THE BASIS POINT

Reporter Passes Out, Do Lawmakers Know Economics 101?, Gold Rally Continues

Reporter Passes Out
It is not often that one is able to watch a financial newscaster pass out while on the job. And don’t ask me what relevancy a keyboard-playing cat has with any of it.

Fed Continues Reign Over Small Banks
Well, let’s not beat around the bush. According to the popular press, the Federal Reserve scored a victory and mortgage bankers suffered a defeat yesterday when the Senate approved an amendment by a 90-9 vote to preserve Fed supervision of hundreds of smaller banks, instead of transferring them to other regulators.

Do Lawmakers Know Economics 101?
Also, the Senate voted 63 to 36 to approve the Merkley amendment and end mortgage kickbacks and “liar loans.” Sometimes one wonders if politicians know basic economic principals – bond math economic dictate that an investor will pay more for a higher yielding instrument, other things being equal. Regardless of my opinion, yield spread premiums are believed to have encouraged brokers to steer consumers into risky, high-interest loans even if they qualified for cheaper loans. And liar loans let consumers qualify for loans they could not possibly repay if they opted to simply state their income or other assets, rather than waiting for verification. The Merkley amendment is here.

As a result of the Merkley amendment, mortgage lenders and loan originators would be banned from accepting payments based on the interest rate and other terms of the loan, which effectively wipes out loan steering, and as I mentioned kills off the yield spread premium – often a key part of broker’s compensation. Proponents say that the amendment will protect homeowners by prohibiting mortgage lenders and loan originators from receiving hidden payments when they steer homeowners into high-cost loans and will create strong underwriting standards to ensure borrowers have the ability to repay their loans. Opponents say that if this passes, it will spell the end of mortgage banking as we know it, and that borrowers should be allowed to cover their closing costs by accepting a higher interest rate loan.

The Senate also voted to keep a measure in the bill, opposed by the mortgage industry, which would require lenders who securitize to retain at least a 5 percent stake in their products. Not even the large lenders can do that if the law applies to conforming product. Democrats on Tuesday defeated a Republican amendment that would have ended government control of the Fannie & Freddie, arguing that the issue should be dealt with separately next year.

Final approval of the Senate bill could come next week. These amendments and the law are not final, and remember that the House bill does not have this language so even if they pass the Senate, there will still need to be reconciliation with the House. There are more than 200 amendments filed on the Senate bill. Any legislation that clears the Senate must be reconciled with a reform bill that passed the House of Representatives in December before Obama can sign it into law. (The Senate unanimously adopted a measure that clarifies that small businesses like jewelers and orthodontists that extend credit to customers would be exempt.) Trade organizations are recommending that members pick up the phone and call their elected officials.

Loan Modification Update
Counselors working with HAMP Modification applications have a shiny new tool to use: the HOPE LoanPort, a new web portal tool. Launched by the HOPE NOW Alliance, along with HUD, this new web portal will allow counselors to collect the necessary documents from homeowners, upload the completed package, submit the completed package directly to servicers, and track the status of a borrower’s application. Designers hope it will stop lost documents, enforce complete HAMP applications, and improve efficiency and transparency. But don’t take their word for it – check out http://www.hopeloanportal.org/.

Lending Industry Sheds 1500 Jobs In March
Anyone who still has a job in the crazy business should know that according to the Bureau of Labor Statistics the mortgage banker and broker sector eliminated 1,500 full-time jobs in March as loan production continued to slow, after adding 4,400 full-time employees in February. An estimated 252,500 full-time workers were employed by the mortgage industry in March, down from 254,000 the prior month. However, employment was down only 6.7 percent from March 2009, compared to a 21.6 percent decline over the previous 12-month period

Gold Rally Continues
Due to several gold teeth, my 87-year old Dad’s mouth is becoming more valuable with each passing week. Gold prices continue to move higher on both global economic uncertainty and inflation fears, hitting yet another high of over $1,230 an ounce. (Why are people always so much more concerned with inflation instead of deflation?) Overall, yesterday the stage belonged to stocks, which are back to pre-Greece crisis levels. Mortgages did ok, however, and improved slightly. For those tracking spreads, current coupon bonds yielded about 140 basis points more than a blend of 5- and 10-year Treasuries, versus 150-160 basis points prior to the Fed’s 15-month $1.25 trillion MBS purchase campaign. And according to a report from Barclays, the Fed owns 32% of the outstanding 30-year fixed rate mortgages, most in the form of 4 & 4½% percent bonds! The $24 billion 10-yr auction went swimmingly. Today we finish off the auctions with a $16 billion 30-yr bond auction. We will also have Initial Jobless Claims and Import Prices for April, both at 8:30. Initial Claims are expected to drop slightly, and Import Prices are projected slightly higher. Ahead of that news the 10-yr is at 3.57% and mortgages are quiet.

Daily Humor
Where do red-headed babies come from?

After their baby was born, the panicked father went to see the Obstetrician.

“Doctor,” the man said, “I don’t mind telling you, but I’m a little upset because my daughter has red hair. She can’t possibly be mine!”

“Nonsense,” the doctor said. “Even though you and your wife both have black hair, one of your ancestors may have contributed red hair to the gene pool.”

“It isn’t possible,” the man insisted. “This can’t be, our families on both sides had jet-black hair for generations.”

“Well,” said the doctor, “let me ask you this. How often are you ‘intimate’?”

The man seemed a bit ashamed. “I’ve been working very hard for the past year. We only made love once or twice every few months.”

“Well, there you have it!” the doctor said confidently. “It’s rust.”