THE BASIS POINT

Financial Overhaul Roadmap For Regulators, State of Monoline Insurers

Financial Overhaul Roadmap For Regulators
W.C. Fields once said, “Never try to impress a woman, because if you do she’ll expect you to keep up the standard for the rest of your life.” Standards are important to the Securities Industry and Financial Markets Association (SIFMA), and it released the results of a study to help regulators manage financial crisis risk. Any market likes stability, and increasing it usually helps prices, and hopefully in turn, mortgage rates. So although it may not directly impact originators at the lower levels, investors should indeed take note since the study addresses hedging, leveraging, trading, etc.

“The interviews focused on how the interviewees defined and/or viewed systemic risk, then specifically identified what type of information and data regulators would require from large, interconnected financial institutions to effectively monitor systemic risks.”

State of Monoline Insurers
Who were/are MBIA and Ambac? They are “monoline insurers”, best known of insuring securities, therefore guaranteeing that if a bond defaults they’ll cover the principal and interest. Up until a few years ago, it was a great gig. Unfortunately in an effort to make more money they moved from insuring easy-to-understand municipal bonds into insuring complex mortgage-backed security derivatives. Although their revenue initially shot up, they underestimated (an understatement) how likely the underlying loans were to go bad. Therefore these insurers didn’t charge enough premiums, or set aside enough reserves. In an interesting twist, the credit rating of the bond insurer was automatically applied to whatever bond they insured. When the loans started going bad, MBIA and Ambac were in trouble cash-wise, their credit rating dropped, and so did the ratings on the bonds they insured & guaranteed, leading to a downward spiral.

Markets A Bit Quiet
What is going on out there? Not much. Monday the yield on the 10-yr note went from 3.23% up to 3.26%. In Washington, the effort to iron out the differences between the Senate and House financial reform bills continues. (Have you told your representative how you feel?) The Fed meets next week, and no matter what folks on TV or newspapers tell you, overnight rates (which don’t have a huge impact on 30-yr mortgage rates) are going to stay the same. Yesterday prices started off a little worse, and then improved back to Friday afternoon’s levels. So the mortgage-backed security market ended the day roughly unchanged, but we still had price improvements from investors. (Kind of like Nordstrom’s increasing the mark-up on socks, and then having a sale taking the price back down to normal levels.)

Is this week a yawner intentionally, with school winding up and vacations kicking in? There are no auctions, no news yesterday, and not much today. We did have the Fed Empire State (NY, for you trivia experts) survey for June, as well as some Import and Export prices for May. Wednesday and Thursday brings us the most potential market moving news with housing starts and building permits, as well as the producer price index, industrial production, capacity utilization and then the consumer price index. But veterans know that with low-volume markets can come volatility. This morning the 10-yr is sitting around 3.25% and mortgage prices are about .125-.250 better.

Daily Humor
GEOGRAPHY OF A WOMAN
Between 18 and 22, a woman is like Africa – half discovered, half wild, fertile and naturally beautiful!

Between 23 and 30, a woman is like Europe – well-developed and open to trade, especially for something of real value.

Between 31 and 35, a woman is like Spain – very hot, relaxed, and convinced of her own beauty.

Between 36 and 40, a woman is like Greece – gently aging, but still a warm and desirable place to visit.

Between 41 and 50, a woman is like Great Britain – with a glorious and all-conquering past.

Between 51 and 60, a woman is like Israel – has been through war, doesn’t make the same mistakes twice, and takes care of business.

Between 61 and 70, a woman is like Canada – cool, self-preserving, but open to meeting new people.

After 70, she becomes Tibet – wildly beautiful, with a mysterious past and the wisdom of the ages…an adventurous spirit and a thirst for spiritual knowledge.

THE GEOGRAPHY OF A MAN
Between 1 and 80, a man is like a third world country – ruled by a couple of nuts.