THE BASIS POINT

Retail Sales -0.1%, Churchill on Economists, More Taylor Bean Fallout, FHA Underwriting Concerns

I like attorneys, and feel that jokes about them are mean-spirited and unnecessary. (Like, “What happens when you give a lawyer Viagra? They get taller!”) Attorneys are certainly finding fruitful grounds in handling all of the recent mortgage fraud cases. Of course it takes the government a while to prosecute, and thus many of the cases involve things that happened between 2005 and 2008. More here.

Winston Churchill reportedly said, “If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions.” The Wall Street Journal polled 52 economists, and 47 had the time to write back – there is beginning to be some optimism about the economy. Out of the 47, 27 economists said the recession had ended and 11 seeing a trough this month or next.

Taylor Bean Fallout
Like lifeboats picking up straggling ferry-wreck passengers, investors are trying to address loans that were targeted for Taylor Bean. Flagstar, for one, stepping into the arena, clarified their position and “remind our customers that we can accept the submission of these loans to Flagstar provided they fit within our current guidelines.” Flagstar will accept a loan that has already closed but it will have to be underwritten to their current underwriting guidelines and noted that it was destined for TB&W for non-delegated customers. Flagstar, and of course any other investor, must have the original note. And if the loan has an application taken date on or after July 30, 2009 and the broker wishes to close in Flagstar’s name, then according to the MDIA the broker will be required to generate a new initial TIL. In addition, Flagstar published several other procedures regarding the TIL, appraisal, and FHA & VA issues. For example, Flagstar will accept an appraisal ordered in the correspondent’s name if the company has been approved by Flagstar as HVCC compliant.

RMIC Does That Too!
Yesterday I mentioned MGIC’s automated software which helps lenders determine the best program and rate (MI rate, by the way). I was gently reminded that RMIC’s Rate Estimator is also tied to their underwriting rules engine and it allows originators to order MI right from the screen with the MI quote, or print the page for future reference. And no user name or password required unless the originator orders the MI.

FHA Underwriting Concerns
And regarding my comments, and those published recently in the Wall Street Journal, about possible future problems with FHA loans, one high producing broker wrote to me and said, “I lost a loan a few weeks ago to a company that originates FHA loans. The borrower had gotten divorced and had to make a very large payment to her husband by the end of the month. I couldn’t close her until the judge either gave her an indefinite extension on the payment or she sold her current home which was awarded to her in the decree, and then used the proceeds to pay him. The Realtor informed me that the borrower closed the deal using an FHA loan and the FHA underwriter said nothing about the payment. It is almost frightening to see how lax FHA underwriting and loans are – it wasn’t that way in the past.”

Wells Fargo Guideline Updates
Wells’ Wholesale group sent out ten (10) pages to their clients concerning revisions to bankruptcy policies, revisions to foreclosure policies, revisions to deed-in-lieu of foreclosure policies, revisions to short sale policies, changes to “age of documentation” requirements for new construction transactions, changes to their two-unit properties with regard to maximum LTV and CLTV, a conforming market classification list update, a condominium construction litigation review criteria, Direct Express documentation update for Social Security and pension income, qualification change for temporary buydown transactions, and told their clients that a new pricing renegotiation form can be sent via e-mail. Like I said, 10 pages…I sympathize with their underwriting staff!

Wells Wholesale continued the barrage by saying after Monday, Freddie Mac Relief Refinance Mortgage required closing costs will be equal to the “actual closing costs, financing costs, pre-paids and escrows to be rolled into the loan amount of the new mortgage may not exceed the lesser of 4% of the unpaid principal balance of the existing loan that is being refinanced or $5,000.” Borrowers may decide to finance the closing costs or pay at closing, and “standard escrow practices will apply when escrows are netted from the payoff amount for Home Affordable Refinance Program loans.” (For loan amounts less than $62,500, the change will reduce the amount of costs the borrower can finance to an amount less than $2500.)

Also, for Wells wholesale and correspondent channels, in a few weeks (the 24th) will require all 5/1 ARM loans, including Home Affordable Refinance Program transactions, to be qualified using the greater of note rate or fully indexed, fully amortized rate (Index plus Margin- with max of life time cap).

Trade Gap +4%, FOMC Summary
Back to something simple, like our gargantuan economy. Yesterday we learned that the Trade Gap increased 4% in May, but widening less than was forecast. Exports were up, with imports up a tad more due to the cost of oil. Most of the increase in imports and exports in June was driven by higher prices, not higher volumes, but in inflation-adjusted terms the trade deficit fell to the lowest level in nearly 10 years!

Yesterday’s FOMC minutes did…not much. “Economic activity is leveling out…inflation is subdued…conditions in financial markets have improved…household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit…businesses are still cutting back on fixed investment and staffing but are making progress…Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.” The statement goes on to say that Fed Funds will stay between 0-.25% for an extended period, and that “to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.”

Treasury Auctions, Retail Sales -0.1%
Before the Fed meeting, the government debt market grappled with buying several billion of 10-yr. notes. Coming in at 3.74% and a cover of almost 2.50, it was satisfactory. Today, however, is the $15 billion 30-yr bond auction. Currently the 30-yr bond is yielding 4.57%, and the question is, of course, what the demand will be like for investors who want to tie their money up for 30 years at that yield. We already had Jobless Claims and Retail Sales. Retail Sales unexpectedly dropped .1% in July from a revised +.8% in June. (Ex-autos it was -.6 %.). Import Prices were -.7%. In addition, Jobless Claims rose by 4k to 558k, whereas analysts expected them to drop. The number of folks collecting benefits fell to its lowest level since April, but the 4-week moving average rose by 8,500 to 565,000 – the first increase in almost two months. After the news we find the 10-yr down to 3.69% and mortgage prices a tad better than Wednesday afternoon.

Daily Humor
More exciting tool definitions, for anyone who is handy…

BELT SANDER: An electric sanding tool commonly used to convert minor touch-up jobs into major refinishing jobs.

HACKSAW: One of a family of cutting tools built on the Ouija board principle. It transforms human energy into a crooked, unpredictable motion, and the more you attempt to influence its course, the more dismal your future becomes.
DRILL PRESS: A tall upright machine useful for suddenly snatching flat metal bar stock out of your hands so that it smacks you in the chest and flings your beer across the room, denting the freshly-painted fender which you had carefully set in the corner where nothing could get to it.

PLIERS: Used to round off bolt heads. Sometimes used in the creation of blood-blisters.
VISE-GRIPS: Generally used after pliers to completely round off bolt heads. If nothing else is available, they can also be used to transfer intense welding heat to the palm of your hand.
WIRE WHEEL: Cleans paint off bolts and then throws them somewhere under the workbench with the speed of light. Also removes fingerprints and hard-earned calluses from fingers in about the time it takes you to say, “Damn.”
ELECTRIC HAND DRILL: Normally used for spinning pop rivets in their holes until you die of old age.
SKILL SAW: A portable cutting tool used to make studs too short.