THE BASIS POINT

More WaMu News, Fed Meeting, Updates on Wells, HSBC & Chase

After announcing plans to raise $7 billion by selling ownership in their company, WaMu elaborated, “We will conduct our mortgage production business through our retail banking stores and our consumer-direct channels, which includes telephone and online sales. This is in line with our strategic direction to organize around our retail distribution network. As a result, we will be closing all our free-standing home loan centers and sales offices, and exiting wholesale lending (selling mortgages through third-party brokers).” They decreased their quarterly dividend rate to $0.01 per share from $0.15 last quarter, saving WaMu $490 million of capital annually, and expect a net loss in the first quarter of $1.1 billion and charge-offs of $1.4 billion. WaMu will consolidate all mortgage loan fulfillment into three core sites in Illinois and Florida and close sites in Washington, Pennsylvania, and three in California.

What were you doing on March 18th? The Fed was meeting, and the Governors were concerned with downside risks to growth, with “many” seeing an outright contraction in GDP as likely. Discussion of the possible need to reverse rate cuts is removed from the statement, and they are expected to cut overnight rates again at their April 30th meeting. “Many participants thought some contraction in economic activity in the first half of 2008 now appeared likely” and some were concerned that “falling house prices and stresses in financial markets could lead to a more severe and protracted downturn in activity than currently anticipated.” Commodity (gas, food) price increases were worrisome, but the expectation of greater slack in the economy and restrained increases in unit labor costs were seen as factors restraining inflation pressures.

Citi may sell $12 billion of loans on their books (I don’t know the make-up), helping clear a $200 billion logjam of unsold loans. Who might buy them? Money managers who have raised funds to invest in distressed debt are striking deals with Citigroup and other banks now eager to unload them. Apollo, Blackstone and TPG (who just put $7 billion into WaMu) stand to profit if demand for the loans pushes prices above Citigroup’s discounted sale price. In fact, rumors abound that due to the current fragmented market, large sums are being made by savvy firms buying and selling distressed debt.

Wells Fargo Wholesale changed adjusters to the price for certain programs, effective next week. These adjusters apply to all government loans, including, but not limited to FHASecure, Rural Housing (USDA), High Balance FHA Loan Program, FHA Streamline Refinance and VA Interest Rate Reduction Refinance Loans (IRRRL). WF Wholesale will require the following minimum loan score, regardless of any automated underwriting findings: the minimum credit score for all purchases and refinances will be 580, Cash out refinance LTV <= 85% is 580, cash out refinances where the LTV > 85% it will be 600. (This does not apply to High Balance FHA Loan Program, with loan amounts above $417,000, where more restrictive requirements apply. These changes also do not apply to HECM (reverse) loans – for those limited brokers approved to originate. Refer to applicable program policy for loan score requirements.)

Is anyone avoiding foreclosure problems? HSBC, as one example, has had formalized “foreclosure avoidance” programs since 2003 where they might forgive a single payment, or move it to the end of the mortgage to permanently reducing the interest rate, or forgive part of the balance of the mortgage when the house is sold. As of year-end 2007, HSBC had restructured or modified nearly one in five of its loans, up 81 percent from a year earlier, or almost $17 billion worth of loans. Per HSBC, 10,300 adjustable-rate loans have received modifications to their payments or rate, and 4,000 customers were refinanced into fixed-rate loans.

S&P downgraded three mortgage insurers due to weak 4th quarter results: PMI from AA TO A+, MTG from AA- TO A, and Radian from AA- TO A. In addition, Freddie Mac has been notified by Triad Guaranty Insurance Corporation (Triad Guaranty) that it has been downgraded by Fitch Ratings from AA- to BBB-.

Chase Correspondent announced second appraisal requirements for FHA loan amounts exceeding $417,000. HUD Mortgagee Letter 2008-09 provided additional information on the second appraisal requirement, and this clarification has been included in the Chase declining markets policy. A second appraisal for FHA Jumbo loans will be required in declining markets when the base loan amount excluding the upfront MIP exceeds $417,000 (regardless of number of units in the property) AND the LTV excluding upfront MIP is ≥ 95% AND either the appraiser OR Fannie or Chase determines the property is located in a declining market and/or there is an “over-supply” of properties.

Mortgage application volume rose 5.4% during the week ending April 4, according to the Mortgage Bankers Association’s weekly application survey. Refinance volume increased 3.4% during the week, while purchase volume rose 8.1%. (Refinance applications accounted for 52.2% of total applications.) For those at home keeping track, the index peaked in May 2003, at the height of the housing boom. This is about the only news out, and the 10-yr is wallowing in the mid-3.50’s again and mortgage prices are roughly unchanged.