Let's start off with two basic premises.

  1. There has always been a range of borrowers (credit & risk-wise) that need home loans at rates that match the risk
  2. There have always been investors out there with varying degrees of appetite for risk, and demand more return for higher risk.

For prime borrowers, the end of the Fed's MBS purchase program is in sight: 6 weeks, $55 billion, that's $9.2 billion a week or 1.8 billion per day. READ MOREAfter which, of course, mortgage rates zoom out of reach, everyone still left in the business will have nothing to do, all refi's and purchases will end, and I will fill the commentary every day with the worst puns and one-liners imaginable.

Seriously, what is going to happen?

Based on antidotal evidence, it appears that many mortgage companies had great Decembers, then January volumes of about half of December's, and expect February to be somewhere between January and December's volume levels. And although 2009 profits tended to make up for 2008 losses, profit margins also appear to be coming down as the realization sinks in that companies will want the production to support staffs.

Credit Suisse came out with a very interesting public report that stated, "Private label Residential Mortgage Backed Securities (RMBS) have seen a fairly consistent rally since March, 2009. We believe the worst is behind us and there is room for further price appreciation, particularly for lower quality, higher yielding assets."

The study points out that for lower quality assets, such as subprime RMBS bonds, have rallied from yields in the mid 20's% to yields in the low 10's%. Subprime pools from 3-4 years ago have roughly 50% of the borrowers seriously delinquent, compared to typical pre-crisis delinquency rate of 4% to 5%. But it also means that half the "subprime" borrowers are making their payments! Credit Suisse believes that this optimistic news is not yet fully priced into the market, and is looking for further gains. In addition, the company believes that "the government will continue its heavy involvement with loan modification programs designed, in part, to stabilize house prices", also beneficial to mortgage security prices and rates.

Merrill Lynch/Bank of America also released research which focused on "the glass half full": which borrowers are safer, and more likely to make payments, than others. Their analysts used data from Equifax, incorporating newly available information on borrower second liens and the history of distress on their other debts besides the first mortgage. It turns out that roughly half of prime and Alt-A borrowers have 2nds on their homes (most HELOC's), whereas only about 25% of subprime borrowers have 2nds (mostly closed-end 2nds). As you would expect, 45% of prime borrowers have a combined LTV below 100%, while only 19% of option ARM borrowers do, and the propensity of a borrower to default on his mortgage rises accordingly. When other types of debt enter the equation, the propensity to have been delinquent on one's other debt rises as we move to poorer credit sectors. "For poorer credit borrowers, going delinquent on other debts may be a way of life, but for prime borrowers, it is more indicative of distress." "We find 65%, 30%, 17%, and 11% of the outstanding balance of prime, alt-A, option ARM, and subprime borrowers, respectively, will not default over 5 years." Bank of America/Merrill Lynch Global research did a fine job on it, and anyone wanting to see it should contact your BofA rep rather than me.

If anything, in the last few years folks still in the mortgage biz have learned that, at least for now, government regulation is playing an increasingly important role. And although they can't influence rates or investor programs directly, they can become involved in the political process. You can join MORPAC, which is the MBAA's political action committee, or attend the MBAA's National Policy Conference held in April in Washington DC. One active originator wrote and suggested membership in the Mortgage Action Alliance (MAA).  "It does not cost anything, you do not have to be a member of the MBAA, it is non-partisan and they allow you to edit the letters they generate if you want to change something in the content." You can sign up for MAA by going to


Brokers learned yesterday that 8-year old Assurity Financial, a wholesaler located in Denver, is shutting down. "Due to circumstances beyond our control, including a rapid, precipitous drop in production below levels necessary to sustain the company's operations, combined with the recent inability of the company to obtain the long term financing necessary to fund its loan production... the winding down of Assurity Financial Services, LLC...The majority of Assurity's employees will be let go at the close of business on February 26th, with a small crew remaining behind to assist in an orderly wind down of the company to satisfy the obligations to its various stakeholders."

GMAC Bank Correspondent Funding (GMACB) Approved Correspondents received a bulletin dealing with FHA Assignment of Trades and Direct Trades. "All May Trades must be assigned to GMAC prior to April 28, 2010." In addition, a minimum of two credit scores from two repositories are required for FHA loans. One score is no longer eligible." And when a borrower vacates their primary residence and purchases a new primary residence, rental income may not be used to qualify the borrower unless the situation meets certain criteria. For example, "Borrower is relocating with a new employer or being transferred by their current employer to an area that is not within a reasonable commuting distance, rental income from their current primary residence may be considered." The bulletin details the LTV and appraisal information required for such scenarios.

Wells' wholesale clients received an update dealing with "Using Calyx and Ellie Mae Fee Detail Sheets" (Wells accepts them, but use the most recent version) and "Reissuing the GFE". "Recent guidance from HUD has made it clear that the GFE must be redisclosed to the borrower within three business days of going from float to lock. The GFE must be redisclosed in all cases and this change is effective immediately. Please note that any redisclosure of the GFE may impact the close/sign date and must be considered when selecting a 15-day lock as the borrower must receive a copy of the redisclosed GFE prior to closing the loan."

In other news from the GFE front, The Accurate Group devised a "GFE calculator for lenders to use as a tool to calculate all types of title insurance premiums and endorsements, recording fees, transfer taxes. We instantly disclose these to lenders in all counties, nationwide in a GFE format that is easy for folks to use." http://www.accurategroup.com/tag-gfe.pdf

Please note that in yesterday's commentary I stated that Flagstar had eliminated their HUD $100 program. As it turns out, they are following HUD's guidelines, and have eliminated the program only in certain states. I apologize for any confusion - editing investor newsletters can be confusing at times.

Mortgage traders reported that Monday was another quiet day, with very light origination. In fact, much of what traders are seeing is a) the usual Fed buying, b) the usual money manager and hedge fund interest, and c) various investor accounts swapping either coupons or type of security (Fannie for Freddie, or conventional for government Ginnie Mae's). With origination down, the natural spread between Treasury securities and MBS's is narrowing, which is helping mortgage rates. And since the Freddie & Fannie delinquent loan buyback announcement came out on February 10th, although the higher coupon products sold off much more than the lower coupons, it appears that the price erosion has stopped.

And the discount rate hike last week is old news, and the Fed made it clear that the increase should not be viewed as a tightening. In 2007 the spread between the discount rate and fed funds was 100 basis points (6.25% vs. 5.25%) whereas now it just went from 25B basis points to 50. So many are expecting the discount rate to be bumped up another 25-50BP at some point in the not too distant future, while the FF target stays put 0.25%. Most believe that inflation is not a big concern for the US at this point, which is why many think the Fed plans on keeping the Fed Funds rate low for an extended period of time.

Today we have the Case Shiller Index and Consumer Confidence numbers, along with a $44 billion auction of 2-yr notes. We find the 10-year yield back into the 3.70's and mortgage prices better by between .125 and .375.

A widow from New York wanted to get out of the big city. She decided to go visit a Dude Ranch in Texas. She spent a week there and had a fantastic time.

When she returned to New York she was at lunch with her friends showing them the pictures of all the good lookin' cowboys.

As the girls were all discussing all of the cowboys one of her friends asked if she "had any 'special' fun on her trip.

She answered, "No."

Another friend chimes in asking, "Why not, since they are so good looking and there are so many of them?"

She replied, "Are you kidding? You can't see them in the pictures but you should have seen the size of the condoms in their back pockets!"