On Thursday, Fannie 3.5% securities (composed of 3.75-4.125% 30-yr mortgages) traded at a 6 (yes, six) point premium. Put another way, 106. Fannie 3% securities (with 3.25-3.625% 30-yr mortgages) were above a 3.5 point premium, meaning a 3.5 rebate. But although prices are at historical highs, no borrower is seeing a 3.5 point rebate on a 3.5% 30-yr conventional loan.

But we all know that the base MBS price is only one part of the equation - just like the base price for a car before extras are added. By the time a rate shows up on the rate sheet, it has passed through changes due to the base asset price (MBS), servicing value, buy-ups, buy-downs, mandatory adjustors, LLPA's, profit margins (at investor and lender levels), and competition (what is the guy up the street doing?). And in this environment, lenders have beefed up those margins to cover rising overhead, reserve against future litigation and buyback costs, cover the increased costs of being audited, add capital for servicing, and slow down production due to capacity and early prepayment issues. Nuff said.

There are a lot of ways to glean information these days, and I found this note of interest. "I thought I would send over a copy of our new eBook ("The world according to HARP (2.0)") for your consideration. Our goal is to provide an educational resource for borrowers. The eBook is available for free download here. Thank you to Charles Warnock, Director of Digital Marketing for Western Bancorp in California. (CEO's, don't be the last on your block to have a director of digital marketing!)

Speaking of books, Michele Perrin of Perrin & Associates just wrote one for "The Lost Bank: The Story of Washington Mutual - The Biggest Bank Failure in American History" by Kirsten Grind. (Michele is the former First Vice President of Washington Mutual's Mortgage Banker Finance Division.) "The book starts with a prologue from September 25, 2008, the day WaMu was taken over by the FDIC, but then steps back to 1981 when Lou Pepper reluctantly finds himself at the helm of unprofitable $2 billion thrift with 35 branches in Washington State. He sets about making the place into the "Friend of the Family." Lou starts coming up with folksy WaMu values for the employees, like "Ethics, Respect, Teamwork, Innovation & Excellence," some of which they were still using when Bank United, where I was working, was acquired by WaMu in 2000. But sadly for the Bank, by 1986 Lou was nearing retirement age and must pick a successor. Enter Kerry Killinger..." Let's not forget the acquisition of Home Savings, subprime lender Long Beach Mortgage. In 2003, powered by the Bank's "Higher Risk Loan Strategy" and the WaMu ad campaign, "The Power of Yes," the volume of mortgage loans tripled, reaching an astonishing $155 billion. As much as 80% of WaMu's Option ARMs were "stated income" loans with no income documentation (fondly referred to as "Liar Loans").  Perhaps even more frightening, stated income loans made up 90% of WaMu's home equity loans. Perhaps JPMorgan Chase didn't get such a bargain when they bought the Bank from the FDIC for $1.8 billion.

Another way to gather information is via conference calls. I have received many e-mails from folks wondering why the eminent domain issue is a hot button for real estate lending, and securization in general. Perhaps they should listen in to SIFMA's call. "San Bernardino County, Fontana and Ontario CA formed a joint powers authority (JPA) charged with exploring the use of eminent domain to seize underwater mortgage loans from their holders, and refinance or otherwise restructure them. This unprecedented plan, if implemented, would be significantly disruptive to mortgage markets in San Bernardino and beyond, due to the material and unjustified losses it would impose on mortgage-backed security investors, among others. SIFMA will hold a call today at 11AM EDT to discuss this issue. Participants can pre-register by clicking the pre-registration link and entering Conference ID Number: 10016559. A dial-in number will be provided upon completion of the pre-registration process. LINK

Layoffs at big banks made the Financial Times headlines today. "Three of the world's biggest banks are preparing to shed a combined 5,350 investment bankers, as the industry struggles to adapt itself to continuing economic woes and the advent of new regulation. Morgan Stanley is cutting a further 4,000 jobs, Deutsche Bank is set to lay off about 1,000 of its investment banking staff, equivalent to about 10% of the unit's workforce, while Citigroup is shedding 350 bankers. "Analysts believe investment banks will remain under severe pressure to cut more costs over the coming months, as the cyclical effects of difficult trading conditions and a bleak economic outlook add to the longer-term challenges that come from tougher regulation of the industry." So far this year, according to analysts, Morgan Stanley has implemented 1,600 lay-offs, while UBS, Credit Suisse and Barclays have all cut 1,500 staff or more.

Last week we had Chase & Wells earnings. This week we learned that Bank of America swung to a profit in the second quarter, earning $2.5 billion. This exceeded analysts' estimates, but revenue totaled $22.2 billion, slightly less than expected and below the level in the first quarter this year. Analysts had been expecting the company to earn $22.9 billion. Credit losses in the second quarter dropped to $1.7 billion from $3.25 billion in the period a year earlier, reflecting what the company said were improving credit conditions for businesses and consumers as well as tighter lending standards. Bank of America plans to cut more than 30,000 workers in the coming years, and the bank has 12,600 fewer employees than it did a year ago. Its Tier 1 capital ratio under the Basel III agreements now stands at 8.1 percent, putting it ahead of the company's earlier goal of 7.5 percent by the end of 2012. Profit was also bolstered by so-called reserve releases as $1.9 billion of the $2.5 billion profit in the second quarter came from reserve releases. Fannie Mae and Freddie Mac want the company to buy back $11 billion in bad mortgages, up from $8.1 billion. Meanwhile, private investors are seeking $8.6 billion in buybacks, up from $4.9 billion.

Elsewhere, Citigroup's net income fell 12 percent in the second quarter partly due to a loss on the sale of its stake in a Turkish lender. The income of $2.9 billion still exceeded analysts' expectations, though. The bank reserved $27.6 billion at the end of the quarter, compared with $34.4 billion in the same period a year ago. The bank drew down its current loan loss reserves by $984 million and took an accounting gain of $219 million because the value of its debt decreased. Both of those items padded earnings. Citi's retail banking revenues grew 32 percent to $1.6 billion from the second quarter 2011, largely due to higher mortgage revenues.


Turning to the markets, there isn't much to turn to! There has been very little to talk about in the Eurozone as headlines have been fairly quiet of late - I guess folks are watching the Tour de France or are on vacation. Yesterday morning's Initial Jobless Claims numbers came in higher/worse than expected, and the Philly Fed, Existing Home Sales, and Leading Economic Indicators were also lackluster. (Jobless Claims increased by 34,000 to 386,000 in the week ended July 14 - the volatility in the numbers was due to a change in the timing of annual automobile plant layoffs.) Looking at June's Existing Home numbers, prices rose again but sales were down. Most of this was attributed to constrained supply. Existing Homes Sales declined 5.4% in June to 4.37 million from an upwardly revised 4.62 million in May, but are 4.5% higher than the 4.18 million-unit level in June 2011. The median price of an existing home increased 7.9% from June 2011 to $189,400, which reflects an increase in the purchase of higher-priced properties. At the current pace, it would take 6.6 months to sell existing inventory, the longest since November, compared with 6.4 months at the end of the prior period.  

Analysts suggest that consumer spending is sputtering, manufacturing growth has slowed, and businesses have grown cautious about investment. But housing is doing pretty well. Cutbacks on home construction shaved as much as a full percentage point from GDP during the darkest days of 2007 and 2008. This year, construction should turn positive-adding around 0.3% points to GDP. By the close on Thursday, 10-year T-notes closed down/worse by about .250 (1.51%), and MBS prices worsened by about .125.

But overnight and today Asian equity markets finished mostly lower, in Europe equities are selling off 0.5% in the aggregate, and it appears our stock markets will be down - economies just aren't doing that well. In Europe, Spain's 10-year yield has breached the 7% level that tipped Greece, Ireland, and Portugal into IMF/EU bailouts. Here in the U.S today and Monday have nothing for news scheduled. The 10-yr is down to 1.48% and MBS prices are better by about .125.

Corporate game of telephone: "Eclipse Memos."
Memo from Owner to the CEO:
Today at 11 o'clock there will be a total eclipse of the sun. This is when the sun disappears behind the moon for two minutes. As this is something that cannot be seen every day, time will be allowed for employees to view the eclipse in the parking lot. Staff should meet in the parking lot at ten to eleven, when I will deliver a short speech introducing the eclipse, and giving some background information. Safety goggles will be made available at a small cost.
Memo from CEO to the Head of Operations:
Today at ten to eleven, all staff should meet in the parking lot. This will be followed by a total eclipse of the sun, which will disappear for two minutes. For a moderate cost, this will be made safe with goggles. The Owner will deliver a short speech beforehand to give us all some background information. This is not something that can be seen every day.
Memo from the Head of Operations to the Head of Underwriting:
The Owner will today deliver a short speech to make the sun disappear for two minutes in the eclipse. This is something that cannot be seen every day, so staff will meet in the parking lot at ten or eleven. This will be safe, if you pay a moderate cost.
Memo from the Head of Underwriting to the Underwriting Team Supervisor:
Ten or eleven staff are to go to the parking lot, where the Owner will eclipse the sun for two minutes. This doesn't happen every day. It will be safe, but it will cost you.
Memo from the Underwriting Team Supervisor to the underwriters:
Some staff will go to the parking lot today to see the Owner disappear. It is a pity this doesn't happen every day.