Bank Failure #124, Do 401(k)s Make Investors Smarter?

I was showing my Dad my cell phone over the weekend. He said, “Son, no one gives a damn about all the things your cell phone does. You didn’t invent it, you just bought it. Anybody can do that.” Life with Dad, always an adventure.

Speaking of buying things, us taxpayers bought us another bank on Friday, although Central Bank of Stillwater, MN agreed to assume all of the failed bank’s deposits and all of its assets. Commerce Bank of Southwest Florida was taken over, and for those keeping a tally, it was #124 for this year and the 12th in Florida. They had total assets of about $80 million and total deposits of about $76.7 million, according to the FDIC. The FDIC and Central Bank will share in losses on about $61 million of Commerce Bank’s assets.

Do 401(k)s Make Investors Smarter?
Do you have a 401(k) plan? It is the most popular retirement savings vehicle in the US, with about 65 million, or an estimated 40%, of private sector employees having one. It is named after the section of the IRS code, and came about in 1978 after Congress provided for taxpayers to receive a break on deferred income. In 1981 the IRS allowed employees to defer part of the pretax salary into their retirement plan. Most are offered at a lower cost than a traditional pension plan, and of course billions of dollars have moved from mattresses into the financial markets. But do they make investors smarter? Of course not – for better or worse, many companies encourage employees to use their 401(k) plans to invest in the company’s stock by offering discounts and other plans. Employees of companies like Enron, Countrywide, WorldCom, Lehman Brothers, Fannie Mae, Freddie Mac, etc. were encouraged to, in effect, double down instead of diversifying, not only relying on the company for employment but also hoping to rely on the stock during their retirement. So as we come up on the end of the year, and employees are realizing that they can put more money into their 401(k) plans, they should be careful where it goes.

Market/Economic News Roundup
Think back to Friday… rates… yup, they didn’t do much. The Fed was in doing some buying, origination seemed to be $3 billion or less, and other buyers were mostly interested in lower coupon product. There is some speculation that many are still flushed with cash and need to put cash to work by year end.

Things could be pretty quiet this week, although there is a decent amount of economic data to be released. Today is Existing Home Sales at 7AM PST. Tomorrow we have GDP, Consumer Confidence, and the FOMC Minutes from the November 4th Fed meeting. Wednesday, when everyone would rather be somewhere else, we have Durable Goods Orders, Personal Income, Core PCE inflation, New Home Sales, and Consumer Sentiment. Add on the Treasury auctions today through Wednesday, and many traders off for the week, and we have a recipe for volatility. Currently the 10-yr is back up to 3.40% and mortgages are worse by about .125.

Lender Guideline Updates
Flagstar requires evidence of liquidation when a borrower’s funds to close are coming from a “401(k), IRA or other acceptable retirement account, regardless of documentation required by Total Scorecard. Loans will not be cleared-to-close until acceptable evidence of liquidation is provided. Document liquidation with the following: a copy of the distribution check and evidence of deposit to the borrower’s bank account or a copy of the retirement account showing withdrawal and evidence of deposit to the borrower’s bank account.

Flagstar told their clients that the Verbal VOE must be completed no earlier than 10 days prior to closing, although Flagstar strongly suggests it be done as close to closing as possible. Also, “This requirement is needed in addition to the verbal verification of employment that the Flagstar underwriter performs during the underwrite.” And for self-employed borrowers, Flagstar requests that the VOE must be performed within 30 days of closing.

As most of us, and Flagstar, know, for FHA Streamline Refinance transactions with case numbers assigned after last Monday, FHA requires verification of funds to close. When funds to close are coming from a borrower’s checking or savings account, Flagstar requires the most recent two months bank statements. The statements must be within the most recent 90 days, and large deposits must be verified. (Is this stuff dry, or what?) “A borrower’s funds to close may come from any source acceptable to FHA. Flagstar requires a payment history for all mortgages being paid off through a Streamline refinance transaction. The mortgage pay history must be provided by the existing servicer and must include the most recent 12 months pay history. If the mortgage has been in effect less than 12 months, the history must reflect the length of time the mortgage has been in effect. Loans that are currently being modified or for which foreclosure proceedings have begun may not be refinanced.

Keen observers of pricing out there have noticed a move toward rewarding high FICO, low LTV product, and penalizing the opposite. So rather than just saying that an investor just doesn’t want the product, they accentuate the product that they do want. For example, the latest example of this is from Caliber Funding. They improved their pricing for loans with a FICO above 760 and an LTV of less than 70% by .250, along with other improvements for loans with FICO scores above 720 with relatively low LTV’s. They also did the same for FHA fixed rate products. (Caliber Funding also confirmed that they will be embracing the extension of the conforming and high-balance conforming loans, although “Caliber Funding does not currently offer financing on the High Balance loan programs”.)

Wells Fargo correspondents should know that after December 13 Wells will revise its conventional policy for income qualification and documentation on all Prior Approval loans submitted to Wells Fargo for manual underwriting (including the Home Opportunities program). The guidelines included are Wells Fargo policy and apply to transactions submitted for Prior Approval manual underwriting for the following six scenarios: 1. Document requirements for dividend and interest income, 2. Document requirements for seasonal income, 3. Document requirements for military income, 4. Requirements for including public assistance in qualifying income, 5. Requirements for including foster care in qualifying income, and 6. Documentation requirements for rental income. Wells’ bulletin included five pages of underwriting excitement – it is best for their clients to check it out.

AmTrust Bank has updated their guidelines which apply to their Conforming High Balance Fixed Core (Standard and IO); Conforming High Balance My Community (Fixed & ARMs) & Conforming High Balance Flex 97 product line(s).
Daily Humor
Four Catholic men and a Catholic woman were having coffee.

The first Catholic man tells his friends, “My son is a priest. When he walks into a room, everyone calls him ‘Father’.”
The second Catholic man chirps, “My son is a Bishop. When he walks into a room people call him ‘Your Grace’.”
The third Catholic gent says, “My son is a Cardinal. When he enters a room everyone says ‘Your Eminence’.”
The fourth Catholic man then says, “My son is the Pope. When he walks into a room people call him ‘Your Holiness’.”
Since the lone Catholic woman was sipping her coffee in silence, the four men give her a subtle, “Well….?”
She proudly replies, “I have a daughter, slim, tall, 38D, 24″ stomach and 34” hips. When she walks into a room, people say, ‘Oh, My God’.”