As the band Rush wrote a few decades ago:
Big money goes around the world
Big money give and take
Big money done a power of good
Big money make mistakes
Big money got a heavy hand
Big money take control
Big money got a mean streak
Big money got no soul...

The big news yesterday in the mortgage bond ranks that involved “big money” was the announcement by Fannie and Freddie that they will buy out loans from their guarantee books that are 120-days or more (4 months) delinquent. Both firms noted that accounting changes brought about by FAS 166/167 had made it more economical for them to do so, rather than advance guarantee payments to the security holders. Analysts with minds far brighter than mine believe that we will see a substantial surge in prepayments. There are, however, some key differences in the timeline between the two agencies’ programs. Freddie Mac expects to purchase "substantially all" of its 120-day+ delinquent loans by the March prepayment report, which should subsequently lead to a one-time surge in Freddie Mac prepayments, and huge prepayments for the more, uh, “credit-impaired” pools.

Fannie, which is still a different entity than Freddie, expects to begin its loan repurchase program by the April prepayment report, and expects to remove most of its seriously delinquent loan pipeline over the next few months. Therefore Fannie should not show a big rise in prepayments until the April report. Overall, however, many feel that the news is a little overdone.

The purchases, which begin next month, will not affect Fannie Mae’s foreclosure prevention activities including their Making Home Affordable Program. And, in theory, due to the accounting change, the cost of purchasing most delinquent loans from MBS and holding them in portfolio will be less than the cost of advancing delinquent payments to security holders. As of December 31, 2009, the total dollar volume of all four or more month delinquent loans in single-family MBS trusts was approximately $127 billion, of which $82 billion backed outstanding 30-year, single-family amortizing fixed-rate MBS. For Freddie’s numbers, you can visit www.FreddieMac.com/mbs/docs/delinquencyrates 021010.pdf

What does any of this mean to Joe Loan Agent, dealing with GFE, investor, appraisal, and volume issues? Well, basically, not much directly. Investors and mortgage traders can use the expected buyouts possibly arbitrage or hold different pools at different times. The first spike in prepays for Fannie coming April 6th (Freddie March 4th), Fannie will phase in buyouts over 3-4 months vs. Freddie’s big spike in the first month, but overall Fannie's delinquency rates are higher than Freddie’s, and there is more volume with Fannie.

Fed Chairman Bernanke’s testimony, which addresses concerns about the end of the purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt securities at the end of March, was read yesterday. In the statement, Bernanke said the interest rate paid to banks on excess reserves held at the Fed (currently over $1 trillion!) may, for a time, replace the Fed funds rate as the main operating target for policy. Raising the rate would give banks an incentive to park more funds at the Fed instead of lending it out to companies or households, which would slow things down should it come to that. Conversely, reducing the rate, and therefore the quantity of reserves, could put more money out into the system. The Fed could also go back to using reverse repurchase agreements (reverse repos), as a means of absorbing reserves from the banking system. In a reverse repo, the Federal Reserve sells a security to a counterparty with an agreement to repurchase the security at some date in the future. “I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery. However, to help reduce the size of our balance sheet and the quantity of reserves, we are allowing agency debt and MBS to run off as they mature or are prepaid.”

Federal Reserve Bank of Dallas President Richard Fisher weighed in with his thoughts on what will happen when the Fed ends their MBS buying program. He believes that the spread between Treasury securities and mortgage securities is abnormally low, and will increase, but said he believes the mortgage market will be fine after the central bank ends its purchases.

I received several comments about the video on the FDIC and OneWest Bank yesterday. One Capital Markets exec wrote, “The 70 and 58 cent upfront price would have been significantly lower without the 80% backstop loss protection.” Another wrote, “The OneWest/FDIC video neglects to mention that OneWest has to experience loss equal to 20% of the aggregate original UPB of all loans sold to them by the FDIC before the shared-loss provisions are applicable. Unless the pool of loans sold to OneWest was 30% HELOCs, it’s going to be really hard for them to experience that kind of loss.” And, “The public is exactly who needs to see this!  Every taxpaying American needs to know the details of the “sweetheart” deals our government is making with their buddies. I, as a 29 year veteran in the mortgage banking business, do not need to “explain” to the public that the crooks in Washington are ripping us off in yet another way.  This video makes that point perfectly clear. You imply that ‘mortgage bankers and bankers’ are fully aware of these shenanigans, and you are wrong.  This video needs to be a public service announcement and should have been aired during the Super Bowl game for all of   America to see. Sorry, but you really missed the boat on this one.”

One certainly wants the Federal Trade Commission on your side when it comes to fighting fraud.  The FTC will soon be attempting to ban foreclosure rescue and mortgage-modification-services companies from charging upfront fees, and firms providing those services would only be paid after providing them. These companies also would have to tell consumers the total amount they will have to pay and that there is no guarantee the lender will agree to change the loan. The rule would also prohibit companies from telling consumers to stop communicating with their lenders, and from misleading consumers about the likelihood of getting the results they want, how long it will take, and refund and cancellation policies.

Although the Freddie/Fannie news stirred up the market volatility a little, overall yesterday bonds did not do well, nor did stocks. The $25 billion 10-yr auction was “lukewarm”, and liquidity was not helped by the snowstorm. And no one is hoping for much from the 30-yr auction. Combine that with the European problems, and a strong Jobless Claims number, and we find rates higher this morning. Jobless Claims tumbled last week by 43,000 to a seasonally adjusted 440,000 for the week ended Feb. 6, down from a revised 483,000 in the prior week. The four-week moving average, which smoothes out week-to-week volatility, fell by 1,000 to 468,500. After the news we find mortgage prices worse by about .125 and the yield on the 10-yr up to 3.71%.

A woman was having a passionate affair with an inspector from a pest-control company. One afternoon they were carrying on in the bedroom together when her husband arrived home unexpectedly.
“Quick” said the woman to the lover, “into the closet!” and she pushed him in the closet, stark naked.
The husband, however, became suspicious and after a search of the bedroom discovered the man in the closet.
“Who are you?” he asked him.
“I'm an inspector from Bugs-B-Gone,” said the exterminator.
“What are you doing in there?” the husband asked.
“I'm investigating a complaint about an infestation of moths,” the man replied.
“And where are your clothes?” asked the husband.
The man looked down at himself and said, “Why, those little &^%$’s!”

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.)