Covered Bonds Overview, Financial Title Fails, Morgan Fires/Hires
“People need good lies. There are too many bad ones.” So chimed in Kurt Vonnegut. Many foreign investors feel cheated by the rating agencies, who gave their triple-A stamp to various mortgage securities that turned out to be anything but triple-A.
COVERED BONDS OVERVIEW
Are “covered bonds” the answer? Touted as a new way for banks to come up with cash for home mortgages, covered bonds are backed by mortgages but they are considered safer investments than other derivatives. The bonds stay on a bank’s balance sheet and are backed by a “cover pool” of high-quality mortgages that must meet certain criteria, such as being up to date in their payments. Investors are also protected because if the mortgages go bad, the bank must step in to ensure that bond holders get their interest. Put another way, investors would buy into a pool of mortgages that would be kept on the balance sheet of the bank that made the loans. At the first sign of trouble in the underlying mortgages, those mortgages would be replaced in the mortgage pool. Thus, investors would be assured of repayment unless the underlying mortgages suffered major losses and the issuing bank failed. Four major banks — Bank of America, Citigroup, JPMorgan Chase and Wells Fargo said they hoped to issue such bonds and a larger group of investment banks and brokerage firms pledged to establish desks to trade the securities.
MORTGAGE APPS DOWN
Yesterday it was announced that the MBA Mortgage Application Index dropped -14.1% last week with the Purchase Index -7.8% and the Refi Index -22.9%. This is the second week of being down – are your locks ok? It is hard to say what matters more: higher rates, summer vacations, continued underwriting tightening, or nervousness about further depreciation.
FINANCIAL TITLE CLOSES
Financial Title Co. has shut its doors across California as part of a closure of multiple offices and title companies by its parent, Mercury Cos. of Colorado. Mercury’s lenders pulled their line of credit after Mercury failed to meet loan requirements, according to one official “Mercury is closing all of its companies outside of Colorado, which includes Arizona, California, Oregon and Nevada,” employees were told. Examiners representing the California Department of Insurance, which regulates and polices title-policy underwriters and agents, were on hand at all 57 Financial Title offices in the state yesterday to ensure that escrow funds were properly handled and not stolen or lost.
MORGAN STANLEY FIRES/HIRES
Morgan Stanley, who cut almost 5,000 jobs, is supposedly recruiting to strengthen its positions in derivatives, commodities and restructuring. They have hired current and ex-executives from Merrill Lynch, Lazard, Bear Stearns, and Societe Generale to beef up their equity derivatives, distressed sales, trading and research, restructuring, and “global commodities risk” groups
HOW NEW HOUSING BILL GETS IMPLEMENTED
Yesterday President Bush signed into law a sweeping housing bill that “aims to boost the struggling housing market and bolster mortgage finance giants Fannie Mae and Freddie Mac.” The cost of the program – which would begin on Oct. 1 and be in place for just a few years – will be funded by fees from Fannie and Freddie, along with fees paid by both lenders and borrowers. We all know the components of the bill, including buyers using FHA loans can no longer accept down-payment “gifts” that are ultimately funded by the home seller, often a builder, in October, but did you know it creates another set of initials to remember? The Act creates an empowered regulator, the Federal Housing Finance Agency (FHFA), with the authority to oversee our secondary mortgage markets (Fannie Mae, Freddie Mac and the Federal Home Loan Banks) and will work with the combined Federal Housing Finance Board (FHFB), Office of Federal Housing Enterprise Oversight (OFHEO) and Housing and Urban Development (HUD) GSE Mission teams to ensure the safety and soundness of the 14 housing-related GSEs!
Before investors spring into action on the new loan amounts and borrowers get “ancy”, several steps must occur, just as they did 4 months ago when loan amounts were raised in many markets. First the GSEs and FHA must assess their internal impacts to determine the delivery approach they will require of mortgage lenders and investors, then they will communicate their requirements to mortgage lenders and investors, and then the investors will go to work identifying the impact on their own business channels and implement the changes as quickly as possible. In other words, don’t look for anything too quickly.
SunTrust notified brokers that beginning tomorrow, faxing a lock will cost them an additional .125 in price in an effort to promote on-line locking.
ECONOMIC DATA
In terms of economic news, today we’ll have Jobless Claims (expected -8,000), GDP for the 2nd quarter (expected +2.3%), the Employment Cost Index, and the Chicago Purchasing Manager’s Survey. Tomorrow we’ll see July’s Nonfarm Payrolls, expected: -60,000, and the Unemployment Rate, expected unchanged at 5.5%. After that, tomorrow, we’ll see July’s ISM Manufacturing Business Index and Construction Spending. Fortunately rates and mortgage prices are behaving themselves, with the 10-yr at 4.03% and mortgages roughly unchanged (so far) from yesterday afternoon’s improvement.
JOKE OF THE DAY
A blonde woman was speeding down the road in her little red sports car and was pulled over by a woman police officer who was also a blonde. The blonde cop asked to see the blonde driver’s license.
She dug through her purse and was getting progressively more agitated.
“What does it look like?” she finally asked.
The policewoman replied, “It’s square and it has your picture on it.”
The driver finally found a square mirror in her purse, looked at it and handed it to the policewoman. “Here it is,” she said.
The blonde officer looked at the mirror, then handed it back saying, “OK, you can go. I didn’t realize you were a cop.”