HUD just released its annual report on the FHA mortgage insurance fund, and noted that it believes its capital position of the insurance fund remains strong and expects to surpass its 2% capital ratio earlier than initially expected.

The positive outlook is largely driven by the profitability of new originations, which are substantially better credit than 2005-08 collateral and are currently paying much higher mortgage premiums.

“However, if economic conditions and home prices deteriorate much more than expected, the fund could find itself in a negative capital position.

This could cause HUD to reconsider its position and increase the FHA annual premium [from 1.1-1.15% today].

Such a move would be a substantial positive for GNMA convexity going into 2012…HUD indicates that, in the midst of continued weakness in housing markets across the county, the MMI Fund capital ratio remains positive this year at 0.24 percent.

With new risk controls and premiums put in place by the Obama Administration, the independent actuaries predict the Fund will return to the Congressionally-mandated threshold of 2% capital more quickly than was projected by last year’s review.

FHA’s capital reserve ratio measures reserves in excess of those needed to cover projected losses over the next 30 years. The independent actuarial reviews of the MMI Fund estimate FHA’s capital reserve ratio to be 0.24 percent of total insurance-in-force this year, falling from 0.50 percent in 2010.”

HARP 2: Underwater Refinance Update
If we put yesterday’s Fannie and Freddie HARP 2 guidelines for underwater refinances in plain language, they’re saying they’ll reduce fees and relieve lenders from some liability on home loans in order to lower the cost of borrowing to distressed homeowners.

For example Fannie Mae said: “The lender is not responsible for any of the representations and warranties associated with the original loan.”

But as detailed yesterday, the timeline is at least 1-3 weeks for lenders to implement new guidelines and start quoting HARP rates and accepting consumer loan submissions. You can SEE IF YOU QUALIFY while you’re waiting.

The good news is that private mortgage insurance defaults declined last month, according to the Mortgage Insurance Companies of America’s (MICA) monthly report. Private mortgage insurance companies reported September defaults fell to 38,719 from 48,187 the previous month.

The bad news is that new biz is down 29%: private mortgage insurers represented by MICA wrote $4.9 billion in new business September, down 29% from $6.9 billion the same month a year ago. The group (which is made up of MGIC, Radian, RMIC, PMI, and Genworth; not listed on its website are Essent and UG) had $477 billion in primary insurance in force in September. That is down 38% from nearly $773 billion in September 2010.

But it’s a good time for refinancing (assuming borrowers are clean and have equity). Rates drop when bond prices rise, and mortgage bonds (aka MBS) were up about .375 yesterday on heavier-than-normal volumes. 10-year notes rallied 18/32nds and down to a yield of 2.74%. Today we have the debt bill moving to the Senate, but we have also had Personal Income and Outlays for June (+.1% but -.2%, respectively). After the numbers the 10-yr is at 2.70% and MBS prices are better another .250-.375.

Ally (aka GMAC) Earnings
Ally Financial reported a net income of $113 million for the second quarter of 2011, compared to $146 million in the prior quarter and $565 million for the second quarter of 2010. Ally’s mortgage operations (which include ResCap and the mortgage activities of Ally Bank and ResMor Trust) are broken down into several segments. The Origination and Servicing segment reported second quarter 2011 pre-tax income of $47 million, down from 2010′s $249 million, with the drop attributed to lower net servicing income, which was impacted by MSR valuation adjustments, lower production as a result of a smaller overall mortgage market, and compressed margins due to a shift in product mix and lower industry volume. Total mortgage loan production was $12.6 billion, up slightly from the 1st quarter but down from the $13.5 billion in the second quarter of 2010. Ally’s “Legacy Portfolio and Other” segment, which primarily consists of loans originated prior to Jan. 1, 2009, reported a pre-tax loss of $174 million in the second quarter of 2011, compared to a pre-tax loss from continuing operations of $19 million in the corresponding prior year period. The big drop was due to a mortgage repurchase expense of $184 million.

Mortgage Insurance Stats
According to MICA (Mortgage Insurance Companies of America) private mortgage insurers wrote $4.8 billion in new insurance on mortgage loans originated in June, up from $3.92 billion in May. MICA’s members include Genworth, MGIC, PMI, Radian, and RMIC. Insurers under the MICA umbrella had $606.3 billion in primary mortgage insurance in force last month, down from $610.8 billion a month earlier. Insurers who are part of MICA received 28,214 applications for private mortgage insurance in June. Of that group, 24,161 borrowers ended up using private mortgage insurance to refinance or purchase a mortgage. During the same month, the companies also reported 45,573 defaults and 38,753 cures on troubled mortgages.

Wells Fargo does a decent business in jumbo loans (at least in its retail and wholesale channels), but earnings results show an industry trend of loan growth that’s flat or down:

Wells Fargo loan growth was flat to down in most loan categories, including a 32% drop in mortgage production. During the first quarter, “Home mortgage applications of $102 billion, compared with $158 billion in prior quarter, home mortgage application pipeline of $45 billion at quarter end, compared with $73 billion at December 31, 2010, home mortgage originations of $84 billion, down from $128 billion in prior quarter, and a residential mortgage servicing portfolio of $1.8 trillion.” You can scroll to page 10 in this supplement for more, including layoffs.

Generally speaking, in the first quarter the four largest banks here in the US saw average loans outstanding drop 7% from a year earlier, but deposits increase by 5%. From a bank’s point of view, the demand for credit has dropped and may not pick up again until the economy shows more improvement.

And, as we found out a few years ago, making loans for the heck of it doesn’t pay off. For some banks, SBA, auto, and commercial lending sectors are showing some growth, but Chase is dealing with WAMU’s legacy, Bank of America with Countrywide’s, and Wells Fargo with Wachovia/World Savings’. And so, very basically, they sit on the cash, and earn the spread between what they pay on deposits and earn on loans.

Private mortgage insurance companies, on the other hand, wish they had more cash. MGIC has lost money in 14 of the last 15 quarters. It is the largest MI company in the US, so therefore used as an indicator of the health of the industry. Yesterday’s release surprised the market, causing stocks of Radian, PMI, MGIC, etc., to tumble. (For the year, MGIC is down 27%, Radian down 33%, and PMI down 44% – don’t look for a lot of free spending at the upcoming conference in NY!) In theory MI companies pay lenders when homeowners default and foreclosures fail to recoup costs – but rescissions are a big issue. MGIC stated that, “The benefit from rejected claims, or rescissions, was about $200 million in the first quarter, compared with annual totals of about $1.2 billion in 2009 and 2010…Rescissions will not continue at the same rates, as a percentage of claims received, we have previously experienced.”

Domination of Government Jobs
A job market story from the Wall Street Journal recently noted, “If you want to understand better why so many states-from New York to Wisconsin to California-are teetering on the brink of bankruptcy, consider this depressing statistic:

Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments are the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bills?”

Besides Wisconsin and Indiana, every state in America (including Pennsylvania and Michigan!) has more government workers on the payroll than people manufacturing industrial goods. Wyoming and New Mexico “lead” the nation with more than six government workers for every manufacturing worker.

The FDIC’s deposit insurance fund took some serious hits during the crisis, and they just released some updates. The FDIC predicts the cost of FDIC-insured institution failures for the five-year period from 2011 through 2015 is $21 billion, compared to estimated losses of $24 billion for banks that failed in 2010 alone. The future is never certain, but most believe that the fund should become positive this year (it has increased for four consecutive quarters) and reach 1.15 percent of estimated insured deposits in 2018. Dodd-Frank rules and Consumer Protection Act require that the fund reserve ratio reach 1.35 percent by September 30, 2020.

Last October the FHA increased its MIP’s from 55 basis points to 90 basis points, and today is increasing the monthly fee to 115 basis points for higher LTV loans. The FHA insurance premiums are not “grandfathered in,” so a borrower who is currently paying low MIPs will have to pay higher MIPs if he/she were to refinance. This is a pretty clear example of what is bad for one group (originators, borrowers) is good for another (investors in existing Ginne Mae securities).

Also note that starting today FHA systems will require mortgagees to certify at the time of requesting a case number that they have an active application for the borrower and property, and provide the borrower’s name and social security number for all new construction. And FHA systems will automatically cancel any uninsured case number where there has been no activity for 6 months since the last action except for loans where an appraisal update has been entered and/or loans where the UFMIP has been received.

CitiBank earnings came in slightly higher than expected, although earnings were slightly below. Net credit losses were down 25% in the first quarter, and analysts are hoping for more good news ahead. It had a 10% loan growth in the first quarter, but repurchase requests are expected to take a toll on future earnings.

According to a Bloomberg report: “Fannie Mae told mortgage servicers to halt a practice that could help them avoid repurchasing flawed home loans. In a notice to banks today, the company said servicers are prohibited from entering into loss-sharing or indemnification agreements with mortgage insurers. The deals help servicers avoid having their policies revoked.”

-Top Marginal Tax Rates 1916-2010 (VisualizingEconomics)

-This Month In Real Estate History (TheRealDeal)

-Fed Officials Present Diverging Views of Inflation (RealTimeEconomics)

-Does Private Mortgage Insurance Have Place In New Mortgage Order (Diana Olick, CNBC)

-San Francisco County Holds At 9.1% In March (SocketSite)

-Lawyer Friday On TMZ! (TMZ)

“Usually MI covers mortgage payments for periods of between 12 months and 5 years, though terms between three and five years are increasingly difficult to find. Insurance usually kicks in when the borrower is unable to meet their mortgage payment obligations because of sickness, injury or unemployment – MI does not cover fraud.”

A National Accounts rep for an MI company clarified,

“What you describe is more like ‘Involuntary Unemployment Insurance’ which does kick in if a borrower loses their job. Some MI companies offer ‘IUI.’ PMI (Private Mtg. Insurance) protects lenders if a mortgage loan goes into default on LTVs above 80%. By helping mitigate the lender’s risk, borrowers can get into homes with lower down payments.”

With the MI increase Monday, FHA’s market share is expected to drop. It is interesting to note the difference of how people in the industry look at the same FHA/VA loans. Originators look at them one way, which is generally a high LTV loan with decent rates but being hurt by higher MIP fees. But when you pool FHA/VA loans, how do investors look at them? The outstanding balance of GNMA MBS’s has risen significantly over the past three years and is now more than $1 trillion. The $1 trillion is in CMO’s (collateralized mortgage obligations) – $300 billion, owned by the Fed – $96 billion, banks and savings institutions, overseas accounts – $250 billion, and others. And there is $80-90 billion of current production that is liquid.

The $80-90 billion of “trade-able” securities are divided between two different markets: “Ginnie I’s” and “Ginnie II’s.” And then each has 3-4 coupons, or buckets that the loans go into, with buy down loans or odd coupons historically going into Ginnie II’s. And it is further divided into 15-year securities, as well as ARM pools. $80-90 billion sounds like a lot, but Wall Street traders, and hedging firms, do their best not to be caught short any of this product. For example, only $5 billion of Ginnie 3.5′s (containing 4% mortgages) were issued – not very liquid at all. And the increase in MIP fees leads to a drop in production. With liquidity an issue, even when you’re talking billions and trillions, companies often use Fannie or Freddie securities to hedge FHA/VA production, which then leads to closely monitoring the spread between Ginnie & Fannie security prices.

JP Morgan Earnings Summary
JPMorgan Chase’s stock is pointing to a higher opening this morning after reporting its 1st quarter numbers that beat expectations. JPM said profit rose 67% to a record with 1st quarter net income climbed to $5.56 billion.

The announcement is full of various metrics and numbers that are best seen by looking at the actual announcement, but focusing on some of them are worthwhile and indicative of large bank’s current mortgage division performance.

JPM reported a $1.1 billion pretax loss from mortgage servicing rights asset adjustment for increased costs, and a $650 million pretax expense for estimated costs of foreclosure-related matters.

“While delinquency trends and net charge-offs improved compared with both prior periods, the current-quarter provision continued to reflect elevated losses in the mortgage and home equity portfolios.”

“Mortgage banking net revenue was a loss of $114 million, compared with net revenue of $962 million in the prior year, and included $271 million of net interest income and $104 million of other noninterest revenue, offset by a loss of $489 million for mortgage fees and related income. Mortgage fees and related income comprised $259 million of net production revenue, $489 million of servicing operating revenue and a $1.2 billion MSR risk management loss. Production revenue, excluding repurchase losses, was $679 million, an increase of $246 million, reflecting higher mortgage origination volumes and wider margins. Total production revenue was reduced by $420 million of repurchase losses, compared with repurchase losses of $432 million in the prior year. Servicing operating revenue declined 3% from the prior year. MSR risk management revenue declined by $1.4 billion from the prior year, reflecting a $1.1 billion decrease in the fair value of the MSR asset for the estimated impact of increased servicing costs.”

As for FHA mortgage insurance hikes, loans started on or after Monday will be subject to annual mortgage insurance of 110 basis points (or 1.1%) for loans equal or less than 95% of a homes value, and loans over 95% of a home’s value will have a 115 basis point (or 1.15%) fee. Up-front premiums due at closing will continue at 1%, and borrowers will still be able to finance that initial 1%.

FHA specialists point out that even with the increase in the annual premium, FHA will continue to be a viable option for homebuyers, with the more lenient credit qualifying, and lower FICO scores when compared to conventional financing at 95% for many cases. But it seems that private MI savings going forward, in most cases, will be greater because the private MI can be cancelled under HOPA before 5 years, sometimes as soon as two years. And taking a broader look, what typically does a mortgage insurance policy cover? Usually MI covers mortgage payments for periods of between 12 months and 5 years, though terms between three and five years are increasingly difficult to find. Insurance usually kicks in when the borrower is unable to meet their mortgage payment obligations because of sickness, injury or unemployment – MI does not cover fraud.

And roughly 85% of bank deposits have a maturity of 3 months or less. Given that, banks must carefully watch the amount of fixed rate loans and fixed rate securities going onto the books to limit the risk to rising interest rates. The difference between interest a bank pays its depositors (about 0%) and interest it earns (say on a 5% mortgage) is a huge part of a bank’s income. But it was not enough to overcome difficulties for four more banks last week, as the FDIC shut them down. In Florida Sunshine State Community Bank was sold to Premier American Bank. Peoples State Bank was sold to First Michigan Bank up in Michigan, in Wisconsin Badger State Bank is now part of Royal Bank, and out in California Canyon National Bank was sold to Pacific Premier Bank.

FHA Mortgage Insurance Going Up Again
“As part of ongoing efforts to strengthen the FHA capital reserves,” and to help push private money back into mortgages, the FHA came out with a new premium structure for FHA-insured mortgage loans increasing its annual mortgage insurance premium (MIP) by a quarter of a percentage point (.25) on all 30- and 15-year loans starting in mid-April. (The upfront MIP will remain unchanged at 1.0 percent.) The increase adds $30 to the average borrower’s monthly payment and in total is estimated to add $3 billion annually to the FHA’s Mutual Mortgage Insurance Fund. It is the second increase since October.

From an investor’s viewpoint, any investor holding Ginnie Mae securities just became much more comfortable with their holdings and with the odds of FHA-to-FHA refinancing going down. Those familiar with FHA loans realize that before October a 95% LTV 30-yr loan paid a 225 basis points up-front MIP with a 50 bps annual MIP. Now, that loan pays 100 bps up-front — but 110 bps annually. Investors believe that this change, given current rates, effectively removes any 5% and 5.5% FHA loans from being refinanced into new FHA loans.