For a mortgage bank, what is your warehouse cost of funds versus the average mortgage rate for your originations? If your mortgages are at 4%, and your warehouse is at 3%, you’re earning a 1% spread. For Wells Fargo, its net interest margin, the difference between what it pays to borrow and what it earns on loans and securities, was 3.84% last quarter. But no matter, as…

Stocks dropped yesterday after Citigroup and Wells Fargo said quarterly revenue “dropped amid economic weakness and market turmoil linked to Europe.” (Wells’ stock dropped over 7% in one day, while Citi was “only” down about 1%.) Looking at mortgage banking, Wells Fargo saw $89 billion in new residential loans go through its system during the third quarter of 2011. Not accounting for weekends, that is about $1 billion per day per my HP-12C. It did not help, however, that Wells increased its mortgage repurchase provision by 61%. Citi reported a 50% jump in residential mortgage originations in the third quarter but also with a large write down related to mortgage servicing rights. Wells took it on the chin with a 6% slump in revenue from a year earlier although third-quarter profit rose 22% percent to $4.06 billion. Citigroup’s net income jumped 74% to $3.77 billion.

Bank of America reported $6.2 billion of net income for the third quarter, up from a $7.3 billion loss one year ago. The worst performer in the DOW 30 stock index this year, the bank extended $33 billion in mortgages during the quarter, with more than half being refinances. And Goldman Sachs (see questionable letter at bottom of commentary) reported a loss for the 3^rd quarter, which is only the second reported loss since 1999! The numbers are worse than expected, and Goldman’s share prices are down as a result.

Here’s a note I received yesterday, if anyone has thoughts: "With the coming demise of Bank of America correspondent, we are at a loss for a source which will purchase our few remaining test cases as we move toward getting our DE approval. Any suggestions?"

"Information is power," as they say.  With LQI, and NMLS, a vendor or investor that controls that loan's data occupies a very important place. I received a note asking, "I have a friend who is fond of the no cash out, no closing cost refinance. He applied, locked, and funded when rates were at 4.375% covering his costs. Now he’s already begun refinancing with another broker for a slightly lower rate, his point being that is a no cost loan. And by doing back-to-back refi's, there is no harm to the borrower. He can’t be the only one out there like that. When do you think investors will get to the level where they’re checking prepayment speeds on individual borrowers, or originators, using NMLS numbers? Are they already doing that?" First off, and this is common knowledge, investors have had early pay-off penalties in place for several years. Borrowers are required to make X number of payments, X depending on the investor, since each investor assumes that it will have the loan on their books for a certain period of time. In my opinion, if investors or vendors are not looking at property, borrower, or loan agent level refinance & delinquency information yet, it is just a short period of time.

For regulators out there, and those who are subject to regulators, “The Multistate Mortgage Committee (MMC) of the CSBS/AARMR has recently issued two separate guides intended for use by state examiners. While the MMC’s focus is on national lenders with operations in 10 or more states, the guides may prove useful tools for all mortgage companies now that everyone is subject to examination. The first item is a 263 page Mortgage Examination Manual which provides guidance about the process and objectives of the examinations as well as information that may be useful to examinees in preparation for examinations. The second item, released on October 7, 2011 is a 42 page guide for examiners to use when reviewing compliance by non-depository mortgage companies with the FRB’s final loan originator compensation rule. The guide does provide mortgage company management some insights about the “map” the state examiners may be using to determine compliance. Copies of both the Mortgage Examination Manual and the LO Comp Rule Compliance Guides are available as links on the home page of the IMMAAG website: http://immaag.com/.

Yes, MERS does things that don’t make the headlines, like give training. This next one is November 8th, and for $75 you’ll hear all about, “New compliance requirements, Reconciliations and quality assurance topics, The Corporate Resolution Management System, and Upcoming system releases.” (The $75 includes Danish!) Don’t be the last to register: http://www.mersinc.org/events/details.aspx?eid(7.

Last week I received this interesting note. “I was at the MBA conference, and I loved it b/c it was fascinating to see the different perspectives you get from Mortgage Bankers versus those you get from the Realtors or Mortgage Brokers (the people who frequent the conferences I usually attend). I very much enjoyed the panel discussions because the information was not stale to me. Here is my biggest take-away: The current crop of seasoned managers and owners has been out of the trenches too long to see what is really going on in today's lending environment. And this results in two big flaws in judgment/assessment. 1. They are too "accepting" of new regulatory constraints. Too many seem to embrace or grudgingly accept the new rules either already here or coming our way, no matter how destructive or irrational. HVCC guidelines, comp rules, and disclosure requirements are often ridiculous, costly and harmful for the consumer because they cause us to lose locks and/or preclude us from crediting fees.  But, unless one is "in the trenches," this is often not fully absorbed.  Everyone should be "fighting mad". And (2) loan officers and most industry professionals "of yore" are simply too "dumb" (for lack of a better word) to close loans in today's environment. We let all of our less than brilliant people go years ago, and we now only hire college grads with 3.5 GPAs or better. We test them before we hire them too.  And we are rolling.  A company can market and originate all it wants, but more business is worthless if nobody is capable of closing the many the tough deals that surface today. The ONLY firm I saw at the conference that was aware of the above facts was Academy Mortgage.  Others are so far behind the curve it was shocking.” So wrote Jay Voorhees with JVM Lending in California.

The markets out there are nervous. Aren’t “markets” always nervous? Analysts note that transitions to foreclosure have started to increase, which will probably prompt some action from the government. And while they are at it, the government will probably soon announce their long-awaited updates to HARP, which will spook the herd on its impact on prepayments. Agency mortgages are doing pretty well, but no so for non-agency production, which saw an index (PrimeX – more on this tomorrow) take a tumble. And over in the commercial sector, the CMBS market showed some life with synthetic prices moved modestly higher.

For economic news, yesterday the Federal Reserve Empire State Manufacturing general business conditions index remained negative and was nearly unchanged. We also learned that Industrial Production rose by 0.2% in September and Capacity Utilization rose to 77.4%, but neither moved rates. Generally news like this pales in comparison to what is happening in Europe, and a spokesman for German Chancellor Angela Merkel warned not to expect all issues to be resolved by the Oct. 23 meeting, calling it an "impossible dream." Bonds “caught some wind,” the 10-yr yield dropped to 2.16%, and many investors had price improvements.

This morning rates have improved again, and the 10-yr is down to 2.09% ahead of the PPI number at 8:30AM EST. Agency mortgage securities are along for the ride to some extent, with early MBS prices better by .125-.250 depending on coupon.

I cannot attest to the validity of this letter, forwarded to me yesterday:
NEW YORK – The following is a letter released today by Lloyd Blankfein, the chairman of banking giant Goldman Sachs:
Dear Investor:
Up until now, Goldman Sachs has been silent on the subject of the protest movement known as Occupy Wall Street.  That does not mean, however, that it has not been very much on our minds.  As thousands have gathered in Lower Manhattan, passionately expressing their deep discontent with the status quo, we have taken note of these protests.  And we have asked ourselves this question:
How can we make money off them?
The answer is the newly launched Goldman Sachs Global Rage Fund, whose investment objective is to monetize the Occupy Wall Street protests as they spread around the world.  At Goldman, we recognize that the capitalist system as we know it is circling the drain – but there’s plenty of money to be made on the way down.
The Rage Fund will seek out opportunities to invest in products that are poised to benefit from the spreading protests, from police batons and barricades to stun guns and forehead bandages.  Furthermore, as clashes between police and protesters turn ever more violent, we are making significant bets on companies that manufacture replacements for broken windows and overturned cars, as well as the raw materials necessary for the construction and incineration of effigies.
It would be tempting, at a time like this, to say “Let them eat cake.”  But at Goldman, we are actively seeking to corner the market in cake futures.  We project that through our aggressive market manipulation, the price of a piece of cake will quadruple by the end of 2011.
Please contact your Goldman representative for a full prospectus.  As the world descends into a Darwinian free-for-all, the Goldman Sachs Rage Fund is a great way to tell the protesters, “Occupy this.”
Sincerely,
Lloyd Blankfein
Chairman, Goldman Sachs