In last night's speech President Obama asked for creation of special unit of federal prosecutors to further investigate mortgage lending practices that led to the housing crisis. "This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans." Soon afterward I received this note: "I guess former Senator Dodd, Barney Frank, Bill Clinton, and Andrew Cuomo had better assemble good teams of attorneys. I don't remember who ran the FDIC for the last 8 years but Shelia Bair and Alan Greenspan might need one too!" Obviously the government's housing ownership push to artificial levels a decade ago is well remembered.

Seriously, there were two quotes that caught the interest of those in our business. The first was, ".....responsible homeowners shouldn't have to sit and wait for the housing market to hit bottom to get some relief. That's why I'm sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won't add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust. Let's never forget: millions of Americans who work hard and play by the rules every day deserve a government and a financial system that do the same." Obviously any type of grand refinance scheme hurts the price of premium (above par) MBS's.

Long on rhetoric and short on details, as one would expect from any SOTU speech, the best article so far is from the WSJ.  The reporter speculates the government will use FHA/FN/FH to refi loans they don't already guarantee.  But what's the cost if the government isn't assuming some losses?  And the mechanics of entering the private mortgage market make one's head spin. Any new legislation is going to have a very tough time clearing congress ahead of the election - I would put the odds near zero. Here is the article.

The second quote was directly at money center commercial banks. "I will not go back to the days when Wall Street was allowed to play by its own set of rules. The new rules we passed restore what should be any financial system's core purpose: Getting funding to entrepreneurs with the best ideas, and getting loans to responsible families who want to buy a home, start a business, or send a kid to college. So if you're a big bank or financial institution, you are no longer allowed to make risky bets with your customers' deposits. You're required to write out a "living will" that details exactly how you'll pay the bills if you fail - because the rest of us aren't bailing you out ever again. And if you're a mortgage lender or a payday lender or a credit card company, the days of signing people up for products they can't afford with confusing forms and deceptive practices are over. Today, American consumers finally have a watchdog in Richard Cordray with one job: To look out for them. We will also establish a Financial Crimes Unit of highly trained investigators to crack down on large-scale fraud and protect people's investments. Some financial firms violate major anti-fraud laws because there's no real penalty for being a repeat offender...So pass legislation that makes the penalties for fraud count."

Honestly, I lose track of the MERS lawsuits around the country, at various stages of appeal, with attorneys on both sides doing very well for themselves. I did notice, however, that Mortgage Electronic Registration Systems had a nice victory yesterday as the U.S. Court of Appeals for the 11th Judicial Circuit validated its rights to assign a security deed and/or foreclose on secured property.  The decision upheld the decision of the U.S. District Court for the Northern District of Georgia in Smith V. Saxon Mortgage. The plaintiff in the original case had contested the foreclosure of her home on the grounds that: The assignment of the security deed was invalid because MERS, as nominee of a defunct lender could not assign the documents of its own volition, and that the "splitting" of the mortgage and the note rendered the mortgage null and void and therefore notices of foreclosure were invalid as not coming from a secured creditor. In the original District Court opinion in March 2011, the judge pointed to the standard language in the Georgia security deed signed by all borrowers at closing which grants MERS the power to act on behalf of the current and future owners of the loan. "Unless the instrument creating the power specifically provides to the contrary . . . an assignee thereof . . . may exercise any power therein contained," she wrote. "The Security Deed...transfers rights to MERS, and MERS' assigns may exercise any power contained therein."

Hey, when was the last time a mortgage company went public? Residential mortgage loan servicer Nationstar Mortgage Holdings named Bank of America Merrill Lynch to underwrite its initial public offering. Last May, the company, which is backed by private equity firm Fortress Investment Group LLC, filed with the SEC to raise up to $400 million in an IPO and use the proceeds from the offering to service acquisitions and for other general corporate purposes. But in other Fortress news, Daniel Mudd (charged with securities fraud during his Fannie Mae CEO reign) has resigned from the board of Fortress.

Flagstar Bancorp came out with its earnings, and saw its losses narrow to $45 million in the fourth quarter from $192 million a year earlier, but worsen from the $14 million loss in the 3rd quarter. Flagstar has had 14 straight quarterly losses. On the mortgage side, originations were up 11% to $10 billion from $9 billion in the year-ago period, and originations for the entire year increased to $27 billion from $26 billion in 2010. The company sold and securitized $10.5 billion in loans during the quarter, up from $8.6 billion in the year-ago period, but the gain-on-sale margin fell sharply to 1.02% from 1.53%. Interest rate lock commitments (IRLCs), the primary driver of GOS revenues, declined 14.5% to $11.2 billion from $13.1 billion. Charge-offs were down ($19 million in bad residential loans down from $360 million in the year-ago quarter). Net servicing revenue increased 71.3% from the prior quarter to $29 million, but the company's reserve for probable losses on representations and warranties rose to $69 million from $10 million a year ago.

The value of servicing is indeed in a state of flux, but that doesn't stop pools from being bought and sold. The latest offering comes from MountainView Servicing Group: a $129 million portfolio of Ginnie Mae mortgage servicing rights containing 566 loans that are 99% FHA fixed-rate mortgages. Approximately 50% of the portfolio is retail origination and the other half is through third-party brokers. The loans are 14 months seasoned and spread between California (97%) and Illinois (3%). The weighted average servicing fee is .396%. Bids are due next Tuesday - contact Troy Rusniak at for more information.

Over the last month, mortgage-backed security prices have done better than Treasury prices, mostly because of supply (mortgage banker selling of $1-2 billion per day) and demand (the Fed alone is buying $1.2 billion per day) issues. Could this relative price movement change direction?  Sure - some broker-dealers believe that a sustained selloff in the rates market that will take the 10-year Treasury to 2.5% or above would be the most likely scenario in which MBS spreads would widen significantly.  This is due to a number of factors, including a prediction that, assuming a selloff is caused by improving fundamentals of the US economy, the probability of Fed's QE 3 involving agency MBS should diminish significantly in a rates backup scenario.

On top of that, IF rates were to see that big of a move, it would mean that volatility has increased - rarely a good thing for MBS's. And when that happens, "convexity hedging" related selling from servicers and originators would probably lead to a sudden increase in the supply of agency MBS in this scenario, resulting in even more selling. Lastly, domestic banks have been providing a very strong bid for agency MBS over the past 5-6 months, and in a rates backup scenario, their deposit growth is likely to be lower, meaning that banks would be unlikely to grow their holdings until rates stabilize again. Simple!

Looking at where things are now, yesterday rates barely budged (the 10-yr at 2.06%) and MBS prices flat - it is really quiet out there. The 2-yr note auction went just fine yesterday; today we have $35 billion in 5-yr notes to auction off. Later today we'll have the FOMC's trifecta of its statement (12:30), economic projections (2PM) and press conference (2:15). (There was one news item this morning - the MBA's weekly mortgage apps number for last week dropped 5%. Refinance activity slipped 5.2%, and purchase apps dropped 5.4% - refi percentage stands at about 81% of all apps. The four-week moving average for all mortgage applications is still up 4.1%.) Currently rates are still nearly unchanged, with the 10-yr sitting around 2.05% and MBS prices perhaps a shade better.

Yes, last night was the State of the Union address, which is often high gratuitous applause and low on substance. But politics is definitely in the news, and here is a handy-dandy guide to figuring out which candidates most closely fits your beliefs: Link

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at The current blog discusses residential lending and mortgage programs around the world. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.