THE BASIS POINT

Rates Up On Mortgage Bond Carnage, Durable Goods Up, Jobless Claims Down, GMAC Changes For Mortgage Banks

Last night I heard my daughter saying her prayers. “Dear God, please send clothes for all those poor ladies in Daddy’s computer. Amen.”

Analysis of Mortgage Bond Selloff and Rate Projections
One trader said, “Mortgages are getting banged like a screen door in a hurricane.” I assume that he was talking about mortgages and bond prices in general. Anyone who has been in this business for any length of time has seen rates shoot up, or rates shoot down, dramatically in the space of a few days. Personally, and I have been wrong before, I think that we have seen the lows in rates. The US Government keeps borrowing, and there are signs that the economy is starting to revive in some areas. I don’t know why rates would go back down too far unless the economy deteriorates more. There are always dips as rates move back down, but I see the trend higher. But like I said, I have been wrong before. But the U.S. budget deficit is rising due to a combination of weak tax receipts and sharply increased spending, balanced against of deflation, weak demand, and slow global growth. What a market!

What made bond prices drop, and rates go up, yesterday, hitting 6-month highs? I guess “More sellers than buyers” probably won’t cut it. While there was one specific news item, like unemployment, the weight of the Treasury auctions, and the debt being issued in general by the US Government, is one of the primary reasons. And will there be demand from buyers of our debt, like China? And once the yield on the 10-yr broke through the technical support level of 3.50%, and then 3.60%, well, suddenly every lender starting selling their production and pipelines. In addition, that brought on over $9 billion in servicer selling on top of the mortgage banker selling, and once again we are reminded that the markets are bigger than the Fed. Remember that if rates go up, mortgages are likely to stay on the books of servicers for a longer, unexpected, period of time, and so often portfolio managers will sell Treasury securities to shorten their duration.

And as we know, when rates shoot up, initially locks pour in, and then things dry up and agents/brokers start reviewing extension policies. And non-depository mortgage banks worry about squeezing fundings through on slim warehouse lines. Rates moved up somewhat late last week, and mortgage applications in the U.S. declined last week. The Mortgage Bankers Association’s index of applications dropped 14%, with the refinancing gauge down 19% and the purchase index up 1%. For news yesterday we also had a report from the National Association of Realtors showing that home sales rose 2.9% in April. About 45% of the in April sales were foreclosures and short sales. And the median price for an existing home last month was $170,200, down 15.4% from $201,300 in April 2008. After the $40 billion in 2-year notes Tuesday, and the $35 billion in 5-year notes yesterday, we have another $26 billion in 7-year notes today bringing this week’s total to $101 billion.

Durable Goods Up, Jobless Claims Down
This morning we actually have some data upon which to chew. (See? You can avoid ending a sentence in a preposition.) Durable Goods in April jumped more than forecast as a rebound in auto demand and surge in defense spending overshadowed declines in business equipment. The 1.9% increase reported by the Commerce Department was the largest since December 2007, and followed a revised 2.1 percent drop in March that was more than twice as large as previously estimated. Jobless Claims dropped by 13,000 to 623,000, although the number of people collecting unemployment insurance rose to a record in the prior week for the 17th straight time, reflecting restrained hiring. And later this morning we’ll see New Home Sales. After the news we find the yield on the 10-yr up to 3.64% and mortgage prices slightly worse, again, from yesterday afternoon.

UK Mortgage Products
What programs are they offering in the UK? Lloyds TSB, among others, offers borrowers a 95% mortgage IF friends or relatives of the borrower hold savings worth 20% of the property’s value in a special account with the bank. The so-called Lend a Hand mortgage offers first-time buyers with just a 5% deposit a three-year fixed rate of 4.39% while the savers have their money tied up for 3 ½ years they can earn a fixed rate of interest of 3.5%. If the borrower fails to meet mortgage repayments there is a legally binding agreement which allows the bank to use the savings to make up any shortfall. However, at the end of the three-year deal if the homeowner’s loan-to-value (LTV) ratio has fallen to 90% as a result of mortgage repayments and rising house prices, the borrower can operate their mortgage independently without the looming legal charge. One benefit is that The deal enables parents and other family members to help out their children without losing control of their savings by locking them up in a house deposit.

GMAC Changes For Mortgage Banks
GMAC’s correspondent group (servicing mortgage banks) announced that, also effective June 1st, they will expand their policy on fee caps for Brokers and Table Funders to all Correspondent clients originating loans through third party brokers. The revised policy will place a limit on total broker compensation. “On loans originated through a third party Broker, including table-funded loans, the Broker may not receive compensation that exceeds the following: If the loan amount is less than or equal to $500,000, 4.5% of the loan amount; If the loan amount is greater than $500,000, the greater of: 2% of the loan amount; or $22,500. The limit includes the sum of all fees paid by the Borrower to the Broker and any fees paid by the Lender to the Broker, such as a yield spread premium. “ GMAC goes on to say that “On loans originated through a third party Broker, including table-funded loans, the Broker may receive all or part of their compensation directly from the Lender in the form of a yield spread premium based on the interest rate agreed to between the Borrower and the Broker. The yield spread premium may not exceed 3% of the loan amount. The yield spread premium must be disclosed on the Good Faith Estimate and the HUD-1 Settlement Statement in accordance with federal law.”

GMAC also changed the minimum credit score requirements for certain programs. For AUS Approve/Accept decision loans, a minimum score of 600 is required. For AUS Refer Decision or Manual Underwrite, a 620 score is required, as it is for Credit Qualifying Streamline Refinance (Non-GM to GM) loans. (For GM to GM loans, a minimum of 580 is required.)

Daily Humor
(Warning: R-rated – please don’t read if easily offended.)
As men age, we start seeing more of the medical world, which nowadays seems to include an increasing number of women as our physicians and therapists. And in my case, a new urologist.
My family doctor recently referred me to a just-out-of-medical-school female urologist. I saw her yesterday, and she’s absolutely drop-dead gorgeous as well as unbelievably sexy.
She told me that I must stop playing with myself.
I asked her why.
She said, “Because I’m trying to examine you…”

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