An elderly lady was having her 100^th birthday party when the emcee stood to speak. He said he had been at the local Hallmark store and looked for the most special birthday card available to celebrate this momentous occasion. As he looked up and down the columns of shelves he noticed the birthday cards for age 70, age 80, and then 90 and then...He finally found what he was looking for.   He proceeded to give the elderly grandma two cards for age 50 each!

Numbers can play tricks. Just ask Goldman Sachs.

The SEC claims that Goldman Sachs had marketed a packages of mortgages put together by a hedge fund that would profit if the mortgages fell in value. The mortgages did indeed fall in value with the bulk defaulting, and the SEC claims that Goldman neglected to fully disclose the role of the hedge fund in putting together the package of mortgages. So on Friday, for example, in spite of companies like Bank of America (and today Citi) having great earnings, financial stocks, and the stock market in general, fell, and rates dropped thanks to the flight to quality. Goldman Sachs misstated and omitted key facts about a financial product tied to subprime mortgages as the U.S. housing market was starting to falter, per the SEC. Was it one of the last deals done by a struggling industry? Let's hope so.

The issue is Goldman's lack of disclosure, and once again where the rating agencies were in all of this. Analysts during the dot-com bubble recommended stocks of banking clients they actually believed were highly overvalued, and the same thing happened. Financial companies should not be allowed to mislead investors or take on leverage that can jeopardize everyone else. From 2004 through 2007 Goldman Sachs created 23 financial transactions called "Abacus", with critics saying that the bank used the deals to off-load the risk of mostly subprime home loans and commercial mortgages to investors. There were $7.8 billion of Abacus notes but the risk passed to investors was multiples higher since the Abacus transactions were synthetic collateralized debt obligations and credit- default swaps. These swaps are used to transfer the risk of losses on debt, and securitization, used to slice the risk in a pool of assets into various new securities, and Goldman's deals were filled with default swaps that offered payouts to Goldman Sachs if certain mortgage bonds didn't pay as promised, in return for regular premiums from the bank.

Hedge fund Paulson & Co. (John Paulson, not Henry Paulson, and is not accused of any wrongdoing) helped pick the underlying securities and also bet the CDO would default. Paulson was proved correct, and his hedge fund eventually turned a $1 billion profit and CDO investors lost a similar amount, according to the SEC. It is the first big case, but probably not the last, that examines investment banker's role in the subprime mortgage mess, and of course other issuers of mortgage securities, such as Deutsche Bank, Credit Suisse, etc., are caught up in the news and its implications. No matter what happens, don't expect less financial regulation as a result.

For good news, Congress approved the Continuing Extension ACT of 2010 (H.R. 4851), which includes a temporary extension of the Federal Emergency Management Agency's (FEMA) statutory authority to issue flood insurance policies under the National Flood Insurance Program (NFIP). The temporary amendment will expire on May 31, 2010. Many investors, such as Union Bank, Provident, and others, sent out announcements re-installing their previous flood insurance policies.

Citgroup announced earnings this morning with earnings per share of 15 cents versus a $0 expected. Revenue was $25 billion versus $21 billion anticipated. Like BofA's, and Chase's, these are solid results, but unfortunately overshadowed.

The FDIC closed down several more banks on Friday. Tamalpais Bank (CA) is now under Union Bank (CA). TD Bank (FL) acquired the banking operations, including all the deposits, of three Florida-based institutions: AmericanFirst Bank, First Federal Bank, and Riverside National Bank. Butler Bank (MA) has new signs on its branches saying People's United Bank (CT). Lakeside Community Bank (MI) is now part of First Michigan Bank. Innovative Bank (CA) was maybe too innovative, and was taken over by the FDIC and a purchase and assumption agreement was signed with Center Bank (CA). City Bank (WA) is now part of Whidbey Island Bank (WA).

The Wall Street Journal reported that federal authorities are picking up the pace in a criminal investigation of Countrywide Financial Corp. and its role in the meltdown in 2007 and 2008 of the U.S. housing and finance industries. The paper didn't offer details on what charges could emerge, but said a grand jury began hearing testimony about Countrywide last year. No criminal charges have been filed against corporate leaders in the larger federal probe.

Investor changes continue unabated. AmTrust Bank has posted an update to its guidelines which applies to its Conforming Fixed & ARMs (Standard & High Balance) product line(s). Suntrust has posted an update to its guidelines which applies to its Key Loan product line(s). GMAC has posted an update to its guidelines which applies to its Conforming Fixed & ARM product line(s). US Bank has discontinued its Second Lien 30/15 fixed product. Flagstar Correspondent has posted an update to its guidelines which applies to its FNMA Standard ARMs, FHLMC Home Possible, FNMA Fixed Rate, FHLMC Fixed Rate, and FNMA Flex 97 & Flex with Subordinate Financing product line(s).

I am sure that Flagstar has the best interests of its clients at heart. But over the span of two days Flagstar released 15 separate bulletins to clients. Fifteen.  Obviously I can't go into details on them, but the titles of the bulletins are 60 Day Lock on Agency ARMs and Extended Lock Update, WBCD Update: Lender Name Reflected On HUD-1, 60 Day Lock on Agency ARMs and Extended Lock Update, Short Sale Agreement, RESPA Compliance - Lock Extensions & Escrow Waivers, Fannie Mae DU Refi Plus Removal of Borrowers, Two-Unit Owner-Occupied Loan Limit Updates, New Approved Appraisal Management Company: PCV Murcor, FHA - Electronic Signatures, FHA & VA - Seller Concessions & Broker Fee Policy, FHA Total Scorecard - Upfront Mortgage Insurance Premium Messaging, FHA - Updated Mortgage Calculation Worksheets & Informed Consumer's Choice Disclosure, FHA & VA - 4506-T Transcripts, FHA - Non-Traditional Credit Overlay, FHA - Recent Mortgagee Letters, and FHA & VA - Property Flipping.

Pinnacle Capital, on its conforming product, offered lowered credit score requirements to 720 and added Rate/Term option for Radian MI on 95% loans, clarified that PUDs that are part of a subdivision are allowed on Construction to Perm, etc., and tweaked its conforming high balance guidelines so that paying off consumer debt will be considered cash-out Pinnacle also adjusted its FHA guidelines stating that "rental income can be used when a borrower is converting their Primary Residence", unlimited CLTVs on FHA cash-out refinances when existing subordinate financing exists,  and said that investment properties are allowed on FHA Streamline Refinance transactions without an appraisal.

Bank of America's wholesale group announced its "Wholesale Lending Standards for Quality" for brokers. "Our standards for quality are based on doing the right thing for our customers, our clients, our associates and our shareholders...the three types of standards that enable us to meet these objectives: Quality and Efficiency Standards (upholding quality loan manufacturing practices), Professional and Industry Standards (ensuring the highest levels of ethical conduct), and Responsible Lending Standards (building and maintaining our customers' trust)." The announcement goes on to tell clients, "If you have questions about our Wholesale Lending standards for quality, please contact your Bank of America account executive."

The Goldman news was enough to shake up the markets, and fixed-rate securities improved in price and dropped in rate. The 10-yr Treasury yield dropped to 3.78% and mortgage spreads widened out slightly, so did rates not improve quite as much. The futures market is pricing in an 83% chance that the Fed keeps rates at .25% through August - so don't look for a change. 

The press is certainly consumed with the Goldman Sachs news, but that doesn't mean that scheduled news comes to a halt. Things are pretty slow this week for the first few days, although we do have Leading Economic Indicators later this morning (expected to be up 1.3% for March, which would be the largest increase in nine months). On Thursday we have the Producer Price Index (PPI), Existing Home Sales, and Initial Jobless Claims. Friday we have Durable Goods, an important indicator of economic activity, and New Home Sales. Currently the yield on the 10-yr is at 3.78% and the 5-yr & mortgage prices are unchanged, maybe worse a tad. READ MORE. SEE CHARTS

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