Retail
-ICSC-Goldman Store Sales, Week/Week +1.2%
-ICSC-Goldman Store Sales, Year/Year +5.3%
-This is a report of comparison of same store sales of retail chains

-Redbook Store Sales, Year/Year +4.9%
-This is a measure of sales at chain stores, department stores and discounters

-Both reports show strength in consumer spending for the week ended December 31, driven by deep retailer discounts. Consumer spending is the largest component of GDP.

Factory Orders (November 2011)
-Factory Orders, Month/Month +1.8%.
-The prior two months had showed decrease in Factory Orders
-Dept of Commerce full report

Fed’s New Rate Communication Strategy
Yesterday’s announcement that the Fed will start to announce interest rate policy in advance was, for me, a non-story. Couple of points:

(1) it has almost never been the case that rate targets have not been exactly what was suggested. The only cases I can think of immediately are the crisic lowerings post 9/11 and post-Lehman.

(2) the Fed has already said that it would keep rates low through the middle of 2013.

Factory Orders (October)
Factory Orders, Month/Month -0.4%

Equity and Treasury prices in the short term will continue to be moved not by fundamentals but by the perception of some sort of solution to the EU debt problem.

Retail Sales
-ISCS-Goldman Store Sales, Week/Week: +0.1%
-ISCS-Goldman Store Sales, Year/Year: +3.7%
-Redbook Store Sales, Year/Year: +4.1%. Previous was +4.2%.

Techs
Our call was for a technical objective of a 1.47% 10-year yield. We are still headed in that direction. The Dow is suffering a technical correction and its first stop on its downward path should be 10,000.

ADP Jobs
-ADP Private Sector Jobs was +91,000 for August, a modest gain
-This is a graph of ADP vs. BLS Jobs.
-BLS is this Friday, and the more important market mover.

Challenger Jobs Cuts
-Announced layoffs in August were 51,114, down from July’s 66,414.
-This is a report of announced jobs cuts at large companies.

Manufacturing
-Factory Orders Month/Month: +2.4%.
-This is largely about recovery in the auto sector.

ISM – Chicago
-The Institute for Supply Management business barometer index for the Chicago area was 56.5 for August down from 58.8.

Challenger Job-Cut Report
-This is a report of announced jobs cuts by large companies
-Announced Layoffs (July) were 66,414
-Previous month was 41,432.
-As graph shows, this is a leading indicator of Jobless Claims and a bad story for jobs recovery

MBA Mortgage Applications
-Purchase Index Week/Week: 5.1%
-Refinance Index Week/Week: 7.8%
-Composite Index Week/Week: 7.1%
-All of these are reversals from last weeks downward changes.
-Refis picked up because rates are down.

Factory Orders (June data)
-Factory Orders Month/Month: -0.8 %
-Previous was +0.8%
-This is continued effect of supply side getting ahead of consumer.
-There is also a story here about how bad data from BEA about GDP gives poor guidance to everyone.

ISM Non-Manufacturing Index
Composite Index for July was 52.7 down from 53.3. Same story as Factory Orders: slowing growth. This ISM report measures services sectors of the economy. The behind the scenes story of the economy is simple. Government and business have done much to stimulate the economy but the consumer is not on board.

The ongoing discussion about the Greek debt situation misses the point that there is continuing concern about much sovereign debt be it Greece, the other PIIGS nations, Japan, China, or the U.S. Default of Greek debt could have the short-term effect of causing flight-to-quality buying of U.S. Treasuries but then call into doubt the ability of the U.S. to service its debt without high inflation. A plan for fiscal sustainability is necessary but impeded by politics.

Greece Bailout Is Like US Needing 10x TARP Funds
Returning to the Greek issue for a moment, some believe that this will be the end of the Euro currency, at least in Greece. Let them print their own currency! The odds of sharp recession have increased, obviously, and naysayers are skeptical about any bailout plan based on the recession-stricken Portuguese and Spanish contributing billions of Euros to the cause. We have the ECB adopting a pure bailout strategy by accepting all Greek collateral and have seen almost $150 billion in potential economic aid offered to the Greeks. This figure is almost 50% of Greek GDP, and is the equivalent of the United States needing 10x the TARP funds! Greece’s GDP is only about 2% of US GDP and slightly less than that of Eurozone GDP, and one analyst likened it to Ohio going bankrupt and taking the entire US economic system with it.

Bond Yields Hit 4 Month Lows
In our market, yields hit their lowest level in more than four months due to the continued “concern” that European governments haven’t yet overcome the region’s debt crisis boosted demand for the safest assets, although there are continued worries about the debt situation in our own country. The difference in yield, however, between Fannie Mae & Freddie Mac mortgage securities and Treasury yields climbed to its highest level in several months. Spreads have not skyrocketed, but have moved up on increased volatility and since investors are very much preferring the safest of Treasury securities. “If Greece could default, couldn’t Fannie or Freddie?” Fortunately for possible borrowers, all rates have dropped, masking the difference. (Greater volatility harms mortgage-bond prices because it makes bigger rises or drops in rates more likely, pushing refinancing and other sources of prepayments on the underlying loans either much higher or lower than expected.)

Mortgage Apps Up, ADP Jobs +32k
This morning we learned what locks desks already knew about last week: mortgage applications rose 4% after declining 2.9% during the previous week. Refinancing apps were down 2.1% from the previous week but purchases increased 13.0% from one week earlier – there’s that homebuyer tax credit at work. In fact, purchase applications were up almost 24% over the last month. We also had the ADP private-payroll number for April which showed job growth coming in at 32,000. After these, and in the face of further stock sell-offs, the yield on the 10-yr is down to 3.55% and mortgage prices are better by between .125 and .250.

Follow Up On Mortgage Fraud Categories Comment
A reader made a good point on an article that I mentioned yesterday which stated, “Next were frauds related to appraisal and valuation misrepresentation, which increased from 22% of reported misrepresentation in 2008 to 33%. With an 11% increase, this is the most notable increase in reported fraud types in 2009. Thank you HVCC.” Vicky (from Valuation Management Group) wrote to point out, “The reported fraud was reported in 2009, but most likely took place in the years prior to 2009. HVCC was not in place until 5/2009, so the results of this will not be realized until the 2011 or 2012 reports.”

PennyMac Earnings
PennyMac Mortgage Investment Trust reported net income for the first quarter of $1.3 million on total net investment income of $3.9 million. During the first quarter the company acquired five residential mortgage whole loan pools valued at $115 million in aggregate, with unpaid principal balances at the time of purchase of $208 million, of which 86% of the loans were either 90 days or more delinquent, or in the foreclosure process.

FDIC Selling 40% Of Silverton Bank Subsidiary
In a related but unrelated matter, the FDIC announced a bid confirmation letter to sell a 40% equity interest in a limited liability company created to hold assets of SFG, a subsidiary of Silverton Bank (GA) to Square Mile Capital Management LLC. The FDIC will initially hold the remaining 60 percent equity interest in the LLC. The assets are mostly performing hospitality loans and loan participations with an unpaid principal balance of approximately $421 million.

Lending Effects of Nashville Flooding
Effective immediately, due to the present flooding activity in the Nashville TN area, Flagstar Bank will be temporarily suspending loan fundings in Davidson County. And when funding resumes, a satisfactory re-inspection will be required (as it already is for Cheatham, Rutherford, Sumner, Williamson, and Wilson counties) that include a statement from the appraiser that the subject property has not sustained any damage, a statement from the appraiser on the neighborhood conditions as they relate to any flooding or mudslide damage, and a photograph of the subject property.

Treasury Tries To Help Force More Loan Modifications
An American Banker article by Kate Berry states that “the Treasury Department is threatening to deny or even claw back incentive payments to mortgage servicers that are not modifying loans according to the administration’s guidelines.” Some say that noncompliance is rampant in the voluntary Home Affordable Modification Program (HAMP), mostly in the area of communications with borrowers about their rights surrounding foreclosure. The Treasury Department pays $1,000 for each completed permanent modification for a delinquent borrower and $500 for each modification given to a current borrower, along with $1,000 per year for borrowers who stay current after being modified. So far, servicer payments have totaled $68.4 million to the 109 servicers who are participating in the program and through March 31st only 230,801 borrowers had received permanent loan modifications and more than a million borrowers were in trial modifications. Given that the program is voluntary, too many penalties can cause servicers to drop out of the program – contractually, there is very little to compel the banks and servicers to do anything.

Loan Modification Comment From Trenches
In a related word from the trenches:

“Large investors and servicers are receiving incentives to modify loans, and then they can turn around and pass the loss portion onto the originator. The most frustrating part is that while the loans were underwritten responsibly (reasonable income, not inflated with a strong likelihood of the income continuing), the servicers are now contacting borrowers or employers and verifying the past income – but how they are getting the authorization from the borrower to do so when there is no loan modification in progress? If there is a discrepancy in income, the result is a repurchase request with complete disregard to the fact that it was their product design that you had to comply with, requiring ‘when verifying employment, no income may be disclosed’. I am sure that there are borrowers that inflated income levels, but on the loans I have reviewed, this does not appear to be the case. I am trying to figure out how this scenario is supposed to be acceptable to those who responsibly played by the rules!”

Daily Humor
Most people don’t know that in 1912, Hellmann’s mayonnaise was manufactured in England.

In fact, the Titanic was carrying 12,000 jars of the condiment scheduled for delivery in Vera Cruz, Mexico, which was to have been the next port of call for the great ship after its stop in New York.

This would have been the largest single shipment of mayonnaise ever delivered to Mexico. But as we know, the great ship did not make it to New York. The ship hit an iceberg and sank, and the cargo was lost forever.
The people of Mexico, who were crazy about mayonnaise, and were eagerly awaiting its delivery, were disconsolate at the loss. Their anguish was so great that they declared a National Day of Mourning, which they still observe to this day.

The National Day of Mourning occurs each year on May 5th and is known, of course, as Sinko de Mayo.

For anyone who originates loans for a living, or knows someone who does, or who didn’t comment during the HVCC comment period and wish they had, you should know that broker compensation is in the hot seat. The Board of Governors of the Federal Reserve is accepting comments until Christmas Eve regarding the TILA changes—documents here and here. Highlights include page 178 (43408) which contains the new proposed broker compensation (little or no rebate will be paid; the broker will not be paid upon any of the loan characteristics and will have to charge a flat fee or an hourly fee, etc.) Also worth viewing are pages 43279 – 43285 (page 49 – 55) (beginning with “Background” on the bottom of page 43279).

Should one desire to comment, try an e-mail to regs.comments@federalreserve.gov, and be sure to include “Regulation Z; Docket No. R–1366,” in the subject line.

Of course the document raises a huge number of questions. Why should brokers and agents’ pay be fixed, but not a realtor’s? Should an originator who does a $1 million loan really receive the same pay as for doing a $100,000 loan? And if not, how should originators then be compensated? Will the proposed structure push loan officers into becoming brokers so that they have a range of pricing from different lenders? Or, instead, would the advantage go to large lenders (Bank of America, Citi, etc.) in adding origination staff since they can pay more?

MBS Market Tidbits
What has the Mortgage Bankers Association of America been up to lately? Well, they set up a council to examine and suggest a framework for the government’s role in the single-family and multifamily secondary mortgage markets. The MBAA advocates a new type of mortgage-backed security with two components. “First, a security-level, federal government-guaranteed ‘wrap’ similar to that on a Ginnie Mae security. The government backstop would be explicit and focused on the credit risk of these mortgage securities. Second, the security would be backed by loan-level guarantees provided by privately-owned, government-chartered and regulated mortgage credit guarantor entities (MCGEs). The infrastructures of the existing GSEs, including their technology, human capital, standard documents and existing relationships, would be used as a foundation for one or more MCGEs.” Share prices of both Freddie and Fannie fell yesterday, since the MBAA will ask Congress to transform Fannie and Freddie into smaller, private companies that would issue mortgage securities guaranteed by the government. Check it out at http://www.mbaa.org/NewsandMedia/PressCenter/70212.htm or Recommendations for the Future Government Role in the Core Secondary Mortgage Market.

Provident’s Arizona Fundings
I don’t live in Arizona, but apparently there is an issue with Provident Funding and that state’s tax bills. Provident has stopped funding loans in Arizona with impound accounts until tax bills come out at the end of the month. So, although they have locked in the loans with impound accounts, it is reported that they will not close them unless originators agree to pay a .25% fee to not have impounds. Supposedly the tax bills always come out in late September, so there is a question about Provident honoring locks that they have already taken in. “We are not closing any new loans with impounds until the tax bill comes out. If impounds are waived, it becomes the borrower’s responsibility to pay the 2009 tax bill so we can proceed. Previously we have had title hold funds to pay the bill, but this practice has ended.”

Wells Fargo Guidelines
Wells Fargo’s correspondent channel, starting in about 3 weeks, will require a minimum of six months of rent loss insurance on conventional loan transactions secured by 2-4 unit primary residences when rental income is used to qualify. (Wells said “Rent loss insurance may be waived when rental income from the subject property is not used for qualifying.”) The channel also brought out additional requirements for FHA and VA loans, also in 3 weeks. They are revising their payment history requirement for non-Wells Fargo serviced FHA Streamline Refinances and VA Interest Rate Reduction Refinance Loans (IRRRL) so that the requirement of no 30-day or greater mortgage lates (0×30) in the most recent 12 months continues to be in effect but also “the loan may continue to be documented and underwritten as a non-credit qualifying streamline refinance if the existing mortgage has a minimum of six months documented payment history (seasoning) with the current lender. If unable to document six months payment history (seasoning) with the current lender, the loan must be documented and
underwritten as a credit qualifying FHA Streamline Refinance or VA IRRRL.

SunTrust Updates
SunTrust, beginning Tuesday, told their clients that FHA Jumbo loans will be available to Government Sponsored clients. The increased loan limits are eligible only on fixed rate mortgages and may be submitted to SunTrust for underwriting, and all FHA Jumbo guidelines must be followed. Be aware that there is a special checklist that must be followed, but that all transactions are eligible for traditional underwriting or automated underwriting through DU/DO and LP.

Market & Economic Update
Yesterday’s market was more of the same: stocks feeling a little heavy, while bonds, and mortgage rates, reaped the benefits of the Fed buying securities, somewhat low lock volume, relatively weak economic information, and some nervousness about the job’s data tomorrow ahead of a 3-day weekend. Factory Orders came out +1.3%, less than expected although June was revised higher. The big news, if there was any, was release of the FOMC Minutes from the August 12th meeting. Surprises were kept to a minimum. The FOMC discussed trimming the MBS and Fannie/Freddie purchase program, see the economy slowly recovering during the 2nd half of 2009, households continuing to face tight credit but that consumer spending was stabilizing. With little inflation on the horizon, they see the risk of substantial disinflation. Not only that, but several members see a sizable risk of bank credit losses. Just what we need…

So far this morning yesterday’s bond market improvements have gone away, primarily attributed to a rally in the Asian equity markets. There is talk of the Chinese government taking steps to support their markets. (Ever notice how not much in Europe seems to impact us anymore? Their Central Bank did vote to leave their rates unchanged last night.) The only news out today was Jobless Claims (-4,000, but the prior week was revised +7,000; the four-week moving average was +4,000) and the ISM Services data at 10AM EST. Of interest that although manufacturing only contributes about 12% of GDP, recently all reports on manufacturing and businesses have been better than forecast. We will also have the Treasury’s announcement for the 3, 10, and 30-yr auction next week. The 10-yr is currently yielding 3.33% and 30-yr mortgage security prices are worse by about .250.

Daily Humor
A married man was having an affair with his secretary. One day they went to her place and made love all afternoon. Exhausted, they fell asleep and woke up at 8 PM.
The man hurriedly dressed and told his lover to take his shoes outside and rub them in the grass and dirt. He put on his shoes and drove home.
“Where have you been?” his wife demanded.
“I can’t lie to you,” he replied, “I’m having an affair with my secretary. We were naked all afternoon.”
She looked down at his shoes and said: “You liar! You’ve been playing golf!”

Bernanke vs Greenspan
I guess when people become tired of Ben Bernanke, they look back at Alan Greenspan. The former Federal Reserve chief’s favorite economic indicator is men’s underwear sales. Supposedly, Greenspan often said one of the first things men stop buying when the economy is doing poorly is underwear, because it’s something no one really sees. You can reason that when men start buying new boxers and briefs, it means the economy is turning around. Interestingly, after a 12-month, 12% decline through the end of January, men’s underpants sales leveled off during February and March, according to NPD (a group which tracks clothing trends). That suggests the economy is stabilizing, right? Usually it goes up 2% to 3% annually – don’t ask me why, as I would think it would hover around population growth – so a return to that would be a good sign.

Factory Orders Up, ISM Index Down
Orders at factories, some of which make underwear, were up .7% in April, and therefore up two of the last three months, after a revised 1.9 percent drop in March that was more than twice the previous estimate. Yesterday we also had the ISM Non-Manufacturing Index increased to 44 in May, the highest level in seven months yet lower than forecast, from 43.7 the prior month. Since the service sector makes up almost 90%, regardless of the headline-grabbing factories, so this is an important number. The market, however, was unconvinced that these were exciting numbers: stocks sold off, and Treasury prices rose (leading to lower rates).

Bond Traders Take Profits
Traders also saw some profit-taking in the steepening yield curve trade, so investors were unwinding the sale of long-dated maturities and purchase of short-dated notes, which widened the yield spreads to historic widths last week. So the yield curve is becoming a little less steep: the difference between 2- and 10-year yields narrowed yesterday to 2.66 percentage points, from a record 2.76 percentage points on May 27. Fannie 4% securities, into which would be placed 4.25-4.625% mortgages, are down (worse) almost 3 points in the last few weeks, yet Fannie 6.5% & 7% securities have actually improved in price! Traders believe that the bottom has dropped out of refinances, so the prepayment speeds on these loans is will slow down at current MBS prices.

Productivity Up
The news overnight and this morning was friendlier toward stocks than bonds, although those two markets improving or worsening at the same time is not unheard of. Are you being productive? U.S. Non-farm Productivity came out this morning, +1.6%, and it was much stronger than initially estimated (+.8%) in the first quarter. The number of hours in manufacturing fell at a record pace, plunging at a 9% annual rate in the first quarter, the largest decline since the first quarter of 1975. Hours worked in manufacturing tumbled at an annual rate of 19.5%, the biggest quarterly drop on records dating back to 1987!

Jobless Claims Down
Workers filing new claims for jobless benefits fell for a third straight week last week, indicating a drop in the rate of the labor market’s deterioration. Claims were down 4k to a seasonally adjusted 621,000 in the week ended May 30th, about as expected. Continuing claims (the number of people staying on the benefit rolls after collecting an initial week of aid) declined for the first time since early January, and was also the first time in 17 weeks that they did not set a record. However, the four-week moving average for new claims, considered to be a better gauge of underlying trends as it smoothes out week-to-week volatility, rose 4,000 to 631,250 in the week ending May 30. After the news we find the 10-yr back up to 3.66% and mortgage prices worse by .375.

Lender Guideline Roundup
SunTrust, beginning this week, said that non-permanent resident aliens will no longer be eligible borrowers for their Portfolio Affordable Housing Mortgage Program. “Loans locked prior to Monday, June 1, 2009 will be honored; however, loans must be closed and delivered to SunTrust by the original lock-in expiration date. Lock extensions and relocks will not be granted. No exceptions.” No tears.

CitiMortgage, who last week came out with their “High Balance Loan Limits for Agency Jumbo loans” – which increased, had some caveats. Nothing onerous, but namely “Loans above the Permanent High Cost limits must be registered using newly created Sub-Program codes…In addition, due to the loan amount changes, LTV and FICO requirements have also been changed by Fannie Mae (and thus Citi). CitiMortgage also announced that DU Expanded Approvals recommendations will no longer be permitted on Agency Jumbo programs, all borrowers must have a FICO score, subordinate financing is not permitted on co-op loans, and for properties in attached condominium projects, the appraisal must contain two comparable sales from projects outside of the subject’s project in addition to the current comparable sale requirements. In addition to required appraisal, a Field Review (One-Unit Residential Appraisal Field Review Report) is required if the loan amount is > $625,500 and the LTV, CLTV, or HCLTV is greater than 80%; or the property is valued at $1,000,000 or more and the LTV, CLTV, or HCLTV is greater than 75%.”

Citi also followed other lenders with their “New lending parameters have been introduced for second homes and investment properties when the borrower has up to four (4) financed residential properties, including the subject property. If the subject property is a primary residence, there are no additional reserve requirements for the other financed properties. If the subject property is a second home or investment property, there are reserve requirements for both the subject property and the other financed properties. Second home – 2 months PITI plus an additional 2 months’ reserves on every other financed second home and investment property are required. Investment – 6 months PITI plus an additional 2 months’ reserves on every other financed second home and investment property are required.” This applies to all Citi’s conventional loans underwritten manually or with DU – but do not apply to DU Refi Plus or loans processed via LP. Citi also reminded sellers that borrowers having more than four financed residential properties are not permitted under their current guidelines.

Daily Humor
A man riding his Harley was riding along a California beach when suddenly the sky clouded above his head and, in a booming voice, the Lord said, “Because you have tried to be faithful to me in all ways, I will grant you one wish.”
The biker pulled over and said, “Build a bridge to Hawaii so I can ride over anytime I want.”
The Lord said, “Your request is materialistic, think of the enormous challenges for that kind of undertaking; the supports required reaching the bottom of the Pacific and the concrete and steel it would take! It will nearly exhaust several natural resources. I can do it, but it is hard for me to justify your desire for worldly things. Take a little more time and think of something that could possibly help mankind.”
The biker thought about it for a long time. Finally, he said, “Lord, I wish that I and all men could understand women; I want to know how she feels inside, what she’s thinking when she gives me the silent treatment, why she cries, what she means when she says nothing’s wrong, and how I can make a Woman truly happy.”
The Lord replied, “Would you like two lanes or four on that bridge?”

Jobs Report: -663k
This morning the unemployment data came out pretty close to expected: U.S. employers cut 663,000 jobs in March, and the unemployment rate hit 8.5%, the highest since 1983 when Reagan was in office. And although February’s numbers were unrevised, January’s were changed to a loss of 741,000, the biggest decline since October 1949. Since December 2007, the U.S. economy has dropped 5.1 million jobs, with about two thirds of the losses occurring in the last five months. After the news, bond prices are down slightly, with the 10-yr yield currently sitting around 2.69% and mortgage prices a shade worse than yesterday afternoon. (Interestingly, with the high profit margins now built into mortgage pricing, in spite of the MBS market worsening yesterday, many originators decided to absorb the price hit instead of passing it along on their rate sheets in order to potentially help locks.)

Chase 105% LTV Refi
Chase Correspondent announced their ability to purchase loans under the new Fannie Mae program DU Refi Plus™. This program is designed to assist borrowers that have demonstrated good pay histories on their mortgages but have been unable to refinance due to a decline in home values.

Wells Keeps Wachovia Warehouse Business
As mentioned several times in recent weeks by me (not that I am any great prognosticator – procrastinator is more the case) Wells Fargo is keeping Wachovia’s warehouse business that will provide funding to independent mortgage bankers. Are they going to open it up to any Tom, Dick, and Harry? That is highly doubtful, and will probably focus on their best clients with proven production, high net worth, and a solid track record in selling loans to Wells. It is rumored that it will not be a captive line – meaning that unlike competitor’s lines, originators are not forced to sell a percentage of their production to Wells.

Daily Humor
One day six retired men sat in an apartment playing poker when one of them, Jack Murphy, lost $500 in a single hand. In shock, he clutched his chest and crumpled at the table-dead. Out of respect for their friend, the five others stood up as they continued playing.
Eventually, one of the men looked around the table and said, “Boys, someone’s got to tell Jack’s wife what’s happened. Who will it be?”

They decided to draw straws-and Jimmy Jones drew the short one. The other men were full of advice for Jimmy: “Be discreet,” “Be gentle,” “Don’t make a bad situation worse.”
“Discreet. You don’t have to worry about that,” assured Jimmy. “I’m always discreet. Discretion is my middle name. Now let me out o’ here so I can get this done.”
Jimmy went over to the Murphy home and knocked gently on the door. When Mrs. Murphy answered, Jimmy said, “I must tell you that your husband has just lost $500 playing poker and is afraid to come home.”
“Tell him to drop dead!” cried Murphy’s wife.
“Anything you say,” he assured her.