THE BASIS POINT

Condo Loan Changes Monday, Are Foreclosure Programs Working?, Market Mixed on GDP Gain

Rates May Hold When MBS Buying Ends
At least there is no ambiguity about what the Fed is doing in their mortgage purchase program. Last week the Fed purchased a net $12 billion in agency MBS, bringing its total net purchase to $1.161 trillion. But everyone has a pretty good sense of how this movie is going to end, right? Well, perhaps not. The odds are highly in favor of the Fed keeping overnight rates where they are through June. In fact, an article in the Wall Street Journal yesterday points out that there is a growing belief among investors that when the Fed’s mortgage security purchase program ends at the end of March, mortgage rates won’t soar. “They argue that investors, searching for higher-yielding securities, will find government-backed mortgage-backed securities a bargain relative to other investments, like corporate debt, that have rallied for much of the past year.”

I don’t think that anyone believes that the US government will suddenly leave the entire housing and mortgage market on its own. Those markets have had either implicit or explicit government backing for decades, which makes investors much more likely to buy mortgage-related securities. Lately production has dropped, as has the weekly amount of Fed purchases from $21 billion to $12 billion, yet mortgage rates are still relatively low. Yes, mortgage rates may move higher, and in fact rates in general may move higher, but at some point the yields look more attractive to investors, and as they buy these securities, the price goes up and rates move back down. Thus goes the argument against lenders saying, with regard to mortgage rates, “The end is near!” Now, if we could only get underwriting guidelines to loosen up!

FHA Condo Changes February 1 Cause Fannie/Freddie Changes
Freddie Mac announced a change to their condo policy for loans with application dates on or after February 1. Companies who sell to Freddie “may only use FHA condominium project approval to determine the eligibility of FHA and certain other federally guaranteed or insured condominium unit mortgages for sale to Freddie Mac. Conventional conforming condominium unit mortgages in FHA-approved condominium projects may still be eligible for sale to Freddie Mac provided the condominium project meets our requirements.” Freddie goes on to remind their customers that borrowers with Freddie Mac-owned mortgages in all condominium projects are eligible for their Streamlined Refinance Mortgage and Relief Refinance Mortgage – Same Servicer. Here’s the full guideline update.

We can expect more changes across the board for condos as the FHA updates it’s condo rules Monday, February 1.

Appraiser As Mortgage Banker?
How far can an appraisal management company go toward originating mortgages? We may find out shortly. It is well know that many large companies such as Wells and BofA have interests in AVM’s but recently a story has made the press about an appraisal company getting involved in mortgage banking. Is it a possible conflict of interest? Stay tuned.

Bernanke Reconfirmation Helps Market
Markets don’t like uncertainty, and a little of that was removed yesterday as Federal Reserve Chairman Ben Bernanke was approved by the Senate for a second four-year term by a 70-30 vote. Supporters admitted that that the Federal Reserve under Bernanke had missed signs leading up to the recent economic crisis, but argued that under Bernanke’s leadership the Fed had helped steer the U.S. economy away from utter catastrophe. But no one wants to switch horses in midstream, even if there could be found a “new horse” that was qualified.

Are Foreclosure Programs Working?
Overall, how have the programs designed to stop mass foreclosures been working? Not so well, and for a variety of reasons. Servicers often don’t have the ability to do renegotiations in bulk, and sometimes make more money by dragging their feet. Loans being placed into securities, which are then sliced and diced, make things more complicated, and borrowers usually are not even sure if they’re eligible. We should all keep in mind, according to a recent paper by the Boston Fed, that foreclosing is often more profitable than renegotiating. Almost a third of delinquent borrowers “self cure”. And of those who have their mortgages modified, more than a third end up defaulting eventually anyway. So in both cases, modifications make the servicer worse off. The housing bubble was very expensive – it will be surprising if we can deal with its consequences on the cheap.

Flagstar Raises Money, Working With OTS On Remediation
Flagstar has raised $300 million by having its controlling stockholder, MP Thrift Investments, purchase over 420 million shares of Flagstar common stock. Flagstar has seen its stock price at less than $1 per share for an extended period, and has suffered due to its concentration of loans in depressed areas. With its eye on continuing to stay in business, Flagstar has entered into agreements with the Office of Thrift Supervision to, within 90 days, adopt specific timeframes for the remediation of certain issues related to mortgage servicing rights. And within 30 days Flagstar must revise the asset concentration policy to establish the existing concentration limit for MSRs at a level consistent with the business plan.

Strong GDP Hurts Bonds & Rates
Yesterday, only one day after the FOMC meeting (which had its first dissenter in over a year), the market started off slightly worse, but then came back later in the day. A weak stock market helped, as did a very good $32 billion 7-yr Note auction. Today we saw Gross Domestic Product for the 4th quarter, estimated to be 4.6% versus the 2.2% annual rate in the prior quarter. The 5.7% pace was certainly stronger than expected, and the highest pace in more than six years.
Growth was boosted a sharp slowdown in the pace of inventory liquidation, but even stripping out inventories the economy expanded at an annual rate of 2.2 percent. Later we’ll have the Chicago Purchasing Manager’s Survey and the University of Michigan Consumer Sentiment Survey. But the GDP number has pushed rates higher, and mortgage prices are worse by about .250 and the yield on the 10-yr is up to 3.68% again.

Update: stocks giving up opening gains and bonds regaining.

Daily Humor
Two Irish hunters got a pilot to fly them into the Canadian wilderness to hunt moose. They managed to bag two big bull moose.

As they were loading the plane to return, the pilot said the plane could take only the hunters, their gear and one moose.

The two lads objected strongly. “Last year we shot two. The pilot let us take them both and he had the same plane as yours.”

Reluctantly, the pilot (who happened to be an ex-mortgage banker and not wanting to be outdone by another bush pilot) gave in and everything was loaded.
However, even on full power, the little plane couldn’t handle the load and went down crashing in the woods. Somehow, surrounded by the moose, clothing and sleeping bags Paddy and Mick survived the crash.

After climbing out of the wreckage, Paddy asked Mick, “Any idea where we are?”
Mick replied, “I think we’re pretty close to where we crashed last year.”