Nov. 26, 2010: How the dollar's value impacts mortgage rates; news from Citi, USB, Nationstar, MWF, Kinecta; market movement near holidays
Rob Chrisman

One can write several volumes about how movements in the dollar impact mortgage lending, and our economy in general. The value of the dollar is certainly tracked in the financial press. For example, the New York Federal Reserve reported that the U.S. monetary authorities did not intervene in the foreign exchange markets during the July—September quarter. But during that period the dollar depreciated 10% against the euro, 5% against the Japanese yen, and its trade-weighted exchange value declined about 7%. So what? Well, a country that cuts interest rates makes its currency less attractive to the world’s fixed-income investors, and money is moved to countries that pay a higher yield on investments.
 
The quantitative easing program (QE2) pumps dollars into the economy, critics say by merely printing money, and the increased supply weakens the value of the dollar relative to other currencies. Over 50% of our US debt is held outside the United States. When foreign investors sell US securities, they must convert the US dollars they receive into their own currency. If the value of the dollar falls, then the value of their US investment falls in relative terms to their currency. As a result, as the dollar drops foreign investors may reduce their purchases of US securities, including mortgage-backed securities (MBS), which would cause yields to increase. This fear of weaker foreign demand hurt mortgage rates.
 
But unfortunately it is not that simple. Recently China's rate hike was another negative for US mortgage rates. Yields must rise in other markets to compete with higher yields in Chinese markets. But then the recent troubles in Ireland caused the typical “flight to quality” and increased the purchases of fixed income US securities – including mortgage-backed securities. If the Chinese currency (yuan) is being valued too low, it makes their exports cheaper and more competitive world-wide. QE2 is designed to increase the demand for Treasury securities and therefore to hold down interest rates and stimulate the economy, which impacts the value of the dollar – but the currency value of many developing countries has skyrocketed during this recent time period. And the dollar index raising has also caused interest rates to rise in line.
 
But the country that has the most inflation ends up with the weakest currency, the strongest exports and the best performing risk assets. A drop in the dollar can help US companies sell their products overseas, but makes imports more expensive. One could almost make a bumper sticker that said, “No country has ever deflated their way to prosperity!”
 
I’ve had many reader comments lately. Any time one brings up compensation, or an article about brokers, suddenly I receive lots of great input. Wednesday I showed a link to an article about mortgage brokers. I received several responses, some listing the author's website and his disclosed relationship with Amerisave. "Obviously your intent was to show what the public is seeing and hearing out there, right or wrong. And any good originator needs to see what is out there because that's what our clients are reading." But the author of the article is the co-creator of the ‘Upfront Mortgage Broker’ and no doubt is receiving monetary and/or professional recognition for his creation if it succeeds.  He also is apparently unaware that the new GFE
mandates the mortgage company state its origination charges up front, regardless of YSP, which is now wholly the borrowers depending upon the rate the borrower chooses, or that lenders rarely pay the same, due to their underwriting requirements or that borrowers loans are not all the same in the time and expertise required to close them.  I think we should also extend this because we need more transparency for writers so that they derive the same compensation for everything they write regardless of the customer.”

"The source of revenue is the arrangement the ‘professor’ has with Amerisave under which the Professor gets paid for borrowers who access Amerisave through this site. The details of this arrangement are spelled out in http://www.amerisave.com/mortgageprofessor/Agreement.cfm  
 
"The link to the article was interesting, but the guy is clueless on how the industry works. His story you linked to and his articles on Yahoo are as bad as a politician trying to “fix” the mortgage industry. Both think they know what’s good for everyone and neither has ever worked or taken the time to learn the industry. Every industry has a profit margin and I can’t figure out why everyone wants to legislate profit margins in mortgages and not every other financial business, especially when originating and closing a loan is tougher than it’s been in 10+ years."
 
The FDIC reported that commercial banks and savings institutions insured by it reported an aggregate profit of $14.5 billion in the third quarter of 2010, “a $12.5 billion improvement from the $2 billion the industry earned in the third quarter of 2009”. Granted, some earnings came from releasing some of the money held as reserves – of course that money was a hit to earnings in the past. But Chairman Bair also said, "At this point in the credit cycle it is too early for institutions to be reducing reserves without strong evidence of sustainable, improving loan performance and reduced loss rates.” Chairman Bair also indicated that the end of a two-year period of contraction in loan portfolios may have run its course. "Total loans and leases held by FDIC-insured institutions declined by just $6.8 billion, or 0.1 percent, in the third quarter," she said. Commercial banks and savings institutions originated $162 billion of single-family loans through retail outlets in the third quarter, a 22% jump from the 2nd quarter. Here you go: http://www2.fdic.gov/qbp/index.asp

And now for some not-so-good news, Existing Home Sales indicated that our nation still has over a ten month supply of total housing inventory – almost 4 million properties! “The 8.4% year-over-year increase in inventory is especially bad news because the reported inventory is already historically very high and the 10.5 months of supply in October is far above normal,” per Mortgage News Daily.

It doesn't take long for the investors to change their pricing structure based on the Freddie changes that happen in March. Citi told clients, "Freddie Mac has implemented new delivery fees on the Relief Refinance loans.  Effective with loans locked on and after Monday, November 29, 2010 the following price adjusters are applicable to all Freddie Mac Relief Refi LP Open Access program loans: 1-4 unit fixed & ARM for terms <180 months (.375), and 1-4 unit fixed & ARM for terms > 180 months (.250).

Starting Monday the IRS is implementing a change that requires all 4506-T forms signed by borrowers to have the verification bureau’s name and address on line 5. All 4506-T forms and amended 4506-T forms missing this information will be rejected by the IRS. Lenders (in this case Nationstar) will stop accepting forms from brokers without this. Nationstar, like the Citi announcement above, starting on 12/1, is adopting Freddie Mac’s FICO/LTV and subordinate financing LPA grids.
 
Kinecta is making a change to its loan submission and appraisal process which will further improve turn times and reduce the need for rate extensions, benefiting both you and your customers. Below are the specific details: Appraisals to be Completed Upfront with Loan Submission Effective for applications taken on or after December 1, 2010, Kinecta has established the following process flow improvement: • Refinance loans will require the appraisal report to be completed and on file upon loan submission. • Purchase loans will continue to only require evidence that the appraisal was ordered prior to loan submission

Wednesday I mentioned the Wells Fargo change to its flip policy. Mountain West Financial told its brokers that after 12/14, MWF will no longer be accepting FHA/VA Flip Properties if the sales price is ≥ 20% increase over the seller's acquisition cost. Flip Properties ≥ 20% must be locked by 12/13/2010 and must fund by 12/31/2010.

U.S. Bank Home Mortgage Wholesale Division reminded its brokers that for the last few weeks a written explanation from all borrowers would be required for all inquiries shown on the credit report for the last 120 days. “Most credit reporting companies are now providing reports with inquiry records covering 120 days. We are requiring that originating lenders obtain reports meeting this standard.”
 
That was quite an Initial Jobless Claims number Wednesday. They dropped to their lowest level since July 2008, at 407,000 for the week ending November 20. This reduced the 4-week moving
average to 436,000 - a level consistent with private job creation of around 150,000 for November (which will probably be offset in part by a 30,000 drop in state and local employment
and a 5,000 increase in federal government employment). We also had the U of M Consumer Sentiment hit 71.6 in November, the highest level since June, and some FHFA housing price numbers which showed a decline.
 
By the time the dust had settled, MBS sales volume was above average, equities had improved, but fixed-income pricing had worsened due to stronger than expected data (Initial Claims, Michigan Sentiment) and a poor 7-year note auction. The 10-year note lost much of this week’s rally, declining 1.25 points to 2.91%. Investors saw higher coupon, existing MBS prices improve relative to lower coupon stuff, due to rates worsening slightly.
 
Is anyone locking today? Today, and any day near a holiday, is notorious among traders. First of all, lots of experienced MBS and stock traders take the day off. In general, December is year-end and many annual bonuses have been earned so there is little motivation to take risks or make moves. At the same time originators should know that there can be large desperation trades to recover losses or adjust balance sheets prior to year-end reporting. This can make for large and quick movements in rates. For the five weeks traders and investors tend to go along with the herd. Preservation of existing gains takes precedence. But some analysts feel that there is still so much cash “sitting on the sidelines” that investors will ultimately look to buy at these higher yield levels and also extend durations. Currently the 10-yr yield is at 2.86% and MBS prices are perhaps .125 better than Wednesday afternoon.
 

A Spanish teacher was explaining to her class that in Spanish, unlike English, nouns are designated as either masculine or feminine. 'House' for instance, is feminine: 'la casa.' 'Pencil,' however, is masculine: 'el lapiz.'
A student asked, 'What gender is 'computer'?'
Instead of giving the answer, the teacher split the class into two groups, male and female, and asked them to decide for themselves whether computer' should be a masculine or a feminine noun. Each group was asked to give four reasons for its recommendation.
The men's group decided that 'computer' should definitely be of the feminine gender ('la computadora’), because:
1. No one but their creator understands their internal logic.
2 The native language they use to communicate with other computers is incomprehensible to everyone else.
3. Even the smallest mistakes are stored in long term memory for possible later retrieval.
4. As soon as you make a commitment to one, you find yourself spending half your paycheck on accessories for it.
The women's group, however, concluded that computers should be Masculine ('el computador'), because:
1. In order to do anything with them, you have to turn them on.
2. They have a lot of data but still can't think for themselves.
3. They are supposed to help you solve problems, but half the time they ARE the problem.
4. As soon as you commit to one, you realize that if you had waited a little longer, you could have gotten a better model.