According to Morningstar, Vanguard has overtaken Pimco as the world's largest bond mutual fund with $288B of assets at the end of Oct. vs. $248B for Pimco. I mention this makes it hard to buy bonds when flows are negative: Pimco lost $39 billion in client withdrawals in a quarter! (Don't take my word for it).

This relates to a note I recently received asking, "Rob, is there an easy explanation about what is going on in the jumbo market, and with jumbo rates?" As usual, it comes down to supply and demand. On the supply side, sure, there are lenders that specialize in jumbo loans, but nationwide jumbo production is probably less than 5% of the total. On the demand side, remember that the Fed is not buying non-agency (like jumbo) securities, which leaves banks putting the loans into their portfolios, selling them in whole loan pools, or selling them to an institution like Redwood Trust that is securitizing these beasties. (Independent mortgage banks don't have portfolios, so need to sell the loans.)

If entities like Pimco have less money, they'll buy fewer securities - and may actually have to sell them to raise cash. And if Fannie & Freddie think that the loss severity on conventional loans warrants a 50 basis point hit (gfee), and jumbo investors think the loss is closer to 10 basis points, that certainly helps jumbo rates in comparison to conforming conventional. There are indeed jumbo/non-agency securities being issued, and rated by agencies such as Kroll, but a fair portion of jumbo production is going right into portfolios or being sold in blocks of whole-loan trades to investors that want the loans, not necessarily the securities.

Yes, supply & demand are the primary determinants of price, and therefore rates in the fixed-income markets: if there is no demand for a certain bond, the price will drop and rates will go up. This is one of the big factors with eminent domain - if it causes investors to back away, rates to borrowers in certain municipalities will suffer. The ongoing national conversation over the municipal use of eminent domain to seize and re-write underwater (but performing) mortgages continues to spread, with the latest city being Pomona (an L.A. suburb).

The city council is considering two housing proposals, one of which is the controversial eminent domain scheme authored by San Francisco investors at Mortgage Resolution Partners (MRP).  Although the city did not approve either proposal at a recent meeting, it did not reject eminent domain. The next meeting will be on November 18, where the topic will likely come up again. The industry has been actively opposing eminent domain in Pomona, sending the council letters and working to meet with officials to discuss the potential damage the program could cause.  According to industry sources, in addition to the specific proposals, Pomona is also considering the possibility of joining with other municipalities (notably the City of Richmond, which has progressed further than any other city and is on the verge of moving forward with eminent domain themselves) in a joint powers authority, similar to the route San Bernardino County took last year, an effort that eventually failed.

Pomona will be interesting, since the council has been split between those supporting MRP and those opposing the plan (a group that may include the city's mayor). The latest wrinkle is that the one council vacancy was filled last week, an appointment by the existing council, and it remains to be seen where the new councilmember, Adriana Robledo, stands on the issue.  As for timing, sources say the topic will not be discussed at the next scheduled meeting, but will get a hearing at a meeting in the not-too-distant future. We'll keep you updated on any further developments. In a recent story the MBA has the scoop.

Let's keep going with some relatively recent investor, vendor, and bank news. As always, it is best to read the actual announcement for full details.

Per the recent issuance of the final rules from the CFPB, Franklin American will only purchase loans that qualify as Qualified Mortgages and meet the established Ability to Repay standards, effective for loans with applications dated January 10, 2014 and after.  FAMC will not purchase loans that qualify under the definitions for Balloon Payment QM or Small Creditor QM.  

With the exception of Conventional Non-Conforming Jumbo, FAMC will continue purchasing loans closed on or after October 1st without tax transcripts until it has assessed the 4506-T backlog at the IRS.

Franklin American warned clients, "In an effort to provide our approved Correspondent lenders with a more streamline process and improved customer service, beginning November 15, 2013 all questions regarding FAMC products or guidelines will be handled by your Regional Sales Associate.  The FAMC Underwriting Help Desk will no longer be in service.  The Regional Sales Associates are able to assist lenders with expedited answers and direction to product and eligibility questions, and we expect that this improved process will continue to meet and exceed lenders' needs and expectations."

US Bank will resume the 4506-T policy it had in place prior to the governmental shutdown as of November 4th, after which all files submitted for underwriting must contain tax transcripts.  Through November 3rd, loans will still be accepted for underwriting with a copy of the cancelled check matching the amount due the IRS; a copy of a deposit matching the exact amount of any return using a bank statement, deposit receipt, or direct bank verification of the transaction; or an electronic filing receipt from the IRS indicating the Declaration Number and AGI that matches the return in lieu of the 4506-T.  With regard to VVOE, Fannie- and Freddie-eligible loans with note dates after October 21st will be subject to the normal requirements, while FHA and VA loans will be accepted with a non-verbal VOE and a Work Number, respectively.  Given the uncertainty about when fiscal year 2014 funding will become available, USDA loans with Conditional Commitments "subject to commitment authority" will not be considered eligible for purchase.

Impac will resume the normal requirement for obtaining IRS tax transcripts utilizing the 4506T for all new applications effective November 11, 2013. "As of today there is no requirement to order the IRS tax transcripts/ROA for those loans already in progress during the government shutdown and during continued Impac suspension for ordering of the IRS transcripts."

Impac is now offering full underwriting on both standard and 203(k) files to all approved correspondents.  As a reminder, all 203(k) loan files will require vendor oversight of the rehabilitation construction product by Renovation Ready.

Per the upcoming implementation of DU 9.1, Mountain West Financial will no longer purchase loans with an LTV/CLTV/HCLTV of more than 95%.  This affects Conforming Mixed and MCM primary residence 1-unit purchase and rate/term refi transactions.  MWF will also be removing the Interest Only option for FNMA Conforming products.

The recent bank news continues to roll along. Investment banker KBW, acting on behalf of Independence Bank, announced that Independence and Premier Service Bank have entered into a definitive agreement in which Independence will acquire Premier.  Premier has two branches and approximately $128.4 million in assets, $65.6 million in loans, and $114.8 million in deposits as of September 30, 2013. Choice Financial Group ($662mm, ND) will buy Great Plains National Bank ($182mm, ND) for an undisclosed sum. NewBridge Bank ($1.7B, NC) will acquire Capstone Bank ($375mm, NC) for about $63.6mm in stock. Heritage Oaks Bank ($1.1B, CA) will buy Mission Community Bank ($445mm, CA) for about $56mm in cash

(14%) and stock (86%). Horizon Bank ($1.8B IN) will buy Summit Community Bank ($163mm, MI) for $18.4mm in cash and stock. Fidelity Bank ($250mm, TX) will buy First National Bank of Byers ($99mm, TX) for an undisclosed sum. First Bank ($262mm, AR) will buy First Community Bank of Crawford County ($74mm, AR) for an undisclosed sum.

But all is not M&A in bank-land. In recent weeks First Mariner Bank ($1.3B, MD) announced it will close two branches as it adjusts to more of its customers doing business online or through mobile channels. (SNL reports the top 3 banks that had the most branch closures in the past 12 months were Bank of America (183), SunTrust (127) and PNC (105).) Key Bank has reduced the size of its branch network by 8% over the past 18 months. And in Wisconsin "North Milwaukee Bancshares, a bank holding company, owns and controls North Milwaukee State

Bank, was placed under a Written Agreement by the Federal Reserve Bank of Chicago.

Rates: up a little, down a little. Yesterday weekly Jobless Claims were little changed at 339K, above the consensus of 330K, and the trade deficit was larger than expected at $41.8B. Third quarter Productivity declined to 1.9%, which was close to the consensus. There probably won't be much volatility today either, as the scheduled news typically doesn't move the entire fixed-income markets. The November N.Y. Fed Empire index is seen higher from the previous +1.5, October import prices are expected lower from +0.2, October Industrial Production/Capacity Utilization with estimates seen lower on the former and flat/unchanged on the latter one. Thursday the yield on the 10-yr stood at 2.70%, this morning we're around 2.73% and agency MBS prices are worse by .250.