Fed Report on Small vs. Large Banks, Thornburg’s Last (and Next) Chapter, Rates Volatile

Update on State & National Mortgage Licensing
The SAFE Act continues to weigh on some agents’ minds. Different states have different interpretations. In general, the SAFE Act requires all mortgage loan officer license applicants to complete 20 hours of pre-license education, including three hours of federal law and regulations, three hours of ethics, including fraud, consumer protection, and fair lending issues, and two hours of training related to lending standards for the nontraditional mortgage product marketplace. Here in California, “Approval has been granted for individuals who are currently licensed by DRE to obtain certification that the pre-license education requirement has been satisfied based on the education completed to obtain their DRE license. However, to be eligible for this process, licensees must file Form MU 4 by August 31, 2010.” There are a few other things to keep in mind, but this appears to be some good news. Here’s the California site.

Thornburg’s Last (and Next) Chapter
In a story out of Reuters, four top executives of Thornburg Mortgage improperly paid themselves handsome bonuses just before the mortgage lender filed for bankruptcy last year, and stole money and ideas from Thornburg to secretly launch a new firm, the bankruptcy trustee in charge of liquidating the lender alleged in a lawsuit. Per the complaint, the four executives and their outside lawyer and law firm conspired to launch a new company, called SAF Financial, using a strategy created by Thornburg to try to save itself. CEO Larry Goldstone, former CFO Clarence Simmons, and former VP’s Deborah Burns and Amy Pell were mentioned.

NY Fed Report on Small vs. Large Banks During Crisis
The New York Fed released an interesting paper, if you find these things interesting, on the events in the Fed Funds market in the 2008 financial crisis. In the immediate aftermath of the Lehman’s bankruptcy we see that the market seems to become sensitive to bank specific characteristics, not only in the amounts lent to borrowers but even in the cost of funds. There were sharp differences between large and small banks in their access to credit: large banks show reduced amounts of daily borrowing after Lehman and borrowed from fewer counterparties. In contrast, smaller banks were able to increase the amount borrowed from the interbank market and even managed to add lending counterparties during the crisis. The study showed that the worst performing banks in terms of ROA started accessing the Federal Reserve’s discount window after the Lehman’s bankruptcy. It seems reasonable to assume that these are banks which were rationed by the Fed Funds market since private banks were not willing to lend to them.

Less Loan Origination Means Less Need for Fed MBS Buying
Obviously the end of the Fed’s purchase program is coming to an end in a matter of weeks – but maybe mortgage rates won’t skyrocket. Once should keep in mind, however, that every estimate out there points to a mortgage origination market that is 40-50% less than 2009’s, so there is some hope that supply & demand functions enter into keeping mortgage rates relatively low – so maybe the rate increase will be less than 50 basis point. Traditionally, mortgage rates widen when Treasury prices rally, and tighten when Treasury prices worsen (and rates go up). “Negative convexity.” In addition, Fannie and Freddie will be buying hundreds of billions of delinquent loans. This has hurt the pricing on higher rate mortgages, but overall could be positive for the markets and mortgage rates.

Improving Stocks, and Rates. For Now
Both the stock and bond markets improved on Thursday, which was nice to see. Both the initial and continuing jobless claims posted week-over-week drops, causing traders to ratchet their estimates for today’s jobs data downward, and pending home sales dropped. Greece began selling 5 billion Euros of 10-yr debt after promising to reduce Europe’s largest budget deficit, which included wage cuts that has prompted more protests. Right now, the futures market is pricing in an 86% chance that the Fed keeps rates somewhere between 0% and .25% through June 23rd, 2010. But a rumor swept the markets yesterday that a very large buyer in 4.5% securities moved mortgages relative to Treasury rates. Supply from lenders (read: locks) has increased lately as rates have crept back down.

This morning’s news, however, has really moved interest rates initially. Non-Farm Payroll “only” dropped by 36,000, and the unemployment rate held steady at 9.7%. Hourly Earnings were up, and the average workweek was down slightly. Rates shot up on the news, as did the stock markets. Call it a knee-jerk reaction, and sometimes you wonder if the market conveniently forgets that the unemployment rate is still near 10%, but stock market futures did indeed rally on the news, the yield on the 10-yr rose from 3.61% up to 3.67%, and mortgage prices worsened by upwards of .250 in price.

Daily Humor
Barack Obama was out jogging along the parkway one morning when he tripped, fell over the bridge railing, and landed in the creek below.

Before the Secret Service guys could get to him, three kids who were fishing pulled him out of the water. He was so grateful he offered the kids whatever they wanted.

The first kid said, “I want to go to Disneyland.”

“No problem,” Barack said, “I’ll take you there on my special airplane.”

The second kid said, “I want a new pair of Nike Air Jordan shoes.”

“I’ll get them for you and even have Michael sign them,” Barack said.

The third kid said, “I want a motorized wheelchair with a built-in TV and stereo headset!”

Barack was a little perplexed by this and said, “But you don’t look like you’re handicapped.”

The kid said, “I will be after my dad finds out I saved you from drowning!”