Sep. 15, 2011: Mortgage banking movies? Redwood Trust's next non-agency deal; BofA's ripple effect in the industry
Rob Chrisman

Welcome to National Hispanic Heritage Month, which started with a week-long tribute in 1968 under President Lyndon Johnson, but was expanded in 1988. “America celebrates the culture and traditions of those who trace their roots to Spain, Mexico and the Spanish-speaking nations of Central America, South America and the Caribbean.” Today is the start of it because it is the anniversary of independence of five Latin American countries: Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. In addition, Mexico and Chile celebrate their independence days on Sept. 16 and Sept. 18, respectively. The Hispanic population of the United States is approximately 51 million, making people of Hispanic origin the nation’s largest ethnic or race minority and definitely one for Realtors and loan agents to reckon with.
 
An employee investigates and then rats out crooked colleagues at Countrywide Financial, is fired, but then the US Department of Labor orders the bank to rehire the employee and pay $1 million in penalties. No, this isn't a Julia Roberts/Abe Vigoda movie, this is all for real: http://www.nypost.com/p/news/business/bofa_whistleblower_wins_back_job_fE3LoloedGbYmC3306a3cM. Speaking of potential mortgage movie plots, Elizabeth Warren, architect of the CFPB, launched her campaign against Senator Scott Brown of Massachusetts. Is Meryl Streep available?
 
Is our housing and mortgage market in too poor of shape to allow the loan caps to fall? I am sure that Congress will tell us, and probably wait until the very last minute to do so. And if Congress extends it for another year or three, all the investors and lenders will have already cut off locks, and re-engineered their processing software.... Here is the latest from the WSJ: http://online.wsj.com/article/SB10001424053111904060604576571020084285738.html?modgooglenews_wsj.
 
Just in time for this anticipated end of higher loan limits, Redwood Trust is expected to sell a $375 million residential mortgage-backed security soon. Out in California, the REIT’s issue supposedly will be backed by 473 loans with an average balance of $793,292 per Fitch Ratings, which issued its review of the deal and its rating requirements. Fitch said it requires 7.4% credit enhancement on senior, AAA-rated bonds, compared with the 7.5% level on Redwood's RMBS earlier this year. The loans were acquired from six lenders, with 80% from First Republic Bank and PHH Mortgage. The last Redwood deal came out in February, and the REIT is expected to do two more this year. Redwood is certainly not leading the effort to keep current agency loan limits in place, and Martin Hughes, CEO of Redwood Trust, noted that banks have little incentive to sell loans for securitizations because of the spread they earn between their borrowing costs and the rates on loans. Mike McMahon, a spokesman for Redwood, declined to comment on its latest deal: http://online.wsj.com/article/BT-CO-20110914-714275.html.
 
As the Bank of America correspondent group winds down, all is not rosy out there. At first blush other firms might relish the additional business, but with the additional business comes restricted trading lines. And if the market moves the wrong way, trading lines are quickly capped as the mark-to-market exposure at a Wells, Chase, or Citi hits the limit. And just because correspondent business moves from BofA to the other investors, doesn't mean the other investors automatically increase their trade limits. In addition, smaller lenders that relied on BofA are now approaching the other investors, sometimes "hat in hand," attempting to obtain a fast approval to either do business or to increase their limits. Community banks, of course, seeking to grow are keeping a close eye on Bank of America and its announced plans to close about 750 branches nationwide.
 
According to the WSJ, PNC Financial, U.S. Bancorp, and Toronto-Dominion Bank are among firms that may benefit as BofA sells assets to raise capital. "PNC this year pushed deeper into the southeast, a Bank of America stronghold, with the purchase of Royal Bank of Canada’s U.S. retail unit. U.S. Bancorp is investing in corporate banking and wealth management, a domain of BofA’s Merrill Lynch, as it increases offerings for high-net-worth clients. Toronto-Dominion agreed last month to buy Bank of America’s credit-card business in Canada and also has expanded in the U.S.” Read all about it: http://www.bloomberg.com/news/2011-09-14/bofa-retreat-may-aid-pnc-as-regional-banks-challenge-too-big-to-fail-firms.html.
 
Several folks wrote in about Bank of America. “Leave it to the WSJ, which apparently has never met a regulation that serves a good purpose, despite a total meltdown of the global economy from a completely unregulated derivatives market.  The damage done to BofA shareholders by the misbegotten purchase of Countrywide dwarfs lost revenue from fleecing small retailers on debit card swipe fees.”
 
A former colleague of mine wrote, "Your BAC contact would be more credible if he or she knew it was Basel, not BASAL. Basel is the town in Europe, BASAL is the core body temperature.  Unsaid is the fact that no other banks have yet taken the steps described by your BofA contact which probably means some combination of they read the rules differently, they have adequate capital or BofA faces capital constraints to a greater extent than that of its peers.  Given BofA’s recent capital infusion from Warren Buffett/Berkshire Hathaway and their sale of their Chinese banking joint venture, one has to at least consider that the issues are capital adequacy issues related solely to BofA and not the result of a shrewd assessment of the risks and rewards attendant with the correspondent lending channel.  Additionally, I’m pretty sure that the Buffett/Berkshire investment doesn’t serve to boost regulatory Tier I capital levels and thus might not move the needle from a Basel III perspective.  Bottom line, BofA appears to be scrounging for capital anywhere it can get it and may be doing so at the expense of having to exit a business that its peers (apparently) find both profitable and relatively easy to properly capitalize."
 
Another wrote, “They're cutting the jobs because they need to desperately figure out a way to become profitable after all the mortgage losses. I didn't see Chase or Citi making massive cuts as a result of over-regulation. If anything, they created all sorts of new jobs for compliance people. I'd repeal about 90% of Dodd-Frank, but it didn't lead to BofA letting people go.”
 
"It is my belief that Durbin/Dodd Frank/etc. are all just a stepping stone to moving our country toward the Canada-like (along with others) banking system with a handful of main banks.  For the government they will be easy to regulate and control.  In the meantime, these additional costs and regulations will no doubt make it EXTREMELY tough for small banks to survive.  I’m guessing we’ll see a lot of consolidation going forward in the banking sector."
 
What happens in Europe doesn’t stay in Europe. Yesterday’s headlines and market reactions continued to swirl around the EU headlines. So for example stocks preferred to rally on news that followed the meeting between Greek, French and German leaders that Greece would remain part of the EU, and were less responsive to a Reuter’s report that documents prepared for a meeting of EU ministers scheduled this Friday and Saturday warned the sovereign debt crisis has become "systemic." Rates didn’t move much Wednesday, however, and the 10-yr closed with a yield of 2.01% with MBS prices roughly unchanged. The 30-yr bond auction went well, bid at 3.33%.
 
This morning we had the Consumer Price Index. (The last time around consumer prices rose .5% in July, mostly due to a jump in gasoline prices following two months of declines. Excluding food and energy, for those who don’t eat or turn on their lights, the core index rose .2% and was up 1.8% from a year ago, the biggest annual increase since December 2009. Thus, it is clear that the jump in food and energy prices from earlier this year has filtered into core prices. Unfortunately, this comes at a time when the labor market and the overall economy are showing signs of renewed weakness.) The CPI this morning was +.4%, with a core rate of +.2%. The Fed may be interested in the year-over-year core number of +2.0% - where its target is. Jobless Claims came in +11k at 428k, with the 4-week moving average creeping higher. And Empire Manufacturing came in at -8.8 – the weakest number in nearly a year.
 
Later we’ll have Industrial Production and Capacity Utilization and the Philly Fed. But in the early going stocks seem to want to move  higher, the yield on the 10-yr is at 2.05%, and MBS prices are worse by about .125.
 

Subject: WHY MEN DIE FIRST (Part 1, Part 2 tomorrow)
This is a question that has gone unanswered for centuries...... but, now we know.
If you put a woman on a pedestal and try to protect her from the rat race...you're a male chauvinist.
If you stay home and do the housework...you're a pansy.
If you work too hard...there's never any time for her.
If you don't work enough...you're a good-for-nothing bum.
If she has a boring repetitive job with low pay...this is exploitation.
If you have a boring repetitive job with low pay.....you should get off your lazy behind and find something better.
If you get a promotion ahead of her.....that is favoritism.
If she gets a job ahead of you......its equal opportunity.
If you mention how nice she looks......its sexual harassment.
If you keep quiet..........its male indifference.
If you cry............you're a wimp.
If you don't........you're an insensitive jerk.
If you make a decision without consulting her......... you're a chauvinist.
If she makes a decision without consulting you...... she's a liberated woman.


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