Recently Bloomberg reported that, “Midgets are losing ground to dwarfs in the mortgage bond market as borrowers lock in FHA loans ahead of fee increases.” Huh? “Midgets” are the nickname for MBS securities made up of 15-year loans guaranteed by GNMA, and dwarfs are the nickname for Fannie 15-yr loans. (Freddie’s are known as gnomes – all of them have shorter maturities than 30-yr paper.) The midget market expanded in the past year because of the growth of FHA-insured lending beyond first-time home buyers or others with little cash or weak credit. Then, as the agency’s fee increases erode the relative attractiveness of the 15-year loans to borrowers who could qualify for Fannie Mae and Freddie Mac mortgages, lenders flooded the market with Ginnie Mae bonds as the opportunity faded. Borrowers with more home equity or bigger down payments had been getting 15-year FHA mortgages in the past year partly because of the MIP differences, and originators knew this. Of course, the change in MIP had an impact on originations, and investor interest.

Here's another note: "For mortgages, it seems that we've been handed the script for the next 3-4 months: it's the same one that we followed since we settled in at these levels in late February.  Sell 'em into tightening, buy on dips, but don't forget that the bias is to tighter spreads, lower volatility, and higher prices.  When in doubt, press the buy button." Comments like this are good for mortgage prices, relative to Treasury prices - "tighter" means that the prices and yields are closer. Granted, MBS prices are greatly influenced by the risk of default, since they aren't risk free as U.S. Treasuries are perceived to be, so the spread will probably never be "0". But here is an interesting note: "GN/FNs were higher again as Ginnies continue to benefit in part on a more favorable capital weighting versus FNMAs under Basel III which was recently approved by the Fed."

Lastly, "Ginnie's are on the moon! For the 3rd straight day GNMA's improve trading higher by almost 8/32s (.250) over the past 3 trading sessions versus Fannie's. This move has been due to the perfect storm: strong buying from customers who believe that we will be stuck at low rate levels for extended periods of time making the carry trade look more attractive. MIP increases making it more expensive and less competitive for Ginnie's making the technicals better with less supply on the margin, and slower prepayments making GNMA's look attractive across the coupon stack."

Of course rates don't all move the same. Traders try to hedge that while LO's wonder why 3.25% mortgages improved (or worsened) by .375 in price while 4.25% mortgage barely nudged. In fact, in the weeks after agency MBS prices hit their peak on May 4th, dollar prices of Fannie 3.5's appreciated 1.125 while prices of Fannie 6's declined/worsened by .75 over this period. Wassup with that? It seems that the prevailing price levels of Fannie 5.0s-6.0s, at that time, were not accounting for the HARP-related prepayment risk and there was no upside to owning them at those price levels.

Pools of HARP loans have been trading under a different abbreviation in the markets for many weeks. The 15-Year MBS prefixes and whole loan products for Refi Plus and DU Refi Plus loans were available beginning June 1. MBS prefixes "CV" (15-Year Fixed Rate, Refi Plus LTV 105.01 thru 125) and "CW" (15-Year Fixed Rate, Refi Plus LTV > 125) are now eligible for delivery and issuance. The "CR" MBS prefix for the 30-Year Fixed Rate, Refi Plus LTV > 125 is also available for MBS delivery and issuance - traders and secondary staffs know that the 30-Year Fixed Rate, Refi Plus over 125 product has been available for whole loan committing and delivery since February 1.

Argue the point all you want, I will argue that investors determine rate sheet pricing, not borrowers or LO's. But pricing adjustment changes directly impact rate sheets, and investor pricing. For example, earlier this year investors were especially interested in the White House announcement, along with a HUD Mortgage Letter that followed, that provided the final piece of puzzle for the widely expected changes to the FHA MIP structure (the one where running MIPs on loans originated before June 2009 was grandfathered). This is dated news, but the news meant that FHA would charge a tiered MIP structure based on the origination date of the loan, based on post-May 2009 (if refinanced, these loans will pay a 120-125bp running MIP, 10bp higher than before, and their UFMIP would also increase by 75bp) and pre-May 2009 (would only pay a 55bp running MIP when they refinance, 55-60bp less than required then, and the UFMIP was also reduced by about 1pt, to 0.01 point). Investors felt that, since because almost all FHA-FHA refinancers wrap the UFMIP into the new loan, the reduction in UFMIP would translate to about 8 basis points of higher refinancing incentive – not huge, but still noticeable.

Investors asked, “What happens to the pre-May 2009 borrower who, after refinancing once (and receiving MIP relief), wants to refinance again?” Since this borrower is no longer originated prior to the cut-off date, he should be ineligible for MIP relief in a second refinance. This is analogous to the GSE borrower who, having refinanced through HARP once, becomes ineligible to "re-HARP" again. If the borrower is forced to pay the new 120-125bp MIP level, investors may be more comfortable having this product on their books as it will stick around longer.

And investors, who as I said determine what they will pay for loans, are very interested in delinquencies and foreclosures. As an example, the performance of FHA loans dominated the April Mortgage Monitor report released by LPS. “While GSE and private loans saw significant drops in foreclosure starts and portfolio loans trended down slightly, foreclosure starts for FHA loans soared, jumping 73 percent in April.  While all 2005+ vintages of FHA loans had increased numbers of starts, the increases for loans originated in 2008 and 2009 were dramatic. ‘In 2008, when the loan origination market virtually dried up, the FHA stepped in to fill the void,’ explained Herb Blecher, senior vice president for LPS Applied Analytics. ‘FHA originations tripled that year, and increased to five times historical averages in 2009. High volumes like that, even with low default rates, can produce larger numbers of foreclosure starts. That represents a lot of loans to work through - the 2008 vintage alone represents some $14 billion of unpaid balances in foreclosure, and the overall FHA foreclosure inventory continues to rise.’” In the current environment, the number of investors interested in owning pools of loans with high foreclosure rates, especially with high original LTV’s, is very limited.


These are from a book called Disorder in the American Courts, and are things people actually said in court, word for word, taken down and now published by court reporters that had the torment of staying calm while these exchanges were actually taking place. (Part 3 of 3.)

ATTORNEY: Can you describe the individual?
WITNESS: He was about medium height and had a beard
ATTORNEY: Was this a male or a female?
WITNESS: Unless the Circus was in town I'm going with male.
_____________________________________

ATTORNEY: Is your appearance here this morning pursuant to a deposition notice which I sent to your attorney?
WITNESS: No, this is how I dress when I go to work.
______________________________________

ATTORNEY: Doctor, how many of your autopsies have you performed on dead people?
WITNESS: All of them. The live ones put up too much of a fight.
_________________________________________

ATTORNEY: ALL your responses MUST be oral, OK? What school did you go to?
WITNESS: Oral.
_________________________________________

ATTORNEY: Do you recall the time that you examined the body?
WITNESS: The autopsy started around 8:30 PM
ATTORNEY: And Mr. Denton was dead at the time?
WITNESS: If not, he was by the time I finished.
____________________________________________

ATTORNEY: Doctor, before you performed the autopsy, did you check for a pulse?
WITNESS: No.
ATTORNEY: Did you check for blood pressure?
WITNESS: No.
ATTORNEY: Did you check for breathing?
WITNESS: No.
ATTORNEY: So, then it is possible that the patient was alive when you began the autopsy?
WITNESS: No.
ATTORNEY: How can you be so sure, Doctor?
WITNESS: Because his brain was sitting on my desk in a jar.
ATTORNEY: I see, but could the patient have still been alive, nevertheless?
WITNESS: Yes, it is possible that he could have been alive and practicing law.


If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog discusses the issue of the Freddie Mac & Bank of America buybacks, and its potential impact on the industry. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.