As much as the government talks about staying out of housing, it can’t. President Obama is expected to unveil a new refi plan today in Virginia at 10AM CST. Whatever plan it is, no one expects it to pass through Congress, IF Congressional approval is required. Recall that this plan was previewed by Obama during his SOTU address last week.  The plan would allow non-agency mortgage holders (so those mortgages not backed by Fannie/Freddie) who are current to refinance into a lower-interest federally insured mortgage (via the FHA).  Borrowers could qualify even if they had negative equity.  The plan could help as many as 3.5M homeowners refinance.  The plan is expected to cost ~$5-10B and Obama will call for a new fee to be charged to banks to pay for the proposal – because they have all the money, right?

Rates can do whatever they want, but if large investors go away, and the government does away with Fannie & Freddie, is the borrower better off? (Remember borrowers?) As was mentioned in this commentary earlier this week, there have been rumors about PHH Mortgage and SunTrust. PHH especially, after the S&P downgrade and the CFPB probe being revealed, was rumored to be having funding problems and being forced to downsize.  Sources indicate that those rumors are true, and that PHH Mortgage has eliminated twelve account rep positions and retained only six.  In addition, clients are suggesting that PHH is cutting back on pricing and increasing internal requirements for loan purchases. And at SunTrust, the entire mortgage channel is indeed going through reorganization, making the business "flatter" and cutting costs.

"In reaction to the Federal Housing Finance Agency statement released December 29, 2011 regarding guarantee fee increases, Chase Lock Extension fees will increase by 0.25% for all extension terms." So reads the latest release from Chase. So, for example, a 7 day extension will cost .625 instead of .375 (which many viewed as steep to begin with); 30 days will now cost a point.

Needless to say with all this, the mortgage herd (especially those companies that sell to them) is spooked. Competitors are warily watching, not really wanting a huge increase in volume coming their way. And smaller shops are wondering, "When is this going to end?” Or "What am I supposed to do?” Some lenders with a minimum net worth of $2.5 million have begun selling loans directly to Fannie and Freddie, with the servicing either being retained (in house or with a subservicer) or sold released to a servicing counterparty of F&F (such as Central, USB, PHH, and so on). But that is not a sure thing either, as the FHFA, not content to leave well enough alone, has offered two options to revamp the economics of mortgage servicing rights – which brings up the issue of how the market values servicing versus how the lender values servicing.

Retaining mortgage servicing isn’t a matter of just saying, “Sounds good, let’s crank it up.” CFO’s and owners need to be fully aware of the capital it requires, both in pricing the loans, in carrying them on the books, and in setting aside reserves for delinquencies. Depending on the arrangement (actual-actual or scheduled-actual) the servicer must fund principal and interest payments to investors, which can quickly eat up cash.

(By the way, SunTrust will buy FirstAgain LLC for an undisclosed sum, as it seeks to increase direct online lending. FirstAgain specializes in providing direct unsecured loans to super-prime borrowers via the Internet and operates proprietary technology offering clients’ completely digital and paperless origination, underwriting and servicing.)

It can't be any fun to be a large financial institution any more - not like the old days. A new federal task group set up to investigate residential mortgage-backed securities (RMBS) fraud signed off on subpoenas for 11 undisclosed financial institutions. New York Attorney General and co-chair Eric Schneiderman did not name any of the financial institutions subpoenaed by the group but said that the group has “jurisdiction to go after every aspect of the artificial inflation… and the crash that brought down the economy” over the last several years. He said that the group would levy “appropriate civil and criminal charges” against financial institutions as investigations moved forward under the auspices of the Financial Fraud Enforcement Task Force. (What about the borrowers who abused the system?) Of course the SEC has already “issued scores” of their own subpoenas, obtained millions of documents, and interviewed dozens and dozens of key witnesses related to mortgage-backed securities. Officials said that the unit will include in its ranks more than 55 Justice Department attorneys and investigators, 15 civil and criminal attorneys, and 10 agents and analysts with the Federal Bureau of Investigation. Thirty more attorneys and personnel will take up positions in the group in the weeks ahead. Critics point to job growth at the Federal level rather than the private sector - our tax money at work!

I received this note. "Rob, who is going to regulate the regulators? They must be tripping over each other with the confusing jurisdictions and responsibilities. I have been in the real estate and mortgage business for years, and I am feeling like one of those floats in the Macy's parade and everyone shooting at it because it is such a big target." President Obama did indeed create yet another regulatory body noted above to investigate financial institutions. He directed Attorney General Eric Holder to create a new office on Mortgage Origination and Securitization Abuses.  The President said, "The American people deserve a robust and comprehensive investigation into the global financial meltdown to ensure nothing like it ever happens again." According to the Huffington Post, the new office will take a three-pronged approach to the issue, holding financial institutions accountable for abuses, compensating victims, and providing relief for homeowners, and will operate as part of the existing Financial Fraud Enforcement Task Force. Good luck working with the state Attorneys General, the Department of Justice, the SEC, the OCC, the FBI…

But we may not have Treasury Secretary Timothy Geithner to kick around much longer. He said President Barack Obama is likely to be re-elected, but he isn't likely to stay for a second term. "I'm confident he'll be president. But I'm also confident he's going to have the privilege of having another secretary of the Treasury."

Remember the little thing in NPR about Freddie betting against homeowners? “Freddie Mac stopped making investments in derivatives known as inverse floaters last year after a regulatory exam raised questions about the mortgage company’s controls, the Federal Housing Finance Agency said. An FHFA examination “identified concerns regarding the controls, including risk management, surrounding the inverse floaters,” the oversight agency said in a statement. ‘FHFA and Freddie Mac agreed that these transactions would not resume.’”
Read all about it at http://www.businessweek.com/news/2012-01-31/freddie-mac-halts-use-of-derivatives-tied-to-high-interest-rates.html.

Above I mentioned the U.S. becoming a nation of renters – but often times investors and lenders do not have sufficient insight into distressed property trends at the national and local level which reduces their ability to effectively manage collateral risk and establish effective loss mitigation strategies and accurate loss projections. DataQuick has developed a Distress Property Analysis Tool called RiskFinder Distress to come up with monthly statistics for the past 10 years to help track trends and help identify geography, down to a neighborhood level, that most negatively impacted by distressed property trends. For more information contact your DataQuick representative or Wendy Barnett at wbarnett@dataquick.com.

The MBA reported that apps last week dropped about 3% after dropping 5% the week before. (Refi’s dropped 3.6%, purchases down 1.7%, with refi’s accounting for an even 80% of nationwide retail applications.) But at least the “Bernanke freight train bond market,” as one MBS salesman noted, is rolling along. “With the Fed potentially on hold thru 2014 and QE3 being discussed,” Fannie 3.5’s are nearly at a price of 104 – that is a 4 point premium for 3.75-4.125% 30-yr loans, not even including the servicing! Yesterday we had a slew of news: the Employment Cost Index rose 0.4% in 4Q 2011, the S&P/Case-Shiller index showed that home prices continued to decline in November, the ISM Chicago Purchasing Managers Index fell, and the Conference Board’s Consumer Confidence Index dropped as well. Most of the news out yesterday points to a slow economy in this country, and a slowing economy generally leads to lower rates.

So are LO’s excited about a continued refi boom? Perhaps – but rates haven’t been an issue in a long time. Investors are not necessarily excited about more refinancing – they’d like to keep the existing MBS’s on their books a while longer. Thomson Reuters noted, “Traders have cautioned of the potential for increased supply in coming days as originator pipelines have been building up in response to the decline in rates.” But the U.S. 10-yr T-note hit 1.80% and rate sheet MBS prices improved by another .125.

Today we’ve already had the MBA apps numbers out, noted above. And we’ve also had the ADP Employment report for January, always of questionable predictive ability for the actual government numbers Friday. The number was +170k for January, with a downward revision for December but still this is the 24^th straight gain in private payrolls. Later we’ll have another ISM Index and Construction Spending at 10AM EST, along with the Treasury announcing the size of next week’s 3, 10, and 30-yr auctions (estimated unchanged at $72 billion). So far rates are flat to Tuesday’s close with the 10-yr at 1.81% and MBS prices unchanged.

CONFUCIUS DIDN'T SAY:
Man who eats many prunes get good run for money.
War does not determine who is right, it determines who is left.
Man who fight with wife all day get no piece at night.
It takes many nails to build a crib, but one screw to fill it.
Man who drives like hell is bound to get there.
Man who stands on toilet is high on pot.
Man who live in glass house should change clothes in basement.
Man who fish in other man's well often catch crabs.
Finally CONFUCIUS SAY -
"A lion will not cheat on his wife, but a Tiger Wood!"