Investors and Wall Street traders continue to conjecture and ruminate about the “Frannie” announcements on Wednesday, which initially met with a response similar to a gal realizing that her boyfriend is going to wear sweat pants on a date. Traders continue to talk about the massive amount of float ($200 billion) that will be taken out quickly, the estimate that Freddie Mac will buy out about $72 billion and Fannie Mae to buy out $127 billion of mortgage-backed securities. Whether or not Freddie and Fannie have to sell existing holdings, and have room under their portfolio caps, to come up with the capital remains to be seen. Will the Treasury pony up the $200 million? Freddie Mac expects to purchase "substantially all" of its 120-day+ delinquent loans by the March prepayment report, whereas FNMA expects to begin its loan repurchase program by the April report, and to remove most of its delinquent loan pipeline over the subsequent few months.

Given that the Fed has been buying more new production than older stuff, very few of these bonds are likely to be bonds held by the Fed, so the impact on the non-Fed MBS float is even greater. One student of the markets ventured that various government entities own maybe 50% of these bonds so maybe half the $200 billion goes right back into the government’s coffers – hopefully they didn’t pay a big premium for the securities if they’re bought back at par. And any entity that has bonds purchased may turn around and buy more MBS’s – which would help mortgage rates and originators. After the buyouts are completed, prepayments on Fannie Mae and Freddie Mac securities would be easier to predict, making the bonds less risky, because the debt would have “limited delinquencies” and “limited rate refinancing risk.

Now, who are Freddie & Fannie going to sell those delinquent loans to? They just don’t go away now, do they? And as 90 day loans become 120 day loans, they will be bought also. If Freddie’s analysts expect the loans to cure, they will probably keep them on their books in securities, although it will take a few months to figure ascertain their position on these loans. For Freddie, given their $1.8 trillion “universe”, the 330,000 of loans they will be buying back represent less than 4%. And the fact that both firms are doing this relatively quickly, although Fannie has a much larger amount of delinquent loans to process, is expected to minimize the long-term disruption in the market, which will help the mortgage market.

Is there hope for mortgage brokers? Many believe so, and http://tinyurl.com/ykzccax is one indication of that.

How many countries use the Euro for a currency? Sixteen, and it appears that they have banded together to forge a plan in spite of European Union law offering no clear procedure for staging the first bailout of a euro zone country in the currency's 11-year history. Some countries, like Germany & France, have been less impacted by the downturn, and are in a better position to offer aid. Athens needs to borrow about 53 billion Euros ($73 billion) this year to cover a huge budget deficit and refinance debt which is coming due. But investors have taken fright over the risks involved in buying Greek bonds, and the government could slide toward default if they boycott future debt auctions.

Wells Fargo wholesale clients were reminded that discount points may only be charged on VA loans when they reduce the interest rate, but discount points payable to Wells Fargo that buy down the rate are allowed on VA loans. These discount points are not included in the VA 1% origination fee cap, and discount points payable to the broker are not allowed on VA loans except in New Jersey.

Pricing engines continue with their updates. US Bank National Correspondent's FHA ARMS, Fannie Mae (Mandatory) Expanded Approval  Products, converting products over to 8.0, Fannie Mae's DU Refi Plus High Balance 8.0 product lines, etc.

Flagstar Bank, for its delegated and direct endorsed customers, announced that effective immediately for “all conventional and FHA loans submitted through Flagstar Bank’s Delegated
channel, all attached condominium projects located in a flood zone must have the flood policy reviewed by Flagstar’s Condominium Review department.” The homeowner association should carry flood insurance for the project with attached units if any units are located in a flood zone. The policy must be equal to the lesser of 100% of the replacement cost or the maximum available of $250,000 per unit.

Effective with loan applications dated on and after February 1, 2010, U.S. Bank Home Mortgage followed Fannie & Freddie and told clients the “reciprocal review process of accepting FHA project approval for conventional loans, including portfolio loans, is no longer available.” Close ‘em by mid-April!

The Freddie & Fannie news has certainly given traders some volatility with which to play. Selling higher coupons, and figuring out what to do with the one-month window for March settlement to sell FNMA premium securities. But the prices of those securities have been driven down, and in addition traders saw a heavy day of selling yesterday. Flows included more “down in coupon” and outright selling in higher coupons from hedge funds and money managers, and interest in lower coupons by the same money managers.

The $16 billion 30-yr bond auction yesterday almost seemed like an afterthought with traders focused on the buyback news. The 10-yr yield was well above 3.60% (not good), and the 30-yr yield came in at 4.72% - the cheapest level a 30-yr auction has come in at since June. But at least it is out of the way! Current coupon mortgage securities are now trading at a yield above the 10-yr of about 66 basis points, and this spread may go even lower if the markets feel that delinquency risk is minimal. Since the end of December the yield on the 10-yr has dropped by 40 basis points (from 3.92% to 3.54%) and now we have given a portion of that up.

This morning the delayed Retail Sales figure was released. Sales rose more than expected in January, according to the Commerce Department, +0.5% after falling by a revised 0.1% in December. Sales, compared to January ’09, were up 4.7 percent. We are seeing a bit of a bounce in bond-land, with mortgage prices better by .125 and the 10-yr hovering around 3.70% ahead of the holiday weekend. (There will be no commentary on Monday – have a nice 3-day weekend.)

A priest and a rabbi were sitting next to each other on an airplane.
After a while, the priest turned to the rabbi and asked, “Is it still a requirement of your faith that you not eat pork?”
The rabbi responded, “Yes, that is still one of our laws.”
The priest then asked, “Have you ever eaten pork?”
To which the rabbi replied, “Yes, on one occasion I did succumb to temptation and tasted a ham sandwich.”
The priest nodded in understanding and went on with his reading.
 A while later, the rabbi spoke up and asked the priest, “Father, is it still a requirement of your church that you remain celibate?”
The priest replied, “Yes, that is still very much a part of our faith.”
The rabbi then asked him, “Father, have you ever fallen to the temptations of the flesh?”
The priest replied, “Yes, rabbi, on one occasion I was weak and broke my Faith.”
The rabbi nodded understandingly and remained silent, thinking, for about five minutes.
Finally, the rabbi said, “Beats the heck out of a ham sandwich, doesn't it?”

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.)