Mara Der Hovanesian about the new report and the need for regulatory change. An edited version of the conversation follows … - BusinessWeek 

1.  Prepare for Stimulus - Vahan Janjigian - You can question whether Obama’s plan will succeed, but don’t doubt that alot of money will be spent. - Forbes 

2.  5 Smart People - A look ahead into the coming year. - Forbes editors and writers take a look ahead at U.S. business and the economy in 2009. Click on the authors to read what they think will be the big trend, hear their unconventional wisdom, be cautioned against misplaced assumptions, check the watch list and get a bold prediction. - Forbes 


AIG Retires $16 Billion in Swaps With Federal Help - By Hugh Son - Bloomberg 


Looking Ahead to 2009 - Bob Eisenbeis -  has 7 areas of interest - Cumberland Advisors 


A Mortgage Paper Trail Often Leads to Nowhere - GRETCHEN MORGENSON - … But lawyers who represent candidates for modifications say the programs are hobbled by the complexity of securitization pools that hold the loans, as well as uncertainty about who actually owns the notes underlying the mortgages…. And here is another hurdle: Most loan servicers — the folks responsible for handling all the paperwork surrounding monthly mortgage payments —   aren’t set up to handle all of the details involved in a modification. … — NY Times


GMAC quiet on bailout hurdle after deadline passes - (AP) — Even after a crucial deadline came and went, the financing arm of General Motors Corp. remained silent Saturday on whether it cleared a final hurdle to become a bank holding company and gain access to billions in federal bailout money. … GMAC had received the Federal Reserve’s approval to become a bank holding company earlier in the week, but the approval was contingent on the ailing auto and home loan provider completing a complicated debt-for-equity exchange by 11:59 p.m. EST Friday. -  AP Google


   IRA ARTMAN SECTION - thanks Ira: 

Man of the Year (Paul O’Neill) - The New York Times earlier this month contributed a memorable anecdote to the lore of this crisis when it reported on the emergency session that took place in the Roosevelt Room of the White House on the day after the credit markets shut down.  - David Warsh -  Economic Principals 

Good Reference - Save This and try it out City-Data.com  interesting web site with home price look up/comps [put in your zip]

Projected Highlights to Come for 2009, by Jim Monachino

(Warning: This is quite bearish.)

Holiday Greetings To All,
2008  is winding down and we will soon be starting 2009.  Looks like a another bump in the road for the World Economy. However, there is opportunity for some of us, if we realize it won’t be business as usual, rather, it will be a new deck and a new deal.

Projected Highlights to come for 2009

  • Deflation:  Phase Two hits with high unemployment (Looking for 10% plus by year end) and accelerated bankruptcies across the board while the CRB Cash Index continues to grind lower with a few keep-em-honest mini rallies through out 2009.
  • Run Away Inflation: Sorry, Fed and World Central Banks will not be able to pull that one off to get everyone off the debt hook.  Look at the velocity of money in circulation (or guess at it).  All the de-leveraging taking place at the Consumer, Business, Money Center Banks, and Governmental levels are crushing the International Stimulus Package efforts, at least near term.
  • Dollar begins to Strengthen: by 2Q as other countries an economies continue to wind down and catch up with the US slow down.  Another words, dollar strengthens by default not necessarily by improving fundamentals.
  • Gold: stays under 2008 highs (Previous highs were slightly over $1,000) and look for large cracks in prices developing in the numismatic coin market.
  • Residential Real Estate:  continues to slide down, no near term bottom in sight for 2009.
  • Commercial Real Estate: Joins the party in a big way as businesses and leases fail leaving huge empty spaces.  At first it will look like teeth are missing from a  beautiful smile.  Construction on some buildings will stop mid way as the excess capacity is drained from the system.  Bids for the Commercial Bond paper will become scarce at any price.
  • National Health Care:  Comes to America not by choice but out of desperation.  Look for a single payer National Health Care Program begin to emerge in 2009.  Crushing business and individual costs along with rising uninsured numbers that are now above 40 mm plus will force the issue.
  • Worker Collective Bargaining: will re-emerge again as workers desperately try to hang on to their jobs and not get run over by business interests. This will be a long and painful process for everyone.
  • Tariffs: or defacto job protecting legislation (This could also take place through the creation of special business sector incentives) will begin to emerge with consequence regarding international trade. Look for trading partners to be doing similar actions.
  • Civil Unrest: in the cities will flare up.  The downturn will occur as an over leveraged citizenry becomes ugly as built in safety nets are unable to hold the numbers.  Possible use of regular Army may be seen to assist crowd control efforts by using the cover of a military exercise or tagging it a monitoring and assist event for Homeland Security purposes.
  • Legacy Leadership: will begin to disappear in both business and government. It will be done quietly but in the next couple of years all new faces will be up front.
  • Nationalization of the Federal Reserve:  I know, hard to believe.  But it happen before in the 1940’s and I believe it will happen again.  Their is precedent, and the while Ben and Greenie (Greenspan) should get an A for effort they clearly failed us in application - F. (This is my wild card call looking to happen in the next couple years as the economies slow recovery start to choke on huge public debt.) 
  • Govt Bankruptcies (light): at the Local, State, Federal and International levels. Look for the emergence of payment default holiday’s to become more common as a useful tool to try and keep decaying infrastructure going.
  • Business Bankruptcies: Consolidation will continue to occur as many business both large and small will slip  under the water and disappear. High unemployment, falling real wages, and eroding family net worth (from declining Property and Retirement Programs) will continue to conspire to disrupt consumer purchasing power.
  • Equity Markets World Wide: continue to grind down with a few brief rallies through out the year.  Be careful in 2009 you don’t get suck into a decaying market prematurely.

FYI - Some stocks took over 20 years to reach old 1929 prices while many never made it at all.

  • Strategy: The old two step might be needed - - regarding the preservation of your principle which should be your main focus during a major world wide deflationary period.  I am completing that strategy as we speak and will share the results with any who may be interested.

That’s all from the sidewalk economist who can also be reached at my blog,

MainStreet Money Monitor       Direct link to post above is here.

Your comments are welcome, and I realize and hope I am way off on this one versus what my cyclical charts seem to be indicating. 

Happy, Healthy, and Safe Holiday Season,   Jim

Jim Monachino is a member of the MortgageNewsClips community. 

(Thanks to Jim for sharing his thoughts. - BC)

Why Zero-Rate Policy Will Fail, by Victor Hong

Here is a simple supply-demand analysis of why the current zero-rate policy will fail.  Draw a supply-demand table in Economics 101, to represent the private credit market.  The highest amount of private credit flows where the supply and demand lines intersect, which also determines market-clearing interest rates.  If rates are artificially set too high or low, private credit disappears, as either users (industries, consumers) or providers (lenders, investors) retreat from unprofitable terms, respectively.

chart from Wikipedia

Currently, as in 1990’s Japan, the US government has pushed benchmark interest rates toward zero, ironically starving the economy of private long-term credit while drowning it in risk-averse short-term liquidity.   If LIBOR hovers at or below 1.00%, few private entities are rationally willing to lend long-term money for productive, legitimate risk-taking activities, especially if the incremental lending spreads over LIBOR (whether 50, 200, or 500 basis points) might still compensate insufficiently for default losses——defaults arising particularly from this credit drought.   Talk about a spiral.

Hence, the US government has become the sole willing major credit source, inadvertently crowding out all private competitors by taking on too much credit risk for too little reward.  Its balance sheet now bulges unwittingly with student loans, unsecured commercial paper, AIG loans, and dealer repo financing.  The real dregs, like municipal loans, GM and Chrysler bridge financing, etc., are coming down the pike.  No wonder that everybody is banging down the doors of the Fed for normal operating funds.

The only way to restore the global economy is for the Fed to stop lending near-free public money to companies, especially failing ones like AIG and GM.   This would allow interest rates to climb back to risk-compensating levels, enticing private credit providers to fund successful businesses again, as before this debacle.

(Thanks to Victor Hong for sharing his thoughts.)