Truth In Lending Regs, CMBS Updates, Wells Earnings

I got very excited yesterday, and I think “my ship has finally come in”. I received an e-mail saying that I had won the “Spanish El Gordo” lottery with a prize of one million pesetas, even though Spain uses the Euro. I knew it was for real since it said, “REFERENCE NUMBER: FCB/09/001, BATCH NUMBER: 2009/430/SPELG”, and then had some Spanish sentences. Very official. There was no way it was fake, but since I know that you can’t always trust the internet, I sent them my social security number and driver’s license numbers via mail instead of over the net.

Given the lack of economic news, yesterday’s focus was on Fed President Ben Bernanke. Not only did his testimony begin yesterday (it is always preceded with the release of the actual speech in writing, which gives the markets the initial jolt), but the Wall Street Journal published a column written by him in the morning. The column discussed “The Fed’s Exit Strategy”, which immediately drew criticism from analysts who feel that it is too early to discuss an exit strategy. One has to wonder about that, given that there are many who believe that the stock market performance over the last few weeks is evidence that the worst is over. “The depth and breadth of the global recession has required a highly accommodative monetary policy…the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero, greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit. These actions have softened the economic impact of the financial crisis. They have also improved the functioning of key credit markets, including the markets for interbank lending, commercial paper, consumer and small-business credit, and residential mortgages. My colleagues and I believe that accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road…”

During his testimony, the market absorbed statements like “tentative signs of stabilization”, “keeping rates low for an extended period of time”, “financial conditions remain stressed”, “housing decline appears to have moderated”, “record budget deficits may begin to pose a threat to the economy”, and “doubt on fiscal sustainability may hurt recover”. (Remember that confidence and trust are critical to any recovery.) Generally speaking, the markets see no substantial change from the Fed’s current policies as they “stay the course”. The federal funds rate will likely remain near zero for an extended period of time, the possibility, granted by Congress, to pay interest rates on the balances held at the central bank by depository institutions. (Paying more on those reserves would likely push up market rates.) In addition, the Fed could drain liquidity from the system through reverse repurchase agreements, selling securities from the central bank’s portfolio with an agreement to buy them back later, and obviously could also sell the central bank’s holdings of long-term maturities outright.

Truth In Lending Reg Updates
US Bank’s Wholesale Division came out with their requirements (which are very close, if not identical, to other lenders) to ensure compliance with the recent revisions of disclosure requirements for mortgage loans. As most know by now, HERA includes amendments under Regulation Z, which implements the Truth-in-Lending Act (“TILA”). After July 30 (is that already only next week?) USB’s Wholesale Division will require that all closed loan files delivered for purchase contain a copy of the early TIL disclosure (to include the added statement: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application”) that was delivered or mailed to the Borrower(s), dated no later than 3 general business days after the creditor received the Borrower(s)’ written application), all corrective TIL disclosures that were required to be delivered or mailed to the borrower(s), a final TIL disclosure signed and dated at consummation, and a signed and dated initial loan application (1003) by interviewer. They want to ensure the creditor delivered or mailed the early TIL disclosure no later than 3 general business days after the creditor received the borrower(s)’ written application, and that the early TIL disclosure was delivered or mailed no later than 7 precise business days before consummation. And watch out if the APR changes by more than the .125% tolerance due to changes in loan terms, fees, etc.: a corrective TIL disclosure must be provided to the borrower(s) within 3 precise business days before consummation. U. S. Bank, and other lenders, will not purchase any transaction that contains a waiver of either the 7 or 3 day waiting periods.

CMBS Updates
What is the CMBS market? “Commercial mortgage-backed securities” are exactly that: securities back by commercial mortgages, as opposed to regular MBS’s. As it turns out, some of the smartest guys in the room are creating new lending companies that plan to go public to raise billions of dollars to take advantage of the distress in the commercial real estate market. Look for a boom in Real Estate Investment Trusts (REITs) going public over the next few years: if the CMBS market doesn’t work, a REIT may finance the property. Just like other credit sources, the CMBS market has been basically shut down in the last year, which is bad news, according to a recent Deutsche Bank report, for the $40 billion that will be needed to salvage the $420 billion of CMBS mortgages maturing over the next 10 years. It also doesn’t help that rents are declining and vacancies are increasing. (It is hard to drive down the street and not see the “for lease”, “for rent”, or “for sale” signs in the windows.) REITS may buy up, manage and originate commercial real estate loans.

Wells Fargo Earnings
Wells Fargo is set to announce their earnings today. It is expected to show an increase in second- quarter profit due to a surge in mortgage refinancing. Wells is the last of the top lenders to report results. BofA had their 2nd quarter profit fall 5.5% on higher credit-card and home-loan losses, Chase reported its first profit increase since 2007 on record investment-banking fees, and CitiGroup had a loss, excluding a $6.7 billion gain from selling control of the Smith Barney brokerage unit, as consumer and business loan defaults rose. Of these institutions, despite various jawboning, only JPMorgan Chase has repaid its bailout funds distributed by the Treasury last year. Wells Fargo supposedly funded more than $100 billion for mortgages in the first quarter, slightly higher than Bank of America’s $89 billion.

Sorry for the lack of rate information, as I am in Vermont, about to drive to Philadelphia and need to get on the road prior to the markets opening. But there are no economic news releases today, so interest rates may move up a little or down a little based on a) Bernanke’s continued testimony, b) the Wells’ results, and c) the equity markets.

Daily Humor
The Husband Store
A store that sells new husbands has opened in New York City, where a woman may go to choose a husband. Among the instructions at the entrance is a description of how the store operates: “You may visit this store ONLY ONCE! There are six floors and the value of the products increase as the shopper ascends the flights. The shopper may choose any item from a particular floor, or may choose to go up to the next floor, but you cannot go back down except to exit the building!”
So, a woman goes to the Husband Store to find a husband. On the first floor the sign on the door reads: “Floor 1 – These men Have Jobs”.
She is intrigued, but continues to the second floor, where the sign reads: “Floor 2 – These men Have Jobs and Love Kids”.
“That’s nice,” she thinks, “but I want more.” So she continues upward. The third floor sign reads: “Floor 3 – These men Have Jobs, Love Kids, and are Extremely Good Looking”.
“Wow,” she thinks, but feels compelled to keep going. She goes to the fourth floor and the sign reads: “Floor 4 – These men Have Jobs, Love Kids, are Drop-dead Good Looking and Help With Housework”.
“Oh, mercy me!” she exclaims, “I can hardly stand it!”
Still, she goes to the fifth floor and the sign reads: “Floor 5 – These men Have Jobs, Love Kids, are Drop-dead Gorgeous, Help with Housework, and Have a Strong Romantic Streak.”
She is so tempted to stay, but she goes to the sixth floor, where the sign reads: “Floor 6 – You are visitor 31,456,012 to this floor. There are no men on this floor. This floor exists solely as proof that women are impossible to please. Thank you for shopping at the Husband Store.”

PLEASE NOTE: To avoid gender bias charges, the store’s owner opened a “New Wives” store just across the street. The first floor has wives that love sex. The second floor has wives that love sex and have money and like beer. The third, fourth, fifth and sixth floors have never been visited.