THE BASIS POINT

MBS vs Treasuries, Thornburg, “Short Refis”

This market is tougher than a $3 steak! When the heck are mortgage prices going to improve? Why is the 10-yr Treasury down into the 3.5% range, yet conforming/conventional 30-yr loans, eligible for FNMA and FHLMC, back up into the 6% range? The widening that is occurring out to these levels, which statistically speaking happens once every 4,000 years, is a combination of several factors. First, investors and money managers feel safer putting their money into Treasury securities rather than mortgage-related securities. Subjecting their money to the potential of borrowers defaulting and property depreciation is something that many prefer not to do. These two factors have led to losses for FNMA and FHLMC, along with others, and some investors have been selling mortgage securities in order to meet capital requirements. And selling has led to lower prices, and thus higher rates.

This morning things are a little better, with the 10-yr at 3.59% but mortgage prices slightly better. We did have some minor news out (the ADP employment report – just for private employers, and a revision to 4th quarter productivity) that didn’t move the market. Later on we have the ISM non-manufacturing index, Factory Orders, and the Beige Book.

Speaking of selling loans, the jumbo secondary market was hit by Thornburg’s capital issues and sale of their product. Since the Thornburg announcement jumbo pricing increased (worsened) over a point in the last 24 hours, and all major investors participated Thornburg disclosed in the filing there’s no guarantee they’ll be able to sell enough assets or raise enough cash to meet its margin calls, but most are keeping their fingers crossed.

Will being a federally insured institution help? Let’s hope so, as Citigroup shares sank about 6% to their lowest level in more than nine years. Forecasts of more losses at Citi and comments from a Middle East fund executive that Citi must raise more cash to stay in business were the reason. The fund executive said that it will take more than the combined efforts of the Gulf’s wealthiest investors (the Abu Dhabi Investment Authority, the Kuwait Investment Authority and Saudi Prince Alwaleed bin Talal) to save Citigroup.

Should the tax payer help borrowers who can’t make their payments on time? President George Bush and the two highest economic officials in the US government don’t think so: they object to plans in Congress for changing bankruptcy laws to protect homeowners and restructure mortgages. It “wouldn’t be fair to millions who pay their mortgages each month on time and it would be unfair to future homeowners,” Bush said, who was then followed by Chairman Bernanke who mentioned the potential unfairness, telling Congress that allowing judges to ease the terms of some mortgages would ‘probably’ add to the cost of all mortgages.

Speaking of planning, have you heard about the “Short Refi”? We all know how a short sale works, the short refinance is similar in that it starts with a borrower that is upside down on their property. The borrower arranges to deliver a payoff demand in to title that is short the amount owed, allowing the borrower to obtain new financing with more affordable terms. What happens to the “short” portion of the current lien? Sometimes banks agree to take an unsecured note for the remaining balance. The existing lender must deliver the “short payoff” to title and provide the new lender with the new terms of the unsecured debt and must guarantee borrower in writing that this arrangement will not result in any degradation of credit to the borrower. Also, the borrower must be able to qualify for the new financing, including the repayment terms of the new unsecured lien. This is a strategy that works best when only one lien currently exists. Good luck with this one… although the borrower gets a more affordable mortgage, the investor avoids too large of a write-down, the lender has a saleable loan – but the end investor loses money.