THE BASIS POINT

Goldman, US Bank Earnings. Lower Fee Reverse Mortgages. Low Rate Rationale. Goldman To Settle?

Goldman, US Bank Earnings
Goldman announced its 1st quarter earnings today. Earnings rose 91% in the quarter, to $3.46 billion, up from $1.81 billion in the same period last year, while revenues increased 36 percent to $12.78 billion, up from $9.42 billion in the quarter a year ago. The bank’s bond, commodities and currency trading bolstered the results. U.S. Bancorp reported net income of $669 million for the 1st quarter of 2010 on total net revenue of $4.3 billion, the result of strong year-over-year growth in both net interest income and fee revenue. USB had lending activity of $36.5 billion during the 1st quarter which included $6.6 billion of new commercial and commercial real estate commitments and $13.3 billion of mortgage production and other retail originations.

Warehouse Lending Update
Is there anything new in warehouse lending? It sounds like it. First California Mortgage, a wholesale operation (with some retail) in Northern California, is a “pilot lender” for the recently announced warehouse initiative between Fannie Mae and Guggenheim Partners’ mortgage warehouse operations company, NattyMac. First Cal will receive a $50 million line, part of the $1 billion that Fannie has pledged in liquidity to non-bank lenders. According to the press release, “The added credit capacity will enable First Cal to fund an additional 5,000 home loans this year and more than triple its 2009 production.”

Lower Fee Reverse Mortgages
Reverse Mortgages are certainly less expensive for borrowers than they were six months ago. Many lenders have cut their closing costs for HECM’s, which make up about 60% of the reverse mortgage market. And with good reason, since from Oct. 1, 2009, to March 31, 2010, home-equity-conversion mortgage volume fell 22% from the same period a year earlier. One thing that hasn’t helped is falling home values, leading to HUD cutting the amount of equity that reverse mortgage borrowers can extract by 10% starting last October. Origination fees are pretty typical in lending, as anyone will tell you, and the $0 origination fee option is only available on fixed-rate Home Equity Conversion Mortgages, not on the adjustable rate program – which is often the best option for the borrower. But the fixed rate reverse mortgage offers a much higher YSP than the adjustable rate, and generally the YSP is lower when the full HUD allowable origination fee is charged instead of the $0 option. Some states apparently have done away with the YSP, but with no origination fee when the YSP goes away, business quickly flows away from brokers and toward the banks.

Goldman To Settle With SEC?
My guess is that Goldman will eventually settle with the SEC, in spite of all the posturing going on now by Goldman. Its stock price seems to have stopped falling, and in fact is up some this morning after its earnings announcement. The timing of the lawsuit, of course, is thought by critics to coincide a little too conveniently with efforts toward financial reform. In spite of warnings by the US government, the big banks have been lobbying hard to water down any attempt at ending TBTF (too big to fail) and their oligopoly in the OTC derivatives markets. One trader said that “the lawsuit Friday was a missile launch, with smart bomb-like precision, right in the heart of enemy territory.” The crackdown on derivatives is the most meaningful part of this legislation. Banks and investment banks have been using their TBTF status to garner high credit ratings, which in turn helps them set up derivatives, which critics say were effectively underwritten by the taxpayer and went undetected by regulators and analysts alike. This bill will explicitly remove derivative dealing operations (and probably most all liquidity provision operations) from all FDIC insured commercial bank enterprises.

Why Fed Rates Will Stay Low For Awhile
Are rates going to go up? Sure they are. But the last time that short term interest rates rose through the actions of the Federal Reserve was almost 6 years ago – many folks in mortgage banking weren’t in the business then. Over the 2-year period from June 2004 through June 2006, the Federal Reserve raised short-term interest rates 17 separate times. But for now, Incomes are not rising, unemployment remains elevated, and the consumer cannot afford to take on higher prices, so few expect short term rates to move much higher in the near term. For a take on what the smart folks think about the odds of overnight Fed Funds moving higher, go to FedFundsFutures.

Economic News Roundup
Yesterday long term rates moved higher, as did the stock market, due to both a decent Leading Economic Indicators number and a turnaround in the stock markets. LEI were up 1.4% in March, with seven of the survey’s 10 components increasing. Until yesterday afternoon loan production was on the slow side (locks were not setting the world on fire), and the demand for mortgages was good. As the day wore on, however, production picked back up, and mortgages finished the day doing poorly relative to Treasury securities. Dealers estimated about $2 billion in supply being sold. There is no scheduled news for today, and this Thursday’s Initial Jobless Claims number seems to be taking on some importance (485,000 last week, anything above 460,000 could be a major disappointment). Regardless, the current yield on the 10-yr is at 3.80% and mortgage prices are about unchanged from the close of yesterday – pretty quiet.

Daily Humor
A couple go for a meal at a Chinese restaurant and order the ‘Chicken Surprise’.

The waiter brings the meal, served in a lidded cast iron pot. Just as the wife is about to serve herself, the lid of the pot rises slightly and she briefly sees two beady little eyes looking around before the lid slams back down.

“Good grief, did you see that?” she asks her husband. He hasn’t, so she asks him to look in the pot. He reaches for it and again the lid rises, and he sees two little eyes looking around before it slams down.

Rather perturbed, he calls the waiter over, explains what is happening, and demands an explanation.

“Please sir,” says the waiter, “what you order?”

The husband replies, “Chicken Surprise.”

“Ah! So sorry,” says the waiter, “I bring you Peeking Duck!”