THE BASIS POINT

Credit Bureaus Do More To Predict Defaults, Is Fed Only Buyer of Mortgage Bonds?, Ford Loses Big

“You can sleep in your car, but you can’t drive your house.” Ford lost many billion for 2008, and with the recent run-up in mortgage rates, maybe you can get a car loan at less than 6%. Because it seems that 30-yr conventional fixed-rates are up at the 6% level again, at the mortgage-banker level, if you want a one point rebate. (If the borrower wants to pony up a point, rates in the low 5’s are attainable, using the unusual buy-down of 1:1.)

Is Fed Only Buyer of Mortgage Bonds Right Now?
Are mortgage rates getting you down? Don’t blame the NY Fed – they’re going as fast as they can, to the tune of almost $17 billion last week of MBS purchases.

OK boys and girls, here is your word of the day: “monopsony”. A monopsony exists where there is only one buyer of a product, as opposed to a “monopoly” where one seller controls the market. Although there is a minor amount of interest by investors in owning securities backed by mortgages, most would agree that at this point the Fed is the primary buyer, and that we are approaching a monopsony, which, like a monopoly, is rarely good. Use that word tonight during Happy Hour.

Mortgage Apps Must Be Complete or They Won’t Be Reviewed
Why should your company be any different from Wells’ wholesale? After January 23, Wells’ brokers have to submit their complete credit package, including income and asset documentation for all borrowers, within 10 calendar days of their lock date. In a story published by Market Watch, Wells Fargo said their applications were up 158% during its fourth quarter versus a year earlier, with their pipeline hitting $71 billion by the end of 2008. Wells also claims that its mortgage market share rose to 12%, based on third quarter 2008 data, from 10% a year earlier.

New Credit Scoring Models
Fair Isaac has something new to talk about. They will start offering the revamped score, “FICO 08,” to lenders. Fair Isaac believes that the new score will do a better job of predicting borrower defaults, be more forgiving of one-time slipups, take a harder line on repeat offenders, and in general will do a deeper analysis of borrowers with poor or thin credit histories. The score will still range from 300 to 850.

Rates Up As Bonds Sell Off
Yesterday was not a good day for Treasury or mortgage rates, or the housing industry. New-Home Sales fell 14.7% in December, and are down 45% from December 2007! This represents the 5th straight month of declines. Durable Goods, as I mentioned yesterday, were also down for the 5th month in a row. Regardless, the Treasury auctioned off $30 billion of 5-yr notes, and it did not go as well as hoped. At this point the last thing on the Fed’s mind is inflation, and in fact deflation is on the minds of many.

Markets Today
How about today – do we need more news that the economy is doing poorly? Will the 10-yr Treasury make up some of the nearly 2 points in price that it lost yesterday? We have already seen Gross Domestic Product, which showed that the U.S. economy shrank at its fastest pace in nearly 27 years in the fourth quarter. It dropped at a 3.8% annual rate, the lowest pace since the first quarter of 1982, when output contracted 6.4 percent. For 2008, GDP rose 1.3 percent, the slowest pace of growth since 2001, when the economy expanded 0.8 percent. U.S. employment costs rose last year at the slowest pace on record, with the Employment Cost Index increasing 2.6% in the 12 months to December, down from a 3.3 percent rise in 2007. The numbers indicate that companies have been cutting overtime and reducing workers’ benefits like pension contributions. We still have the Chicago Purchasing Manager’s survey and the University of Michigan Consumer Confidence survey later, but for now the 10-yr stands at 2.80% and mortgages are about .250 better in price than yesterday late afternoon.

Daily Humor
A Greek and a Scotsman were sitting in a Starbuck’s cafe one day discussing who had the superior culture.

Over triple lattes the Greek guy says, “Well, we Greeks built the Parthenon,” arching his eyebrows.

The Scotsman then replies, “Well… it was the Scots that discovered the Summer and Winter Solstices.”

The Greek retorts, “We Greeks gave birth to advanced mathematics.”

The Scotsman, nodding in agreement, says, “Scots were the ones who built the first timepieces and calendars.”

And so on until the Greek comes up with what he thinks will end the discussion. With a flourish of finality he says, “The Greeks were the ones who invented sex!”

The Scotsman replies, “Aye, that is true, but it was we Scots who introduced it to women.”