Since early October, the 10-year US Treasury yield has gone up about 85 basis points (from 2.4% to 3.35%). The crisis in Europe and the Fed's $600 billion bond-buying program (QE2) typically would move rates lower. But a pick-up in world economic indicators, along with concern over a growing US deficit has instead produced the opposite result: bond buyers now want a higher interest rate to compensate them for the risk of future inflation and/or a weak dollar. Companies from PIMCO to Goldman Sachs are raising their GDP estimates for 2011.

What is the impact of this on US government debt payments? The yearly debt on $1 million of 10-yr Treasury note at 2.40% is $24,000. The debt payment at 3.35% is $33,500, for a difference of $9,500 per year. On $1 billion this becomes a difference of $9.5 million per year, on $10 billion $95 million per year. There are no auctions for a few weeks, but total weekly auction amounts are much higher than $10 billion. Granted, older, higher yield debt is maturing, but you get the picture.

The Federal Reserve just published a paper titled, "Mortgage-Backed Securities: How Important Is 'Skin in the Game'?" which is worth a glance. "Financial reform legislation passed by Congress in 2010 requires mortgage originators to retain some loss exposure on the mortgages they securitize. Recent research compares the performance of mortgage-backed securities for different types of issues in which originators retain different degrees of loss exposure. The findings suggest that retention of even modest loss exposure by originators reduces moral hazard and is associated with significantly lower loss rates on these securities." FULL STORY

Wells Fargo told regulators which mortgages should not be included in the government's 5% risk retention program under Dodd Frank. "Any mortgage originated in any of Wells Fargo's business channels should be exempted" according to a high level source. (OK, just kidding - I'll save it for the April 1 edition.) Federal regulators must determine what mortgages fall in and outside of the 5% required capital, and given that the future of Freddie and Fannie are up in the air, Wells' definition of mortgages that should be exempt says nothing about agencies. Wells Fargo said risk retention, for any loan, should include an early payment-default provision covering up to the first three months of a loan and a 5% vertical slice of retained credit risk on top of the standard representations and warranties. Wells Fargo would also prefer a simpler and narrower definition of a qualified residential mortgage (exempt from risk retention) instead of some type of national underwriting standard. Wells Fargo said mortgages with a 70% loan-to-value ratio or below should qualify as exempt.

Speaking of Wells Fargo, many of its brokers received word yesterday of an operations site closure in Northern California. "I wanted to make you personally aware of some changes within the Wells Fargo Wholesale Lending organization. Today we made a difficult announcement to our team members that we are closing our Wholesale operations site in Concord, Calif., effective Dec. 31, 2010. To ensure no disruption of service, brokers who deliver to Concord will have their loans processed by our site in Irvine, California...We remain steadfastly committed to wholesale lending and will continue to work to maintain our position as the leader in wholesale lending." A source told me that in Irvine, their staffing has grown exponentially ("from 35 to over 400") in the last year.

CitiMortgage spread the word that, "A team of us at Citi have been working on a project to try to find new ways to help mortgage Customers. First we launched videos on the topic. The first was posted to You Tube here: Others will be following. We then identified Customers who may have serious questions or concerns that an open dialogue would help them. In an effort to accomplish this, we are having a special Customer Information Session on Wednesday December 15, 2010 from 6:00 AM to midnight. Here is the invite:  Although the invite was mailed to select Customers, it is open to all. Based on the success of this event, we are considering a variety of other proactive outreach to Customers in need."

Fannie announced the successful rollout of DU 8.2 over the weekend. Few in the business don't know the changes, which include foreclosure policy changes, the implementation of a preforeclosure sale message when a borrower's credit report indicates that an account may have been included in a preforeclosure sale, new rounding logic for LTV/CLTV/HCLTV ratios, removes certain programs and for certain LTV's like Community Seconds, Flexible mortgages, etc. The change, and recent Freddie change, obviously resulted in dozens of investor and pricing engine changes. Optimal Blue broadcast changes for Mortgage Services III, Citi, US Bank, SunTrust, Bank of America, Franklin American, GMAC, etc., etc.

Here are some recent e-mails concerning industry topics such as compensation, FHA FICO's, new programs, and so forth:

"Has anyone noticed the decline of Wall Street firms buying mortgages directly from smaller originators? I never touted the virtues of Wall St. being in the mortgage market, except to say they threw better parties than the banks. The 'we're the smartest guys in the room' mentality has always been what the conduits say when they want to mask their inferiority complex. Conduits aren't sophisticated enough to understand the securitization markets, and Wall St isn't smart enough to understand the complexities of underwriting and servicing."

The CEO of Wyndham Capital passed along (thank you) this link for more compensation information. HERE IT IS

Premier Nationwide Lending, out of Texas, stated, "As of now, the only sure thing the industry knows is the following: A mortgage originator will be able to receive compensation from either the creditor or the consumer - but not both. The mortgage originator cannot receive compensation that varies based upon any term of the loan except for the amount of principal Incentive payments to a mortgage originator based on the number of residential mortgage loans originated within a specified period of time are expressly permitted. The Fed ruling has left a lot of grey areas but the above items we know. A notable misconception I see in the marketplace is the broker will be penalized and the banker will not.  This is totally untrue.  There is nothing in the law that states a mortgage banker will have any advantage over a mortgage broker in regards to compensation. Whether one works for a banker or a broker, you will be held to the same standards. I've heard in some instances it being stated that a broker will be limited to 2% compensation. This is false."

"We have one Oklahoma bank that will go to the 580 level for FHA FICO's and that attracts some low hanging fruit on the personnel side due to their niche of targeting what I consider as the new Subprime. We had discussed the reasons why a lender might want to risk doing loans with the 580 FICO and the only reason comes down to high margin and profits. As a bank we have taken on the philosophy of 'just because you can doesn't mean you should' when it comes to product offerings."

"Other than losing an LO and some loan business to this type of lending, my biggest gripe is as a US tax payer. Why in the world would FHA continue to allow such high risk loans when the free market has adjusted the other way? Even if the originating lender gets off the hook, you and I still pay the price along with every other qualified buyer."

Another wrote, "The current housing market is still inefficient. I know this because on a macro level the Fed made huge profits on MBS's, but on a micro level how many stories do you hear about 'Why am I turned down for a loan when I have a 700 FICO, and don't owe anything?"? And the conduits are happy: their mortgage channel went from an Oligopoly to a Monopolistic Competition market structure, back to an Oligopoly. Why wouldn't they be happy?"

Is the jumbo market beginning to thaw out a little more? Banks and credit unions have never stopped offering the products, say what you like about the rates and programs. On the wholesale side, lesser known players are beginning to emerge. One reader wrote, "If you are looking for a fixed jumbo investor on a broker basis for the NJ and Pa markets, 3rd Federal Bank is offering 15 and 30 years." Another wrote, "Out in California, Union Bank is offering product to brokers." A third mentioned, "I am a portfolio wholesale lender out of Dallas that specializes in jumbos, condos, and non-warrantable condo projects with competitive ARM products - and we lend in every state. I can't vouch for rates or underwriting, but for information on this last one check with Nick Glasse at

On to the markets. Yesterday MBS volumes were still slow, with Tradeweb volume at about 82% of its 30-day average, down from 90% on Friday and last week's daily average of 113%. 10-year Treasury notes closed 3.28% after being up at 3.39%, recovering from an intraday low of down 3/4s of a point early this morning. In fact, the fixed-income markets made a nice recovery overall. "Investors emerged to take advantage of the yield levels in Treasuries, as did investors of MBS" and by the end of the day MBS prices were better by about .125.

When four of Santa's elves got sick, the trainee elves did not produce toys as fast as the regular ones, and Santa began to feel the Pre-Christmas pressure. Then Mrs. Claus told Santa her Mother was coming to visit, which stressed Santa even more. When he went to harness the reindeer, he found that three of them were about to give birth and two others had jumped the fence and were out, Heaven knows where. Then when he began to load the sleigh, one of the floorboards cracked, the toy bag fell to the ground and all the toys were scattered.  

Frustrated, Santa went in the house for a cup of apple cider and a shot of rum. When he went to the cupboard, he discovered the elves had drunk all the cider and hidden the liquor. In his frustration, he accidentally dropped the cider jug, and it broke into hundreds of little glass pieces all over the kitchen floor. He went to get the broom and found the mice had eaten all the straw off the end of the broom.

Just then the doorbell rang, and an irritated Santa marched to the door, yanked it open, and there stood a little angel with a great big Christmas tree. The angel said very cheerfully, "Merry Christmas, Santa. Isn't this a lovely day? I have a beautiful tree for you. Where would you like me to stick it?"

And so began the tradition of the little angel on top of the Christmas tree.
Not a lot of people know this.