A calendar's days are numbered. (Get it?) We're halfway through August already, and I bet time passes more slowly when one is serving time in prison for mortgage fraud in Seattle and Hawaii.

"Want a Cheaper Mortgage? Go to a Smaller Bank." I am not saying whether headlines like this are true or false, but these are what the general public tends to see.

"There are two sides to a balance sheet, left and right. On the right side there is nothing left, and on the left side there is nothing right." On Friday Palos Bank and Trust Company, Illinois, was closed and First Midwest Bank, Illinois, assumed, with the help of the FDIC, all of its deposits.

The e-mails regarding buybacks continued to come in Friday and here are some.

A principal at Walzak Risk Analysis wrote, "We need to understand what mistakes and or flaws actually contribute to default and for how long that impact lasts (the 11 year old loan for example).  If small to mid-sized lenders are not having problems, it is probably because they sold their loans to the big lenders and the big lenders haven't forced them back or they were smart enough to include language in their contracts about what could or could not be forced back to them.  For example, I have seen contracts that say after the first year of performance, the only reason they will be required to repurchase is if the loan contained fraud that is proven to be initiated by the original lender.  Whoever the attorney was that wrote those contracts was one smart puppy."

"Freddie and Fannie say that lenders were still responsible for checking the information provided by the borrower or broker. Lenders should be reviewing the customer's position, industry, and years on the job to determine if the stated income appeared plausible and accurate,"

Lenders, as I mentioned on Friday, believe that they should not be buying loans back that were originated according to the guidelines in place at the time, especially for stated income loans. And instead of suing the lender, Fannie and Freddie and other large investors have brought in auditors to pore over loan files finding other errors that can justify a repurchase request.

"I have seen few cases in the last few years actually result in buy backs or indemnifications. Companies are receiving huge numbers of buyback requests, but only a few result in an actual buy back or indemnification that results in a loss for the lender - but there is a lot of time and effort being spent to resolve these matters."

"On the repurchase front, we recently received a repurchase from the investor for the loan being a 5/1 ARM with 5/2/5 caps, and the investor sold it into a Fannie pool with 2% initial caps.  We also received one from another investor that was for the first mortgage of an 80/20 combo with the only reason being that BofA sold the loan into a pool that did not allow subordinate financing.  Both were easy rebuttals, but the fact that we have to spend time on these types of issues is ludicrous."

"This year, we have seen / dealt with many buyback issues / requests for files that are; a) several years old, and only recently became non-performing (hence, the request to buy back by the investor), b) fit the guidelines at the time they were underwritten and approved,  c) underwritten, and approved by the investor's underwriter.  With that in mind, I have a hard time believing we are alone in that respect."

And for a little venting: "If anyone wonders how they can 'trust the guidelines were using now', just use the guidelines that will be sent out 5 or 10 years from now.   As long as you are following them you will be fine. And please let everyone else know what they will be. If they really want to be safe and compliant, they should do a thorough background check of the appraiser, underwriter, escrow attorney, sellers, buyers, listing agent, LO, previous owners, builders, neighbors, and immediate family members of all parties involved in the transaction or might be involved in the transaction.   Income should be documented with 12 months of original paystubs along with complete federal taxes and W-2's for the last 5 years need to be in the file.  4506, 4506T, and 8821 all need to be executed.  They should be initially executed by the processor.  They should be re-executed by the underwriter so as to confirm authenticity. They need to be executed a 3rd time by a quality control officer as a fraud guard safety prevention.  Etc."

"Help with MI rescission issues may be here. Of particular interest, following on the heels of the widely discussed lawsuit that Bank of America had filed against MGIC, is the fact that the attorneys at the American Mortgage Law Group appear to have their sights set on pursuing those mortgage insurance companies whose rescission practices the attorneys believe to have been both wrongful and the direct cause of many repurchase disputes that are facing its clientele and the industry as a whole. The AMLG is a national mortgage banking law firm with a long and successful history of assisting correspondents and secondary-market investors with their many repurchase disputes and recovery from third parties (e.g., borrowers, brokers, appraisers, settlement agents, title companies, surety bonds, builders, etc.).  See http://americanmlg.com for more details, or contact Justin Vedder at jvedder@priestongroup.com."

Lenders seem to be seeing the proverbial pig going through the snake. "Turn-around times are increasing, and anyone who qualifies and has equity is trying to refi their loan - and FHA borrowers with little to no equity are doing streamline refi's which do not require an appraisal. In the case of FHA refi's, they will all close at the end of the month because with FHA loans the borrower owes the existing lender one month of interest, which creates even more of a bottleneck near month-end." But the general public seems distrustful of the origination community, this is compounded by a confusing regulatory environment, and at the same time lenders are frustrated with borrowers.

The National Information Center has just released consolidated financial statements for bank holding companies for the 2nd quarter which provides a good early estimate of changes in bank assets and liabilities. The top 50 bank holding companies shed $32 billion of residential MBS's during the 2nd quarter (agency and non-agency). This decline was led by the top four banks by total assets, whose net position in RMBS declined by the same amount. One bank dropped $22 billion of agency/conventional pass-through securities. Non-agency and commercial MBS holdings declined by $2.2 and $2.3 billion, respectively, for the top 50 banks, but GNMA holdings grew $4 billion and holdings of US Treasuries was up by $8 billion. So why did mortgage securities perform ok? Recent data suggests that banks added $40-50bn in MBS in the past month! Banks change their holdings often, and the report indicated that there was no industry-wide shift in the use of Agency MBS's.

Fannie Mae reminded its clients of its "expectation for lenders to have prudent processes and controls in place that support their ability to fully assess the borrower's financial circumstances and ability to successfully repay the loan" and sent out a bulletin that "Specified when a lender is required to re-underwrite a loan after the initial underwriting decision has been made up to and concurrent with loan closing, defined the steps required if the borrower discloses or the lender discovers additional debt(s) and/or reduced income after the initial underwriting decision was made up to and concurrent with loan closing, and simplified and expanded the DU resubmission policy, including increasing from 2 percentage points to 3 percentage points the tolerance for additional borrower debts and/or reduction of income that affect the debt-to-income ratio." HERE is the bulletin from Fannie Mae.

Mortgage prices just keep rolling along (agency MBS's, not non-agency stuff). Not only are all rates dropping, but the spread between Treasury and MBS's is still fairly tight - further helping mortgages. The demand for agency MBS cash flows is strong, but the primary market can't churn out enough supply. Investors know that, on average, current mortgages have sparkling credit quality, and that the risk of investing in them is minimal since both Treasury and mortgage securities are firmly backed by the same entity: the US Government. Whatever spread now exists is based not so much on fear of default, but more fear of early pay-off.

Thursday saw a lot of selling in agency MBS's, but on Friday it dropped off a cliff, nearing a paltry $1.2 billion. Regardless, rates continue down. The 10-year U.S. Treasury note yield fell to a fresh 16-month low in Europe today with weakness in Japan and in equity markets stimulating demand for U.S. government debt - we're down to a yield of 2.59% (weren't we just around 3%?) and mortgages are better between .125 and .250 in price this morning. Overall it's a pretty decent news week. Today is the Empire State manufacturing index; tomorrow will be a bigger day with Housing Starts & Building Permits, Industrial Production & Capacity Utilization, and the Producer Price Index. Jobless Claims, Leading Indicators and the Philly Fed manufacturing index will be released on Thursday. HERE is the full calendar of events

Larry the Lobster and Sam Crab were some fantastic musicians on the disco circuit. They jammed for many years till one night, after a gig and a few beers, they stepped out of a club and were run down and killed by a Mack truck. Larry the Lobster goes to heaven and Sam Crab goes to hell.

One day Larry says to St. Peter, "I sure miss my old buddy Sam. I hear he has his own disco down there - do you think I could go visit him and jam some, just one more time?"

St. Peter says, "I think you can have a one time, one-evening pass to hell to jam with Sam Crab."

Larry is elated and asks St. Peter for an instrument. "All we have in Heaven are harps," he says. Larry the Lobster shrugs and says, "That will just have to do!"

So Larry goes off to hell and has a fantastic time. He and Sam jam all night, just like the old days. When he comes back and sees St. Peter, he thanks him profusely for the pass. But St. Peter just looks at Larry and asks him, "Aren't you forgetting something?"

Larry thinks for a second, then smacks his forehead and says..."I left my harp in Sam Crabs Disco!"

(Think Tony Bennett.)