When I take a potato masher out of the kitchen drawer, my dog hardly pays attention. But when I reach in and take out the cheese grater, she suddenly becomes my best friend.

After I started in this business in the mid-80's, an experienced loan agent pulled me aside and said, "When I look at a loan file or talk to a borrower, I know in less than a minute whether or not it is a 'do-able' deal." Experienced agents have told me that this is no longer the case, given the automatic underwriting procedures, the changed guidelines, the compliance issues, etc. As you can guess, a small percentage of experienced agents have moved back into "private money", "make sense" lending, since this is where their comfort level is.

There appear to be three big components at play with volumes for lenders: rates, equity, and underwriting. Rate-wise we're above the lows, but still very good. I hear few folks complaining about rates, but they certainly have not helped spur business in recent weeks. For equity, unless property values stabilize, and/or move higher, many folks who had equity in their property already refinanced; those that didn't refi because of values haven't seen enough of a rise to do so now. And is anyone loosening up their guidelines or their documentation? It would be news to me... One agent wrote to me and said, "Basically there is a reason someone didn't refi last year, and those that didn't probably can't do it now." So we're left with a purchase business.Fannie & Freddie and large investors feel this year's market will be about 50-60% of last year's, and companies are already seeing it. Established companies are adding agents, branches, and perhaps moving into new areas. Others are cutting loose agents, consolidating branches, and in some cases retrenching. What an interesting business.

What are experienced mortgage companies doing right now to help themselves? Name a solid company that hasn't established clear rate lock policies and controls managed by a centralized lock desk. What good does it do anyone to have old, expired loans in your pipeline? And have good measurement devices: a complete set of management reports to measure profitability, risks, the cost to originate a loan, calculate your gain on sale margin by product, commissions, old loans and/or loans closed and not shipped or purchased after a set period of time. You've heard it all before, right?

Lots of mortgage companies made large profits last year - some would say that it balanced out the money lost in 2008. But do they expect to make more money in 2010 on lower volumes? Management shouldn't assume that a decline in profitability is the result of decreased origination volume - what if volume drops 10% but profits are down 25%? Gain on sale margins may have slipped for whatever reason - overtime, a few bad loans, pricing decisions to maintain market share, etc. And watch those utility bills: I was walking by a mortgage co-worker's desk the other day, and noticed that she had plugged her power strip back into itself to save electricity! That's sacrifice! (Yes - blonde.)

At least rates are cooperating, and last week long-term interest rates declined. Mortgage rates have retreated to the low 5.00% range, and our economy is still "fragile". Inflation is not an issue and the consumer spending still is relatively slow. Maybe everyone is waiting for 3D televisions!

The MBAA reported that mortgage application volumes increased 9.1% last week from the week before. Refinancing filings rose almost 11%, and purchase apps were up a little over 4%. Nationwide refi's make up almost 72% of apps.

The press has certainly focused on FHA lending lately, and many feel with good reason. FHA-insured mortgages are thought to be a problem in the future. Government officials, who only five years ago were clamoring for more lenient guidelines to increase home ownership percentages, now want to further tighten guidelines. The FHA allowed builder and seller-funded down-payment assistance programs longer than other loan types, which didn't help their situation or their capital reserve ratio, nor did institutional investors refinancing "at risk" mortgages into FHA loans. According to a story in the Wall Street Journal, the FHA says the loans it is guaranteeing these days will turn a profit because the credit profile of its borrowers has improved. The average credit score for FHA borrowers has risen to 681, from 630 two years ago. The median U.S. score is about 720. Of course, those in the business know that investors have FHA overlays which have contributed toward the improvement.

And in fact the FHA announced changes to its guidelines yesterday. It will raise the minimum down payment required for borrowers with credit rating scores below 580 to 10%, while the down payment for higher-ranked borrowers would stay at 3.5%. The up-front MI premium is also going from 1.75% to 2.25%. HUD is seeking congressional approval to allow it to raise annual mortgage insurance premiums -- which are paid out by the borrower over the life of the loan -- above the 0.55 percent maximum. Lastly, the FHA also said it was cutting the amount of aid sellers could provide buyers to 3 percent of the purchase price from 6 percent; a move it said could help lessen incentives to inflate appraised home values. READ MORE

Of course the press, and economists, will question whether or not it will cut off the housing recovery. If you think about it, in the long run is raising the down payment requirement, or the minimum credit score, the cost of MI, or cutting seller contributions going to kill the housing market? The FHA, after all, doesn't lend money to home buyers. It collects fees to insure lenders against default on loans that meet FHA criteria. Of course, with the current criteria, everyone in the business knows that their nickname, deserved or not, is now the "new subprime" loan: average credit scores of FHA borrowers is lower than other types of loans, delinquencies are much higher, and the market share of FHA loans is between 25-50% in many parts of the US.

In an interesting quote, Warren Buffett weighed in on the plan to tax banks. "I don't understand plans for a bank tax - it just doesn't make any sense to me  that banks should be taxed to cover losses at other bailed-out companies, such as automakers, Fannie Mae , or Freddie Mac."

Getting back to the market, yesterday was pretty quiet, giving lenders and lock desks a day after the holiday to work on projects, extensions, renegotiations, etc. Dealers reported that mortgage selling was pretty light, with just under $1 billion in supply, and the Fed, money managers, and hedge funds doing the buying. But today we have had a flurry of news. U.S. Housing Starts unexpectedly fell 4% in December, pulled down by a lack of activity for single-family dwellings. Starts for single-family homes fell 6.9 percent last month, but multifamily starts were up over 12%. The Producer Price Index was up for the third month in a row, rising .2% (up 4.4% for the year) versus expectations of being unchanged. The core rate, ex-food & energy, was unchanged, lower than expected.

But perhaps more important than the economic news were the earning results this morning. Morgan Stanley earned $413 million in the 4th quarter, but it was still below estimates. Wells Fargo swung to a profit in the fourth quarter on net income of $2.82 billion, versus Bank of America's loss of $5.2 billion due to taking a hit from higher credit costs and TARP repayments. And the Bank of New York Mellon profit beat estimates, hitting almost $600 million.

Bank of America's stats included a 2009 net income of $6.3 billion, a one-time $4 billion TARP repayment cost, provisions for credit losses of $10.1 billion, and nonperforming assets of $35.7 billion. Morgan Stanley reported income from continuing operations for the year of $1.1 billion, compared to a loss of about $800 million a year before. They also incurred a repurchase of TARP capital, net revenues for the year of $23.4 billion compared with $18.2 billion in the prior year, total nonperforming assets of $27.6 billion as of December 31.

After all of this we find the 10-yr yield at 3.65% and mortgage prices better by between .125 and .250.

Three rotten old Grandmas were sitting on a bench outside a nursing home when a Grandpa walked by.
And one of the Grandmas yelled out saying, "We bet we can tell exactly how old you are."
The old man said, "There is no way you can guess it, you old fools."
One of the old Grandmas said, "Sure we can! Just drop your pants and under shorts and we can tell your exact age."
Embarrassed just a little, but anxious to prove they couldn't do it, he dropped his drawers. The Grandmas asked him to first turn around a couple of times and to jump up and down several times. Then they all piped up and said, "You're 87 years old!"
Standing with his pants down around his ankles, the old gent asked, "How in the world did you guess?"
Slapping their knees and grinning from ear to ear, the three old ladies happily yelled in unison, "We were at your birthday party yesterday!"