THE BASIS POINT

Rates Extremely Volatile But Better Today, No Fee Reverse Mortgages?, Latest On Private MBS Regs

No Fee Reverse Mortgages?
If a senior citizen pays even one penny for a reverse mortgage, is the borrower paying too much? The latest trend in reverse mortgage lending is for the lender to charge no origination or servicing fees. MetLife, Pentagon Federal Credit Union, and now Financial Freedom and Generation Mortgage are all taking this approach in making fixed-rate, home equity conversion mortgages (HECMs).

Latest On Private MBS Regs
The SEC voted 5-0 to put new rules for non-agency ABS/RMBS securitizations out for a 90-day comment period. We’ve been through these comment periods before, so here’s your chance! The proposed securitization policies include beefed-up standardized minimum loan-level information requirements, which must be posted with the SEC and made available to investors 5 business days before deal pricing, a risk retention requirement, effectively a 5% “vertical” slice of the deal – i.e., 5% of the entire deal, not the first 5% of losses, and the same application of most of the disclosure requirements to 144A deals. Under FAS 166/167, keeping “skin in the game” means that the deal’s assets have to stay on balance sheet, obviating a classic motivation of securitization, and impacting the credit rating of the security compared to the credit rating of the issuer and its chance of bankruptcy. Much has to happen before we see the resuscitation of non-agency securitization, and these are steps.

Rates Better But Volatile
Huh? Mortgage rates improved, even after the Fed stop buying them last Thursday? Wow! Just think of all the folks who thought that mortgage rates would zoom up relative to Treasury rates! (Fortunately I was not one of them – I am so rarely right that I have to keep reminding myself about it.) Money managers, pension funds, insurance companies, and servicers were all buyers, and the only selling came from lenders with about $1.5 billion of origination.

With rates going up and now back down somewhat, hedged originators might be feeling a little whipsawed, but since the pipelines aren’t all that big these days perhaps the damage is minimal. (And of course the largest owner of MBS (the Fed) controls its own funding costs and doesn’t have to hedge.) We are past the quarter-end, almost done with the first of the April auctions, and banks are appearing to be stepping into the void left by the Fed. Remember that the Fed was never a traditional buyer of mortgages, so we are back to a more normal market – another good thing. Origination is still expected to be down 40-50% in 2010 as good credit homeowners refinanced in 2009. They won’t be back to refi again in 2010, so most origination will be purchases as we are already seeing.

Yesterday we continued to see bonds’ prices improve, and rates drop, after a solid $21 billion 10-yr sale by the Treasury. The yield on the auction was within 2 basis points of where the existing 10-yr was trading, indirect bidder participation was solid and the bid/cover was highest for a 10-year auction since at least 1994 – so maybe 4% is the current magical yield after all. The bond market was helped by Ben Bernanke’s somber statements about the economy not being out of the woods yet and the fact that inflation is not an issue. On Monday the 10-yr hit 4% for the first time since June, but we’ve bounced off that level and are now back down to 3.86%. And today we got our first economic news of the week, with Initial Jobless Claims coming in at 460,000, up 18k from 442,000. The 4-week moving average moved up slightly. After the number mortgage prices are generally better by about .125.

Daily Humor
(Warning: rated PG)
Two lawyers had been stranded on a desert island for several months. The only thing on the island was a tall coconut tree that provided them their only food. Each day one of the lawyers would climb to the top to see if he could spot a rescue boat coming.

One day the lawyer yelled down from the tree, “Wow! I can’t believe my eyes. There is a woman out there floating in our direction!”

The lawyer on the ground was most skeptical and said, “You’re hallucinating – you’ve finally lost your mind.”

But within a few minutes, up to the beach floated a stunning red-head, face up, totally naked, unconscious, without even so much as a ring or earrings on her person.

The two attorneys went down to the water, dragged her up on the beach and discovered, yes, she was alive, warm and breathing.

One said to the other, “You know, we’ve been on this God forsaken island for months now without a woman. It’s been such a long, long time…So… Do you think we should well… You know… Screw her?”

“Out of what?” asked the other.