The first observance of Labor Day is believed to have been a parade of 10,000 workers on Sept. 5, 1882, in New York City, organized by Peter J. McGuire, a Carpenters and Joiners Union secretary. By 1893, more than half the states were observing “Labor Day” on one day or another, and Congress passed a bill to establish a federal holiday in 1894. President Grover Cleveland signed the bill soon afterward, designating the first Monday in September as Labor Day. Who are we celebrating? Well, per our Census Bureau, there are about 155 million people in the U.S. who are 16 years and older who make up the labor force. Per its records, we have about 1.1 million cooks, 7,800 actors, 3.1 million teachers, 395k hairdressers, 33,000 telephone operators, and 12 DE underwriters.

How about some banking new & HARP theory before everyone heads off for a three day weekend? First, a few days ago the FDIC reported that commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation reported aggregate net income of $34.5 billion in the second quarter of 2012, a $5.9 billion improvement from the $28.5 billion in profits the industry reported in the second quarter of 2011. This is the 12th consecutive quarter that FDIC bank earnings have registered a year-over-year increase. Almost two-thirds of all institutions reported improvements in their quarterly net income from a year ago. Also, the share of institutions reporting net losses for the quarter fell to about 11% from nearly 16% a year earlier. Critics note that lower provisions for loan losses and higher gains on sales of loans and other assets accounted for most of the year-over-year improvement in earnings.

So did banks set aside too much in previous years to cover losses? Probably not, although, per the FDIC Acting Chairman, "Levels of troubled assets and troubled institutions remain high, but they are continuing to improve…Most institutions are profitable and are improving their profitability. All of these trends are consistent with the moderate pace of economic growth that has occurred over the past year." And, say what you want about regulation and compliance, the plethora of exams and audits may be assisting in the trend.

But the increased costs and problems in banking, which are normally passed on to the consumer, and U.S. monetary policy, also influence current events. The Financial Times points out a recent example of Hudson City Bancorp, a New Jersey-based thrift that M&T Bank this week agreed to buy in a $3.7bn deal. The immediate thought was that M&T was making a big play in the jumbo market, given Hudson’s demographic and loan makeup. Hudson City has done well, accepted no TARP money. Hudson did, however, go awry on interest rate risk, borrowing money from the Federal Home Loan Bank and using it (along with deposits) to originate mortgages and buy securities. “As mortgage rates plunged it spurred homeowners to refinance at lower rates. But a chunk of Hudson City’s funding was locked in at higher ones. The bank could not originate mortgages at high enough rates to match its funding costs nor could it reinvest the money into assets that earned more than it was paying. Regulators did not look favorably on the situation and the OCC required Hudson City to ease its interest rate risk in recent years. That proved a costly manoeuver: the borrowings carried pre-payment penalties.” Apparently, per the Financial Times, M&T will have to pay $15-16 billion to unwind the remaining $13 billion of loans that still have higher costs than the current level of rates.

Which reminds me, a week or two ago the U.S. Treasury said it will begin selling floating-rate notes in a year or so, as it seeks to meet investor demand. The delay is required to give Treasury time to change systems, choose an index and work out details.

The stats show that banks are the driving force of the HARP. But many companies are focused on originating HARP & HARP II loans, and the potential of HARP 3. But how is all this impacting investor’s perception of non-HARP pools? The impact of the summer rally in mortgage rates is likely to be concentrated on the newer vintage lower coupon prepayments (non-HARP collateral) rather than HARP prepayments. Unlike the HARP eligible pools, prepayments on the newer vintage lower coupons (non-HARP) have not skyrocketed in spite of the fact that mortgage rates rallied to all-time lows in Q3 of last year. Given that mortgage rates are around 3.75% now, or lower, what are some of the factors that are likely to drive prepayments on the newer vintage non-HARP pools? Locked out borrowers with high LTV’s in the newer vintages which have few options for refinancing, and weakness in the housing market has pushed LTVs for some low LTV borrowers above 80%. This, as well as the “strenuous” process of getting accurate appraisals makes it much more expensive and complicating for these borrowers to refinance.

The next factor investors are talking about is borrower outreach and indifference. I hear repeated stories about borrowers walking in of the street with a 5% rate asking if rates are lower than that. Lenders have been aggressive about courting HARP eligible borrowers for refinancing’s whereas similar marketing is not being done for non-HARP borrowers, muting reactions of non-HARP borrowers to the ever lower mortgage rates even though the popularity of HARP amongst borrowers continues to be high. The third factor is mortgage origination capacity: lenders can issue approximately $130-135bn agency MBS on a monthly basis. Some of the excess capacity in the system may go towards closing purchase loans, but refinancing capacity is likely to increase further.

The final factor is servicer concentration. Lenders like Wells Fargo and Chase have become a more dominant part of recent production non-HARP pools versus the seasoned pools where Bank of America had a fairly heavy concentration (remember Countrywide?). Both Wells and Chase have been very focused on HARP and have seen the HARP share of their servicing book decline significantly as these loans paid off. As the non-HARP loans dominate their servicing book, it could change their focus and lead to more capacity to process the newer loans leading to higher speeds on these new issue pools. The belief is that factors that have led to the slower prepayments on newer vintage lower coupons are likely to stay intact over the next couple of months. With the pickup in HARP, the short-term capacity constraints in the system could become even more severe in the recent rally as lenders will have to fully underwrite a larger portion of refi applications. However, over the medium to long-term, prepayments on Chase and Wells serviced non-HARP pools could go higher as these lenders dedicate more capacity and resources to these loans.

Turning to some agency & investor training updates...

Fannie Mae will be offering a number of instructor-led webinars as part of its HFI InDepth program, the first of which is a course on interpreting DU underwriting findings.  This program will be available on a variety of dates from September 10^th through October 24^th.  The “Investor Reporting with Confidence: Best Practices for Reconciling Actual Loans” and “Bank vs. Book: Reconciling Actual Custodial Accounts” webinars will be available on several dates throughout September and October as well.  These are aimed primarily at originators, underwriters, and servicers.  For further details on course content and scheduling, see https://www.efanniemae.com/lc/hfindepth.jsp.

To all new Hope LoanPort users, the FHA offers a weekly training session every Tuesday via webinar.  Advanced classes are also available for those with an interest in learning more about user administration, reporting, and various other processes and procedures that aren’t covered in the basic training.  Experienced Hope LoanPort users looking for a refresher are encouraged to attend as well.  To register, email kbailey@hopeloanportal.org with an email address, full organization name, city and state, and preferred class date and time.

The FHA Denver Homeownership Venter and the Nebraska Mortgage Association will host “A Day with FHA” on September 6^th, a full day of training that will cover refinances, REO calculations, transactions that affect maximum LTVs, and other topical FHA updates.  Register at http://www.regonline.com/builder/site/Default.aspx?EventID24712 and select “HUD Training Day.”  Also available on the 6^th is a one-day training on FHA appraisals.  The agenda features appraisal protocol, updates to policy, and equipping participants with the tools to determine property eligibility.  Attendees are eligible to receive seven hours of continuing education credits that are accepted by the State of Nebraska for appraisal licensing requirements.  Interested parties can register at http://www.regonline.com/builder/site/Default.aspx?EventID24712.

On September 12^th and 13^th, the FHA’s Santa Ana Homeownership Center will hold several training sessions in Phoenix, AZ.   Two-day classes on automated vs. manual underwriting, feedback certificates and documentation, post-endorsement technical reviews, insuring deficiencies, FHA appraisals, and niche underwriting topics will all be available.  Though the programs are geared primarily towards underwriters, processors, and loan officers, all are welcome.  For those who can’t make it to Phoenix, the same training will be available in three other locations on different dates.  More information can be found at http://www.hud.gov/emarc/index.cfm?fuseactionemar.registerEvent&eventId32&updateN.

A webinar on the FHA’s energy efficiency measures will take place on September 13^th for those interested in knowing more about how the Energy Efficient Mortgage (EEM) program can assist borrowers in financing energy-saving improvements into their mortgages.  Designed for loan originators, processors, underwriters, brokers, and agents, the training will cover the program’s features and Home Energy Rating System reporting.  See http://www.hud.gov/emarc/index.cfm?fuseactionemar.registerEvent&eventId43&updateN to register.

As part of the recent updates made to Desktop Underwriter, Fannie will be holding a live webinar discussing the revisions to DU’s credit risk assessment and eligibility requirements on the weekend of October 20^th.  See http://cl.exct.net/?qs"06ed04439efbe99f9ed60d472bf3738c14b7e0f1752f389cb6a138152bf5c3 to register.

The NeighborWorks Training Institute will be holding several courses for housing counselors in Washington, D.C. from December 10-14^th.  More information and registration links are available at http://nw.org/network/training/upcoming/DCNTI12.asp.

Owing to high demand, Fannie will be holding an additional Know Your Options Customer CARE webinar on September 18th discussing single-point of contact loss mitigation.  Further details and registration links can be found at https://fanniemae.webex.com/mw0306lc/mywebex/default.do?nomenutrue&siteurlfanniemae&service6&main_urlhttps%3A%2F%2Ffanniemae.webex.com%2Fec0605lc%2Feventcenter%2Fevent%2FeventAction.do%3FtheAction%3Ddetail%26confViewID%3D1082375017%26siteurl%3Dfanniemae%26%26%26.
 
The National Reverse Mortgage Lenders’ Association will be holding its annual meeting in San Antonio, TX from October 15-17th.  Aimed at financial planners, researchers, and construction professionals as well as lenders, the program will discuss recent product innovation and the potential implications of the upcoming presidential election for the reverse mortgage industry. Speeches, panel discussions, debates, and workshops all feature on the agenda.  For more information and registration details, see http://www.nrmlaonline.org/.

Fannie will be hosting a webinar on Version 9.0 of Desktop Underwriter that will cover the updates to the system’s credit risk assessment and eligibility requirements on October 20th.  Interested parties can register at https://fanniemae.webex.com/mw0306lc/mywebex/default.do?nomenutrue&siteurlfanniemae&service6&main_urlhttps%3A%2F%2Ffanniemae.webex.com%2Fec0605lc%2Feventcenter%2Fprogram%2FprogramDetail.do%3FtheAction%3Ddetail%26siteurl%3Dfanniemae%26cProgViewID%3D123.

Well, enough about learnin’, and on to the markets. Yesterday’s Initial Jobless Claims, a leading indicator on the health of the economy, came in at 374,000, higher than the 370,000 expected – but not much. (Adding to the negative tone of the report was a higher revision to the previous week's reading.) With GDP ranging between 1.5-2%, it is hard to make much of a case for higher rates here in the United States. But consumer spending in the U.S. climbed in July for the first time in three months, +.4% in July, and incomes were +.3%. The UST 10-yr yield closed at 1.62%.

Early on we find the 10-yr at 1.64%, and MBS prices a shade worse. Although there is no official early close in the bond markets today, don’t look for much going on, aside from in the funding departments of mortgage banks, this afternoon.

Thanks to Guy Schwartz at CMG for this one: "According to Wikipedia, the term ‘Catch-22’ was coined by Joseph Heller in his novel Catch-22. Initially this is based on the explanation of the character Doc Daneeka as to why any pilot requesting a psych evaluation, hoping to be found not sane enough to fly (and thereby escape dangerous missions), would thereby demonstrate his sanity. Last week while processing a cash-out loan for one of our clients, we called to tell him that when we processed the 4506 T through the IRS, it came back with no record found. We had a copy of the tax return he gave us. We asked him when he filed his tax return and he then said, ‘I haven't, I was hoping to use the money from the refinance to pay my taxes.’ Oh boy! If this is not the quintessential Catch 22 we don't know what is: without the income on that tax return there is no loan. We should probably just cancel that loan.”

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 new CFPB Rule combining TILA & RESPA disclosures. 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.

Rob

(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx or www.TheBasisPoint.com/category/daily-basis. For archived commentaries, go to www.robchrisman.com. Copyright 2012 Chrisman LLC.  All rights reserved. Occasional paid notices do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)