May 11, 2011: Webinar today on FHA lending & regulation; more chatter on the agencies & life in the biz; volatility & hedge cost
Rob Chrisman

Regardless of what my kids say, this commentary hasn’t been around long enough to have ever been written by candlelight. But starting next year I will be able to say I used incandescent light. On Jan 1, 2012, the 100-watt incandescent light bulb will cease to exist by law, which should help save energy given that 90% of its energy is given off as heat rather than light. The 75-watt goes away 1 year later, followed by the 60-watt and 40-watt versions in 2014. I can visualize a run on them at Home Depots across the country in about 7 months…
 
A quick note for anyone interested in FHA lending’s pitfalls, the recent filed lawsuit against Deutsche Bank, and the enforcement tools regulators are using – there is a webinar today on those subjects.  The webinar’s discussion will review the charges in the case and potential implications for FHA lending, and participants will be able to submit questions to be answered during the hour-long session from 3-4 EST, 12-1 PST. Webinar Presented by BuckleySandler LLP: “The False Claims Act and FHA Lending: What Does U.S. v. Deutsche Bank Mean for You?” Webinar topics include a summary and analysis of legal theory and corresponding charges in U.S. v. Deutsche Bank AG, et al., pitfalls in FHA Lending, avoiding False Claims Act liability, and beyond, how and when are False Claims Act violations triggered, what other enforcement tools are regulators using, what you can do now to position and protect your company, and insights on where the government and private plaintiff’s bar will go from here. Click here to register: https://www1.gotomeeting.com/register/127579497. After registering you will receive a confirmation email containing information about joining the webinar.
 
Lawsuits seem to be omnipresent in mortgage lending and banking. Here is the latest list of “Professional Liability Lawsuits” from the FDIC – another list you probably don’t want your company on: http://www.fdic.gov/bank/individual/failed/pls/index.html.
 
Yesterday the commentary mentioned one attribute of Fannie's portfolio (a large number of Countrywide loans) which contributed to the difference in earnings between Fannie & Freddie. I received some notes, summed up by one Secondary exec in New York. "Fannie's grappling with Countrywide loans, but remember that Freddie also has a glut of Taylor Bean Whitaker loans. And although both FNMA & FHLMC purchased mortgages down the credit curve several years ago, including subprime mortgages, it was primarily because HUD mandated that they do so. And regarding your Cato Institute quote about abolishing those agencies, readers should know that some people at Cato also support an end to HUD."

“Freddie’s portfolio isn't quite as awful as Fannie's, according to Anthony Sanders, Mercatus Center scholar and a real estate finance professor at George Mason University. He says that Fannie had a larger share of subprime mortgage-backed securities and Alt-A mortgages. Consequently, its losses were more severe last quarter than Freddie's losses.”
http://www.theatlantic.com/business/archive/2011/05/fannie-needs-another-85-billion-from-taxpayers-but-freddies-okay/238618/

Along those lines, one reader wrote, "I do believe EVERYONE in the Real Estate industry has played some part....big or small, in why we are here.  The Realtor, the Lender, and the Appraiser - everyone was looking to make a dollar - since that was each one of those people’s jobs. Keep in mind that the lenders were given ridiculous products to sell and push, that the Realtors loved to sell and push homes, that the appraisers loved to do more appraisals and sell and push values to keep making money (vicious circle), and let’s not forget our government’s beautiful speeches on how ‘Everyone deserves Home Ownership.’ No one deserves anything - you EARN the right for homeownership - it is not your American Right - how that got clouded in the discussion is beyond me. Basically what my point is to stop the finger pointing at each other and start fighting back at the true source of this” Our Overreaching, Overbearing Government..."

And on the indiscretions, past and present, another wrote, “At my previous employer – a top 5 investor & originator - some of us ‘decent producers’ were allowed to solicit preferred realtors to be on the REO List for properties. Well once this occurred we were pushed by management to tell the realtors that if anyone wanted to buy that REO they must push, steer, the potential buyer to go with the LO who helped get them on the list or assigned agent. I was personally told by my manager that if we did not get a majority, if not all, of the deals from those assigned REO’s that the realtor would be in jeopardy of taking us off that list. But here we are in 2011 and ‘compliance’ is important, right? Yesterday my buyer’s agent calls me and say’s we need a cross qual with ---- or the buyer’s offer will not be accepted. So I have the borrower qualify with ----. But then the listing agent tells my buyer’s agent that they will not accept a Pre-Approval letter from any other ---- loan consultant other than the preferred LO who is on the MLS  since they don’t know if the other LO’s are qualified to give a pre-approval  and that ---- will only accept the preferred lender’s pre-approval. Can you say ‘Strong Arm’?”

Do you ever wonder what happens to math and statistics majors? The grab jobs at places like the Dallas Fed, writing missives on the housing market, suitable for anyone who needs information on a speech. http://www.dallasfed.org/research/papers/2011/index.html#wp1104.

Some math majors end up calculating hedge costs. A week or so I mentioned those costs, which are important to minimize for any company’s hedging effectiveness. It is important to be reminded that market volatility impacts hedging costs: increased volatility means an increased hedge cost. Secondary Marketing departments usually have to contend with a wider bid/ask spread for hedge securities in volatile markets as Broker Dealers widen their prices slightly. Loan sellers may have to contend with a slight time difference between when a block of whole loans are sold and when the hedge is bought back, which may work for or against the P&L. Keep in mind, however, that volatility impacts the spread between best efforts loan sale prices and mandatory prices – namely the price spread between the two increases, helping those companies that hedge. Investors are expecting that their hedge costs will increase and therefore they reduce what they are willing to pay for unclosed loans to offset the increased cost.
 
But from an originator’s angle, increased market volatility (rate sheet prices going up and down during the day) also has adverse effects on pull through (typically decreasing) and renegotiations (typically increasing). So although the factors listed in the paragraph above may be somewhat foreign to an originator or underwriter, they may impact rate sheet pricing – ask your “Secondary Dude (or Dudette)” about what they mean for your daily pricing.
 
Yesterday’s fixed-income markets saw some volatility yesterday, but unfortunately for lenders the direction was toward lower MBS prices and higher rates. The news primarily consisted of a higher-than-expected print on import prices, the IMF’s preparations for another bailout to Greece (to replace the last one), and the Treasury’s $32 billion 3-yr note auction. Current coupon MBS prices worsened between .125-.250 on average volume while the 10-yr Note dropped nearly .5 and closed at a yield of 3.20%. Traders are definitely seeing the MBS production mix shift from 4.5’s and 5’s down to primarily 4’s (which include 4.25%-4.625% conventional mortgages) although origination is extremely light (barely making $1 billion per day over the past few weeks).
 
Today we’ve already had mortgage applications for last week, which the MBA said increased 8.2%.  The refi number was +9%, hitting its highest level since mid-March, and purchases were up nearly 7%. The 4-week moving average is up nearly 3%, and refi’s account for over 63% of all applications. We also had the March Trade Deficit clock in at $48.18 billion, up from $45.44 billion in February. At 11AM MST the Treasury auctions $24 billion in 10-year notes, which currently is sitting around 3.22% and MBS prices are worse by about .125.
 

Three Cajuns go down to Mexico to celebrate college graduation. They get drunk while discussing why they seem to have displaced all the minorities as the butt of jokes, and wake up in jail, only to find that they are to be executed in the morning though none of them can remember what they did the night before.
The first one, Henri, is strapped in the electric chair, and is asked if he has any last words. He says, "I just graduated from Nichols State in Thibodaux, Louisiana and believe in the almighty power of God to intervene on the behalf of the innocent."
They throw the switch and nothing happens. They all immediately fall to the floor on their knees, beg for Henri's forgiveness, and release him.
The second, Gaston, is strapped in and gives his last words, "I just graduated from McNeese State in Lake Charles, Louisiana and I believe in the power of justice to intervene on the part of the innocent."
They throw the switch and, again, nothing happens. Again, they all immediately fall to their knees, beg for his forgiveness, and release him.
The last one, Boudreaux, is strapped in and he says, "Well, den, I'm from the University of Louisiana in Lafayette and I just graduated wit ma degree in Electrical Engineering, and I'll tell you right now, you ain't gonna electrocute nobody if you don't plug this ting in."

 
I’m happy to announce that I will be writing a twice-a-month blog that you can access at the STRATMOR Group web site located at www.stratmorgroup.com. Each blog will address what I regard as an important topic or issue for our industry. My first blog, for example, considers the near and longer-term outlook for jumbo lending. Since you can comment on my blogs, I’m hoping each topic I address will generate a thoughtful dialogue.