Repeat after me: Fed Funds are set by the Federal Open Market Committee, don't vary daily, and have no direct bearing on 30-yr mortgage rates. 30-yr mortgage rates are set by supply and demand through the bond markets, vary every day, and prices are adjusted by what investors & servicers want to see flowing into their portfolios.

According to Fed Chairman Bernanke, the Fed still expects the labor market to improve very slowly, so they are reluctant to remove monetary stimulus by raising rates. Fed officials believe that inflation will remain low for the next couple of years, meaning that there is little short-term pressure to raise rates. But mortgage rates are not set by the Fed, or their thoughts on inflation - they're set by "the market".

Hats off to Citigroup, who announced it has struck a deal with the government to return $20 billion in bailout money to taxpayers through a combination of stock and debt, the bulk of which would come from a $17 billion common stock offering. Citigroup received $45 billion of bailout money, and then the government converted $25 billion of its preferred-stock stake in the company into common stock over the summer. That effectively gave U.S. taxpayers a 34% stake in the company. It is nice to see some of "our" investments paying off. This pretty much leaves Wells Fargo as the largest mortgage investor still owing without a plan.

Abu Dhabi, one of the seven United Arab Emirates, will be giving Dubai, another one of the seven, a $10 billion "lifeline" to head off a bond default. This action has helped overseas stocks, since it should enable Dubai World to repay a $4.1 billion Islamic bond its property developer unit Nakheel was due to pay today. I am not quite sure if this is like Atlanta giving Miami a loan, or Delaware giving New Jersey a loan, or Mexico giving Canada a loan, but it is similar.

Mortgage brokers: are they as endangered as some believe that they are? Between July and September, brokers originated less than 13% of residential loans according to the National Mortgage News. Out of $443 billion, 48% went through retail, 39% through correspondents, leaving 13% through wholesale. READ MORE

I couldn't quite find the transition for the word "fiasco" from "a round-bottomed glass flask for wine fitted with a woven, protective raffia basket that also enables the bottle to stand upright" to "complete and total failure". The House of Representatives roiled the waters last week by voting to create the Financial Services Oversight Council, which some feel should be called the Financial Industry and Services Council Overseers (FIASCO). The House passed the "Financial Regulation Bill" which will significantly tighten federal regulation of Wall Street and the financial sector. The bill, which still has to go to the Senate next year, creates a new agency to oversee consumer lending, establishes new rules for transactions that contributed to the meltdown, and seeks to reduce the threat that one or two huge companies on the verge of collapse could bring down the economy. READ MORE

Part of the massive financial reform bill includes the "cram down amendment". It would give bankruptcy judges the ability to modify, or "cram down," terms of a first mortgage. The MBAA opposes the measure, and stating that while its intentions are good, it would encourage homeowners to opt for bankruptcy and create new risks for the mortgage market. That portion of the bill was voted down in the house on Friday. READ MORE

With all the fuss about Fannie's DU 8.0 being implemented over the weekend, poor Freddie Mac has all but been forgotten. Franklin American, though, gave us a Freddie Mac LP Update. "As announced by Freddie Mac in their Guide Bulletin 2009-18 and restated in Bulletin 2009-24, mortgages with application dates on or after December 14, 2009 must meet revised eligibility parameters for new case files submitted to LP on and after the weekend of December 13th. Maximum DTI Ratio - In an effort to more closely align both LP and DU DTI requirements, FAMC is implementing a maximum 45% DTI for locks and/or new submissions to LP on or after today. Locks received and case files submitted prior to today may continue to be underwritten to the previous guidelines." FAMC goes on to say that the maximum CLTV for cash out refinance transactions has been reduced slightly, and that for Expanded LTV for 2nd home purchase & rate/term refi's they are subject to increased MI FICO and eligibility requirements as well as limited MI availability. And importantly for their clients, DU loans with Reduced MI must be delivered by 1/15/10 and be purchased by 1/29/10, LP loans with a DTI > 45% must be locked with FAMC and/or submitted to LP prior to today, and LP cash out refinances with a CLTV greater than 80% must be delivered by 12/22/09 and be purchased by New Year's Eve.

Starting next Monday Flagstar "will begin net funding existing payoff(s) on Flagstar-to-Flagstar table-funded refinance transactions." This will apply to any loan that hasn't yet reached a Closing Docs Ordered status by 12/21. Not eligible are loans that are not table funded, loans that do not utilize a closing package created in their closing platform, loans that are not underwritten by Flagstar, and loans that have a negative Net Loan Disbursement.

Who is doing 125's? Flagstar, for one. Effective immediately, Flagstar Bank will be lowering the price adjustment on the Fannie Mae 125% LTV DU Refi Plus, Freddie Mac 125% LTV Relief Refinance, and Freddie Mac 125% LTV Relief Open Access loans.

Beginning this Wednesday, Caliber Funding will be accepting FHA Streamline Refinances from their clients.  The borrowers will need a minimum 640 FICO for all transactions with a tri-merged credit report and at least one score, a maximum 100% LTV/CLTV/HCLTV, should have made a minimum of 6 payments with 0X30 mortgage lates for mortgages with less than 12 month payment history. And (can you believe this??) Caliber Funding must be able to confirm that borrower is employed and has income. The nerve...

Well, traders on Friday saw the usual cast of characters in buying mortgages: the Fed, banks, and hedge funds & money managers. But based on recent auction demand, investors appear to believe that there is little risk of higher inflation in the short-term, and are comfortable buying short term fixed income securities. But the demand for the 10-yr and 30-yr auctions was very disappointing: gee, you don't want to earn 3.5% for 10 straight years? To top it all off, on Friday the University of Michigan Consumer Sentiment Survey was higher than expected.

What do we have to look forward to this week? It will be a busy pre-Christmas week for economic news. For one, the Fed meeting on Wednesday is expected to have no change for rates but, as usual, investors will be closely watching the language. The Producer Price Index (PPI) comes out tomorrow, as does Industrial Production and Capacity Utilization, and the Empire State Manufacturing Index. This is followed by the Consumer Price Index (CPI) and New Residential Construction on Wednesday. Housing Starts comes out Wednesday. Jobless Claims, Leading Economic Indicators, and the Philly Fed are on Thursday. This morning we find rates (10-yr at 3.54%) and mortgage prices about unchanged from Friday afternoon's levels.

If you ever need a creative "Out of Office" response for your e-mails:

  • I am currently out of the office at a job interview and will reply to you if I fail to get the position. Please be prepared for my mood.
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  • Sorry to have missed you, but I'm at the doctor's having my brain and heart removed so I can be promoted to our management team.
  • I will be unable to delete all the emails you send me until I return from vacation. Please be patient, and your mail will be deleted in the order it was received.
  • I will be out of the office for the next two weeks for medical reasons. When I return, please refer to me as "Kate" instead of Dave.