THE BASIS POINT

Another Warehouse Lending Setback, Is California So Bad It’s Good?,

Two cannibals are eating a clown. One says to the other: “Does this taste funny to you?”

Warehouse Lending Setback
There’s nothing funny about Colonial BancGroup’s Cease and Desist order, which may impact warehouse lending (many mortgage companies rely on Colonial for a warehouse line to fund their loans) and also Taylor Bean’s partial acquisition of the company. The FDIC and the State of Alabama ordered Colonial Bank to turn around its operations and raise its capital levels by September 30th, change the way it is reserving for future loan losses, and must cease and desist from operating with “inadequate management and board of directors oversight.” It would seem that federal regulators are somewhat doubtful that the company’s $300 million equity deal with Taylor Bean & Whitaker will go through. Before the U.S. government gives them $550 million in TARP money, the bank was ordered to raise the additional capital. The bank made a deal with TBW for the money in exchange for giving the firm a 75% controlling interest in the bank and five seats on its board.

Is California So Bad It’s Good?
Are things so bad in California that they’re good? Brisk sales of foreclosures are leading optimistic analysts to forecast an end to the misery of falling home prices in California. Some analysts say the slide in home values in California has run its course thanks to buyers with government mortgages and investors snapping up foreclosed properties. (California’s median price for an existing, single-family home rose 1.4 percent in April from March to $256,700, marking two consecutive months of gains, but is still down 36.5 percent from a year earlier. April’s backlog of homes selling for $300,000 or less, where foreclosures are concentrated, now takes only 2.5 months to deplete, compared with 11.1 months a year earlier.) Others believe that the reduced backlog of foreclosures is only temporary because mortgage defaults are on the rise in upscale neighborhoods. Stay tuned!

How Are Loan Underwriters Viewing Income
How are investors’ underwriting departments handling inconsistent overtime and second job income? It is a problem, especially if it is inconsistent or not available to make payments for the remainder of the ten months, the borrower is at risk for early payment default. Some investors are asking lenders to consider the consistency of income: pay stubs and W-2’s can show stability of overtime, and second job income is recommended to be verified for two years. Some ask for a history of two years or more, and if part-time or secondary income is questionable consider including debts less than 10 months in the calculation of DTI.

Market Roundup
At least interest rates improved during the day yesterday after we finished up with the last week of government Treasury auctions. In addition, Japanese Finance Minister Yosano said his government is “confident” about the outlook for US government debt – always nice to hear. So 10-yr Treasury, which is not always the greatest measure for mortgage pricing but still easy to track, broke the 4% level which caused investors to come in and buy it, pushing prices up and rates down.

Later we have the University of Michigan Confidence Survey, but the only scheduled economic news out this morning so far was the Import Price Index. U.S. import prices rose 1.3 percent in May, according to the Labor Department, mostly due to petroleum prices. This was about as expected – which is nice to see. It is also nice to see the 10-yr back down to 3,83% and mortgage security prices better by .250-.375. The market was very oversold, technically, so you’d expect to see a bounce at some point.

Daily Humor
Boudreaux & Thibodeaux are bungee-jumping one day. Boudreaux says to Thibodeaux, “You know, we could make a lot of money running our own bungee-jumping service in Mexico.”

They don’t have it there and Thibodeaux thinks this is a great idea, so they pool their money and buy everything they’ll need; a tower, an elastic cord, insurance, etc. They travel to Mexico and begin to set up on the square. As they are constructing the tower, a crowd begins to assemble. Slowly, more and more people gather to watch them at work. When they had finished, there was such a crowd they thought it would be a good idea to give a demonstration. So Boudreaux fastens him to the bungee cord and Thibodeaux jumps.
He bounces at the end of the cord, but when he comes back up Boudreaux notices that he has a few cuts and scratches. Unfortunately, Boudreaux isn’t able to catch him, and he falls again, bounces and comes back up again.
This time, he is bruised and bleeding. Again Boudreaux misses him.

Thibodeaux falls again and bounces back up.
This time he comes back pretty messed up, he’s got a couple of broken bones and is almost unconscious.

Luckily, Boudreaux finally catches him and says, “What happened? Was the cord too long?
Barely able to speak, Thibodeaux gasps, “No, the Bungee cord was fine. It was the crowd. What’s a piñata?”