Get A 5-Point Credit Score Gain. Housing Supply Shortage? New Rules For Mortgage Bond Issuers.

How To Get A Quick 5-Point Credit Score Gain
Here’s a tip of the day: if a borrower needs an additional 1-5 pts on a FICO score to qualify for a particular home loan program, with the borrower’s permission use the painless 5 year electronic opt-out on Apparently it has a positive impact on FICO scores after about a week.

Price, Risk & Ratings Agencies
Prices are certainly a great mechanism for showing the relative value of different things. This was the focus recently of some commentary in Bloomberg by Caroline Baum regarding the Goldman Sachs hearings. Even a purple Ford Pinto has a price, so if Goldman was selling “bad securities” to buyers, just as buyers invest in distressed debt, junk bonds, foreclosed properties, etc., then the price should reflect the risk. Regardless of social value, Ms. Baum points out that “Price is the mechanism through which savings are allocated to the most productive uses in a market economy. It’s the way consumers convey what goods and services they want to buy. It’s what prompts producers to hedge and speculators to speculate.” It didn’t help, of course, that the rating agencies gave AAA ratings to many securities that were not AAA – even Enron carried an investment-grade rating days before it collapsed.

5% Reserve For Mortgage Bond Issuers?
Most people in the mortgage business know that if companies were required to hold reserves of 5% of every mortgage security they issued, no one would securitize anything. Convincing lawmakers of that is another thing. The FDIC “approved a Notice of Proposed Rulemaking (NPR) to clarify the safe harbor protection in a conservatorship or receivership for financial assets transferred by an insured depository institution (IDI) in connection with a securitization or participation.” After the standard 60 day comment period, the FDIC has proposed some changes to the standards in the NPR but has retained a clear focus on improved transparency and a better alignment of incentives for strong underwriting in the securitization process.

“The FDIC is proposing:

1) a 5% reserve fund for RMBS in order to cover potential put backs during the first year of the securitization, rather than the prior 12 month seasoning requirement;

2) required disclosure of any competing ownership interests held by the servicer, or its affiliates, in other loans secured by the same property; and

3) requiring deferred compensation only for rating agencies, rather than all service providers.”

The FDIC’s proposed disclosure and risk retention requirements are very close to the SEC’s proposals.

The FDIC apparently believes that the 5% rule is necessary to restore investor confidence. The public comment period ended Feb. 22 (you wrote in, right?) after the House passed a bill that included the 5% risk-retention language. At this point there is continued discussion about not having the 5% apply to securities made up of Freddie, Fannie, or FHA/VA loans, or only allowing loans to be securitized on home loans that are less than a year old or don’t document borrower income. Given that the SEC is also involved in the decision making process, along with the FDIC and Congress, it is somewhat confusing. RiskRetention

And the FDIC did not stop there. On another topic, “The FDIC today issued for public comment a proposed rule that would require certain identified insured depository institutions (“IDIs”) that are subsidiaries of large and complex financial parent companies to submit to the FDIC analysis, information, and contingent resolution plans that address and demonstrate the IDI’s ability to be separated from its parent structure, and to be wound down or resolved in an orderly fashion.” This won’t impact smaller companies, since the proposal “would apply only to IDIs with greater than $10 billion in total assets that are owned or controlled by parent companies with more than $100 billion in total assets.” The government wants to be able to figure out how to deal with large, complex financial institutions in the event of another credit crisis. “The comment period will be open for 60 days following publication in the in the Federal Register.”

New Buyers For Mortgage Loans
Mortgage banks looking for new investors for their loans have new options. PennyMac is in the market, and Redwood Trust (the company behind the recent securitization using Citi loans) announced that it is purchasing prime residential mortgage loans from banking companies and other selected originators. The flow purchase program is currently operating with a small number of mortgage loan originators that have national platforms. Aside from knowing that Brett Nicholas is the Chief Investment Officer at the Mill Valley, CA firm, I don’t know anyone to call there for more information.

Housing Supply Shortage?
How is it possible that there aren’t enough houses to sell out there? All real estate is local, and as it turns out in some markets (Denver, San Francisco) real estate agents are complaining that they don’t have enough homes to sell.

Mortgage Bonds Better, Loan Apps Up
Investors in mortgage bonds stepped up yesterday, especially given the lower origination volumes, steep yield curve, and relatively low interest rates. There is certainly no lack of cash “waiting” on the sidelines, and mortgages “tightened” to Treasury securities nicely, helping mortgage rates on a relative basis. Traders reported buying from foreign and domestic money managers, banks, funds, and insurance companies. Traders estimated origination volume to be about $2 billion that was sold into the secondary markets. But lock desks were a little busier last week. The number of mortgage applications in the U.S. rose last week by 3.9%, with refinancing up 15% and the purchase index down 9.5% after the end of the first-time home buyer tax credit.

Today is the third day of no scheduled economic news of much consequence, although we do have some Trade Balance data (which are included in the GDP data) and the weekly mortgage application survey that the MBAA is kind enough to provide the industry (noted above), along with some speakers from the FOMC. Yesterday, after rates were up a little in the morning, a few investors improved pricing after a decent $38 billion 3-yr auction and as stocks sold off somewhat. Today we have the $24 billion 10-yr Treasury note sale ($16 billion in 30-yr’s tomorrow). With not much going on, stocks are pointing toward the upside, the current yield on the 10-yr is at 3.56% and mortgages are better by about .250.

Daily Humor
(Warning: PG rated.)
A man walks into a bar and takes a seat next to a very attractive woman. He gives her a quick glance then casually looks at his watch for a moment.
The woman notices this and asks, “Is your date running late?”
“No,” he replies, “I bought this state-of the-art watch, and I was just testing it.”
The intrigued woman asks, “A state-of-the-art watch – what’s so special about it?”
The man explains, “It uses alpha waves to talk to me telepathically.”
The lady smiles and says, “What’s it telling you now?”
“Well, it says you’re not wearing any panties.”
The woman giggles and replies, “Well it must be broken because I am wearing panties!”
The man smiles, taps his watch and says, “Darn thing’s an hour fast!”

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