THE BASIS POINT

Consumer Spending Up, Will Fed Stop MBS Buys?

My father used to say, “It’s OK to kiss a nun, but don’t get into the habit.” Speaking of habits, the bond market has become accustomed to the Fed buying mortgages. What if they stopped? Federal Reserve President Lacker suggested the Fed may not need to spend the full amount it pledged ($1.25 trillion, for folks keeping score at home) to buy mortgages. So when someone like that suggests ceasing the program, it probably means a) the economy is seeing enough of a rebound that rates may move higher, or b) the demand for mortgages (artificial, yes, but demand nonetheless) will be lower, pushing prices lower and rates higher. So prices indeed did move down after his comments.

Interestingly, it was reported that net purchases by the Fed totaled over $25 billion in the week compared to the 2009 weekly average of $23.3
billion. For the six weeks prior to this, the Fed’s weekly totals were below $23 billion. Once again, where would mortgage rates be without the Fed
having stepped in and been buying production? Would other entities have picked up production of roughly $4 billion a day?

The other day Existing Home Sales were up over 7%. That is great news. But as I mentioned earlier in the week, the “recovery” is not impacting every segment in the same way, and in fact most of the housing price boom has been in the lower-priced home market. For example, sales of houses priced at less than $100,000 were up almost 39%. But sales of homes with a price tag of over $250,000 were actually down, and in fact for anything more than $1 million sales were down 25-30%.

Consumer Spending Up
Today we had Personal Income and Personal Consumption, and later this morning we’ll have the University of Michigan Consumer Confidence figures. Consumer spending (“Personal Consumption”) was up .2%, as expected, in July, mostly attributed to the “cash-for-clunkers” program. June’s spending number was revised to +.6% from +.4%. Unfortunately for people earning incomes, Personal Income was unchanged in July, and thus with spending rising faster than incomes, the personal savings rate fell to 4.2% from 4.5% in June. These numbers, combined with what looks like another day of improving stocks, have pushed the yield on the 10-yr up to 3.51% and pushed 30-yr mortgage prices down (worse) by about .125.

Lender Guideline Updates
Who are the large servicers of commercial and multifamily loans, which is supposedly the next big shoe to drop? Coming in first, according to
the MBAA, is Wells Fargo/Wachovia Bank, with $476 billion in U.S. master and primary servicing at the end of June. PNC Real Estate/Midland Loan
Services came in second, with $308 billion; Capmark Finance finished third, with $249 billion; KeyBank Real Estate Capital took fourth place, with
$133 billion; and Bank of America finished fifth, with $132 billion. Add ‘em up to get $1.3 trillion. The MBAA breaks down the servicing into several
categories, such as largest servicer for commercial securities, largest servicer for life insurance companies, etc.

And speaking of servicing, Bank of America has completed the transfer of 180,000 FHA and VA loans (mostly held in Ginnie Mae securities) from Taylor, Bean and Whitaker. I imagine their IT department put in some overtime on that little project.

Flagstar sent out a lengthy update for their guideline changes, mostly due to Fannie’s upcoming changes. For Flagstar, starting next week, the maximum age of credit documents (credit reports, asset, income, and employment documentation, etc.) is 90 days for existing construction and 120 for new construction. For appraisals the maximum age is 120 days. All Brokers and Correspondents are required to obtain a verbal VOE for all borrowers within 10 calendar days from the note date for employment income and within 30 days for self-employment income. The verification must be delivered with the closing package. As with other investors, for stocks, bonds and mutual funds, 70% of the verified value may be used for reserves. For retirement accounts, 60% of the vested value may be used, and for relocation mortgages all relocating borrowers will have to qualify under their normal underwriting guidelines.

Flagstar also changed Construction to Perm loan types are effective for all loans received in underwriting on or after 8/31/09: “The ability to determine the LTV based on the appraised value only has been removed. The LTV must always be determined based on the normal guidelines. Flagstar came out with updates to the Freddie Mac Relief Refinance Program, whereby Freddie Mac has revised the requirements to permit the use of proceeds to pay the lesser of 4% of the current unpaid principal balance (UPB) of the Mortgage being refinanced or $5,000 in related closing costs, financing costs and prepaids/escrows. This amount has been increased from $2500.

And, last but not least, two weeks from today Flagstar Bank is suspending most Freddie Mac ARM products. In fact the only Freddie Mac ARM product that will remain available is the 5/1 LIBOR ARM under the Freddie Mac Relief Refinance Program.

Daily Humor
A man walked into the Women’s Department of Macy’s in Manhattan. He told the sales lady, “I would like a Baptist bra for my wife, size 32A”.

With a quizzical look, the saleslady asked, “What kind of bra?”

He repeated, “A Baptist bra. She said to tell you that she wanted a Baptist bra and that you would know what she wanted.”

“Ah, now I remember,” Said the saleslady, “we don’t get as many requests for them as we used to. Mostly our customers lately want the Catholic bra or the Salvation Army bra, or the Presbyterian type.”

Confused and a little flustered, the man asked, “So what are the differences?”

The lady responded, “Well, it’s really quite simple. The Catholic type supports the masses, the Salvation Army lifts up the fallen, and the Presbyterian type keeps them staunch and upright.”

He mused at that for a moment and then asked, “So, what is the Baptist type for?”

“They”, she replied, “make mountains out of molehills”.