Underwriters and LO’s rarely raise an eyebrow when I say something like, "Studies find that 43% of households have less than $1,000 in liquid savings and 28% live paycheck to paycheck without any savings at all."  In the wake of the Baby Boomers and Generation X come Generation Y, also known as the Echo Boomers, and 90% of them have less than $1,500 in assets.  Needless to say, $1,500 isn’t much of a down payment, nor does it serve as a great financial safety net, which means that Generation Y is much likelier to face foreclosure.  Rather than homeownership (less than 33% surveyed expressed the desire to own a home), they prioritize further education, living in highly social areas (i.e., in a city versus the suburbs), and the general idea of freedom. 

This trend, not welcomed by Realtors and those in the mortgage biz, seems to stand in opposition to the “American Dream.” One tends to forget, however, that the Baby Boomers are the first generation to consider home ownership the principal component of the dream, a direct result of the greater universal prosperity enjoyed by Americans in the years following World War II.  Given the economic climate in which many Echo Boomers are coming of home-owning age, it is hardly surprising that this endeavor is not high on their list of priorities.  In addition, many economists believe that homeownership doesn’t actually “pay for itself,” and that a homeowner never recoups the cost of insurance, interest paid on a mortgage, or maintenance. But folks have to live somewhere!

Yesterday someone told me that an analysis found that about 11 million homes are underwater and about 40% of those had home equity mortgages. I don't know the source, but it is probably not a surprise to anyone in the business. As part of a national settlement over foreclosures, mortgage servicers Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial will receive some relief on their $308 billion in home-equity loans. They will be able to share losses on second liens with bondholders and receive credit toward their cash contributions to the settlement under the arrangement, which aims to eliminate delays in processing loan workouts. Critics, however, fear that putting senior and junior liens on equal footing will inflate the cost of first-lien mortgages as investors add a risk premium to account for the possibility of higher losses

Redwood Trust, who, like many, earn its profits from home ownership and who some in the industry think is the only non-agency game in town, doesn't always make money. In fact, it lost $3 million last quarter: http://www.marinij.com/business/ci_20057272.

Along those lines, the FDIC’s Quarterly Banking Profile for the fourth quarter of 2011 was released yesterday, and shows a modest but steady recovery in the banking industry. A majority of banks reported improved quarterly earnings, but 813 institutions remain on the “Problem Bank List” - 11% of all FDIC insured banks and savings associations. In 2011 the industry had a net income of $119.5 billion, the highest earnings since 2006, and for the fourth quarter made a profit of over $26 billion. But don’t pop the champagne cork yet: although this is the 10th consecutive quarter of earnings increases, virtually all of the earnings increase was the result of lower provisions for loan losses, as has been the case for the past nine quarters. Loss provisions for the fourth quarter totaled $19.5 billion, down by 40% from $32.7 billion in the comparable quarter of last year. The FDIC reported that about 19% of institutions reporting losses for the quarter, but 63% of banks reported an improvement in quarterly net from last year and return on assets (ROA) rose to 0.76% from 0.64%.

Of great interest in the FDIC report was the growth in loan portfolios.  Lending increased by about $130 billion: $63 billion in commercial and industrial borrowing, $26 billion in residential loan balances, and about $21 billion in credit card lending.

It is hard to keep track of the legal actions out there, the latest being the SEC giving Goldman Sachs and Wells Fargo a “Wells notice.” A Wells notice indicates SEC staff plan to recommend that the agency take legal action and gives a recipient a chance to mount a defense. Goldman received its Wells notice on February 24, relating to a $1.3 billion subprime mortgage-backed securities deal in late 2006 that the bank underwrote. On the other side of the nation, Wells Fargo said its Wells notice related to its disclosures in offering documents for mortgage-backed securities. The bank said it is providing information requested by various regulatory agencies in connection with their investigations.

And within the last week consumer complaints have triggered yet another legal problem for Bank of America. HUD is charging BofA with discriminating against disabled homebuyers under provisions of the Fair Housing Act. The charges, which have been moved to the Department of Justice, arise out of allegations from two borrowers in Michigan and one in Wisconsin who said they were required to provide personal medical information and documentation regarding their disability and proof of the continuance of the Social Security payments in order to qualify for a home mortgage loan.  HUD alleges that Bank of America first denied the loans to the borrowers who relied on disability income to qualify for their home loans.  The Bank then imposed unnecessary and burdensome requirements as evidence of the continuation of Social Security income including provision of physician's statements to reevaluate and approve the loans. As we know, the Fair Housing Act makes it illegal to discriminate in the terms and conditions of a loan to an individual based on a disability, including imposing different application of qualification criteria.  The Act also makes it illegal to inquire about the nature or severity of a disability except in limited circumstances.

HUD Secretary Donovan and Acting FHA Commissioner Galante testified yesterday. Nothing much new was said, but there was a little news on the recent FHA changes to future MIP amounts. Originators and investors are particularly interested in any news related to streamline refinancing of GNMAs. Mr. Donovan said "In addition to taking steps to make these refinance loans more widely available, FHA is working on adjusting the premium structure for all Streamline Refinance transactions that are refinancing FHA loans endorsed on or before May 31, 2009, to further incentivize refinance activity. These changes will ensure that borrowers benefit from a net reduction in their overall mortgage payment while still ensuring FHA has the resources to pay any necessary claims." Watch for more details Thursday.

There is more on the recent investor condo move. I received this note from Dave Lewis, Managing Consultant for Con-Serve Capital Consulting: “My thoughts turned to Provident's bold move in shutting down 3rd party access to Fannie Mae condominium loans.  I like the fact that the surviving aggregators stand up to FNMA and FHLMC when they feel something useless has been offered. In this case, FNMA is burdening a servicer with making insurance evaluations that are generally beyond the servicing manager's ken.  Rather than do that, FNMA and FHLMC could save the nation a whole lot of trees and trouble by doing the following: 1. Maintain a Master List of Approved Condominium Projects (that's an approval for lender sales not consumer buys). 2. For those approved, the Agency Master file includes updated budgets, insurance, local or state approvals and other minutia known only to our agency friends.  Any Master Insurance policies have a clause that covers the agency as a named insured on any unit that has been financed with an Agency loan.  The insurers deal directly with the agency, not the originating or servicing lender. 3. The Master File is updated once a month on a date certain.  Additions are posted, deletions noted. (Originators originate loans in approved projects; servicers service loan payments and funds transmittals, FNMA/FHLMC determine which projects are acceptable on a month by month basis. If an insurance renewal comes in on a previously approved project, and the renewal does not conform to the Agency posted insurance standards, then the project falls from the Master List until the matter is rectified). 4. Require home buyers within the project to carry an HO-6 in form acceptable to the agency, and escrow the payment for the renewal of that policy, as you would for any other insurance escrow.  No Ho-6, no loan programs available at the Agency.”

Dave continues: “No originating lender out there wants to maintain insurance policies they can't read in file cabinets that never get opened after the loan closes.  We have all been there, done that.  Let the agencies hire some high powered insurance staff to interpret what coverages are acceptable from any Master Insurer.  After all, the agencies recently received a nice bonus in the form of increased G-Fees - certainly they need something upon which to spend all that new money.”

Sometimes I am tempted to say, “Rates are about the same – ‘nuff’ said.” Although that sums things up for Tuesday (the 10-yr closing at 1.93% and MBS prices about unchanged), there was a little bit of news. The Case-Shiller 20-city index was down almost 4% in the 4^th quarter and down about 4% from a year ago, down about 1% from November.

For news today, we learned from the MBA that apps last week dropped .3% from the prior week. Refi’s were down about 2%, but purchases improved about 8%. The four-week moving average for all mortgage applications is now up 0.3%, but refi’s have dropped to about 78% of all application activity. (ARM’s are still at about 5% of all apps.)

Today and tomorrow the press is trying to make a big deal out of Chairman Bernanke's Humphrey-Hawkins testimony followed by Q&A before the House Financial Services Committee, but many doubt anything new will be said. We had the second revision to the 4^th quarter GDP, and it is now +3.0%. It didn’t really move the markets – it is considered old news. Later we’ll have the Fed’s release of its Beige Book. This also rarely moves markets, in spite of it containing economic reports from the 12 Districts in preparation for the upcoming FOMC meeting on March 13. In the early going the 10-yr is nearly unchanged at 1.92% - and the same for MBS prices.

There comes a time when a woman just has to trust her husband.  For example:
A wife comes home late at night and quietly opens the door to her bedroom.