The plan worked as they helped get JP Morgan Chase to take over WAMU and Wells Fargo to take over Wachovia. Indymac, WAMU, and Wachoivia were among the largest players in negative amortization Option ARMs. The other two players were Countrywide which was taken over by Bank of America and Downey Savings which was recently taken over by US Bank. Now US Bank is thought to be a top suitor for Indymac.

GMAC
In other banking news, GMAC was granted a banking charter by the Federal Reserve so they can now access TARP funds to help their auto lending. They also have a significant residential mortgage operation and status of that unit is unknown at this time.

In 2006 GMAC sold 51% of the firm to private equity firm Cerberus. As part of this deal…

GM owned all of GMAC until it sold a 51 percent stake in GMAC in 2006 to a group led by Cerberus, the New York-based private equity firm. As part of today’s agreement, GM will reduce its ownership in GMAC to less than 10 percent and transfer what remains to an independent trust, which will dispose of the stakes within three years.

Cerberus funds that hold GMAC stakes will distribute them to their investors, the Fed said. Cerberus’s voting control will be cut to less than 15 percent, or 33 percent of GMAC’s total equity. None of the recipients will have more than 5 percent of the votes or 7.5 percent of the total equity. The Fed also required Cerberus employees and consultants to stop providing services or acting as “dual employees” of GMAC.

U.S. Bancorp will post fourth-quarter net charge-offs of $600 million to $650 million and a roughly equal amount of loan-loss provisions, the bank’s chief executive, Richard Davis, said Thursday.

As a result, U.S. Bank will post about $1.2 billion in credit costs for the fourth quarter, or approximately even with third quarter net charge-offs of $1.25 billion.

“U.S. Bank is not seeing an increasing … curve in charge-offs,” Mr. Davis said. “We are not also seeing an improving slope. We’re just seeing a continuation of the same curve.”

He said U.S. Bank will post “impairment” or write-down charges of about $200 million $300 million, compared with third-quarter impairment charges of $411 million.

Mr. Davis did warn investors that nonperforming loans — or loans nearing charge-off — will continue to rise in the fourth quarter to about 1.14% to 1.18% of all loans. That’s a sharp increase from the bank’s third quarter nonperforming ratio of 0.88%.

As consumers continue to fall behind on their loan payments in increasing numbers, banks are working to restructure loans to offer those consumers lower monthly payments.

U.S. Bank is faring considerably better than its peers in keeping restructured loans from lapsing back into default, according to historical research.

Mr. Davis said “one third to 40% of the loans we restructured found their way to net charge-off.” That compares with higher rates of relapse that other banks are seeing. Many banks are seeing one of every two restructured loans return to delinquent status.

They, along with PFF Bank & Trust (Pomona, CA) were taken over by U.S. Bancorp. Downey is the third largest bank to fail this year, and US Bancorp has agreed to change the terms of mortgages taken out by Downey and PFF customers, in a program similar to the one the Federal Deposit Insurance Corp is using for mortgages held by IndyMac. The FDIC agreed to share losses on the acquired loans with the bank’s U.S. Bank unit. U.S. Bank had 2,556 branches before this transaction, of which 353 were in California. Downey has 170 branches in California and five in Arizona while PFF Bank has 38 branches in California. So far this year, 22 banks have failed, the most since 1993 when 50 banks failed.

FDIC To Bank Bank Bonds
Speaking of the Federal Deposit Insurance Corp, they voted last week to strengthen the guarantee on bank bonds, clearing the way for financial institutions to access credit markets with the backing of the U.S. government. The FDIC will provide the guarantee on senior unsecured bank debt, ensuring creditors get a timely payment of principal and interest in the event of a default. Banks had said bond investors would reject the debt because the original guarantee wasn’t strong enough to put the bonds on par with other government or government-backed securities. The FDIC excluded from the program any loans with maturities of less than 30 days. In theory this should help create investor demand for the guarantee.

Fannie Mae Might Lower Debt-to-Income Ratios to 45%
There are rumors about Fannie changing their DTI. A senior underwriter at Fannie Mae responded to me and said, “No, I hadn’t heard any rumors placing Fannie with Freddie’s DTI announcement. We know that Freddie announced that in March 2009 they were going to reduce the DTI to 45% on all products except Streamline Refinances. As you know, Fannie has a 45% max DTI on Jumbo Conforming but currently that is the only program that imposes the DTI restriction.”

Citigroup Gets Gov’t To Back Mortgages
Citigroup executives have arranged a deal whereby the U.S government will guarantee $306 billion of troubled mortgages and other assets. Citigroup will also get an additional $20 billion of cash from the U.S Treasury. In return for the guarantees, the US government/US taxpayer will receive $27 billion of preferred shares paying an 8% dividend. Said another way, our government will guarantee any losses on more than $300 billion of Citi’s troubled assets, and will make a fresh $20 billion investment in the bank. On the news, stocks have rallied, but bonds have not.

The 10-yr is worse by .5 in price, with the yield up to 3.23%. Fortunately mortgage prices are roughly unchanged from Friday afternoon.

Massive Retail Store Closures
There is an e-mail making the rounds saying that, “It would be better to give cash or a present than a gift card this year. Stores across America are being scheduled to close after the Christmas season due to economic difficulties and bankruptcy, which would render most cards useless.” This is sobering: Circuit City closing 155 stores nationwide. Ann Taylor is closing 117 stores nationwide. Eddie Bauer has already closed 27 shops in the first quarter and plans to close up to two more outlet stores by the end of the year. Women’s retailer Cache announced that it is closing 20 to 23 stores this year. Lane Bryant, Fashion Bug, and Catherine’s are closing 150 stores nationwide. Talbots & J. Jill will be shuttering all 78 of its kids and men’s stores, plus another 22 underperforming stores. The Gap Inc. is closing 85 stores. Foot Locker is closing 140 stores. Wickes Furniture is going out of business. Levitz/BOMBAY is closed. The owner of Zales & Piercing Pagoda is closing 105 outlets. The Disney Store may close up to 98 stores. Home Depot is shutting down 15 core retail stores. Macy’s is closing 9 stores. Video rental company The Movie Gallery is eliminating 160 stores. Gone are 33 Pep Boys stores. Sprint Nextel 125 retail locations. Ethan Allen Interiors is closing 12 stores, and Wilson Leather is closing all 260 mall stores. Pacific Sunwear will close its 154 Demo stores. The Sharper Image is in bankruptcy and 90 of its 184 stores are closing. KB Toys posted a list of 356 stores that it is closing around the United States as part of its bankruptcy reorganization. Dillard’s Inc. is shutting down 6 more stores. Starbucks: Starbucks will close approximately 600 company- operated stores in the U.S. Kirklands home décor will be closing nearly 130 stores nationwide. Linens ‘n Things is closing 120 stores. Dell Inc. closed its 140 kiosks in the United States, and Liz Claiborne Inc. said it’s closing the entire 54-store Sigrid Olsen chain. Lone Star Steak House is shutting 27 stores, Rite Aid 28 stores, and Big Dollar is closing 10 establishments.

Daily Humor
A guy goes into the bar, grabs a stool, takes a seat and orders a beer. No one is around but he hears, “Nice Shirt” in a very soft, low voice. Looking around, he sees nobody and shrugs it off. A minute or 2 later, he hears in a soft tone, “Nice Tie”. Again he looks around and sees himself alone at the bar.

When the bartender shows up with his drink, he tells the bartender he keeps hearing things. When the bartender asks for details, the customer retells the story. Bartender then replies, “It’s the nuts – they’re complimentary”.

In the same deal US Bank also took over PFF Bank & Trust. Between the two takeovers, they said they’re acquiring about $12.8 of assets and $11.3 of liabilities. The Minnesota bank will more than double its California presence after adding 170 Downey branches in California plus five in Arizona, and also 38 PFF Bank branches in California. US Bank never lent Option ARMs, and retains most of its loans in its portfolio.

There have been 22 bank failures so far in 2008. Loan and deposit customers of Downey are better off with US Bank. Here’s a US Bank Q&A for Downey customers.

Downey Savings In Trouble
Rumors, and facts, are suggesting that Downey Savings is on the ropes.

More Mortgage Application Disclosures Coming
What will loan agents be doing in a year? How about RESPA training? The industry was wrong about HUD taking RESPA reform back to the drawing board. HUD has amended RESPA, effective January 2010. The “highlights” include a three page GFE, and lender fees on the GFE must match (exactly) the fees on the HUD I; the interest rate must be stated on the GFE with the date the rate is good through; the lock period associated with the interest rate must be stated; the origination fee and discount on the HUD must be the same as on the GFE; it will no longer be acceptable to take a loan application before the consumer selects a program, and all the information must be available within three days.

ING Loan Changes
Here is some clarification on ING’s latest changes. Scott Gray, who runs broker lending for ING, wrote to me and said, “We put out our announcement about lowering LTV’s a week ahead of time so our brokers can get the loans in their pipelines, slated for ING Mortgage, submitted before we make the change. Second, to put rumors to rest, we are actually reducing LTV’s by 5% from a maximum of 80% to 75% on fully amortized loans and from 75% to 70% on IO loans. However, in California, we are actually expanding our loan menu, bringing back second homes and loans to $3 million.” Thank you Scott.

Treasury Alters TARP Plan
In what some call “changing horses in midstream”, or “acting like a trader rather than an economist”, ex-Goldman Sachs Treasury Secretary Henry Paulson said the Treasury has put a plan to purchase illiquid mortgage-related assets on hold. Now the Treasury Department is considering requiring that firms seeking future government money raise private capital in order to qualify for public assistance. It won’t impact what has already been done with injecting money into banks. On the news yesterday, the stock market quickly sold off on worries that the $700 billion plan may not help the economy. Rates were helped, somewhat, since the $700 billion plan may not help the economy. You get the idea. In fact, rates are good, but so far this year the S&P 500 broad stock market index is -42%.

Mortgage Applications Up, Jobless Claims Up
Here is some good news, aside from rates generally being low. US Mortgage Applications increased 11.9% last week, bouncing off an 8-year low. Purchases were +9% and refinancing applications were +16.1%. Forget the Trade numbers this morning. (U.S. imports fell by 5.6% in September and exports suffered their steepest drop since September 2001, narrowing the monthly trade deficit slightly more than expected.) The Labor Department’s weekly Jobless Claims number showed workers filing new claims for jobless benefits rose last week to 516,000, the highest level since the weeks following the Sept. 11, 2001 attacks, when they were 517,000. The four-week moving average, which smoothes out weekly variations, was 491,000, the largest since March 1991. We still have the Treasury’s auction of $10 billion of 30-yr bonds later today. With all of this, the 10-yr is back up to 3.72%, and 30-yr mortgage prices are worse by about .250 in price.

Daily Humor
Forrest Gump Explains Mortgage Backed Securities

Mortgage Backed Securities are like boxes of chocolates. Criminals on Wall Street stole a few chocolates from the boxes and replaced them with turds. Their criminal buddies at Standard & Poor rated these boxes AAA Investment Grade chocolates. These boxes were then sold all over the world to investors. Eventually somebody bites into a turd and discovers the crime. Suddenly nobody trusts American chocolates anymore worldwide.
Hank Paulson now wants the American taxpayers to buy up and hold all these boxes of turd-infested chocolates for $700 billion dollars until the market for turds returns to normal. Meanwhile, Hank’s buddies, the Wall Street criminals who stole all the good chocolates, are not being investigated, arrested, or indicted.
Mama always said, “Sniff the chocolates first, Forrest, sniff the chocolates first.”

Ginnie Mae Background
It is good to keep in mind that the reserve requirement for Ginnie Mae securities is 0. 0 with a “z”. Ginnie Mae is a government-owned corporation that guarantees bonds backed by home mortgages that have been guaranteed by a government agency, mainly the Federal Housing Administration and the Veterans Administration. Their insured bonds have always had the explicit backing of the federal government, as opposed to Fannie and Freddie, who guarantee bonds backed by mortgages that have no government guarantee up until recently. As many originators know, the FHA was created in the 1930’s to help borrowers who couldn’t get conventional home loans because they had low credit scores or limited resources. A bank or other institution bundles a group of FHA mortgages and sells a bond backed by mortgages in the pool to investors, and Ginnie Mae insures the bond, for a fee. (It doesn’t own any bonds itself.) Borrowers make their payments to the servicer, who in turn remits the payment to Ginnie Mae, which passes them through to investors.

Mortgage Wholesalers Exit, Make Changes
And now for the latest lender to exit wholesale lending through brokerage channels, we turn to Downey Savings. Downey Savings and Loan Association, a subsidiary of Downey Financial, will close its wholesale loan department and loan processing centers supporting the unit immediately. Downey Savings will also downsize its retail loan department. The moves will affect about 200 employees.

HSBC wholesale announced, “The following changes are being implemented for the Fannie Mae and Freddie Mac Conforming-Jumbo Fixed Rate and Fixed Term LIBOR ARMs: Monday, October 20 will be the last day HSBC will accept registrations in any of these programs. Friday, October 24 will be the last day to lock loans in any of these programs. For Broker and Table Funded transactions, the maximum lock period will be 30 days. Lock periods greater than 30 days will not be permitted. For Correspondent transactions, the maximum lock period will be 40 days. Lock periods greater than 40 days will not be permitted. All loan packages must be received no less than 10 business days prior to the lock expiration date. No lock extensions will be permitted.

Market/Economic Stats
The yield on the 10-yr Treasury is back down to 3.89%, and mortgage prices are better by roughly .250 in price this morning. We had Housing Starts which hit a 17-year low in September – supposedly home builders are trying to reduce their unsold inventories. Housing starts fell 6.3%, the lowest level since January 1991, and starts of single-family homes tumbled 12% to 544,000, the lowest since February 1982, much worse than expected. Later we have the University of Michigan survey. One would expect to see rates drop, as technically we are “oversold”. LIBOR is continuing to improve – the fifth day in a row today. Perhaps this cash infusion thing is working! Hopefully some of this spills into mortgage-backed securities, especially with things seeming to slow down lock-wise.

DAILY HUMOR
A distinguished young woman on a flight from Ireland asked the Priest beside her, “Father, may I ask a favor?”

“Of course, child, what may I do for you?”

“Well, I bought an expensive woman’s electronic hair dryer for my mother’s birthday that is unopened and well over the Customs limits, and I’m afraid they’ll confiscate it. Is there any way you could carry it through customs for me? Under your robes perhaps?”

“I would love to help you, dear, but I must warn you: I will not lie.”

“With your honest face, Father, no one will question you.”

When they got to Customs, she let the priest go ahead of her.

The official asked, “Father, do you have anything to declare?”

“From the top of my head down to my waist, I have nothing to declare.”

The official thought this answer strange, so asked, “And what do you have to declare from your waist to the floor?”

“I have a marvelous instrument designed to be used on a woman, but which is, to date, unused.”

Roaring with laughter, the official said, “Go ahead, Father. Next!”

Along the lines of fallout, to control costs Provident Funding stated that, “When we commit a fixed price to you for a specific time period, we must honor that price. We take interest rate risk to guarantee to you a price we may not be able to secure in the market when we sell your loan. Managing that risk can be costly if an account fails to keep their commitment to close the loan with us. Logically then, Provident Funding places a great deal of importance on closing every locked loan within the agreed upon time period so we monitor our accounts locked fallout. Fallout = loans that an account locks and subsequently does not fund with us.” Provident proceeded to notify brokers who had poor pull through that they were terminating their relationship. Makes sense!

MORTGAGE INDUSTRY ROUNDUP
Anyone interested in the fundamentals of the housing bill should read it.

Downey Financial saw their fourth straight quarterly loss, and the stock fell 34% yesterday, meaning that it is down 94% this year. Chief Executive Officer Daniel Rosenthal stepped down, as did founder, chairman, and largest shareholder Maurice McAlister, 83. Chief Operating Officer Thomas Prince, 61, is the interim CEO. As every originator knows, Downey was one of the biggest players in option-ARMs.

Washington Mutual’s stock took a hit on Thursday (-13% to $4/share) on concerns that the nation’s largest thrift is losing access to important sources of funding. Many of WaMu’s unsecured creditors are “quietly” reducing their exposure to the troubled bank, according to a report by an analyst, citing information in the company’s second-quarter earnings report. That means the thrift has to rely more on insured deposits and borrowing from the Federal Home Loan Banks for funding. In the company’s earnings report released earlier this week, it said that total deposits fell by $6.13 billion during the second quarter.

Wachovia’s Chief Financial Officer (Thomas J. Wurtz) resigned yesterday, following the bank’s larger-than-expected $8.86 billion second-quarter loss. Wachovia has already slashed its dividend and cut 10,750 jobs, also recently lost their CEO.

MARKET ROUNDUP
After a few days of improvement, mortgage prices got whacked today after Durable Goods shot up in June on demand for metals, machinery, electrical equipment, and military needs. Durable goods orders, expected -.3%, were up 0.8 percent, after a revised 0.1 percent gain in May, and ex-transportation orders were climbed 2% last month, the sharpest rise since December. This certainly is counter to yesterday’s Existing Home Sales falling 2.6% in June, 15.5% lower than June 2007. Total housing inventory represents a 11.1.-month supply at the current sales pace, up from a 10.8-month supply in May. Not surprisingly there is a downward distortion in the price data with the short sales and foreclosures accounting for 33% of transactions. In addition, the supply of homes may be even greater because not all foreclosed properties are counted by the Realtors group – they only include foreclosures that have been listed on the multiple listings service. Later today we’ll have New Home Sales, expected -2.0%, but for now the 10-yr is up to 4.05% and 30-yr mortgages are worse by roughly .375 in price.

JOKE OF THE DAY
An old Baptist man prays to God and says “God, I’ve been a good person my whole life, always gave charity, prayed, never did a bad deed. But I’m broke and I want to leave my kids with an inheritance. I’ve never asked for anything from you in my life – please let me win the lottery tomorrow night”.

Of course he doesn’t win and drops dead on the spot.

When he gets “upstairs” he asks God to explain himself – how could he not give an old man who always did his bidding – his one wish?

So God turns to him and says “You fool – you could’ve at least bought a ticket.”