THE BASIS POINT

Rates Down on Stock & Euro Debt Weakness, Greece Bailout Like U.S. Needing TARPx10, Loan Mod Help

Rates Benefit on Stock Weakness
The drop in the equity markets yesterday, and possibly again today, certainly helped the flow of funds into “safer” investments – such as Treasuries and MBS’s. But we also had some economic news of note, the first being Pending Home Sales. The index was up 5.3% in March, with sales in the South up 13%, up 2% in the West, up 1% in the Midwest, but fell 3.3% in the Northeast. Second, Factory Orders here in the US were up 1.3% in March. And the Federal Reserve released its “Senior Loan Officer Survey” which showed that banks kept their lending standards tight during the first quarter – no surprise there, huh? There may have been a little movement in commercial and industrial loans to large and medium-size firms.

Greece Bailout Is Like US Needing 10x TARP Funds
Returning to the Greek issue for a moment, some believe that this will be the end of the Euro currency, at least in Greece. Let them print their own currency! The odds of sharp recession have increased, obviously, and naysayers are skeptical about any bailout plan based on the recession-stricken Portuguese and Spanish contributing billions of Euros to the cause. We have the ECB adopting a pure bailout strategy by accepting all Greek collateral and have seen almost $150 billion in potential economic aid offered to the Greeks. This figure is almost 50% of Greek GDP, and is the equivalent of the United States needing 10x the TARP funds! Greece’s GDP is only about 2% of US GDP and slightly less than that of Eurozone GDP, and one analyst likened it to Ohio going bankrupt and taking the entire US economic system with it.

Bond Yields Hit 4 Month Lows
In our market, yields hit their lowest level in more than four months due to the continued “concern” that European governments haven’t yet overcome the region’s debt crisis boosted demand for the safest assets, although there are continued worries about the debt situation in our own country. The difference in yield, however, between Fannie Mae & Freddie Mac mortgage securities and Treasury yields climbed to its highest level in several months. Spreads have not skyrocketed, but have moved up on increased volatility and since investors are very much preferring the safest of Treasury securities. “If Greece could default, couldn’t Fannie or Freddie?” Fortunately for possible borrowers, all rates have dropped, masking the difference. (Greater volatility harms mortgage-bond prices because it makes bigger rises or drops in rates more likely, pushing refinancing and other sources of prepayments on the underlying loans either much higher or lower than expected.)

Mortgage Apps Up, ADP Jobs +32k
This morning we learned what locks desks already knew about last week: mortgage applications rose 4% after declining 2.9% during the previous week. Refinancing apps were down 2.1% from the previous week but purchases increased 13.0% from one week earlier – there’s that homebuyer tax credit at work. In fact, purchase applications were up almost 24% over the last month. We also had the ADP private-payroll number for April which showed job growth coming in at 32,000. After these, and in the face of further stock sell-offs, the yield on the 10-yr is down to 3.55% and mortgage prices are better by between .125 and .250.

Follow Up On Mortgage Fraud Categories Comment
A reader made a good point on an article that I mentioned yesterday which stated, “Next were frauds related to appraisal and valuation misrepresentation, which increased from 22% of reported misrepresentation in 2008 to 33%. With an 11% increase, this is the most notable increase in reported fraud types in 2009. Thank you HVCC.” Vicky (from Valuation Management Group) wrote to point out, “The reported fraud was reported in 2009, but most likely took place in the years prior to 2009. HVCC was not in place until 5/2009, so the results of this will not be realized until the 2011 or 2012 reports.”

PennyMac Earnings
PennyMac Mortgage Investment Trust reported net income for the first quarter of $1.3 million on total net investment income of $3.9 million. During the first quarter the company acquired five residential mortgage whole loan pools valued at $115 million in aggregate, with unpaid principal balances at the time of purchase of $208 million, of which 86% of the loans were either 90 days or more delinquent, or in the foreclosure process.

FDIC Selling 40% Of Silverton Bank Subsidiary
In a related but unrelated matter, the FDIC announced a bid confirmation letter to sell a 40% equity interest in a limited liability company created to hold assets of SFG, a subsidiary of Silverton Bank (GA) to Square Mile Capital Management LLC. The FDIC will initially hold the remaining 60 percent equity interest in the LLC. The assets are mostly performing hospitality loans and loan participations with an unpaid principal balance of approximately $421 million.

Lending Effects of Nashville Flooding
Effective immediately, due to the present flooding activity in the Nashville TN area, Flagstar Bank will be temporarily suspending loan fundings in Davidson County. And when funding resumes, a satisfactory re-inspection will be required (as it already is for Cheatham, Rutherford, Sumner, Williamson, and Wilson counties) that include a statement from the appraiser that the subject property has not sustained any damage, a statement from the appraiser on the neighborhood conditions as they relate to any flooding or mudslide damage, and a photograph of the subject property.

Treasury Tries To Help Force More Loan Modifications
An American Banker article by Kate Berry states that “the Treasury Department is threatening to deny or even claw back incentive payments to mortgage servicers that are not modifying loans according to the administration’s guidelines.” Some say that noncompliance is rampant in the voluntary Home Affordable Modification Program (HAMP), mostly in the area of communications with borrowers about their rights surrounding foreclosure. The Treasury Department pays $1,000 for each completed permanent modification for a delinquent borrower and $500 for each modification given to a current borrower, along with $1,000 per year for borrowers who stay current after being modified. So far, servicer payments have totaled $68.4 million to the 109 servicers who are participating in the program and through March 31st only 230,801 borrowers had received permanent loan modifications and more than a million borrowers were in trial modifications. Given that the program is voluntary, too many penalties can cause servicers to drop out of the program – contractually, there is very little to compel the banks and servicers to do anything.

Loan Modification Comment From Trenches
In a related word from the trenches:

“Large investors and servicers are receiving incentives to modify loans, and then they can turn around and pass the loss portion onto the originator. The most frustrating part is that while the loans were underwritten responsibly (reasonable income, not inflated with a strong likelihood of the income continuing), the servicers are now contacting borrowers or employers and verifying the past income – but how they are getting the authorization from the borrower to do so when there is no loan modification in progress? If there is a discrepancy in income, the result is a repurchase request with complete disregard to the fact that it was their product design that you had to comply with, requiring ‘when verifying employment, no income may be disclosed’. I am sure that there are borrowers that inflated income levels, but on the loans I have reviewed, this does not appear to be the case. I am trying to figure out how this scenario is supposed to be acceptable to those who responsibly played by the rules!”

Daily Humor
Most people don’t know that in 1912, Hellmann’s mayonnaise was manufactured in England.

In fact, the Titanic was carrying 12,000 jars of the condiment scheduled for delivery in Vera Cruz, Mexico, which was to have been the next port of call for the great ship after its stop in New York.

This would have been the largest single shipment of mayonnaise ever delivered to Mexico. But as we know, the great ship did not make it to New York. The ship hit an iceberg and sank, and the cargo was lost forever.
The people of Mexico, who were crazy about mayonnaise, and were eagerly awaiting its delivery, were disconsolate at the loss. Their anguish was so great that they declared a National Day of Mourning, which they still observe to this day.

The National Day of Mourning occurs each year on May 5th and is known, of course, as Sinko de Mayo.

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