Monthly Payments on U.S. Debt
Since early October, the 10-year US Treasury yield has gone up about 85 basis points (from 2.4% to 3.35%). The crisis in Europe and the Fed’s $600 billion bond-buying program (QE2) in theory would move rates lower. But a pick-up in world economic indicators, along with concern over a growing US deficit has instead produced the opposite result: bond buyers now want a higher interest rate to compensate them for the risk of future inflation and/or a weak dollar. Companies from PIMCO to Goldman Sachs are raising their GDP estimates for 2011.
What is the impact of this on US government debt payments? The yearly debt on $1 million of 10-yr Treasury note at 2.4% is $24,000. The debt payment at 3.35% is $33,500, for a difference of $9,500 per year. On $1 billion this becomes a difference of $9.5 million per year, on $10 billion $95 million per year. There are no auctions for a few weeks, but total weekly auction amounts are much higher than $10 billion—they’re often as high as $100b. Granted, older, higher yield debt is maturing, but you get the picture.
Latest On Mortgage Securitization
The Federal Reserve just published a paper titled, Mortgage-Backed Securities: How Important Is ‘Skin in the Game’? which is worth a glance. “Financial reform legislation passed by Congress in 2010 requires mortgage originators to retain some loss exposure on the mortgages they securitize. Recent research compares the performance of mortgage-backed securities for different types of issues in which originators retain different degrees of loss exposure. The findings suggest that retention of even modest loss exposure by originators reduces moral hazard and is associated with significantly lower loss rates on these securities.”
Wells Fargo told regulators which mortgages should not be included in the government’s 5% risk retention program under Dodd Frank. “Any mortgage originated in any of Wells Fargo’s business channels should be exempted” according to a high level source. (OK, just kidding – I’ll save it for the April 1 edition.) Federal regulators must determine what mortgages fall in and outside of the 5% required capital, and given that the future of Freddie and Fannie are up in the air, Wells’ definition of mortgages that should be exempt says nothing about agencies. Wells Fargo said risk retention, for any loan, should include an early payment-default provision covering up to the first three months of a loan and a 5% vertical slice of retained credit risk on top of the standard representations and warranties. Wells Fargo would also prefer a simpler and narrow definition of a qualified residential mortgage (exempt from risk retention) instead of some type of national underwriting standard. Wells Fargo said mortgages with a 70% loan-to-value ratio or below should qualify as exempt.
Future of Loan Officer Pay
The CEO of Wyndham Capital passed along (thank you) this link for more loan officer compensation information.