Rumors are always in the markets, and can move them. And, of course, rumors are in other areas besides the markets. It is rumored that last Friday Hilary asked Chelsea if she had had sex with her then-fiancé, and that Chelsea remarked, "Not according to Dad I haven't."
The rumor regarding a massive government-sponsored refinancing of over $1 trillion in loans continued to play in the market until it was shut down by a US Treasury official Thursday. The conjecturing, helped along by a blog on Reuters, spooked the market for high-coupon loans (at this point, anything 5.25% and above), and could certainly be construed as a political gambit. Investors, of course, are counting on that high yield for a few years, so a made-up threat of a huge refinance drove prices down by almost .5 in some areas. The loans that have not refinanced may not, so the risk in owning such high dollar price MBS's is headline risk like this. "The administration is not considering a change in policy in this area," said Treasury spokesman Andrew Williams. READ MORE
What is not a rumor, unfortunately, is Fannie Mae losing $1.2 billion in the 2nd quarter, and asking the U.S. Treasury Department for another $1.5 billion to stay afloat. At this point, are we supposed to say, "No."? Optimists are quick to point out that this loss is much better than the nearly $15 billion Fannie lost in the same period a year ago. Regardless, this leaves Fannie with a negative net worth of $1.4 billion at the end of June. The company's regulator, the Federal Housing Finance Agency, asked for $1.5 billion from the Treasury to eliminate the deficit and so the Treasury will buy another chunk of senior preferred stock from Fannie and bring its equity up to about $86 billion. Credit-related costs, which include provisions for loan losses, provisions for losses on loan guarantees and foreclosed property expenses, were $4.9 billion in the most recent quarter. That's down from $18.8 billion in the second quarter of 2009, Fannie said.
When I was in college, I stopped by an antique store that was selling copper fire extinguishers for $50 each. I "managed" to buy four of them for $160. When I brought them home, my mother, raised during the Depression, looked at them and said matter-of-factly, "If you can afford to buy 4 useless fire extinguishers, you can afford to buy your own text books from now on." Everything has a price, and folks interested in buying foreclosed homes certainly have many from which to choose - mostly at auctions. For example, LPS Auction Solutions will be selling a large number of homes, nationwide, in an online auction. The bid deadline is August 30, 2010. Property information and photos of the homes for sale are available at www.LPSAuctions.com, and most homes will be available for viewing on 8/21, 8/22, and 8/28
Has hedging a pipeline changed much in the last 20 years? I am sure that some will argue that it has. It certainly has become more scientific at some firms (assuming a lender outsources the hedging to some firm like CMC, Compass, Flatirons, MCM, MIAC, QRM, etc., in alphabetical order), but often the basic choice, as it has been for many years, is whether to use a pull through hedge, a delta hedge, or some hybrid to measure risk. Historically, if a market improves during the lock period, the loan gains in value, and a broker or agent is more likely to renegotiate or take the lock elsewhere, and the lender/investor counting on that lock come up empty-handed. But when rates head higher during the lock period, the opposite happens, and the odds of the loan funding with the original lender increase.
Depending on the margin priced into the loan, assuming Secondary is calculating margins correctly, it doesn't take a huge market move to wipe out any un-hedged gain originally priced into a loan. As mentioned Wednesday, this margin not only incorporates the best efforts/mandatory spread, but also the various margins on different products, rates, business channels, and so forth. If Secondary doesn't know what her profit margin is for each loan, how well can she report to senior management how well the hedged worked?
The reason I bring this up is that something interesting is going on in the markets right now. Namely, a new coupon has been created: the Fannie or Freddie 3.5% MBS. Think of it as a bucket for 3.75%-4.125% loans.) Rates have not been this low before, so there was no need for the bucket/MBS coupon. But like someone feeling around in a dark room and not wanting to stub their toe, MBS traders and originators are being very tentative about trading this new 3.5%coupon. Most small and mid-sized mortgage banks are pricing hefty margins into these low note rates and selling this low coupon production on a best efforts basis, letting an accumulator such as Wells or BofA handle the risk. In this uncharted area, liquidity is critical, and the volume of bonds being bought and sold is being carefully watched as acceptance slowly grows. READ MORE ABOUT THIS ISSUE
You know, doctors can be so frustrating. You wait a month and a half for an appointment and he says, "I wish you had come to me sooner." Everyone knew that this was coming... the FHA insurance pool is becoming depleted, and it only has $3.5 billion in cash and Treasury securities left in its "capital reserve account". The money sitting in the CRA represents a 71% decline in just the last three months. The Mutual Mortgage Insurance Fund (MMIF) capital ratio has fallen below its statutorily mandated threshold. On the good news side of the ledger, from October through June the FHA had 19,310 fewer insurance claims on loans gone bad and paid $3.7 billion less than projected by the audit, perhaps due to solid foreclosure efforts although some feel that this is only because some states are experiencing a backlog in processing foreclosures.
The FHA Commissioner told FHA lenders that "Congress has taken quick action and passed H.R. 5981. (It has not been signed by the President yet.) The bill gives FHA the authority to adjust its annual mortgage insurance premium (from .55% to 1.55%), yielding approximately $300 million per month in value to the FHA Mutual Mortgage Insurance Fund at a time when its reserves are perilously low." The FHA will lower its upfront premium simultaneously with the increase to the annual premium so that in about a month FHA's upfront mortgage insurance premium will be adjusted down to 100 basis points on all amortization terms and the annual mortgage insurance premium will increase to 85-90 basis points on amortization terms greater than 15 years. As you can guess, mortgage insurance companies are pleased with this news, since annual FHA premiums will be closer to annual PMI premiums and that could encourage lenders and borrowers to turn to non-FHA products for more mortgages. FULL STORY
Out in California, Sierra Pacific notified its brokers of the extension/relock/renegotiation policies. They seem fairly representative of what is out there. (Secondary Marketing staffs are generally aware of the definitions for "Extension" (adding extra days to a lock that has not yet expired), and "ReLock" (establishing new lock parameters after original lock has expired). SP tells its brokers that extensions are available on loans with an Approved status and the property appraisal has been underwritten, that the lock must be within 5 days of the expiration date, and that the lock cannot be expired. Fees range from .125 in price for 4 days up to .375 for 16 days, regardless of where current pricing is for the lock at that time. ReLocks are eligible if loan is approved and the property appraisal has been underwritten, and are priced at current market or original lock price, whichever is worse plus a .125 point re-lock fee. There are other specifics, of course, but this seems indicative of the current market.
On Monday U.S. Bank Home Mortgage Wholesale Division will increase its fee on all VA and FHA government programs, fixed rate and ARMS. Look for a hit of a point for loans to borrowers with FICO scores above 620 but less than 640. (No charge from 660-719, and a bump of .125 on anything above 720.)
$2.4 billion flowed into the MBS market yesterday, with the lion's share being 4% securities. (The 10-yr was up almost .5 in price and the yield closed at 2.91%, the 5-yr Treasury was better by almost .25 which was the same for mortgages.) Of particular interest to investors, however, was the release of the Fannie Mae prepayment speeds, since maintaining cash flows is important if an investor is going to pay a premium for a pool of mortgages. Overall early pay-offs were about as expected, but the recent lower-coupon production has seen a trend of paying off slightly earlier than had been hoped, which is causing some nervousness out there. That being said, lenders know that refinance volumes might be constrained by pricing in order to keep volumes manageable, so that there is a backlog of business out there - which causes even more nervousness among investors since prepays might pick up steam.
Today we had "the big employment number", certain to influence the Fed's meeting next week. The pace of the economic recovery continues to rely on private-sector employment growth, which is a problem since in the last 7 months the private sector added only 593,000 jobs. The ADP survey indicates that small firms (1-49 workers) represent about 45% of the level of employment, but accounted for only 16% of the increase in employment over the past five months. And Initial jobless claims have now fallen in three of the last four weeks, but remain stubbornly around 450,000 - weak.
Nonfarm payroll was -131k for July, with private sector jobs increasing 71k. The headline unemployment rate was at 9.5%, unchanged from June, and Hourly Earnings were +0.2%. The yield on the 10-yr has moved down to 2.85% and mortgage security pricing is better by at least .250 - we'll see if investors pass that onto their rate sheets.
Boudreaux, a good old boy from South East Louisiana, while not a brilliant scholar, was a gifted portrait artist. His fame grew, and soon people from all over the country were coming to South Louisiana to have portraits done. "Dah boy could paint dat stuff!" they'd say, and it looked good too!
One day, a stretch limo pulled up to his house. Inside the car was a beautiful woman, and she asked Boudreaux if he would paint her in the nude. This was the first time anyone had made this request of Boudreaux. The woman said money was no object; she was willing to pay $50,000.
Not wanting to get into trouble with his wife, Boudreaux asked the woman to wait while he went in the house and conferred with Clotille, his missus. In a few minutes, he returned and said to the lady, "I can do dat, ain't no big thang. I'll paint ya in da nude, but I gotta leave my socks on.......... so I'll have a place to wipe my brushes."