-Fannie Mae Outlook: Economy Hits Air Pocket (MortgageNewsDaily)

-Why I’m Not Buying Zillow (Duff McDonald, Fortune)

-BlackRock names new global head of real estate (Pensions & Investments)

-Could End Of Refi Years Mean Bottom For Loan Profits? (National Mortgage Pro)

-Are Your Paying $500 For An Appraisal That Costs $200 (FoxBusiness)

-You Can Only Call Yourself An Entrepreneur If…(Altucher)

What if the U.S. government shut down and no one noticed? Even worse (or better, depending on one’s point of view), what if all federal workers went on furlough and the public realized there were benefits, not just costs, to smaller government? Essential services will be maintained, including the distribution of Social Security checks. Employees involved in the military, national security and law enforcement will stay on the job. Non-essential workers will be furloughed. President Barack Obama says a shutdown would further reduce confidence in government. Guess what? It can’t go much lower. The approval rating for Congress dropped to 18 percent last month, near the lowest in the Gallup poll’s 37-year history of tracking the trend.

Word has it that since it doesn’t rely on Congressional funds, the Federal Reserve (central bank) would remain open for business as usual, with normal staffing levels. The Fed would therefore be able to continue with its day-to-day operations. The SEC is expected to continue operations as well. But lenders and vendors were out warning originators about possibilities.

The mortgage industry could be adversely affected by a government shutdown because there are a few critical parts of the mortgage approval process. Every bank must order tax transcripts from the IRS when approving loans, and also when doing FHA loans, a series of background reports are pulled on borrowers. Both systems would likely be shut down, causing big loan delays.

Independent of the government shut-down, Wells Fargo cut 1,900 mortgage jobs. “The cuts add up to about 3% of Wells Fargo’s mortgage staff, including interim positions that are tied directly to origination volumes. Most of the layoffs are these interim employees, who were told when hired that their position could be short term.” Wells Fargo’s overall headcount was 272,200.

BlackRock, best known for being the world’s largest asset manager and its huge institutional bond accounts & iShares exchange-traded funds, is planning a massive expansion in old-fashioned mutual funds and related retail offerings. BlackRock wants to double its $300 billion U.S. retail business by the end of 2014, with the managing director saying, “The firm has identified U.S. retail as a strategic priority. We think we can double our business from where it is now.”

As BofA is hammered by bond investors to buy back loan pools that comprise those bonds, one big question is whether BofA would go back to those smaller banks who originally did the loans (and sold them to BofA) and try to collect from them. Which defeats the goal of regulators to broaden out consumer lending choices from big banks to smaller banks. One thing that gets lost in the regulatory propaganda is that the big banks are a support system for the small banks. And if this scenario where BofA pushes accountability down the chain, small banks would suffer. It’s a tangled web.

Recap of Market Week
All of the news this week has, as expected, created a lot of volatility in the markets. Yesterday, for example, both stocks and bonds soared. Mortgages were better by .375-.50 in MBS-land, but with only $1.5 billion in production being sold and traders reporting pension funds, money managers, and “delta hedgers” buying positions. After the QE2 information from Wednesday was digested, the S&P500, a better indicator of the general stock market than the Dow (which only has 30 stocks), hit its highest level in 2 years. The yield on the 10-yr dropped to 2.48%.

This morning we learned that Nonfarm Payrolls were up 151,000, the unemployment rate came in at 9.6%, and August and September numbers were revised higher. Private sector jobs jumped, and Hourly Earnings were up .2%. The headline number was more than twice as high as what was expected, and so far in 2009 874,000 jobs have been created. Do we really need QE2? This unemployment data really shocked the market, pushing stocks higher (so far) yet again, and driving rates higher. As I type this the 10-yr yield is sitting around 2.53%, and MBS prices are all over the board which means higher rates.

Latest On Jumbo Mortgages
BlackRock gave folks with non-agency mortgage interest some good news. Upwards of 90% of production is passing through the agencies (Fannie, Freddie, Ginnie) right now, but Blackrock’s planning a $1b fund to finance prime jumbo mortgages for a new version of a private-label residential mortgage-backed security. “But unlike the old RMBS issuance, BlackRock said this product will separate the originator of the loan and the servicer, a conflict of interest many investors feel have left them out in the cold as modifications and refinancing demand grew.” Its appetite is estimated to be about $100-$250 million in mortgages per quarter, per Reuters.

Homeownership Lowest In Decade, 19m Homes Vacant
The nation’s homeownership rate is at the lowest level in more than a decade. But really, is this a bad thing? Many would argue that it isn’t. Earlier this week the Census Bureau announced that the percentage of households that owned their homes was unchanged at about 67% last quarter, unchanged from the 2nd quarter and matching numbers from back in 1999. For several years prior to 1999 it was running around 64%, and hit its peak in 2004 at 69%. But almost 19 million homes, or 14.4 percent of all houses and apartments, were vacant according to the government survey.

Bigger Bank Dividends?
Reuters has good news for certain bank stocks:

“The U.S. Federal Reserve is expected to soon allow some healthy banks with strong capital levels to increase dividend payments…It is expected to take a conservative approach in deciding which banks can increase dividends and assess each bank individually.” “Banks have been pushing to boost dividends. But regulators have balked at giving them the green light, citing uncertainty about the economic outlook and new capital rules. With global capital rules and the U.S. financial regulatory system retooling farther down the track, the environment is more conducive to letting strong banks increase dividend payments. The Fed does not want to prevent banks that are viewed as particularly strong from boosting dividends.”

Speaking of investment income, yes, lower rates have an impact. Coca-Cola issued $4.5 billion in 3-year debt yesterday that pays investors .75%. Walmart issued similar debt last month. Remember that 3-yr US Treasury paper is only yielding .46% – but investors are apparently willing to accept those low levels of interest income. There has been heavy issuance of corporate bonds in the past two years and record amounts of inflows into corporate debt mutual funds. Colgate-Palmolive has sold five year debt with a coupon of 1.375 per cent while Johnson & Johnson issued 10-year debt paying just 2.95 per cent. Per Financial Times, Coca-Cola will use the proceeds to “restructure its debts after it acquired the North American business of Coca-Cola Enterprises, the bottler”.

More Housing Industry Earnings
Beazer Homes (#8 in the USA operating in 16 states) posted a loss in the last quarter of about $60 million, much worse than expected. Total revenue fell 25 percent to $274.8 million. For the fourth quarter, net new home orders decreased 20.6 percent, while the number of homes closed decreased 30 percent. Homebuilding revenues from continuing operations decreased 25.5 percent, the company said.

CoreLogic, a provider of real estate services and analytics, and which was spun off from First American earlier this year, lost $93 in the 3rd quarter versus income of $24 million in the second quarter. Until the end of the year, the company said it will repurchase up to $100 million in common stock, which is at about the same level it was when it first traded in early June.

In the 3rd quarter Ocwen Financial lost about $9 million, including $33.9 million in costs related to the acquisition of HomEq and $20.1 million in litigation charges stemming from a judgment in a case with Cartel Asset Management. For the year earlier third quarter, Ocwen reported a loss of $42 million. Ocwen (Newco spelled backwards, which is where the name came from) reported its servicing portfolio rise to $76 billion from $40 billion a year ago, and servicing revenue for the quarter rose 51% to $95.3 million from about $63 million a year ago.

The Purpose Of Treasury Auctions
When the US Treasury sells billions in new debt every other week, does the money go toward increasing the deficit or toward paying off old debt? The answer is both. For example, yesterday came news that the Treasury Department plans to sell $72 billion in its quarterly sales of long-term debt next week as follows: $32b 3yr notes 11/8, $24b 10yr notes 11/9, $16b 30yr bonds 11/10. The whole thing will raise $58.2 billion in new cash, with the rest of the proceeds going to pay off maturing debt. After expanding debt sales to finance annual budget deficits exceeding $1 trillion for the past two years, the Treasury has more recently been scaling back auction sizes as lower projected budget deficits have allowed them to reduce borrowing. Most estimates point to a Federal deficit north of $1.2 trillion in fiscal 2011, $1 trillion in 2012, and $900 billion in 2013.

Which leads into yesterday’s announcement that the Federal Reserve will print money to buy an extra $600b of Treasury bonds by next June. Their hope is that the move will make it cheaper for us to borrow money, take out mortgages or refinance our houses, and for businesses to borrow funds in order to expand. Higher inflation and lower unemployment are the goals. The financial markets had priced in the Fed’s move for weeks, and stock indexes didn’t move much after the announcement. “The pace of recovery in output and employment continues to be slow,” the Federal Open Market Committee statement said. It will help by raising asset prices, like stocks, which might make some folks feel better and go out and spend.

Banking & Mortgage Earnings Roundup

• >> Freddie Mac reported a $2.5 billion third-quarter loss, and is asking taxpayers for an additional $100 million in part to cover the cost of $1.6 billion in interest payments made to the federal government. Its loss was less than in recent quarters, a possible indication that mortgage delinquencies are slowing – but it, and the industry, is still grappling with delays in the foreclosure process which, combined with a slow housing market, will only cost more mo’ money.
• >> PennyMac Mortgage Investment Trust reported net income for the third quarter of $7.7 million. Last quarter PennyMac invested $125 million in distressed mortgage assets, comprised of $73 million in nonperforming residential mortgage whole loans and $52 million in MBS’s using cash from existing investments and debt from security repurchase agreements on the Company’s mortgage-backed securities. Per its press release, “at the end of the quarter, the Company’s portfolios of residential mortgage whole loans and mortgage-backed securities were valued at $245 million and $137 million, respectively. After the end of the third quarter, the Company entered into a transaction to purchase nonperforming whole loans valued at $222 million. That transaction is scheduled to close in the middle of December.”
• >> PHH (#7 in mortgage volume in the first half of 2010) lost $2 million in the 3rd quarter, down from a loss of $80 million a year ago. Mortgage closings increased, which helped revenue for the quarter increase to $572 million from $507 million last year. The mortgage-production segment of PHH had income of $161 million, while the servicing segment lost $194 million for a combined loss in the mortgage-services unit of $34 million. Mortgage closings were $12.7 billion for the quarter, up 26% over second quarter 2010 and 41% versus the period a year ago.
• >> Bank of America and PNC Financial Services are reported to soon be reducing their investment in BlackRock by selling 42 million shares of its stock. BlackRock’s stock price is down almost 30% this year (including 4% yesterday), but the sale should bring in billions of dollars for BofA and PNC which will help them with cash needs and in focusing on core businesses.
• >> Ally Financial came out with its 3rd quarter results showing the 3rd consecutive quarter of profitability. The company made $269 million of net income, and core pre-tax income of $636 million, compared to a net loss of $767 million for the third quarter of 2009. Ally’s position in the auto finance industry helped.

Nevertheless, this just adds to market uncertainty, keeps mortgage-related stocks down, and makes lenders continue to believe that holding on to cash (rather than lend it out) makes sense. The Federal government can run quantitative easing all it wants, but until large lenders and investors feel comfortable enough to come out of their shells, the housing market may not rally to any great extent. It also illustrates conflicting policy priorities, because it could put the Fed at odds with a bank the Treasury Department has been helping through the financial crisis over the past two years.

What is a Derivative?
A derivative is a financial instrument that has a value determined by the price of something else. They are not “bad” things, and in fact in many cases promote liquidity as the value linked to the expected future price movements of the asset to which it is linked. There are many kinds of derivatives, with the most notable being swaps, futures, and options. Over-the-counter derivatives are important risk-management tools for companies worldwide. Companies use OTC derivatives to manage exposure to interest rates, currency-exchange rates, commodity prices and other risks inherent in their business.

Because commercial and industrial companies use derivatives in this manner, they can devote time and attention to what they do best: producing and providing medical equipment, clothing, floor covering, mortgages, and other goods and services. For mortgage bankers and other financial firms, they can use credit default swaps to manage their exposure to credit risk in an efficient and cost-effective manner, which makes loans more available and less expensive to businesses and consumers. Because credit default swaps played a role in problems encountered by a small number of insurers, including AIG, policymakers at the federal and state levels are considering steps that can be taken to reduce the risk of similar problems arising in the future. And if it helps mortgage bankers, let’s do it.

Wells, Morgan Earnings
Both Morgan Stanley and Wells Fargo issued their 3rd quarter earnings this morning. Both stocks are down on the news, although the numbers generally came in close to expectations. For Wells, non-performing loans were up modestly. WF had record earnings, and said it has no plans on freezing their foreclosure process. Morgan Stanley announced that it will spin off its $7 billion hedge fund business that it purchased in 2006.

Mortgage Apps Down
Last week’s mortgage application index (with numbers from the week before) had a nice boost, but this morning’s MBA announcement showed that last week’s applications dropped 10.5%. The decline was the largest in four months, with refi’s down about 11% and purchases down about 7%. As folks in the business know, despite low rates or quantitative easing by the Fed, unless a borrower has the equity or qualifies using current guidelines it doesn’t matter what rates are.

Rates Up A Bit After Yesterday
Yesterday rates improved but despite favorable earnings reports (BofA and Goldman) and stronger than expected Housing Starts, stocks sold off throughout the day with acceleration as the afternoon moved on news that PIMCO, BlackRock, the New York Federal Reserve Bank, and others were suing BofA to take back millions in RMBS related to misrepresentations (see above). The 10-year note, which at one point was down (worse) by about .625 in price, ended better by .125 at 2.48%. Mortgage-backed securities improved roughly .250 in price, and most investors had one or more price improvements but Tuesday was the 2nd day of light supply – where are those locks? Besides the MBA application numbers, we have the Fed’s Beige Book later this morning, so it is pretty quiet out there. The 10-yr is sitting around 2.51% and mortgages are worse between .125-.250, giving back some of yesterday’s gains.

In the 2nd quarter of 2009, the number was actually a little better than expected, falling at a 1% annual rate. (In the first quarter GDP was -6.4%.) Still, with the contraction in the second quarter, U.S. GDP has fallen for four straight quarters for the first time since government records started in 1947. Residential investment dropped at a 29.3 percent rate in the April-June period after plummeting by 38.2 percent in the first quarter.

Employment Cost Index +0.4%, Good 7yr Treasury Auction
Lastly for economic news on this summer Friday, and the last business day of July, the U.S. Employment Cost Index rose by a bigger-than-expected 0.4 percent in the second quarter. For the last 12 months, the ECI was +1.8%, the lowest on record going back 27 years. On the good news side, yesterday’s $28 billion 7-yr auction went better than expected, and we saw some nice price improvements in Treasury securities and in mortgages. And the government announced that they had purchased over $20 billion in MBS’s last week, bringing their total for the year to about $702 billion. It can’t hurt, right? After the GDP data the 10-yr yield is down to 3.56% and mortgage security prices are better by more than .250.

Short Payoff vs Short Sale
What is a “short pay-off”? In this situation, a lender will forgive a portion of the principal balance owing on the mortgage, which has been paid as agreed, if the borrower refinances the loan with a different lender. (Is this like giving your buddy $20 to take the girl you’re trying to break up with on a date?) It is not the same as a “short sale” where usually the borrower is behind and/or is having financial difficulties. US Bank’s Consumer Finance Division will accept short payoff transactions, as long as the reason for the short payoff is part of the new lender’s program offering. And in addition, US Bank has a list of documents and agreements needed. Speaking of US Bank, their wholesale division reminded clients that they do not accept Property Inspection Waivers (PIWs) issued by DU.

PennyMac IPO
In what some view as a “hobby company” for ex-Countrywide executives, PennyMac Mortgage Investment Trust went public yesterday, backed by BlackRock and Highfields. Critics are quick to point out that not only did they cut the size of their IPO by 20%, but after raising $335 million in cash their stock fell from $20 per share to $19.10. PennyMac’s earnings will come from buying mortgages from failed banks and redoing the terms. Although once again critics claim that they originated the mortgages in the first place, and are now trying to profit from them again, someone has to do it, right? More than 1.5 million properties received a default notice or were seized in the U.S. during the first six months of 2009.

Daily Humor
[Warning: R-rated.]
A guy fell asleep on the beach in Florida for several hours and got horrible sunburn, specifically to his upper legs. He went to the hospital, and was promptly admitted after being diagnosed with second-degree burns.
With his skin already starting to blister, and the severe pain he was in, the doctor prescribed continuous intravenous feeding with saline, electrolytes, a sedative, and a Viagra pill every four hours.

The nurse, who was rather astounded, asked, “What good will Viagra do for him, doctor?”
The doctor replied, “It won’t do anything for his condition, but it’ll keep the sheets off his legs.”

BlackRock Inc. reached an agreement to buy Barclays Global Investors from Barclays PLC for $13.5 billion, creating a money-management titan roughly twice the size of its closest competitor.

The firm, renamed BlackRock Global Investors, will have more than $2.7 trillion in assets under management. The deal makes BlackRock, already a major player in actively managed stock, bond and alternative-investment products, an indexing giant and the largest U.S. provider of exchange-traded funds.

The transaction, expected to close in the fourth quarter, gives the British bank a 19.9% stake in BlackRock. Barclays President Robert E. Diamond and Chief Executive John Varley would take seats on BlackRock’s board. BlackRock is acquiring BGI in exchange for 37.8 million shares of common stock and equivalents and $6.6 billion in cash.

The deal more than doubles the assets under management for BlackRock, which was already one of the world’s largest money managers. The company had assets under management of $1.28 trillion at the end of the first quarter, down 6% from a year earlier.
More

Though asset-management industry mergers often have disappointing results, BlackRock may be one of the few firms positioned to make such a large acquisition a success, industry observers say. BlackRock, founded in 1988 by Mr. Fink, has proven adept at deals, merging with Merrill Lynch Investment Managers in 2006 in a move that more than doubled its assets under management.

BlackRock managed to emerge from the financial crisis in a clear position of strength. Managing stock, bond, alternative investment, and cash-management products, the firm was largely able to hang on to investor assets even as shareholders jumped from riskier holdings to more conservative investments.

BGI, based in San Francisco, is known largely for its index-tracking products. The firm created the first index fund for institutional investors in 1971, and most of its roughly $1.5 trillion in assets under management are in indexed products.

…The firm is paying an average of 30 cents to 50 cents on the dollar for the loans and the FDIC is sharing some of the risk, spokesman Andrew Chang said.

…PennyMac’s purchase is the second FDIC sale of bank assets to private buyers announced this year. Regulators are seeking to dispose of assets after at least 25 lenders collapsed last year. With banks concentrating on rebuilding capital, the FDIC has been offering loans to private buyers, and last week sold the remains of IndyMac Bank to a group led by former Goldman Sachs Group Inc. executive Steven Mnuchin.

“This asset sale did not provide any loss-sharing,” said FDIC spokesman David Barr in an interview about the PennyMac deal. “It is a participation sale, however, which means the FDIC benefits from cash-flow generated from these loans.”

The FDIC will receive 80 percent of the loan’s cash flow until a certain, undisclosed level of payments are received, then 60 percent thereafter, he said.