When I read about the post office's plan to raise first class postage again, it makes me realize that I learned very little about economics and budgeting in Cal's MBA program. I had always thought that if an organization is losing money, it is time to change the business model and/or hunker down. But as I understand it, the primary reason for the increase is that the United States Postal Service is expected to lose $6.5 billion this year, and another $7 billion in 2011. Yet I still receive mail 6 days a week, and pass by 3-4 post offices around town - nothing has changed.
I must be missing something. Maybe the government will cover the loss with all the interest earned on the $1+ trillion of mortgages it recently bought, along with the TARP fund pay-backs. Alright, I will step down from my soap box, but right after...
Our elected officials returns from the July 4th recess this week, and those in the mortgage business are waiting to see if the Senate passes the Financial Reform Bill and passes it along to the president for his signature - as expected. Among other things to note, the bill establishes the "Consumer Financial Protection Bureau" (CFPB). Yes, another acronym to track! The CFPB will be part of the Federal Reserve Board with broad authority to write rules to protect consumers from unfair or deceptive financial products, acts or practices. This agency will be led by a Director appointed by the President. "The CFPB will be responsible for regulation and enforcement of major consumer protection laws including RESPA, TILA, HOEPA, HMDA, etc. primarily for non-depository lenders.
Congress must also deal with the expiring 2001 and 2003 tax cuts. Political analysts believe that any bill to reform/extend/revise the tax code to deal with the wholesale expiration of the 2001 and 2003 tax cuts at the end of 2010 is not going to come together until after the November elections, at the earliest. (Prior to November no one is going to suggest anything too dramatic, in spite of the increasing federal deficit as a percent of GDP.)
What difference does this make for mortgage bankers? Investors, especially institutional investors, and public companies that pay dividends could get to December and still have no certainty as to what the dividend and capital gains tax levels are going to be for 2011. And as we know, if "the market" is uncertain, it does not trade well, although this uncertainty could be challenging more for portfolios heavily concentrated in dividend-paying stocks as confusion could lead to unpredictable behavior in advance of year-end. But investors in MBS's, which obviously pay interest and have capitals gains, could be impacted.
A House of Representatives Appropriations Subcommitteeapproved the FY 2011 budget, which includes $150 million to support the HECM program during 2011. The Obama Administration, which projected $30 billion in endorsements, requested $250 million for the HECM program to offset projected losses for the FHA's reverse mortgage program. But HECM volumes are expected to drop, and as of May the FHA shows that $15.1 billion of HECMs have been endorsed during fiscal year 2010, down nearly 30% from the previous year. But reverse mortgage volume increased in June for the first time all year. During June, reverse mortgage lenders endorsed 5,304 HECMs, an increase of 16.5% from the previous month, although year to date HECM volume is down 39% from 2009. According to Reverse Market Insight, over 1,000 reverse mortgage lenders have left the business in the first six months of 2010 with 400 new lenders in the business. Wells Fargo leads the origination pack, followed by BofA, One Reverse Mortgage, MetLife, and Urban Financial Life.
On Friday the FDIC/regulators closed Home National Bank (OK), and the FDIC entered into a "purchase and assumption agreement" with RCB Bank, also of Oklahoma to assume all of the deposits of Home National Bank. Ideal Federal Savings Bank's all insured non-brokered deposit accounts went to M&T Bank (MD). Bay National Bank (MD) was closed, with business transferred Bay Bank (MD). And USA Bank of NY was closed and taken over by New Century Bank (dba Customer's 1st Bank) out of Pennsylvania.
In the "old days" of mortgage banking, it was important to have low guarantee fees from Fannie and guarantor fees from Freddie. (Owners of mortgage banks would often compare them at conferences, since they were thought to be a proxy for how safe your company was, and how it stood with the agencies. The g-fee money was used to protect against credit-related loan losses, along with covering some internal agency expenses.) The Federal Housing Finance Agency (FHFA) has found that the average total "g-fee" charged by Fannie Mae and Freddie Mac on single-family mortgages fell in 2009 relative to 2008, from 25 basis points to 22 basis points. It turns out that the decline in the total guarantee fees resulted from "significant improvement in the credit profile of the single-family mortgages they acquired relative to 2008fees charged by the Enterprises for guaranteeing securities backed by single-family mortgages that are not insured or guaranteed by the federal government and that finance properties with four or fewer residential units. Those fees cover projected credit losses from borrower defaults over the life of the loans, administrative costs, and a return on capital."
Fannie Mae spooked the appraisal herd recently by requiring that lenders cannot use inexperienced appraisers, wanting lenders to explain any changes made to the appraised value of a property, requiring interior photos, requiring a 2nd appraisal or field review if the original appraisal was deficient (and not to find a better value), and providing further guidance on how to determine comps. This is starting September 1st. Of course the business is dealing with appraisers not being able to find enough comps, and/or "distressed sales" making up a greater portion of the real estate market therefore becoming the only comps and pushing values down. Typically three comparable sales are required with a maximum price adjustment of 15%.
Appraisers are also dealing with the Dodd-Frank Act, which would require lenders and AMCs to pay appraisers "customary and reasonable fees" which in turn begs the question "What does that mean?" Many believe that banks and larger lenders will return to having internal valuation departments rather than outsourcing to an AMC.
Looking back to Friday, and much of last week, mortgage prices did very well. Traders reported that there is good interest among buyers for agency mortgage product, and all securities did pretty well. $1.9 billion of mortgages were sold and bought - mostly 4 and 4.5% 30-yr securities containing 4.25-5.125% mortgages. (About $10-11 billion were sold and bought during the week.) If an investor buys a pool of mortgages, the yield is about 3.60% compared to about 3.0% for a 10-yr risk free Treasury note - a relatively narrow spread. There was some optimism from Europe coming from hopes that the stress tests on banks will remove some uncertainty from that area - and removing uncertainty is usually a good thing. In fact, in the last month the euro, versus the dollar, is up 7%.
This week will be a busier week for economic news than last which may push rates around a little, along with earnings announcements from some major companies (like Chase, Citi, and BofA). In addition to the auction (which starts today) we will have the June 22-23 FOMC meeting minutes, Retail Sales (look for an increase), and Industrial Production & Capacity Utilization (flat or slightly improved). On Thursday and Friday we will have the Producer and Consumer Price indices, respectively, but no one is looking for anything earth-shattering on the inflation front. Given the lack of inflation, the poor jobs market, languishing housing market, and issues in Europe, no one is looking for any change in overnight rates until 2011 at this point. We begin the week with the 10-yr's yield at 3.04% and mortgage prices not doing much of anything. ECON CALENDAR HERE
Things I Learned in the South:
There are 5,000 types of snakes and 4,998 of them live in the South.
There are 10,000 types of spiders. All 10,000 of them live in the South, plus a couple no one has seen before.
If it grows, it'll "stick ya". If it crawls, it'll "bite cha".
"Onced" and "twiced" are words.
It is not a shopping cart, it is a buggy!
"Jaw-P?" means, "Did yall go to the bathroom?"
"Fixinto" is one word. It means, "I am fixing to do that."
There is no such thing as lunch. There is only dinner and then there is supper.
Iced tea is appropriate for all meals and you start drinking it when you're two. Southerners do like a little tea with their sugar.
The word "jeet" is actually a phrase meaning, "Did you eat?"
You measure distance in minutes.
You switch from heat to A/C in the same day.
All the festivals across the state are named after a fruit, vegetable, grain, insect, or animal.
You only own five spices: salt, pepper, Tony's, Tabasco and ketchup.
The local papers cover national and international news on one page, but require 6 pages for local high school sports and motor sports, and gossip.
You think that the first day of deer season is a national holiday.
In the South there is almost summer, summer, still summer, and Christmas.
Going to Wal-Mart is a favorite pastime known as, "goin Wal-Martin" or "off to Wally World".
Fried catfish is the other white meat.