THE BASIS POINT

Future of Analyzing Mortgage Securities, FBI Targets Hundreds For Fraud, FHA Mortgage Insurance Up Again?

 

FBI Could Arrest Hundreds For Mortgage Fraud
This week the the FBI could arrest hundreds for mortgage fraud. Charges are expected to be leveled over offenses ranging from pushing borrowers to lie about their income on mortgage applications to providing homeowners with false information about foreclosure rescue programs, the newspaper said.

How Analysts Will Research Mortgage Bond Funds
Federal Housing Finance Agency (FHFA) regulations will soon require additional Loan Originator Identifiers on all Agency loans. In compliance with FHFA, on all apps after July 1, information on loans will also include Loan Originator ID and Loan Origination Company ID. There is some state-by-state variance with this. But for the Nationwide Mortgage Licensing System (NMLS), no action is required “of any mortgage loan originator who is an employee of a federally insured depository institution or an owned and controlled subsidiary of such a depository institution that is federally regulated.” As this trend takes shape, it should help mortgage analysts do better research on mortgage bond pools by being able to research the firm and the specific loan agent that did the loan(s).

FHA Monthly Mortgage Insurance Increasing?
The House of Representatives has just approved by a 406-4 vote the Federal Housing Administration Reform Act, designed to add more financial strength to the FHA. The FHA now has the authority to raise the ceiling on the annual premiums it charges borrowers for the FHA guarantee and raises the limits on multifamily housing in certain high cost communities, among a few other things. As we all remember in early April the upfront premiums went from 1.75 percent to 2.25 percent – but not the annual premium. Now the FHA has the ability to increase its annual premium to 1.50 percent of the unpaid balance of the loan. This shift will allow for the capital reserves to increase with less impact to the consumer because the annual MIP is paid over the life of the loan instead of at the time of closing.

Rates Are Great
How about these rates? A friend of mine who runs a branch originating mortgages says, “If you can’t do loans with these rates, you’d better find something else to do.” Of course, there are many constraints, but rates are not one of them being around 4.75%. With the yield on the 10-yr down into the low 3%’s, mortgages have gone along for the ride. Fixed income prices are also taking their cues from the equity markets. Despite the historically low rates, many homeowners have already refinanced recently, remain underwater on their mortgages, have uncertain job situations, or have damaged credit following this downturn, and therefore may not qualify to refinance.

Retail Sales Less Than Expected, Consumer Sentiment OK
Friday we found out that the US consumer is not purchasing quite as much as analysts had thought they were. For good news, however, the University of Michigan says that consumers are in a better mood, and rates may be helping. We got a nice little rally Friday (even the dollar was up), given that dreary Retail Sales of -1.2% instead of the expected +.2%, and 10-yr notes were up .5 and several investors changed prices. (Countries in Europe are insolvent, and our retail sales being up or down a little is more important?)

Double Dip Recession Chatter
Now we have economists talking about a double-dip recession in this country: stagnant employment, housing foreclosures, Europe dragging the US economy down, stocks falling, etc. There have been very few US double dips, however, throughout our economic history. One can argue that industrial production here is recovering, low rates are helping many segments of the economy, including those who have recently refinanced. Revolving debt, such as credit cards, is declining, and non-revolving debt, such as car loans, is increasing – but overall consumer credit is declining. Banks continue to tighten terms and conditions on consumer loans such as extending fewer loans to customers that do not minimum credit levels. Times are particularly difficult for small firms as standards and terms are still tightening and demand is still declining for small business credit card loans. Thus, both the supply and demand for new loans remains constrained.

Economic Preview For Week
For economic news, there is none scheduled for today. Tomorrow we’ll see some import & export price information, along with some manufacturing numbers out of New York. Wednesday will contain the Producer Price Index, Housing Starts, and Industrial Production and Capacity Utilization. Thursday is the big day with Initial Claims, the Consumer Price Index, Leading Economic Indicators, and the Philly Fed survey. Some say that the inflation reports are important, others say that inflation is not a concern, and are more interested in the industrial production and jobless claims numbers. Either way, stay tuned, and prices are a little worse this morning!

What MBS Market Means For Hedging
How are investors handling this latest rally in mortgage prices? Normally skittish about prepays, analysts are seeing lower levels of prepayment fears, as I mentioned last week, given how well higher coupon MBS’s are doing. But, unfortunately for brokers, there also the expectation that the primary-secondary spread will widen in a rally, reducing the chance for refi’s. Put another way, mortgage companies may just add to their profit margin rather than follow MBS’s prices higher. Investors continue to buy mortgage-backed securities investors need interest rate duration in a liquid form, which mortgages provide. Friday spreads widened a little, which means that MBS prices did not do as well as Treasury prices. But, nonetheless, mortgages have been doing well. (As a side note, the yield spread between European corporate debt and US corporate debt is the widest on record, signaling that investors are not confident that European lawmakers can settle their financial crisis.)

Daily Humor
The room was full of pregnant women with their partners, and the class was in full swing. The instructor was teaching the women how to breathe properly and was telling the men how to give the necessary assurance to their partners at this stage of pregnancy.

She said, “Ladies, remember that exercise is good for you! Walking is especially beneficial – it strengthens the pelvic muscles and will make delivery that much easier!”

She looked at the men in the room and told them, “Gentlemen – remember – you’re in this together – it wouldn’t hurt you to go walking with her.”

The room suddenly became very quiet as the men absorbed this information.

Then a man at the back of the room slowly raised his hand.

“Yes?” answered the teacher.

I was just wondering – is it all right if she carries a golf bag while we walk?”

 

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