Fannie’s Bailout Tab at $76b, Two More Banks Fail, Rates Volatile on Varying Stats


What Economic Stats Are Doing To Rates
Are we heading for lower rates, or higher rates? Certainly there is no inflationary pressure, although GDP for the fourth quarter (generally thought of as “old news”) was revised slightly higher, and was the strongest quarter of economic growth in more than six years. But Existing Home Sales decreased over 7% in January and was much weaker than expected. At over 3 million units available for sale, at the current pace this is almost an eight month supply. And for the sales in January, 38% were “distressed” sales which include foreclosures. (Maybe we’ll get another tax related surge in the coming months based on the April 30th date, maybe not.)

Also on Friday we had the Chicago Purchasing Managers Index show a little increase in February, but the Michigan Consumer Sentiment Index dropping slightly from January’s levels. But how do Purchasing Managers stack up against news from Greece, or the level of foreign interest in buying our debt? They don’t. The threat of ratings cuts for Greece fueled demand for the safety of U.S. debt and Federal Reserve Chairman Bernanke pledged to hold interest rates at a record low – so don’t look for (short term) rates moving much higher. But continued faith in U.S. economy could fade quickly without signs that Congress is crafting plans to address the very large deficit in which we find ourselves – Bernanke believes that deficits need to be brought down to 2.5% to 3% of the nation’s gross domestic product to be sustainable.

Rate-wise, dealers and investors become a little nervous about mortgages (relative to Treasury securities) if 4.5% securities approach a price of 101. Looking ahead to March, however, we have some uncertainty about the Fannie & Freddie buyout impact, consumer concern over the employment situation and we have the employment number this Friday, scheduled termination of the Fed MBS purchase program, an FOMC meeting mid-month, the usual 2 rounds of treasury auctions, and shaky equity and currency markets.

Busy Economic News Week
This week is full of news, beginning with Personal Income & Consumption and Construction Spending today, along with the Institute of Supply Managers Index. Tomorrow we have a break, and then on Wednesday we have the ADP employment number (which doesn’t include government jobs), the ISM services number, and the Beige Book from the Fed. Thursday is Jobless Claims, 4th quarter Productivity, Factory Orders, and Pending Home Sales. Lastly, Friday we have the usual set of employment data, which is the biggest economic event of the week. Look for a decrease of about 20,000 jobs in February. But ahead of all this rates are quiet, with mortgages a shade better and the 10-yr steady at 3.63%.

Fannie’s Bailout Tab at $76b
Knowing that April 15th is next month, here’s a new word for you: “Intaxicaton”, which is the euphoria at getting a tax refund which lasts until you realize it was your money to start with. Will Fannie be receiving a refund? Fannie Mae reported a $72 billion net loss for 2009, $15 billion in the 4th quarter, and greater than the $59 billion the company lost in 2008. Fannie said it asked the U.S. Treasury for another $15.3 billion to stay afloat, bringing its total bailout tab past $76 billion. (Freddie Mac lost $6.5 billion in the 4th quarter and almost $22 billion for the year, but didn’t ask for more bailout cash.)

Freddie Eliminating Interest-Only In September
I don’t know what I’ll be doing around Labor Day, but Freddie Mac will be eliminating its Interest Only product. At that time the company announced that on or about September 1, it will cease purchasing and securitizing IO mortgages, including Freddie Mac Initial Interest fixed-rate and adjustable-rate mortgages. As agents and brokers know, what Fannie or Freddie do, the other usually follows, and with them, most investors. This will leave portfolio and hard money lenders as the only entities possibly offering IO products by late summer.

HUD’s Rules On Consumer Rate Quoting
On 2/18 HUD met with major FHA lenders “to help promote consistency” for the new RESPA. HUD addressed its “restrained enforcement” position and advised that this only covers a party that has implemented the new RESPA rule in good faith. Implementation in good faith requires use of the new good faith estimate (GFE) and HUD-1 forms, and abiding by the intent of the new rule with regard to fee categories and tolerances. As for “worksheets”, HUD advised that although worksheets can be useful for generic rate quotes, a worksheet should not look like a GFE and it should be clear that the worksheet is not a GFE, it never should be used “in lieu of” a GFE, and a consumer should not have to show an “intent to move forward” to receive a GFE. HUD advised that a pre-approval without the issuance of a GFE may be used in a purchase transaction only if the consumer has not executed a purchase contract on a property. HUD also explained that a pre-approval may not be used with a refinance, and that a lender should never advise a consumer not to disclose their property address in order to avoid providing a GFE.

Two More Banks Fail
Here is a riddle for you. What happens every Friday, is tragic, and is only expected to become worse? The answer is regulators shutting down banks, this time in Nevada and Washington. The assets of Carson River Community Bank (NV) will be assumed by Heritage Bank (NV), and those of Rainier Pacific Bank (WA) by Umpqua Bank (OR). It is reported that FDIC officials claim that the pace of bank seizures will likely accelerate.

Caution To Mortgage Banks Selling Loans
If you gearing up to sell mandatory, or have you based your business model on it, be careful! The word is out that some dealer clearing houses will be requiring counter-party agreements with the MBS security dealers, so in case a dealer “goes down” (like Lehman or Bear or Drexel Burnham) the counterparties will stand behind the trades. This means the originating mortgage bank. It is rumored that anyone selling securities may be asked to pony up points based on perceived counterparty risk plus any negative mark-to-market for mandatory hedging purposes. And new trade lines will be, in effect, traded with margin. So whether you calculate the difference between best efforts and mandatory execution is .250 or .625 in price, there may be hurdles.

Daily Humor
A man and a woman, who had never met before but who were both married to other people, found themselves assigned to the same sleeping room on a Trans-continental train.

Though initially embarrassed and uneasy over sharing a room, they were both very tired and fell asleep quickly, he in the upper berth and she in the lower.

At 1:00 AM, the man leaned down and gently woke the woman saying, “Ma’am, I’m sorry to bother you, but would you be willing to reach into the closet to get me a second blanket? I’m awfully cold.”

“I have a better idea,” she replied. “Just for tonight, let’s pretend that we’re married.”

“Wow! That’s a great idea!” he exclaimed.

“Good,” she replied. “Get your own *&^% blanket.”

After a moment of silence, he belched.

Comments [ 4 ]
  1. Sugarleg says:

    how do you see the “Move Your Money” movement being affected by these bank closures? am I right in assuming that most of the backs that are getting shuttered small, community banks? also, on CRE, due to the lag that commercial loans are defaulting, can we expect worse economic repercussions from those defaults?

  2. With these latest failures, Umpqua (the one taking over assets–or loans–of Ranier Pacific) is a great example of a 'community' bank—they are one of many smaller to middle-tier banks who stand to benefit greatly by assuming deposits and/or assets from other less stable smaller banks that fail.

  3. Sugarleg says:

    so the small bank failures are a good thing? doesn't it seem that the market would want to have strong community banks who are doing the underwriting on loans for people who live and work and are therefore invested in their communities?

  4. I wouldn't say a company failing is a good thing, but if it's happening, it's because the bank isn't meeting minimum federally required capital standards. Whether this is from bad management or bad luck is beside the point. The point is a bank is failing and a new bank (which can be smaller, same size, or bigger) will usually get involved in cherry picking assets (loans) and/or deposits. There's obviously merit to the idea of a truly local bank but every bank has to have certain scale to best serve it's clients.

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