BofA Acquires Merrill, Lehman Bankrupt, AIG May Fail, and What it All Means For Mortgages

Consider this list of news for the week (even though it’s only Monday):

  • Best Buy Co. agreed to buy Napster (digital downloading of music) for $121 million.
  • Reddy Ice Holdings (the largest US manufacturer of packaged ice) suspended its quarterly cash dividend indefinitely and said it was undertaking a strategic review of its business.
  • 5,000 Carnival Cruise lines passengers, who sailed out of Galveston pre-Ike, now need new cars, as theirs are all totaled! Let’s hope they don’t work for Merrill or Lehman…
  • Giving everyone another reason to fly 1st class or Business Class, United Airlines is doubling the fee to check a second bag on a domestic flight from $25 to $50 one-way.
  • US interest rates are pricing in an almost for-sure .25% cut in overnight Fed Funds by the Federal Reserve by the end of the year, if not at, or before, its meeting tomorrow, due to concerns over the stability of the banking industry.
  • AIG, the huge insurance company, finds itself in trouble, downgraded, and potentially dragged under by the events over the weekend.
  • Lehman Brothers will declare bankruptcy. The US Government decided that they did not want to back up Lehman’s $60 billion of bad real estate investments, nor did Barclay’s, nor did a plan to have all the major Wall Street firms pitch in $60 billion to purchase Lehman’s bad real estate assets and create what’s knows as a “Bad Bank” work out. (“Bad Bank” was chosen because the names Countrywide, Washington Mutual and IndyMac had already been taken.) Many investment banks worked over the weekend to figure out their exposure to Lehman Brothers, especially to their real estate investment portfolio.
  • Bank of America said it would acquire Merrill Lynch in an all-stock transaction worth about $50 billion. Bank of America has the most deposits of any U.S. bank, and has both theirs and Countrywide’s servicing portfolio, while Merrill Lynch is the world’s largest and most widely recognized brokerage – it certainly will create a monolithic global financial services giant. I don’t know if that is a good thing right now.
  • Rumors of Chase taking over WAMU were either false or haven’t come to fruition yet.

What does it all mean?
What does all this mean to a mortgage customer, agent or company? The Lehman and Merrill news has pushed the stock market down over 300 points, and caused rates to drop. The 2-yr yield is down to 1.84%, the 10-yr is down to 3.53%, and fixed-rate mortgage prices are better by .5-.75, depending on the product and coupon. Well, besides your stock market investment going down, watch for your product mix to change: many originators reported a change in their pipeline mix with purchases going from 70% down to 40% and refis going from 30% to 60%. And even though rates are low, and the yield curve has steepened (helping ARM prices compared to 30-yr prices), losing potential mortgage investors is not a good thing. And it will certainly not make any investors lighten up their underwriting criteria…

Loan Guideline Updates
UBOC wholesale channel announced that Effective with applications received on or after today, the maximum LTV for the Interest Only and Two-Step Programs for loan amounts up to $500,000 is no longer 90%. The maximum LTV is 80% due to the unavailability of mortgage insurance. Effective on October 1, mortgage insurance will no longer be available for IO Programs. Therefore, any application received prior to today with an LTV over 80% must have received mortgage insurance approval prior to October 1, or will be reviewed for a counter offer to an 80% LTV.

Citi, along with practically everyone else like Wells, Chase, etc., worsened their adjustments for investment properties, effective today. For Agency and Agency Alt A investment properties, LTV <= 75% (1.75), LTV 75.01 – 80% (3.00), LTV > 80% (3.75), and for Investment Property – Agency Alt A Fixed and ARM – LTV <= 75% (1.75).

Economic Calendar for This Week
The economic calendar for the week begins with today with Empire Manufacturing at 8:30 am, followed by U.S. Industrial Production (output tumbled a bigger-than-expected 1.1% in August due to a big drop in auto production, and was the largest drop in 3 years) and Capacity Utilization (which slipped to a smaller-than-expected 78.7%, the lowest in almost 4 years). Tomorrow, the FOMC meets for a one day meeting on interest rate policy. We also have the Consumer Price Index (CPI) tomorrow. Wednesday we’ll see Housing Starts, Thursday Initial Jobless Claims and Leading Economic Indicators. (There is nothing on Friday.)

A farmer named Clyde had a car accident. In court, the trucking company’s fancy hot shot lawyer was questioning Clyde.

“Didn’t you say, at the scene of the accident, ‘I’m fine,’?” asked the lawyer.

Clyde responded, “Well, I’ll tell you what happened. I had just loaded my favorite cow, Bessie, into the…”

“I didn’t ask for any details”, the lawyer interrupted. “Just answer the question, please. Did you, or did you not say, at the scene of the accident, ‘I’m fine!’?”

Clyde said, “Well, I had just got Bessie into the trailer and I was driving down the road….”

The lawyer interrupted again and said, “Your Honor, I am trying to establish the fact that, at the scene of the accident, this man told the Highway Patrolman on the scene that he was just fine. Now several weeks after the accident he is trying to fraudulently sue my client. Please tell him to simply answer the question.”

By this time, the Judge was fairly interested in Clyde’s answer and said to the lawyer, “I’d like to hear what he has to say about his favorite cow, Bessie.”

Clyde thanked the Judge and proceeded. “Well, as I was saying, I had just loaded Bessie, my favorite cow, into the trailer and was driving her down the highway when this huge semi-truck and trailer ran the stop sign and smacked my truck right in the side. I was thrown into one ditch and Bessie was thrown into the other. I was hurting, real bad and didn’t want to move. However, I could hear old Bessie moaning and groaning. I knew she was in terrible shape just by her groans. Shortly after the accident a Highway Patrolman came on the scene. He could hear Bessie moaning and groaning, so he went over to her. After he looked at her, and saw her fatal condition, he took out his gun and shot her between the eyes. Then the Patrolman came across the road, gun still in hand, looked at me, and said, ‘How are you feeling?’”

“Now tell me, Judge, what the heck would you say?”