Sorry, did I hit the incorrect letter? The Administration announced important enhancements to the Making Home Affordable Program, including the Home Affordable Modification Program (HAMP) late last week. The expanded program is expected to be available by May, but we should keep a few things in mind. First, this is not the mortgage refinancing program that President Obama mentioned in the SOTU speech (that referred to helping current borrowers refinance into a lower rate). The HAMP update is a focus on debt forgiveness modifications, and arguably impacts investors more than originators and Realtors - the implications for agency MBS investors seem limited but are very meaningful for non-agency investors. (Removing the 31% DTI constraint for HAMP eligible borrowers could embrace about 800,000 potential borrowers, and the program will be extended through 2013.)

Analysts suggest that the effect on agency MBS prepayment speeds should be minimal, since the vast majority of debt forgiveness will be on delinquent loans, which are typically already bought out of the agency MBS trust (if they are more than 120 days delinquent). The only effect could be if underwater borrowers in agency MBS pools start going delinquent on purpose to qualify for debt forgiveness, speeds will obviously rise - hopefully unlikely. And only pools of loans originated before 2009 qualify for this program. FHFA Acting Director Edward DeMarco released a press statement stating that "principal forgiveness did not provide benefits that were greater than principal forbearance as a loss mitigation tool". Further, the press release noted that "FHFA's assessment of the investor incentives now being offered will follow its previous analysis, including consideration of the eligible universe, operational costs to implement such changes, and potential borrower incentive effects." This suggests that Fannie Mae and Freddie Mac may not adopt this program. The incentive to investors for principal reduction in HAMP has been tripled (the range of 6-18 cent payout on debt reduction goes up to 18-63 cents) - a significant change for various reasons and should result in higher modification rates. It is important to note that the incentives for servicers are not any different now than before (servicer strip dependence on the balance).

The President's State of the Union address suggested a new government effort to refinance borrowers but at this point most expect it will be aimed at non-agency loans, but more details should emerge in the near term. Total borrower savings from such a refi effort would be at most $5-6 billion per year, but in reality would be a small fraction of that amount. The program may involve non-agencies refinancing into FHA loans and so expect the impact on the agency MBS market to be modest, however. Total throughput of the program should be low, given the challenges witnessed in agency HARP, lack of servicer incentives, and rep/warrant hurdles. Recently a speech by HUD Secretary Donovan sparked fears of a Ginnie refi program and while this program is likely targeted at non-agencies investors continue to fear event risk in Ginnies, possibly via a restructuring of MIPs at some point.

And while we're talking about residential MBS's, agency (Fannie, Ginnie, Freddie) MBS prices have had a great run since mid-December compared to Treasury prices. Some now expect agency MBS spreads to remain tight so long as the 10-year Treasury stays at current levels.  Should the 10-year yield hit 2.5%, however, they would see those spreads widen significantly. These projections are due in part to the Fed's announcement that they will likely keep short-term rates low until late 2014, which both creates an ideal scenario for banks to buy up agency MBS and for implied volatilities to decline, and to the fact that the Treasury has been selling about $10 billion agency MBS monthly but that this should be drawing to a close, leaving only $15 billion.  Additionally, the MBS sector is attractively priced compared to investment grade corporate bonds right now, so the long-term "supply-demand technical" look good. In the event that the 10-year yield reached 2.5%, though, spreads would widen, a prediction assuming that a selloff is caused by improving fundamentals of the economy, which reduces the probability that the Fed's QE3 involving agency MBS would diminish significantly in a rates backup scenario.  Such a shift in rates would also indicate that volatility had increased, which would likely lead to a sudden increase in agency MBS, which of course skews that nice supply-demand projection. There's your dose of daily technical talk.

There is a lot of chatter about investors out there, some of it factual, some of it rumored. The most recent big move was from Citibank, which, due to liquidity and market risk concerns, became the latest major bank to stop the purchase of "medium" and "high risk" mortgage loans from its correspondent originators. No one wants buyback requests appearing in their mailbox, and Citi is no exception. And we know that these, if they can't be fought, are passed on to the company that sold the loan to the investor. So Citi is attempting to improve the quality of the mortgages it buys, a good thing, and told correspondent lenders "to withdraw medium/high risk loans," saying the bank could not predict time frames for when the loans would be reviewed "if we are able to review them at all." Perhaps Citi's pre-purchase review process (begun in 2010) is still letting some potentially defective loans slip through.

While this is a good goal, and should be done, for correspondent clients it is more tough news since it comes on the heels of Bank of America and MetLife's exit from correspondent lending. Ally/GMAC has scaled back. And rumors surfaced last week, and I repeat - rumors, that SunTrust will be combining its wholesale and correspondent channels, and that PHH is also contemplating scaling back operations. (Of course wholesale reps love calling on larger correspondent clients, but it doesn't work the other way - correspondent reps rarely want the opportunity to call on brokers. Certainly the rep and warrants are different.) On the positive side, we have Wells Fargo being featured on the Forbes cover and recent results from Flagstar showing that mortgage banking operations had strong revenues in the fourth quarter. (Flagstar's gain on loan sale income increased from Q3 totals to $106.9 million, with a margin of 102 basis points. The firm reported residential first mortgage loan originations of $10.2 billion in Q4, an increase of $3.3 billion, or 47.1 percent, from third quarter totals.)

We're pretty much done with much of the earnings reports from the big banks/servicers. Things don't look too peachy as most took charges for repurchasing soured loans, complying with federal mortgage servicing standards, paying for an upcoming settlement with state attorneys general and resolving significant foreclosure and litigation costs. Wells Fargo posted the strongest fourth-quarter mortgage results but still had $300 million in costs related to mortgage servicing and foreclosures. U.S. Bancorp and PNC Financial Services both took charges in the quarter related to the pending settlement agreement with state attorneys general and to the cost of complying with federal consent orders for past mortgage servicing failures ($164 million and $240 million, respectively). Most lenders would agree that mortgage banking profits are up and origination volume increased in the fourth quarter, things are slower than a year ago. BofA's mortgage origination volume dropped 77% from a year ago and Wells saw a 6.2% decline from a year earlier in fourth-quarter mortgage originations (to $120 billion). Chase's mortgage origination volume dropped 24% from a year earlier, and Citigroup's fell 3%. One investment bank noted, "Solid organic loan growth is very difficult to achieve when consumers and corporations are deleveraging (cutting back on debt in their lives) and economic growth is moderate."

MGIC (which injected $200 million into a subsidiary last month to keep writing policies) announced that it posted its sixth straight quarterly loss. MGIC said its risk-to-capital ratio will probably exceed the maximum 25-to-1 allowed by some state regulators in the second half of this year. The ratio was 20.3-to-1 on Dec. 31 compared with 22.2-to-1 on Sept. 30.

Friday saw our share of bank closures. In Florida First Guaranty Bank and Trust Company of Jacksonville was enveloped by CenterState Bank of Florida, with the help of the FDIC. Up in Tennessee, Tennessee Commerce Bank became part of Kentucky's Republic Bank & Trust Company and BankEast in Knoxville is now part of U.S. Bank National Association of Ohio. And up in Minnesota Patriot Bank Minnesota is now part of First Resource Bank of Savage, Minnesota.

Friday also had news that the U.S. economy expanded less than forecast in the fourth quarter as consumers curbed spending and government agencies cut back, validating the Federal Reserve's decision to keep interest rates low for a longer period. GDP disappointed analysts. Remember - jobs and housing, housing and jobs. "We're going into 2012 with less momentum than people were thinking," said Michael Hanson, a senior U.S. economist at Bank of America. This week's Fed announcement that they would hold rates near zero for years was a stunning admission that monetary policy has failed to stimulate the economy to anywhere near the extent anticipated. And fiscal policy has had the same impact. So what does the government have up its sleeve? Not much.

If that's the case, then we're in for a weak 1st quarter here in the United States, and we're going to have to face the prospect that European debt needs to be written off. At this point it is arguable how much of Europe's coming recession spills into the United States, but it will indeed have an impact. And, more often than not, a slowing U.S. economy leads to lower rates (since there is less demand for capital) - unfortunately for LO's the lower rates have to be balanced against the higher fees, documentation hurdles, and appraisal problems.

Our 10-yr T-note closed Friday with a yield of 1.90%. One headline I saw this morning noted that, "US stocks are poised to open lower Monday after the weekend came and went without Greek leaders reaching an agreement on a debt-relief deal." Is that a surprise to anyone? In this country this morning we've already had Personal Income +.5%, Personal Consumption was unchanged, the savings rate went to 4%, and the Core PCE Price Index was +.2%. For the remainder of the week, the big excitement will be Friday's employment data. But rates continue to drop, and we find the 10-yr down to 1.83% and MBS prices are about .250 better.

An old man walks into the barbershop for a shave and a haircut, but he tells the barber he can't get all his whiskers off because his cheeks are wrinkled from age.
The barber gets a little wooden ball from a cup on the shelf and tells him to put it inside his cheek to spread out the skin.
When he's finished, the old man tells the barber that was the cleanest shave he's had in years. But he wanted to know what would have happened if he had swallowed that little ball.
The barber replied: "You'd just bring it back tomorrow like everyone else does".

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.