THE BASIS POINT

Fannie & Freddie Earnings, BofA Takes Taylor Bean FHA Servicing, Calculating Treasury Auction Bids

Last week, not only did they extend the program, but we found out that the Toyota Corolla became the most traded-in car as part of the “Cash for Clunkers” program. After hearing about it, the C.E.O. of General Motors said, “Oh my God, don’t tell me Toyota makes even a better clunker than we do.”

One can’t call the recent financials from Freddie Mac a “clunker”. Freddie reported a net income of $768m for the 2nd quarter, Q209, compared with a $9.9bn net loss in the previous quarter. “We are pleased that our financial results allowed us to finish the quarter with a positive net worth, meaning we will not need to request any additional financial support from the government at this time,” said interim CEO John Koskinen. Freddie’s net worth at the end of the quarter was $8.2 billion, with a provision for credit losses of $5.2 billion. Freddie’s stock price nearly doubled. For Fannie, the news was not quite so rosy. Fannie Mae said it needs a $10.7 billion injection of cash from the Treasury Department to stay afloat after losing $14.8 billion in the 2nd quarter. Fannie had $18.8bn in credit-related expenses, and their provision for credit losses was $18.2 billion (but only $4.8 billion of that was for net charge-offs – the rest going to build reserves). The remaining $13.4 billion went toward building loss reserves, as Fannie expects continued losses. So what did Fannie’s stock price do? Like Freddie’s, it shot up – go figure. Just another reason why I could never become a day-trader and make money in the stock market.

BofA Takes Taylor Bean Servicing
Congratulations, I guess, to Bank of America. According to the National Mortgage News, the Government National Mortgage Association has hired Bank of America to service the roughly $25 billion in FHA receivables it seized from Taylor, Bean & Whitaker last week.

Wells Fargo Appraisal Rules
Wells Correspondent told clients that, starting with conforming applications September 1, they will “require an appraisal update that supports the original appraised value for loans purchased greater than 60 days after closing (note date to purchase date). The appraisal update must be dated within 30 days of the date Wells Fargo purchases the loan.” If the loan is unsalable based on the updated appraised value, Wells Fargo Funding will require the loan to be repurchased. The revised requirements for Wells Fargo loan age and collateral valuation support Freddie Mac’s revised requirements for collateral valuation and Fannie Mae’s property value representation and warranty requirements; and ensure we can provide Sellers the best price possible on agency conforming business.” In addition, Wells’ correspondent channel told sellers that “effective with Mandatory Commitments, Best Effort Registrations and Best Effort Locks on and after August 17, 2009, Wells Fargo will require: Prior Approval: Transactions secured by Condominiums, where the project is involved in litigation due to construction defects, are not acceptable for purchase by Wells Fargo Funding. Condo projects involved in other litigation scenarios may be approved when the risk to the project is assessed and the project is financially sound and marketable.”

Calculating Treasury Auction Bids
Today the Treasury Department is going to sell some securities – namely $37 billion in 3-yr notes. Traders note, however, that the government “conveniently” changed the way indirect bids are calculated. “In the old days”, indirect bids gave us an indication of how strong the demand by foreign investors was, which in turn tended to move rates. Indirect bids, however, have become much more nebulous: any bid that comes through a primary dealer, but not the primary dealer itself, is counted as an “indirect bid”. Proponents argue that the change allows more transparency on who the bids are actually coming from. In the past accounts could go through primary dealers who would show their bid plus the accounts bids – and the total would be primary bids. But now the accounts bid must be counted as indirect through the primary. It allows the government to see foreign demand for Treasury securities.

Why should any loan hack care? (That is a term of endearment, by the way.) Foreign investors own more than a quarter of the Treasury market, making their continued interest in U.S. bonds is critical to our market and our rates. Indirect bids have been unusually strong lately – at the last 2-yr auction, 68% were “indirect”. Indirect bids are defined as ones that do not go through primary dealers (large banks that do business directly with the Fed and are required to actively take part in Treasury auctions). If foreign demand dips, for whatever reason (nervousness about our deficit, for one reason) rates may move higher as prices drop. Econ 101!

Rate/Market Roundup
Speaking of economics, we saw some improvement in rates yesterday – although many feel that mortgage rates are going to stay near here for quite some time. Although the economic data is varying from one day to the next, for the most part it is “less bad” then before, leading to some optimism about the economy. But a stronger economy leads to higher rates, right? Remember, however, that the data is not all pointing to strength, so stay tuned…

For example, this week, starting today, we have $75 billion of Treasury supply to absorb. ($37 billion today, $23 billion of 10-yr Notes tomorrow, and $15 billion in 30-yr bonds will be sold Thursday.) On top of this, we have the FOMC’s two day meeting which begins today, although no one is looking for any changes in the overnight Fed Funds rate. With no other economic news, we find today’s 3-yr at 1.75%, the 10-yr at 3.74%, and mortgage prices about .125 better than Monday afternoon’s levels.

Daily Humor
[Warning: PG-rated.]
My neighbor found out her dog could hardly hear so she took him to the veterinarian. She found that the problem was hair in his ears! The veterinarian cleaned both ears and the dog could hear fine.

The vet then proceeded to tell my neighbor that if she wanted to keep this from reoccurring she should go to the store and get some ‘Nair’ hair remover and rub it in the dog’s ears once a month. So my neighbor went to the drug store and gets some ‘Nair’ hair remover.
At the register, the druggist tells her, “If you’re going to use this under your arms don’t use deodorant for a few days.”
The lady says, “I’m not using it under my arms.”
The druggist says, “If you’re using it on your legs don’t shave for a couple of days.”
The lady says, “I’m not using it on my legs either; I’m using it on my schnauzer.”
The druggist says, “Stay off your bicycle for a week.”