CIT Bankruptcy?, How Mortgage Payoffs Affect Rates, JP Morgan Chase Beats Street

“Two peanuts walk into a bar, and one was a salted.” Crime is everywhere! According to the Financial Crimes Enforcement Network (FinCEN), a division of the Treasury Department, they are notifying the mortgage industry that it is considering whether to move ahead with proposed anti-money laundering and suspicious activity reporting regulations. In other words, cash reporting requirements for U.S. banks may be expanded to non-bank residential mortgage lenders and originators.

CIT Bankruptcy?
Remember CIT? There is talk in the press about CIT declaring bankruptcy, although they are in talks with the government about a bail out. The Treasury, however, said “the government needed to keep the threshold high for exceptional aid to individual companies, adding that the United States had a powerful set of financing mechanisms to help restart overall credit markets.” If CIT were to go bankrupt, it would join Lehman Brothers and WaMu among large U.S. financial services companies to collapse since the credit crisis accelerated last September.

How Mortgage Payoffs Affect Rates
As I have explained, mortgage rates, and prices, are partly determined by the length of time investors (bond holders) expect to have them on their books. Therefore “prepayment speeds” are carefully watched: the faster they pay off, often times the less investors are interested in holding them. Fannie Mae determined that “principal balances for loans that had been fully liquidated in the month prior to the month of pool issuance (the “liquidated loan balances”) as well as partial curtailments made in that prior month (the “prior curtailment amounts”) were inadvertently included in, and constituted greater than one percent of, the original principal balance for those pools.” This led to prepayment speeds appearing to be faster than was actually occurring! Fannie caught it, has changed it, and not only helps analysts better understand how fast mortgages are actually paying off, but in a very small way helps mortgage pricing in general.

And frankly, mortgage pricing could use some help, although it would seem that borrowers are relatively happy with rates, generally speaking. Lately the markets have been focused on earnings, and the first few days have been better than expected. Thus equities have been rallying, often at the expense of bond prices. No one wants to miss the stock market boat, it seems, although we continue to receive repeated warnings about the economy “not being out of the woods” and housing taking a few years to recover.

Weaker Economic News
Yesterday’s news, after the CPI was released, indicated that indeed, we are not out of the woods. Industrial Production was -.4%, and Capacity Utilization fell to 68%, the lowest level since records began in 1967. Does manufacturing still matter? Of course, but keep in mind that it accounts for about 12% of the $14 trillion U.S. economy. We also had the release of the FOMC minutes: no exit strategy was mentioned, but suggested that it will be discussed at next month’s meeting. It also suggested that the Unemployment Rate may indeed exceed 10% this year, and that the economy continues to be weak and vulnerable.

JP Morgan Chase Earnings Top Estimates
On tap for today we will have the usual Thursday Jobless Claims. JPMorgan Chase surpassed Wall Street’s estimates for earnings in their second quarter, as investment banking performance offset consumer-related credit losses and earnings were up 33%. We will also see the Philadelphia Fed Survey, along with Housing Starts and Building Permits. Let’s hope interest rates do better than they did yesterday, with the 10-yr and mortgages selling off and causing a few intra-day prices changes.

Daily Humor
The Smiths were unable to conceive children and decided to use a surrogate father to start their family. On the day the proxy father was to arrive, Mr. Smith kissed his wife goodbye and said, ‘Well, I’m off now. The man should be here soon.’

Half an hour later, just by chance, a door-to-door baby photographer happened to ring the doorbell, hoping to make a sale. ‘Good morning, Ma’am’, he said, ‘I’ve come to…’

‘Oh, no need to explain,’ Mrs. Smith cut in, embarrassed, ‘I’ve been expecting you.’

‘Have you really?’ said the photographer. ‘Well, that’s good. Did you know babies are my specialty?’

‘Well that’s what my husband and I had hoped. Please come in and have a seat. Where do we start?’

‘Leave everything to me. I usually try two in the bathtub, one on the couch, and perhaps a couple on the bed. And sometimes the living room floor is fun. You can really spread out there.’

‘Bathtub, living room floor? No wonder it didn’t work out for Mr. Smith and me!’

‘Well, Ma’am, none of us can guarantee a good one every time. But if we try several different positions and I shoot from six or seven angles, I’m sure you’ll be pleased with the results. In my line of work a man has to take his time. I’d love to be In and out in five minutes, but I’m sure you’d be disappointed with that.’

‘Don’t I know it,’ said Mrs. Smith quietly.

The photographer opened his briefcase and pulled out a portfolio of his baby pictures. ‘This was done on the top of a bus,’ he said.

‘Oh, my God!’ Mrs. Smith exclaimed, grasping at her throat.

‘And these twins turned out exceptionally well – when you consider their mother was so difficult to work with. I finally had to take her to the park to get the job done right. People were crowding around four and five deep to get a good look.’

‘Four and five deep?’ said Mrs. Smith, her eyes wide with amazement.

‘Yes’, the photographer replied. ‘And for more than three hours, too. The mother was constantly squealing and yelling – I could hardly concentrate, and when darkness approached I had to rush. Well, if you’re ready, I’ll set-up my tripod and we can get to work right away.’


‘Oh yes, Ma’am. I need to use a tripod to rest my Canon on. It’s much too big to be held in the hand very long.’

Then Mrs. Smith fainted.