In the current environment, the government giveth, and the government taketh away. Barney Frank once again made headlines last week with the statement that the House Financial Services Committee will recommend doing away with Fannie Mae and Freddie Mac and “rebuilding the U.S. housing-finance system from scratch”. “A whole new system of housing finance," although most analysts feel that there will be continued government involvement. Given that they set the standards for the mortgage industry, own or guarantee half of the $11 trillion in outstanding home mortgages, and attract huge amounts of capital, it is hard to imagine replacing them with several private investors whose cost of capital would be much higher. No one expects much to happen for a very long time on this issue.

Last week the stock markets took a tumble – does that mean that we’ll see a bounce back this week? Perhaps, but the continued nervousness about our economy and our banking system that caused stocks to sell off caused bonds to rally and rates to drop. And mortgage traders saw origination pick up a little, as folks locked when rates were dropping. Some believe that rates may stabilize this week, perhaps creep a little higher, with yet another Treasury auction to deal with. ($44 billion in 2-yr tomorrow, $42 billion 5-yr Wednesday, and $32 billion in 7-yr. Thursday.)

This week we can look forward to Existing Home Sales today at 10AM EST, Consumer Confidence tomorrow, and Durable Goods and New Home Sales on Wednesday. Thursday we have Jobless Claims, and on Friday we have GDP. Let’s not forget the Fed meeting this week, with no change in rates expected, and the Senate’s vote on Bernanke’s confirmation. The yield on the 10-yr is up to 3.63% and mortgage prices are worse between .125-.250.

The term "The Fed" encompasses many entities. It meant something different to Al Capone, for example, than a bond trader. (At least, I hope so.) For example, the futures market believes that there is almost a 90% chance that "the Fed" will keep rates somewhere between 0% and .25% through the end of April. The Federal Open Market Committee is responsible for open market operations, which influence "the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The FOMC meets eight times per year, with one of these meetings starting tomorrow, where it reviews "economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth." Although the minutes (released later) list numerous attendees, "the FOMC consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis." I think that we, the taxpayer, spring for the donuts and coffee. Maybe some fruit..

And just so we're clear, the federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. The FOMC does not set mortgage rates, but changes in the federal funds rate often affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money & credit, and mortgage rates.

In an interesting move, where some feel that the answer is obvious, on the 28^th the U.S. Treasury Department will ask bond dealers about the potential market impact from the end of the Federal Reserve’s mortgage-backed securities purchase program. Let’s take a step back and ask, “Why would an investor want to own any mortgage-backed securities?” Well, supply is expected to drop, perhaps making them more attractive than Treasury securities. Yes, delinquencies are an issue, but many expect, 2010 to be marked by home price stability or only modest weakness due to government efforts. If rates are stable, the bond market in general should be ok. On the flip side, maybe investors don’t want them. The expected end of the Fed purchase program may push mortgage rates higher, making current production’s yields less valuable.

Last week I mentioned the potential impact to the IRS regarding the deduction of origination points by the borrower. As it turns out, those clever folks in government already thought of that, and there might be no deduction change according to the HUD’s FAQ site. “A loan originator may designate any origination point paid on page 2 of the HUD-1 in Line 801. The designation should follow ―Our Origination Charge‖ either by adding the language ―Includes Origination Point" (_% or $__) or by placing an asterisk (*) and adding the language at the bottom of
the page.”

"Two small banks in Florida and Missouri failed Friday night, making them the fifth and sixth banks to close in 2010." These "small banks" will cost the FDIC approximately $93 million. Gone are the four branches of Premier American Bank in Miami and the single branch of Bank of Leeton in Leeton, Mo., taken over by "Premier American Bank, National Association" and Sunflower Bank, respectively. I wonder if small banker's heart rate has been scientifically proven to go up on Friday's... Then three more were taken over in New Mexico, Oregon and Washington, bringing the total cost to $532 million. Charter Bank (NM) went to Beal Financial Corp., but will re-open today with the same name. Evergreen Bank (WA) went to Umpqua Bank, and Columbia River Bank (OR) went to Columbia State Bank.

It appears that currently Wall Street is not concerned about the minutia of guideline changes, but is focused on the Fed (“Will they extend the program? What will happen if they don’t? Will they continue to roll securities out into future months?), the uncertainty regarding the political landscape (“What other proposed bank regulations may arise in the near term that will effect trading and lending operations?”), and liquidity, since the number of active participants in the market (yes – mortgage bankers) seems to decrease on a weekly basis and as a result liquidity has drastically diminished.

Are Down Payment Assistance Programs really "like zombies", as one person wrote, in that they just won’t go away even when shot with a gun? Just ask the FHA, which has billions in losses from a down-payment-assistance program terminated in 2008, but is now dealing with a bill introduced by U.S. Representative Al Green, a Texas Democrat. “It would restart a program that allowed nonprofit groups to donate the 3 percent down payment low-income buyers needed to get FHA-insured mortgages. Sellers, often homebuilders, would then contribute that amount, plus a fee, to the nonprofits.” There are obviously the “put more Americans in homes” arguments, along with “put more people to work”. Night of the Living DAP.

For investor excitement, SunTrust Banks posted a net loss of $316 million for the fourth quarter of 2009, and a full-year net loss of $1.73 billion, compared with $741m of net income in the previous year. Loss expectations in the mortgage unit drove the results, as the company bolsters its reserve for expected mortgage loan repurchases. SunTrust expects $220 million of losses related to the repurchase of loans, and although they had lower mortgage market-related losses, it was offset by a decline in mortgage production income. The volume of requests for SunTrust to repurchase mortgages rose each quarter in 2009, according to the earnings statement.

Wells correspondents learned that FHA-project approvals are no longer allowed for conventional loans as a result of Fannie Mae’s discontinuance of accepting FHA-approved condo projects for conventional loans. Starting February 1, Wells Fargo Funding will no longer allow conventional loans secured by condominiums that have utilized an FHA-project approval for project acceptance.

Union Bank of California came with a few miscellaneous adjustments to their underwriting guidelines. Non-arm length transactions are not allowed if the seller is currently delinquent on their mortgage(s) or on short sale transactions. (A copy of the demand for payoff for the existing mortgage(s) should be obtained for verification.) And if there is more than one borrower on the loan, the limit of 10 financed residential properties, including their primary residence and the subject property, applies to the cumulative total for all borrowers.

A Montana rancher got in his pickup and drove to a neighboring ranch and knocked at the door. A young boy, about 9, opened the door "Is your Dad home?" the rancher asked.
"No sir, he isn't," the boy replied. "He went into town."
"Well," said the rancher, "Is your Mother here?"
"No sir, she's not here either. She went into town with Dad."
"How about your brother, Howard? Is he here?"
"No sir, He went with Mom and Dad."
The rancher stood there for a few minutes, shifting from one foot to the other and mumbling to himself.
"Is there anything I can do for you?" the boy asked politely. "I know where all the tools are, if you want to borrow one. Or maybe I could take a message for Dad."
"Well," said the rancher uncomfortably, "I really wanted to talk to your Dad. It's about your brother Howard getting my daughter, Suzie, pregnant."'
The boy considered for a moment. "You would have to talk to Pa about that," he finally conceded. "If it helps you any, I know that Pa charges $500 for the bull and $50 for the hog, but I really don't know how much he gets for Howard."

Rob

(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx. For archived commentaries, check www.robchrisman.com, or to subscribe/unsubscibe write to rchrisman@robchrisman.com.)