THE BASIS POINT

Cash-Out vs. Cash-In Refi Stats, Retail Sales Preview, Europe’s Debt Problems, Indymac’s Sweetheart FDIC Deal

Cash-Out vs. Cash-In Refi Stats
Remember when cash-out refinancing was the bulk of our business, and any investor who would tweak their price slightly on this product would either see all or none of the business? Four or five years ago, that category of loan hit 88%, which, according to Freddie Mac, put another way, means that 9 out of 10 refi borrowers were increasing their loan balance! Now, however, the trend has moved in the opposite direction: in Freddie’s latest quarterly survey of refinancings, 33% of homeowners put cash into the deal to lower their mortgage balances, which was the highest ever, and cash-out refi’s are down to 27%. And why not, IF you have the cash – you’re certainly not earning much on it in the bank – and if you’d like to qualify for a better rate by lowering your LTV. Columnist Ken Harney points out that it is one form of savings plan – just like it used to be!

Treasury Auctions Watering Down Bond Market
Fixed income securities weren’t helped by the $81 billion of securities to be sold this week, on top of the weather issues. The 3-yr auction was yesterday, 10’s today, 30’s tomorrow. The only scheduled news for today is the Trade Balance numbers.

Europe’s Sovereign Debt Problems
Of more concern, however, is the “sovereign debt” issue unfolding in Europe which focuses on PIGS (Portugal, Italy, Greece, and Spain). Like our subprime issue, a problem in one area can start “the dominoes falling” depending on other country’s exposure to another nation’s inability to repay debt. A larger entity stepping in and announcing that it will stand behind debt helps to comfort the markets, which helped stocks yesterday.

Retail Sales Preview
Tomorrow we have Retail Sales. As you may recall (I don’t), retail sales closed last year on a disappointing note falling 0.3 percent in December. Holiday sales, however, came in better than expected. But we may see a boost from chain store sales (up in January), gas station sales (gas prices went up a little), although auto sales are not expected to be good. For January expect headline retail sales to increase 0.2%. After the trade numbers (which showed a widening to $40.2 billion) the 10-yr clocks in at 3.63% and mortgage prices are better by about .125.

Current vs. Older Jumbo Production
After my comments yesterday on less-than-stellar jumbo production, several astute folks pointed out that any statistics involving pools of jumbo loans are older production, often from 2005-2008, are not going to look good. The popular press often leaves information like that out of their reports: what the press portrays to the public is different. I agree, and savvy investors can reap some better-than-average returns. Many private money investors are reaping the benefits of higher returns making loans with no loss of sleep. There is a significant difference in the value of a mortgage which would pass FNMA’s guidelines as “approved/ineligible” and the jumbo stuff generated a few years ago as stated income or Option ARM. There should be a healthy market for approved/ineligible current production.

Indymac’s Sweetheart FDIC Deal
I received too many e-mails discussing this video link to not mention it. Even though the video focuses on IndyMac Bank, the FDIC, and OneWest Bank, if the public catches wind of this, both mortgage bankers and bankers will have more explaining to do: For those who don’t feel like taking notes, it is a study on the sweetheart deal they cut, complete with an example of a bad $478,000 loan with six months of missed payments purchased at 70% for $334,600. The borrower is forced into a short sale on property at $ 241,000, so the loss on the original loan is $244,200. The FDIC pays 80% of the loss calculated from the original price, not the reduced 70% reduced price, bringing the loss payment to the purchaser to it to $195,360. So the short sale proceeds plus the FDIC guarantee totals $436,360. Already the profit for the purchaser is $241,000+$195,360 – $334,600 = $101,760, and on top of this, the original borrower was forced to sign a promissory note for $75,000.

Mortgage Apps Up Modestly
Locks desks were steady last week, generally speaking, and the MBAA reported that their poll of applications fell a seasonally adjusted 1.2% compared with the week before. According to the survey, which is said to include about half of all US retail residential applications, purchases dropped 7%, but refi’s rose 1.4%. Over the last four weeks apps are up almost 4%. ARM loans still account for less than 5% of volume, and refi’s still account for around 70%.

Preview of Bernanke Testimony on Bailout Exit Strategy
Yesterday was a pretty quiet day in the market, with a nice bounce in stocks and bonds not doing much of anything (although some investors made their prices worse late in the day). Due to snow, the House Financial Services Committee won’t see Chairman Ben Bernanke on unwinding the central bank’s expansion of liquidity, but they will hear his testimony read. The Fed could increase the interest paid on excess bank reserves to sop up “extra” cash out there, which may have more of an impact than raising the overnight Fed Funds rate. Not only are investors wondering about another extension (not likely) of the MBS purchase program, but also when the Fed might decide to start selling MBS’s from their portfolio… this would pull money out of the economy and shrink the Fed’s $2.2 trillion balance sheet, helping to avoid inflation and getting the Fed out of the business of subsidizing mortgages, but also push mortgage rates higher.

FHA Appraisal Policy Feb 15
Even though it is only the 11th, don’t forget that that the FHA’s new appraisal policy is effective with case numbers assigned on/after February 15: FHA-approved lenders are prohibited from accepting appraisals prepared by FHA Roster appraisers who are selected, retained or compensated in any manner by a mortgage broker or any member of a lender’s staff who is compensated on a commission basis. (Mortgagee Letter 09-028.)

Daily Humor
(Warning: jokes do not always reflect the opinions of the joke teller!)

A son asked his mother the following question: “Mum, why are wedding dresses white?”

The mother looks at her son and replied: “Son, this shows your friends and relatives that your bride is pure.”

The son thanks his Mum and goes off to double-check this with his father.

“Dad why are wedding dresses white?”

The father looks at his son in surprise and says:

“Son, all household appliances come in white.”