A story from the Associated Press, W.R. Starkey Mortgage agreed to a settlement with the state of North Carolina for $4.5 million that includes the resignation of chairman and CEO William Starkey Jr. Based in Plano, Texas, this company will refund $26,000 to each of the 170 North Carolina families who bought manufactured homes from Phoenix Housing Group Inc. W.R. Starkey Mortgage was accused of falsifying information about borrowers to boost their credit scores and help them qualify for loans they otherwise wouldn't have gotten. Starkey Mortgage neither admitted nor denied the allegations by state officials.

Anyone hedging a pipeline, or is thinking about it, may be seeing red flags on the horizon. $2.7 billion in mortgages was sold yesterday - mostly 4 & 4.5 % securities as has been the case for several months. The yield on the 10-yr didn't do much, staying in the low 2.90's, yet 30-yr current coupon production was worse by .250 in price - what happened to mortgage prices? Commercial banks, in particular, enjoy the spread between what they pay you on your checking account and what they earn on their mortgage portfolio, and the latest Fed data shows that commercial bank holdings of MBS's has ballooned. Lately the supply of actual mortgages has not kept up with the demand. What does an originator do if it doesn't have the mortgages to fill sales to investors, called "failing", which it has already done? READ MORE

In late 2009 and earlier this year, the Fed bought $1.25 trillion in agency MBS which helped mortgage rates but also created a situation whereby it "helped make some securities so hard to find that Wall Street has been unable to complete an unprecedented amount of trades". According to an article by Bloomberg, failures to deliver or receive mortgage debt totaled $1.34 trillion in the week ended July 21, compared with a weekly average of $150 billion in the five years through 2009. Not being able to fill a security, and continue rolling positions, is not usually a recipe for success for mortgage banks. Not filling trades and speculating that "the market will come back" helped drive Capital Commerce (Sacramento, CA) under in 2003. MORE ABOUT FAILED MBS TRADES

On the opposite side, the difficulty of executing transactions may eventually drive investors away from mortgages. Gulp. A situation where a mortgage bank that promised mortgages to fill a security back in May or June, then didn't have them fund, and has "failed" to deliver them continually ever since not only impacts the Wall Street firm, or investor, which bought the bonds, but also investors farther up the food chain, such as insurance companies and pension funds. "If reduced liquidity in the mortgage-market persists and causes investors to seek other assets, it would run counter to the Fed's goal of buoying demand for the securities."

UBS AG likes mortgages. Or, more specifically, it likes originating mortgages for its clients, and then cross-selling other services to them. UBS has brought in executives from other financial institutions, such as Goldman Sachs and Bank of America, who will push to make more mortgages and other loans through UBS's brokerage unit (with 6,700 advisors), and hire more "mortgage experts". UBS officials say the home loan business offers an attractive cross-selling opportunity without exposing the company to excessive risk, especially for existing clients who want their "guy at UBS" to help them consolidate their debt and in some cases help them de-lever. According to the press release, less than 20% of UBS's brokers in the U.S. have clients with mortgages originated through the firm, about one-third the percentage at rival securities firms, UBS estimates.

HUD is contemplating several changes to the FHA suite of products. These changes are being floated out there, and have not been made, but many feel that they will, For example, seller concessions that help defray a buyer's costs (closing costs, inspections, appraisals free upgrades, etc.) may go from 6% down to 3% since there is a strong correlation between high seller concessions and high default rates. This year, the FHA plans to impose a minimum credit score requirement of 500 and borrowers with credit scores below 580 would have to make a down payment of at least 10% instead of 3.5%. (Large lenders already have overlays in place to protect themselves anyway.) There is some thinking that FHA-bound borrowers, whose loans are manually underwritten, would be required to have cash reserves equal to at least one monthly mortgage payment, especially if they have a low FICO, and there is some talk about limiting the ability to refinance into an FHA loan if the house is underwater. FULL STORY

Is the United States heading for the Japanese-like plight, marked by deflation, and a long economic slump with low growth and falling prices?

Federal Reserve Bank of St. Louis President Bullard released a paper, echoing the opinion of Kansas City's Fed President Hoenig, warning that the Fed's policy of keeping interest rates near zero during the economic crisis may do exactly that. Bullard believes that absent more aggressive moves to spark its own slowing economy, the U.S. could be in for similar debilitating deflation. Keeping overnight rates at 0% may have the unintended consequence of anchoring expectations for falling prices.

In a deflationary environment, businesses and consumers hoard cash on the assumption that prices will be lower soon. That leads to a stall in economic growth, or contraction, and jobs and income are lost in a vicious spiral down. Fed Chairman Ben Bernanke acknowledged that the deflation threat, last seen in the U.S. in 2003, is on his radar screen. Bullard argues that a better way to stimulate economic growth is to have the Fed aggressively buy up government debt ("quantitative easing") but this has the effect of printing more money because it increases the supply of money in the economy.

Speaking of the Fed, Bernanke and the Fed's Open Market Committee meet in a week. As always, the Fed Governors have a lot on their plates: the threat of deflation mentioned above, their holdings of +$1 trillion of MBS's and possibly buying more, Europe's problems, the "pause in the US recovery", my dog's bad breath (ok, just seeing if you're reading this). Our job market may stink, but stock market performance is helping - corporate profits, for a variety of reasons, have been excellent.

US Treasury prices wallowed around in the muck yesterday, given continued positive corporate earnings and better-than expected economic news. Construction Spending was +.1% for June, and revised higher for May. (Overall spending on non-residential projects posted a surprising increase in June, rising by 0.4% on gains for hospitals and hotels. Still, the increase came from public sector spending; private sector non-residential construction outlays fell a 15th straight time.) The ISM Manufacturing Index fell in July, but is still indicating an economic expansion with no price pressures.

30-yr bonds, rarely a proxy for 30-yr mortgages, were worse by almost 1.5 points; 10-yr Treasury prices were worse by .5 with the yield moving up to 2.96%. Not that the two markets always move in opposite directions, but stocks rallied, hitting their highest levels in 10 weeks. In mortgage-land, prices worsened (and spreads to Treasury yields widened), with "more sellers than buyers". Current coupon mortgages were about .250 worse. Overnight, however, the market has reversed itself. Stocks are pointing down, and rates are lower: the 10-yr is down to 2.91% due to a combination of light overseas buying and a Wall Street Journal story suggesting the Federal Reserve may start re-investing proceeds from its MBS portfolio back into the open market (MBS or Treasuries). READ MORE

The next time you think your hotel bill is too high, you might want to consider this:

My wife and I were traveling by car from Brooklyn to Miami.  After almost eleven hours on the road, we were too tired to continue, and decide to take a room.  But, we only planned to sleep for four hours and then get back on the road.  When we checked out four hours later, the desk clerk hands us a bill for $350.

I explode and demand to know why the charge is so high. I tell the clerk although it's a nice hotel; the rooms certainly aren't worth $350.

Then the clerk tells me that $350 is the 'standard rate'. I insisted on speaking to the manager. The manager appears, listens to me, and then explains that the hotel has an Olympic-sized pool and a huge conference center that were available for us to use.

"But we didn't use them!"

''Well, they are here, and you could have," explains the manager. He goes on to explain we could also have taken in one of the shows for which the hotel is famous. "We have the best entertainers from New York, Hollywood, and Las Vegas perform here," the manager says.  

"But we didn't go to any of those shows."

"Well, we have them, and you could have," the manager replies.

No matter what amenity the Manager mentions, I reply, "But we didn't use it!"

The manager is unmoved, and eventually I gave up and agreed to pay.  I write a check and give it to the manager. The manager is surprised when he looks at the check. "But sir, this check is only made out for $50.00."

"That's correct, as I charged you $300 for sleeping with my wife."

"But I didn't!" exclaims the manager.

"Well, too bad, she was here, and you could have."