THE BASIS POINT

Treasury Auction Preview, Exec Changes At Wells, Fate of CIT Portfolio

With no economic news of note, and the 2-yr auction having gone well, rates are not moving much. Although today’s release of the Fed meeting’s rate decision may change that, depending on the language, no one is looking for an increase in overnight rates. The $40 billion of 5-yr notes is auctioned off about an hour ahead of the announcement, which may muddy the waters somewhat. Some economists feel that the Fed will post some language today as to how and when they will begin to wind down the $1.25 trillion mortgage security buying program – but they certainly don’t want to stifle the recovery.

The other news out this morning is that last week’s mortgage applications here in the U.S. shot up to their highest levels since May. Apps were up 13%, with refinancing up 17% and purchases up almost 6%. In fact, refinancing has gone to 64% of all applications. Rates are helping, although it seems that many lenders are hovering around 5.25%. Borrowers, if they’d like to pay a point, can go down into the high 4% range for a 30-yr fixed rate loan. Of course, some agents are saying that only the borrowers with the best FICO’s and some equity in their homes are able to refinance (if they didn’t already do it this year). Anyway, the 10-yr yield is up to 3.49% and mortgage prices are worse by about .125.

Loan Guideline Updates
Fannie Mae authored Announcement 09-29 which gives several updates to their eligibility requirements, underwriting guidelines, mortgage insurance (MI) options, products, and pricing to help support housing market liquidity and sustainability. DU Version 8.0 Release Notes have also been published to reflect 09-29. Fannie is introducing a new option for minimum MI coverage in order to “help MI companies preserve capital and potentially increase their capacity to insure conventional loans with LTVs above 80 percent.” Fannie will increase the minimum credit score requirement to 620 for both DU- and manually underwritten loans. In addition, DU Version 8.0 will include an update to the DU credit risk assessment; an update to the maximum allowable DTI to 45%, “with flexibilities up to 50% for certain loan casefiles with strong compensating factors; and retirement of Expanded Approval® (EA) EA-II and EA-III recommendations (except for DU Refi Plus loan casefiles).” The Release Notes are available for DO/DU Version 8.0, which will be implemented the weekend of December 12, 2009, and will explain changes in DU Version 8.0 in support of Announcement 09-29.

GMAC Bank sent out a clarifying note concerning Reg. Z, which implements the TILA and HOEPA and takes effect after October 1 except for the escrow requirements applicable to “higher priced mortgage loans,” which become effective on April 1, 2010. GMAC Bank will not originate, purchase or table fund loans that meet the definition of a “higher priced mortgage loan” under Regulation Z § 26.35 and the official commentary to the regulation. “The loan file delivered to GMAC Bank must contain evidence of the date the lender on the note set the interest rate with the consumer for the last time before consummation.” As I noted yesterday, “evidence” includes a rate lock-in agreement, screen print from the client’s system indicating the lock date, or an internally generated document stating the interest rate lock date.

Wells Fargo’s correspondents, after 10/26, for FHA streamline and cash-out refinance transactions, must have a minimum FICO for all streamline refinances of 640, and a minimum FICO for high balance cash-out refinances of 660. (The minimum loan score for non-high balance FHA cash-out refinance transactions remains at 620.)

Exec Changes At Wells
The mortgage and banking industry had some personnel changes yesterday. Dick Kovacevich will retire as chairman of Wells Fargo on 1/1 after 23 years with the bank. John Stumpf will take his place. (I don’t know if there is a link, but shares in Wells Fargo were up almost 4% yesterday.) And Freddie Mac found a new CFO (Ross Kari), hiring him away from Fifth Third Bancorp. Freddie has not had a CFO since April, and he will be responsible for Freddie’s accounting, financial planning and investor relations.

Fate of CIT Portfolio
Step right up! Lone Star Funds, who bought much of the CIT Group’s portfolio, plans to sell $239 million of securities backed by the subprime mortgages. These days, it’s always nice to see “a deal” being talked about! Lone Star bought CIT’s home lending unit last year. The sale is backed by almost $600 million of loans with an average credit score of 571, 15% are 30 days delinquent, and the debt exceeds the current worth of homeowners’ properties by more than 6 percent. The securities that are being offered carry credit support (protection against losses on the underlying loans) of 60 percent, in effect backed by $150 million of junior-ranking securities that aren’t being sold.

Mortgage Banker Reaction to FHA Changes
In a reaction to the credit policy changes proposed by the FHA, the Mortgage Bankers Association of America’s chairman of MBS made a statement supporting HUD’s FHA.

“It is important to note that FHA is not in financial trouble…We applaud FHA’s goal of enhancing the management of its credit risk. Additionally, ensuring fair and accurate appraisals will also help FHA better manage its risk. Further, for several years, MBA has been advocating for higher net worth requirements for FHA lenders. It is important that lenders and brokers be made to have sufficient financial backing so they can be held accountable in the event of problem loans. At the same time, it is just as important that any new requirements be reasonable, and not unduly hamper competition.”

I hope that this all works out. So far this year Ginnie Mae loans (primarily FHA and VA mortgages) account for about 20% of production. And because regulators allow banks to treat Ginnie Mae securities as risk free assets, they are attractive for banks to buy and hold them. Of course this helps support the housing market, although any costs will be paid for by the Federal Government, i.e., you and me the tax payers.

Daily Humor
The Lone Ranger and Tonto went camping in the desert. After they got their tent all set up, both men fell sound asleep.
Some hours later, Tonto wakes the Lone Ranger and says, “Kemo Sabe, look towards sky, what you see?”
The Lone Ranger replies, “I see millions of stars.”
“What that tell you?” asked Tonto.
The Lone Ranger ponders for a minute then says, “Astronomically speaking, it tells me there are millions of galaxies and potentially billions of planets. Astrologically, it tells me that Saturn is in Leo. Time wise, it appears to be approximately a quarter past three in the morning. Theologically, the Lord is all-powerful and we are small and insignificant. Meteorologically, it seems we will have a beautiful day tomorrow. What’s it tell you, Tonto?”
“You dumber than a buffalo. It means someone stole the tent!”