Despite Late Day Weakness, Mortgages Improve On The Week

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Mar 30, 2012 4:12PM

MBS RECAP: Calm, Positive Morning Gets Rolled Over By Snowball Selling

“Across all operations in the schedule listed below, the Desk plans to purchase approximately $44 billion and sell approximately $43 billion in Treasury securities over the month of April.” There were some slight changes in the size of the buybacks..

Mar 30, 2012 3:20PM

Mortgage Rates Lower Overall This Week, But Higher Today

After improving yesterday, Mortgages Rates moved higher today , falling roughly in line with mid-week offerings depending on the lender . The weakness was abrupt, arriving late in the day, but was not scarcely enough to affect the current Best-Execution 30yr Fixed Conventional Rate of 4.0%. That means the weakness was seen in the form of slightly higher closing costs. Buydowns to 3.875% remain too steep to make sense for most borrowers, and would need to get closer to the buydown that currently exists…

Micro News

2:21 PM:

NY Fed Releases Next Month’s Buying Schedule

2:09 PM:

You Will See Reprices For The Worse if You Have Not Already

1:43 PM:

Negative Reprice Risk Increases as MBS Hit New Lows

1:01 PM:

Don’t Tune Out Just Yet…. Friday Afternoon Volatility

12:28 PM:

Slow and Steady Winning the Race for MBS. Friday Reprices?

10:00 AM:

ECON: Consumer Sentiment Stronger Than Expected

9:50 AM:

ECON: Chicago Purchasing Managers Index Weaker Than Expected

9:24 AM:

Apathy Monster Strikes! Bond Markets Slightly Better. Volume LOW

Around the Web

Video News

Europe Boosting Bailout Fund?

Is Spain the New Greece?

Weather Creating False Consumer Confidence Data?

Today’s Comments

Donald Scott

“Mostly lenders are worried about the saleability of the high LTV/CLTV loans. They are worried that they will be stuck with non-performing loans down the…”

Jason Harris

“I closed one last week with a $400K 1st, subordinated a $105,000 2nd lien and had an appraisal of $240K. (We require 2055 EXT for all Fannie’s) Saved…”

catherinecoy

“Donald Scott, can you give us a few “for instance” regarding UWM’s HARP overlays. Why in the world do lenders/investors need to gummy up…”

Today’s Q&A

“Time of your Closing”

“Who Is Responsible for a Mortgage When a Spouse Dies Without a Will?”

“Can an inherited foreclosure impact a minor’s credit?”

<!–

Today’s Forum Discussions

Selina KSD

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Selina KSD

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Selina KSD

“We offer you the superior quality golf sets from top brands such as Taylormade, Callaway, Ping, Titleist and Mizuno. No matter you buy one or a lot of…”

–>

[MBS Commentary] – MBS RECAP: Calm, Positive Morning Gets Rolled Over By Snowball Selling

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MBS RECAP: Calm, Positive Morning Gets Rolled Over By Snowball Selling

Posted to: MBS Commentary
Friday, March 30, 2012 4:09 PM

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MBS Live: MBS RECAP

Things could have gone either way into this month-end/quarter-end trading day, either running out of steam at recent highs (or lows in TSY yields) or extending recent gains just a bit more to reach a potential range boundary around 2.10% in 10yr yields.  We ended up getting the “running out of steam” option, and what had been an exceedingly calm session at improved prices quickly got ugly.  A few big sellers flushed out a small flood of hold-outs who’d been waiting to hit that magical 2.10% or at least 2.13% range boundary.  Those first two over-sized snowflakes were all that was needed to convince the hold-outs that bond markets were indeed out of steam for the month.  And the snowball was rolling…  MBS swung 3/8ths of a point to the downside, prompting widespread reprices for the worse.

Open MBS Live Dashboard
FNMA 3.5
102-25 : -0-05
FNMA 4.0
104-28 : -0-04
FNMA 4.5
106-12 : -0-04
FNMA 5.0
108-02 : -0-03
GNMA 3.5
104-09 : -0-05
GNMA 4.0
107-11 : -0-03
GNMA 4.5
108-27 : -0-02
GNMA 5.0
110-15 : -0-02
FHLMC 3.5
102-17 : -0-05
FHLMC 4.0
104-18 : -0-05
FHLMC 4.5
106-02 : -0-03
FHLMC 5.0
107-23 : -0-02
Pricing as of 4:08 PM EST
Afternoon Market Updates
A recap of MBS Market Updates provided by MND Analysts and streamed live to the MBS Live Dashboard.

Make sure you’re signed up for Reprice Alerts to be notified by email or text the instant these are issued.  You can manage all MBS Live email and text notifications thru the ‘My Alerts’ menu option at the bottom of the dashboard or by clicking here.

2:21PM  :  NY Fed Releases Next Month’s Buying Schedule

“Across all operations in the schedule listed below, the Desk plans to purchase approximately $44 billion and sell approximately $43 billion in Treasury securities over the month of April.”

There were some slight changes in the size of the buybacks… 2036-2042 range down from $1.75-2.25 bln to $1.50-2.00 bln. 2020-2022 Buybacks down from $4.50-5.25 bln to $4.25-5.00 bln.

Slightly negative for bond markets here as it decreases the level of guaranteed commitment to the long end, although mitigated by the fact that the overall scheduled buying amount remained unchanged. (In other words, the change is that the Fed is only promising $1.50 bln and $4.25 bln in those two operations whereas before they were in for a quarter of a billion dollars more.

2:09PM  :  ALERT: You Will See Reprices For The Worse if You Have Not Already

Yet another alert to emphasize the seriousness of the situation. The whole point of the “Tasuki Gap” conversation in this morning’s “Day Ahead” post was to introduce the possibility that markets had identified the near term range boundary around 2.14 in 10yr yields after not being able to make it back to the site of the initial gap from March 13th in the mid 2.13’s.

It’s now possible that we’re seeing exactly that. What began as a minor pop driven by some ECB headlines and a few large blocks of sales in TSY Futures quickly took on “snowball” characteristics resulting in the largest 10 minutes of volume of the entire week.

The battle in question is occurring in Treasuries at the moment. MBS are merely keeping pace, and outperforming as the normally do into TSY sell-offs. We’re looking for 10yr notes to find support between 2.2068 and 2.2120. If they do this, the bleeding should stop for the day, but it could be too little, too late to escape the sending of the message that the near term range boundary is in. In this case, we’d be looking at an equivocal range trade slightly higher in yield ahead of next week’s employment data.

Fannie 3.5’s are currently down 6 ticks on the day at 102-24 and 10yr yields are up over 4 bps to 2.2016, having briefly tested the previously mentioned 2.2120 level. Too soon to confirm it as a bounce, but we’re hoping…. If you haven’t seen a reprice for the worse yet, they’re coming. (the tasuki gap post mentioned about is linked here:)

1:43PM  :  ALERT: Negative Reprice Risk Increases as MBS Hit New Lows

This is more of an addendum to the previous alert to let you know that MBS have indeed broken below 102-29 and despite the “Friday afternoon” light volume in bond markets, price is price, and current prices justify increased risks of negative reprices.

Fannie 3.5’s are down 4 ticks on the day now at 102-26. 10’s are up 1.8 bps on the day at 2.177.

1:01PM  :  ALERT: Don’t Tune Out Just Yet…. Friday Afternoon Volatility

This isn’t necessarily a negative reprice alert, but for our audience members in the field, we wanted to let you know about a quick 4/32nds drop in MBS. 102-02’s have quickly become 102-30’s and the main culprit looks to be low volume and potentially EU-headlines related to Spain. But like so many snowballs, what starts with low volume can soon grow to problematic sizes.

Bottom line, exercise caution. 10yr yields are up a quick 2bps from their very best to very worst levels of the day in a matter of minutes. It looks like support is at least going to TRY to hold at these levels, which would go a long way toward mitigating any potential shifts in reprice risk, but if Fannie 3.5’s dip below 102-29, negative reprice risk would be picking up again.

12:28PM  :  ALERT: Slow and Steady Winning the Race for MBS. Friday Reprices?

On the one hand, MBS are at their best levels of the day and have been trading in “tortoise-like” fashion, slowly and steadily making their way higher. The move is analogized by 10yr benchmarks which are also at their best levels of the day. But there are caveats….

a) Low volume
b) day’s range is still fairly narrow
c) Fannie 3.5’s up 4/32nds to 103-01
d) 10’s still above important 2.13 pivot

Long story short, yes, such price action is historically indicative of the early reprice crowd inching their fingers toward to reprice button, but the extent to which that phenomenon plays out is mitigated by the day of the week, hour of the day (afternoon on a Friday = dead), and the general levels.

Whether or not we see positive reprices doesn’t much matter next to the fact that we’re not likely to see negative reprices (at least not for market-based reasons). To that end, we’re floaters until cut-off, unless things turn around markedly before then. Extremely quiet and boring out there this afternoon… We hope it stays that way.

Featured Market Discussion
A recap of the featured comments from the Live Chat on the MBS Live Dashboard.
Matt Hodges  :  REPRICE: 4:03 PM – Suntrust Worse
Steve Chizmadia  :  REPRICE: 3:05 PM – Pinnacle Worse
Ira Selwin  :  REPRICE: 2:36 PM – Franklin American Worse
Matthew Graham  :  “I know you know this AH, but for anyone who doesn’t, it can be a bit of a paradigm shift to wrap your mind around the fact that this whole sell-off is dependent on a few big trades starting a snowball… It really could just as easily have gone the other way if those trades were buys instead of sells.”
Andrew Horowitz  :  “had a nice run through yesterday nothing to drive it today, profit taking maybe and technical plays “
Matthew Graham  :  “this just as easily could have gone the other way this afternoon.”
Matthew Graham  :  “I started to get concerned about this yesterday when 10’s looked out of gas to move much lower. I know there was a lot of that sentiment “out there,” but fairly balanced with others who anticipated a more sincere test of 2.13+, 2.10 or 2.096″
Andrew Horowitz  :  “failure at 2.14 maybe MG?”
Matthew Graham  :  “The Tasuki gap thing really started out as more of a conversation piece and a bit of lark this morning, but that’s exactly the point of it… Tasuki is the sash of a kimono, and the Tasuki gap pattern in candlesticks was thus named because the kimono fabric hangs over the sash, but is not supposed too completely envelope it. It could indeed turn out to be “nothing to see here,” or it could evolve into a nasty long term pivot point. There’s no way to know that right now.”
Jason Nugent  :  REPRICE: 2:28 PM – USBank Worse
Jason Nugent  :  REPRICE: 2:22 PM – Sun West Mortgage Worse
Matthew Graham  :  “originator selling quickly ramping up over 2 bln”
Matthew Graham  :  “aforementioned “critical support” broken down.. “
Timothy Baron  :  “This is getting fugly.”
Thomas Nelson  :  REPRICE: 2:19 PM – NYCB Worse
Charles Beasley  :  REPRICE: 2:17 PM – Chase Worse
Jason Nugent  :  REPRICE: 2:17 PM – Wells Fargo Worse
Chris Kopec  :  “Who ran over my turtle?”
Matthew Graham  :  “this is a real battle folks… biggest 10 minutes of volume of the week”
Chris Kopec  :  “It was just insane of me to think we could have an event-free Friday afternoon.”
Matthew Graham  :  “2.2068 to 2.2120”
Brent Borcherding  :  “It’s like you can know what they’re going to do before they do it, if you pay attention.”
Ira Selwin  :  REPRICE: 2:00 PM – Franklin American Worse
Matthew Graham  :  “2.21 is critical support in 10’s “
Matthew Graham  :  “getting some reports now of a few big sellers forcing the hands of a few others, starting the snowball rolling. You could be seeing what the markets are identifying as the near term range boundary. “
Wayne Simms  :  “Consumer here — ran my numbers through the chat ringer yesterday and just now locked my HARP refi at 4.125 — many thanks to the collective wisdom of the board.”
Matthew Graham  :  “at this point, it’s technical/snowball selling. Kicked off with various EU Headlines re: spain/ECB”
Bill Laffey  :  REPRICE: 1:48 PM – Provident Funding Worse
Michael Tadros  :  REPRICE: 1:46 PM – Interbank Worse
John Rodgers  :  “I’m locking so it won’t matter”
John Rodgers  :  “Hopes are fading for 103-5”
Matthew Graham  :  “interesting article for discussion: http://www.mortgagenewsdaily.com/03292012_mortgage_referrals.asp&#8221;
Daniel Kramer  :  “NYCB, but they are a nightmare to deal with, in my opinion”
Ira Selwin  :  “True Jumbos? Did you check out US bank ?”
Matt Devine  :  “anyone know who has some competitive rates for jumbo loans?”
Matthew Graham  :  “New bill introduced today in congress: “H.R. 4323: To amend the Truth in Lending Act to improve upon the definitions provided for points and fees in connection with a mortgage transaction.””

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[Mortgage Rate Watch] – Mortgage Rates Lower Overall This Week, But Higher Today

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Mortgage Rates Lower Overall This Week, But Higher Today

Posted to: Mortgage Rate Watch
Friday, March 30, 2012 3:20 PM

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After improving yesterday, Mortgages Rates moved higher today, falling roughly in line with mid-week offerings depending on the lender.  The weakness was abrupt, arriving late in the day, but was not scarcely enough to affect the current Best-Execution 30yr Fixed Conventional Rate of 4.0%. That means the weakness was seen in the form of slightly higher closing costs.  Buydowns to 3.875% remain too steep to make sense for most borrowers, and would need to get closer to the buydown that currently exists from 4.125% to 4.0% in order to vie for the Best-Execution title.  That said, some lenders would be able to structure scenarios lower than 4.0%.

 (read more about Best-Execution calculations).  

Today’s market movements essentially played out according to the concerns we raised yesterday.  This doesn’t always happen, and we don’t normally lean too far in one direction or another, but yesterday we did, and it helps tell the story of how things happened today.  Here’s what we said:

We’re more concerned about the momentum of the recent improvement in rates being able to continue after today’s trading than we were yesterday.  This might seem odd given the fact that rates held steady yesterday but improved today, but underlying levels in bond markets failed to break convincingly into the stronger territory they’d been in before their major movements on 3/13 and 3/14.  

Of all the days this week, we see tomorrow as the most dependent on the scheduled economic data to help bond markets decide whether or not they’re out of steam following this much-needed correction from weaker mid-month levels.  If they are indeed out of steam, that will likely not help mortgage rates tomorrow.  Based on the fact that we’ve recovered quite a bit of lost ground over the past two weeks and that a negative day tomorrow could mark a temporary shift in momentum, today stands out as a safe opportunity to recapture some of those losses.  In other words, if you’d been floating over the past two weeks, waiting for things to come back, we’re at levels where it’s starting to make more sense to lock in those gains without hoping for more.

This “running out of steam” is essentially what happened.  Bond markets tried to eke out a few more gains, and were even able to do so in the morning trading, but the afternoon saw widespread instance of “giving up” those goals of further improvement.  That retreat led to a fairly abrupt worsening of levels in MBS (the Mortgage-Backed Securities that most directly influence mortgage rates), and most lenders recalled rate sheets to put out slightly higher versions.  

Next week brings the important Employment Situation Report on Friday.  Even before then, market moving data and events dot the calendar right from the beginning of the week.  In a vacuum of economic data and events, rates would continue to get worse next week.  Betting on lower rates is to hope that the data turns out to be economically worse-than-expected or that a news headline rattles market confidence and drives better demand for fixed income investments like MBS.  Ultimately, Friday’s Jobs Report is the “biggie,” and will serve to either accelerate or undo some of the progress or deterioration created in the first four days of the week. 

Today’s BEST-EXECUTION Rates

  • 30YR FIXED –  4.0%
  • FHA/VA -3.75%
  • 15 YEAR FIXED –  3.25%-3.375%
  • 5 YEAR ARMS –  2.625-3.25% depending on the lender

Ongoing Lock/Float Considerations

  • Rates and costs continue to operate near all time best levels
  • We’re currently further away from the very best levels than we have been in recent months
  • We’ve broken away from a long, stable trend and are expecting greater volatility
  • Rates could easily move higher or lower, but given the above facts, there seems to be more risk than reward regarding floating
  • (As always, please keep in mind that our talk of Best-Execution always pertains to a completely ideal scenario.  There can be all sorts of reasons that your quoted rate would not be the same as our average rates, and in those cases, assuming you’re following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).

 

 

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[MND NewsWire] – Key Factors In Real Estate Agents Recommendations of Mortgage Providers

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Key Factors In Real Estate Agents Recommendations of Mortgage Providers

Posted to: MND NewsWire
Thursday, March 29, 2012 9:36 AM

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Real estate agents appear to be playing a significant role in determining who writes their customers’ mortgages.  The results of a new study, Key Factors in the Referral of Homebuyers to Mortgage Originators has found that homebuyers rely on their real estate agent to recommend a specific lender in about one-third of the mortgage-financed home purchases in the U.S.

The study, sponsored by Inside Mortgage Finance utilized a survey of 1,800 real estate agents and was conducted by Campbell Surveys in January.  The research was aimed at understanding the factors that are involved in mortgage referrals to lenders and to identify the issues most likely to impact a home purchase transaction in the current environment.

The report says that, “Although real estate agents have never been shy about recommending lenders to homebuyers,” it appears that agents pay a particularly important role in referring customers where financing contingencies have become so central to the transaction.  Agents reported that they recommended one or more specific mortgage providers in nearly 60 percent of the transactions where they represented the homebuyer.  Of those lenders who reported making such referrals, more than three-quarters said they had recommended more than one firm.

Agents reported that their recommendations were accepted by homebuyers more than 58 percent of the time.  This indicates that real estate agents control or influence 34 percent of mortgage-financed home purchases.  Where homebuyers did not follower their agents’ recommendation, agents reported that it was generally because the homebuyer had an existing banker relationship or a pre-approval letter from another mortgage provider.

Real estate offices frequently partner with a lender or, in the case of large firms, have their own lending division.  A majority of the respondents in the Campbell survey reported that such a relationship existed in their firm but they also indicated that this was not a significant factor in their recommendation of a lender.  Only 16 percent of home purchases involved a lender in such a partner relationship.

 The report says this lack of enthusiasm for “mortgage partners” is partially explained by the perception that real estate agents get little out of referring business to these partnerships.  It quotes one agent as complaining that such referrals are a one-way street.   “Our company has an in-house mortgage person. We do not use him because he generates no leads for us. The lender our team of agents uses sends many leads our way. We believe we should support those who help support us,” the agent said.

Responding agents were asked to rank 22 factors that determined which mortgage providers they chose to recommend.  The top ranked factor was “reliable preapproval letters.  However, this also ranked first in their ranking of 22 significant problems with mortgage financing.  The report says, “In a housing market where getting approved for a mortgage can be a big challenge, the new study found that preapproval letters play an outsized role in how mortgage lenders are perceived by agents.  In fact, the possibility that even with a preapproval letter a borrower could face a mortgage rejection helps explain why cash homebuyers generally pay about 10 percent less than homebuyers requiring a mortgage when purchasing a home

Agents rated “returns phone calls and emails” and “reliable in meeting a closing date” almost as high as reliable pre-approvals in recommending a lender.   “Competitive rates” ranked number five.

 When asked to rate specific national direct lenders as well as a generic “local lender” on a range of factors. The results showed that local mortgage lenders with reliable preapprovals and strong personal service tended to rate the highest among agents.

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[MND NewsWire] – ‘Too Big To Fail’ Delaying Recovery, Undermining Public Trust

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‘Too Big To Fail’ Delaying Recovery, Undermining Public Trust

Posted to: MND NewsWire
Monday, March 26, 2012 2:00 PM

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The Federal Reserve Bank of Dallas recently published an essay titled Choosing the Road to Prosperity:  Why We Must End Too Big to Fail – Now” written by its Executive Vice President and Director of Research Harvey Rosenblum.  This is part two of a summary of that essay.  Part one can be found here: Is Fed Endorsing Ending to Too Big to Fail?

When financial institutions started to fail and credit froze in 2008 the Federal Reserve used the customary tools to get the economy moving again, first cutting and keeping the federal funds rate – what banks charge one another for overnight loans – close to zero.  This usually makes short-term credit available at lower rates, driving borrowing by consumers and businesses while pushing up the value of assets thus bolstering business balance sheets and consumer wealth.  Declining rates drive down the dollar making U.S. exports cheaper and more attractive overseas as long as other countries don’t also drive down rates.  Second, the Fed has injected billions of dollars into the economy by purchasing long-maturity assets on a massive scale, pushing long term rates down as well.  While this reduces the burden on borrowers it punishes savers, especially those who depend on interest payments.

While growth restarted in mid-2009 it has been tenuous and fragile and stock market gains while large have been volatile.  Job growth has been disappointing with only a third of the jobs lost to the recession regained.

“The sluggish recovery has confounded monetary policy.  Much more modest Fed actions have produced much stronger results in the past.  So what’s different now?”  Part of the answer is excesses that have not been wrung out of the system including falling house prices that continue to drag down the housing market.  “The Too Big to Fail (TBTF) banks remain at the epicenter of the foreclosure mess and the backlog of toxic assets standing in the way of a housing revival.”

Another part of the answer is the monetary policy engine is not hitting on all cylinders.  Low federal funds rates haven’t delivered a large expansion of credit because if one part of the economy isn’t functioning properly it degrades the performance of the rest.  Some contributions to recovery such as asset value and wealth have been weaker than expected partly because burned investors are demanding higher-than-ever compensation for risk.

Recovery also requires well capitalized financial institutions and the machinery of monetary policy haven’t worked well because of TBTF.  Many of the biggest banks still have balance sheets clogged with toxic assets while smaller banks are in much better shape either because they didn’t make big bets on mortgage-backed securities, derivatives and other risky investments or if they did they have already failed. 

Injecting capital into the system as the Fed did in 2008 was necessary but one downside was a residue of distrust in the government and the banking system and an erosion of faith in American capitalism.  It showed ordinary workers and consumers a “perverse side of the system” where they see that normal rules of markets don’t apply to the rich, powerful, and well connected.  TBTF violated basic tenants of a capitalistic system.  Capitalism requires:

  • The freedom to succeed and the freedom to fail. Hard work and good decisions should be rewarded; more importantly, bad decisions should lead to failure.
  • Government to enforce the rule of law. This requires maintaining a level playing field. TBTF undermines equal treatment, reinforcing the perception of a system tilted in favor of the rich and powerful.
  • Accountability. The perception and reality is that virtually nobody has been punished for their roles in the financial crisis.

The economy faces two challenges.  The short term must focus on repairing the mechanisms so the impacts of monetary policy will travel through the economy faster and with greater force.  In the long term the country must ensure that taxpayers won’t be on the hook for another massive bailout.  Both challenges require dealing with the threat posed by TBTF institutions.

The government’s main response to the crisis was the Dodd-Frank Wall Street Reform and Consumer Protection Act and its effectiveness will depend on its final rules.  The lack of regulatory certainty has already undermined growth and is delaying repair of the lending and financial markets parts of the monetary policy engine. 

Policymakers can have the most impact with Dodd-Frank by requiring banks to hold more capital, “tacking on additional requirements for the big banks that pose systemic risk, hold the riskiest assets and venture into the more exotic realms of the financial landscape.”  Capital cushions should be tied to size, complexity, and business lines and give TBIF institutions more skin the game and restore market discipline.  Small banks didn’t ignite the regulatory crisis and shouldn’t face the same burdens as big banks that follow risky business models.  TBTF banks’ sheer size and their presumed guarantee of government help provided a significant edge – perhaps at least a percentage point – in the cost of raising funds.  Making them hold more capital will level the playing field among banks.

Higher capital requirements will require the biggest banks to raise equity through stock offerings or by retaining earnings through reduced dividends.  “Banks that clean up their balance sheets will have a better chance at raising new funds while laggards will find it more difficult and may further weaken and need to be broken up, their viable parts sold off to competitors.  It is important to redistribute these assets so as to enhance overall competition.”

While the near-zero federal funds rate helped many banks’ capital rebuilding process it could be argued that the zero interest rates are taxing savers to pay for recapitalizing those who caused the problem in the first place.

Unfortunately the sluggish recovery is a cost of the long delay in setting new standards for capital.  Given the urgent need to restore growth and a healthy job market “the guiding principles for bank capital regulation should be:  codify and clarify, quickly.  There is no statutory mandate to write hundreds of pages of regulations and hundreds more pages of commentary and interpretation.  Millions of jobs hang in the balance.”

As part of its strategy to end TBTF, Dodd-Frank expanded the role of regulators and added new ones, in effect shifting responsibility from the Fed to Treasury and injecting politics into the mix.  The current remedy for insolvent institutions, i.e. FDIC resolution, works well for smaller banks but TBTF rescues over the last three decades have penalized equity holders while protecting bond holders and bank managers.  Disciplining the management of big banks, just as happens at smaller bank, would reassure a public angry with reckless behavior necessitating government assistance.

The question remains whether the new resolution procedures will work in the next crisis.  Because big banks often follow parallel practices, odds are that several will get into trouble at the same time and this might overwhelm even the most far-reaching regulator scheme.  TBTF might become TMTF – too many to fail – as happened in 2008.

A second issue is credibility.  The Implicit guarantee imputed to Fannie Mae and Freddie Mac became explicit for them and for big banks when the federal government did indeed come to their rescue.  Words on paper only matter when bankers and their creditors actually believe that Dodd-Frank puts government out of the bailout business although the new law has begun enforcing some market discipline.   “The credibility of Dodd Frank’s disavowal of TBTF will remain in question until a big financial institution actually fails and the wreckage is quickly removed so the economy doesn’t slow to a halt.  Nothing would do more to change the risky behavior of the industry and its creditors.”

The survivors of 2008 have not changed; their corporate cultures remain based on short -term incentives of fees and bonuses, they have the lawyers and money to resist federal regulation and, their significant presence in dozens of states confers enormous political clout.

The Dallas Fed has advocated breaking up the nation’s largest banks into smaller units but it won’t be easy.  There are thorny issues about how to reduce the size of banks; the level of concentration deemed save will be difficult to determine, and the big financial institutions will dig in to challenge any breakups.  But a financial system composed of enough banks to ensure competition in funding businesses and households with none big enough to put the overall economy in jeopardy will give the country a better chance of navigating through future financial difficulties and this level playing field will restore faith in market capitalism.

As stated at the beginning, the problems that periodically roil the financial system are the result of complacency arising from sustained good times, greed and irresponsibility that run riot without market discipline, the exuberance that overrules common sense, and the complicity of going along with the crowd.  These are natural to humans and we cannot eliminate them, merely be alert to them.  But concentration in the financial sector is not natural but rather the result of artificial advantages including that some banks are TBTF.  Human weakness will cause market disruptions; big banks backed by government turn them into disasters.

Dodd Frank hopes to eliminate TBTF but the new law leaves the banks largely intact and they remain a danger to the financial system.  “The road to prosperity requires recapitalizing the financial system as quickly as possible.  The safer the individual banks, the safer the financial system.  The ultimate destination-an economy relatively free from financial crises-won’t be reached until we have the fortitude to break up the giant banks.”

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[MBS Commentary] – MBS MID-DAY: Trading Near Best Levels in Low Volume

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MBS MID-DAY: Trading Near Best Levels in Low Volume

Posted to: MBS Commentary
Friday, March 30, 2012 11:09 AM

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The day has been woefully uneventful so far, at least with respect to what it might have been…  Rather than get any sort of meaningful “vote” from market movements as to which way the momentum will shift, we’re left with what’s shaping up to be a mostly sideways day.  We’re thankful that it’s at least one of those sideways days that leaves bond markets in slightly better territory.  Fannie 3.5’s have explored 103-00+ prices on several occasions and 10yr yields have tested below 2.15 a few times.  We’d say that 10’s holding support at 2.16’s would basically be a non-event, and MBS wouldn’t much care.  In other words, unless 10yr yields break 2.168 or 2.147, the day is over.

Open MBS Live Dashboard
FNMA 3.5
103-00 : +0-03
FNMA 4.0
105-02 : +0-02
FNMA 4.5
106-16 : +0-00
FNMA 5.0
108-04 : -0-01
GNMA 3.5
104-16 : +0-03
GNMA 4.0
107-16 : +0-02
GNMA 4.5
108-29 : +0-00
GNMA 5.0
110-17 : +0-01
FHLMC 3.5
102-25 : +0-03
FHLMC 4.0
104-25 : +0-02
FHLMC 4.5
106-06 : +0-01
FHLMC 5.0
107-25 : +0-00
Pricing as of 11:08 AM EST
Morning Market Updates
A recap of MBS Market Updates provided by MND Analysts and streamed live to the MBS Live Dashboard.

Make sure you’re signed up for Reprice Alerts to be notified by email or text the instant these are issued.  You can manage all MBS Live email and text notifications thru the ‘My Alerts’ menu option at the bottom of the dashboard or by clicking here.

10:00AM  :  ECON: Consumer Sentiment Stronger Than Expected

  • RTRS – US Consumer Sentiment Final March 76.2 (Consensus 74.7) Vs Preliminary March 74.3
  • RTRS – Current Conditions Index Final March 86.0 (Consensus 84.5) Vs Preliminary March 84.2
  • RTRS – Consumer Expectations Index Final March 69.8 (Consensus 68.0) Vs Preliminary March 68.0
  • RTRS – 12-Month Economic Outlook Index Final March 79 Vs Preliminary March 74
  • RTRS – 1-Year Inflation Outlook Final March 3.9 Pct Vs Preliminary March 4.0 Pct
  • RTRS – 5-Year Inflation Outlook Final March 3.0 Pct Vs Preliminary March 3.0 Pct
  • RTRS – Consumer Sentiment Index And Current Conditions Index At Highest Since February 2011

9:50AM  :  ECON: Chicago Purchasing Managers Index Weaker Than Expected

*PMI at 62.2 vs 63.0 consensus, 64.0 in Feb
*New Orders 63.3 vs 69.2 last time
*Prices Paid 70.1 vs 65.6 in Feb
*Employment Index 56.3 vs 64.2 last time

The Chicago Purchasing Managers reported the March Chicago Business Barometer paused after February’s ten month high. While slowing, the Chicago Business Barometer marked its fifth month above 60, a 2-1/2 year period of expansion and trend data improved. Increases were seen in five of eight Business Activity Indexes, highlighted by significant advances in Prices Paid and Inventories, and a notable lengthening in lead times for Production Material.

9:24AM  :  ALERT: Apathy Monster Strikes! Bond Markets Slightly Better. Volume LOW

So far, this morning is not living up to any expectations or hopes we had for it to act as some sort of tie-breaking vote as to continue the rally down to range boundaries or start a bounce back a few bps early. It’s a lot like getting told that to meet for a special gathering on the 9th green at 9pm only to be met by the sprinklers turning on.

Despite the Euro-zone raising their combined firewalls from €500 to €700 bln, as well as a smattering of austerity-related headlines out of Spain, overnight volume and volatility were low. But the most surprising part of the morning has been the lack of a reaction to the Incomes and Outlays report.

First of all, let’s be clear… Bond markets are slightly improved, and we’re happy about that. But we’ve basically been sideways and in excruciatingly low volume. The whole thing is totally noncommittal whereas by all rights, it could have been the opposite. A +0.8 spending figure is enough to revise GDP estimates higher, but markets aren’t trading it that way… they’re not really trading much of anything in any way.

If the Incomes/Outlays report didn’t do the trick, we’re not overly-hopeful that Chicago PMI at 9:45 or Consumer Sentiment at 9:55 are the two epic pieces of market data that will finally provide the big picture for market movement this morning. After that, the day is basically over with the exception of Fed Twist buying from 1015-1100am. Either way, markets already missed their chance to “show up” today for the one event where we expected to see them (unless they’re running really late!). Joke’s on us I suppose… Maybe NFP week ahead will do the trick…

8:37AM  :  ECON: Personal Consumption Expenditures Rise, Income Lower

*spending up 0.8 vs 0.6 consensus
*income up 0.2 vs 0.4 consensus
*core PCE price index +0.1, as expected
*Core PCE year-over-year up 2.3 vs 2.4 consensus

Personal income increased $28.2 billion, or 0.2 percent, and disposable personal income (DPI) increased $18.9 billion, or 0.2 percent, in February, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $86.0 billion, or 0.8 percent. In January, personal income increased $26.5 billion, or 0.2 percent, DPI increased $5.0 billion, or less than 0.1 percent, and PCE increased $40.9 billion, or 0.4 percent, based on revised estimates.

Real disposable income decreased 0.1 percent in February, compared with a decrease of 0.2 percent in January. Real PCE increased 0.5 percent, compared with an increase of 0.2 percent.

Featured Market Discussion
A recap of the featured comments from the Live Chat on the MBS Live Dashboard.
Matthew Graham  :  “yeah, 11am.”
Brent Borcherding  :  “Fed buying then we’re done today?”
Brent Borcherding  :  “It just makes me angry, but you know this.”
Matthew Graham  :  “yeah, I see deceleration. figured I’d post a bullish view to counterbalance the innate bearishness of the average MBS watcher”
Brent Borcherding  :  “Or its the trailing and is the beginning of the slow down, with more slowed growth ahead for Europe. 2 can play this game.”
Matthew Graham  :  &quot;a more bullish-leaning perspective on Chi-PMI : &quot;CHRISTOPHER LOW, CHIEF ECONOMIST, FTN FINIANCIAL, NEW YORK &quot;It’s down a little bit more than expected but anything over 60 is respectable. New orders weakened, but dropping from 69 to 63, again, is not a big deal. The real way to look at these numbers is five months in a row over 60. Chicago is more sensitive to export weakness than the national index and given what’s going on in Europe and Asia I think it’s remarkable that the number is wher&quot;
Brent Borcherding  :  “It was just an extension of the previous rule…came out in December of 2011 good through 2012.”
Matthew Graham  :  “RTRS- THOMSON REUTERS/U. OF MICH CURRENT CONDITIONS INDEX FINAL MARCH 86.0 (CONSENSUS 84.5) VS PRELIMINARY MARCH 84.2 “
Matthew Graham  :  “RTRS – THOMSON REUTERS/U. OF MICH CONSUMER SENTIMENT INDEX AND CURRENT CONDITIONS INDEX AT HIGHEST SINCE FEBRUARY 2011 “
Matthew Graham  :  “RTRS- THOMSON REUTERS/U. OF MICH US CONSUMER SENTIMENT FINAL MARCH 76.2 (CONSENSUS 74.7) VS PRELIMINARY MARCH 74.3 “
Matt Hodges  :  “okay, with the normal restrictions of not having a realtor selling, etc?”
Brent Borcherding  :  “I’m certain they do.”
Matt Hodges  :  “Is FHA still allowing less than 90 day flips?”
Jude Bridwell  :  “tough to break that 2.15 barrier”
SMTM  :  “103”
Dmitriy S  :  “bring on 103!”
Brent Borcherding  :  “whiff”
Matthew Graham  :  “RTRS – CHICAGO PMI EMPLOYMENT INDEX 56.3 IN MARCH VS 64.2 IN FEBRUARY “
Matthew Graham  :  “RTRS – CHICAGO PURCHASING MANAGEMENT NEW ORDERS INDEX 63.3 IN MARCH VS 69.2 IN FEBRUARY “
Victor Burek  :  “another miss”
Matthew Graham  :  “RTRS – CHICAGO PURCHASING MANAGEMENT INDEX 62.2 IN MARCH (CONSENSUS 63.0) VS 64.0 IN FEBRUARY “
Brayden Alexander  :  &quot;He said he will be right back, just catching a smoke, plans on being a facemelter&quot;
Matthew Graham  :  “he was here earlier”
Raul Lopez  :  “103 today?”
Matthew Graham  :  “we’re not overly-hopeful that Chicago PMI at 9:45 or Consumer Sentiment at 9:55 are the two epic pieces of market data that will finally provide the big picture for market movement this morning. After that, the day is basically over with the exception of Fed Twist buying from 1015-1100am.”
Jeff Anderson  :  “Is the day over after Chicago PMI and Mich Sentiment?”
Jeff Anderson  :  “Great stuff, MG.”
Matthew Graham  :  &quot;lol, I was waiting for a comment on it… thanks JA. first ‘lol&quot; of the morning&quot;
Jeff Anderson  :  &quot;Agreed on the locking up a few today. But who’s not loving the Upside Tasuki Gap. I mean, c’mon!&quot;
John Rodgers  :  “Correct”
Matt Hodges  :  “it’s a potentially very good day to lock, that’s all”
Matt Hodges  :  &quot;we’ve enjoyed much in gains over this week. Who knows about EU tapebombs might come out this weekend&quot;
Matthew Graham  :  “RTRS – US FEB PERSONAL SAVING RATE 3.7 PCT, SMALLEST SINCE AUG 2009, VS JAN 4.3 PCT “
Victor Burek  :  “new coupon..auction yesterday”
John Rodgers  :  “Why is the 7 yr getting such a strong bid?”
Victor Burek  :  “weather related?”
Matthew Graham  :  “I’m surprised stocks aren’t rallying on a +.8 spending figure”
Matthew Graham  :  “RTRS- US FEB REAL CONSUMER SPENDING +0.5 PCT VS JAN +0.2 PCT (PREV 0.0 PCT) “
Matthew Graham  :  “RTRS – US FEB CORE PCE PRICE INDEX +0.1 PCT (+0.1310; CONS +0.1 PCT) VS JAN +0.2 PCT (PREV +0.2 PCT) “
Matthew Graham  :  “RTRS – US FEB PERSONAL INCOME +0.2 PCT (CONS +0.4 PCT) VS JAN +0.2 PCT (PREV +0.3 PCT) “
Victor Burek  :  “income lower”
Matthew Graham  :  “RTRS – US FEB PERSONAL SPENDING +0.8 PCT, LARGEST INCREASE SINCE JULY, (CONSENSUS +0.6 PCT) VS JAN +0.4 PCT (PREV +0.2 PCT) “

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[Pipeline Press] – LO Comp & The CFPB; FHA & Seller Contributions; Redwood Trust, ewarehouse Chatter

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LO Comp & The CFPB; FHA & Seller Contributions; Redwood Trust, ewarehouse Chatter

Posted to: Pipeline Press
Friday, March 30, 2012 8:43 AM

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What is more fun to talk about, the latest CFPB power grab, an investor changing its appraisal review process, or the 42-state Mega Millions lottery? Apparently the previous $360 million wasn’t enough to grab nationwide attention – but now we’re at a record $500 million. The Federal, state, and local governments are all licking their chops, as is everyone who bought a ticket not knowing that a lottery is a tax on people who don’t know math. Expected winnings have actually decreased since the last play (when no one won) due to the sheer number of people that are now entered, and the odds of winning the grand prize are less than 175 million to 1. Folks should know which of the 56 balls have come up most often (11, 14, 18, 33 & 48), what numbers are most often played (numbers less than 30 due to birthdays), and so forth if they want an edge.

What is “election uncertainty“? Election uncertainty is the buzz-term that economists around the world are talking about. If you take the world’s GDP, and which countries make up the lion’s share of that gross domestic product total, you’ll find that the majority of them have elections this year and next. And these elections, whether they’re in France, Egypt, Iceland, Japan, Palau, or the United States, can easily move markets. So no matter how exciting the NCAA men’s games are tomorrow, be sure to blurt out, “This isn’t half as interesting as election uncertainty!”

Bailout? “No Way!” says the FHA. Well, at least “Unlikely!” Straight from the horse’s mouth…

Bailout or not, there are indeed things going on, or that might go on, with the FHA program that are causing concern. For example, the proposed reduction in seller contributions. When a seller sells, they can’t always afford to pay a Realtor and throw 6 points at the deal. Banks and homebuilders can, and do, pay those points, but with a cap, that can’t happen anymore. It will level the field a bit for private sellers of homes versus say homebuilders or banks (read more HERE).  And yesterday the commentary mentioned the new collection policy. Any lender with a portion of its business in the sub 660 FICO region is quick to point out that this change targets the traditional “low to moderate income” borrowers.  How much of the borrower population will be impacted is anyone’s guess, but of greater concern/question is, “Have economics caused the FHA’s mission to change, and by how much?”

Yesterday the commentary mentioned, “Over at Freddie Mac, it has expanded its policy on HASP Open Access such that HVEs are now permitted for one or two-unit properties only and must not be more than 120 days old at the Note date.  HVE values are calculated by the initial LP Feedback Certificate, and subsequent HVE values will have to be determined, if it has expired, by running the property through CoreLogic, or, if it hasn’t expired, by pulling an additional HVE using CoreLogic.” I received this clarification: “For Freddie, lenders are not limited to CoreLogic.  They can obtain HVE valuations for free through LP or our look-up tool.  But, in addition to CoreLogic, they can also obtain HVE values (for the first time or to replace an expired valuation) through CBC Innovis, Equifax, Dataquick, and LPS.” Thank you very much.

With the industry seeming to pin its non-agency hopes, for better or worse, on Redwood Trust, which lost its CFO several months ago, another CFO wrote yesterday, “It is good to see another deal put out by Redwood. But it might be useful if you raised a red flag regarding their taxable income versus their dividends. Specifically http://www.redwoodtrust.com/, Investor Information, Redwood Review, Page 4 of the last report. Compare taxable income to dividends…over 9 quarters they are down a total of ($0.53) per share for taxable income but paid dividends of $2.25. If one multiplies $2.25 by 78 million shares you find $175 million of capital returned to shareholders on top of the reported losses. One can’t help but wonder if this is a sustainable business model. Given so much weight and attention are given to their deals, shining a light on this appears to be relevant.” (On Page 8 management notes, “We believe we can generate the capital needed for the vast majority of these new investments and dividends through cash from operations, principal payments from our investments, asset sales, and obtaining debt financing on our commercial portfolio.”)

The Consumer Financial Protection Bureau plans on taking a close look at the Federal Reserve’s controversial loan officer compensation rule and will issue a new proposal “soon.” CFPB acting assistant director Peter Carroll recently stated that the agency is particularly interested in transactions where the consumer pays discount points and “how that affects creditor-paid transactions,” he said. As we know all too well, the Fed rule prohibits dual compensation and restricts LOs at mortgage brokerage firms from being compensated by the consumer and the wholesale lender in the same transaction, and bans LOs from making less money on a deal and passing that savings onto the borrower. The Dodd-Frank Act transferred the Fed’s jurisdiction for the LO compensation rule to the new consumer bureau in July 2011. “We are re-visiting some of the issues around that rulemaking as well as other items that were given to us in the Dodd-Frank Act,” Carroll said. Carroll heads the CFPB’s “Office of Mortgage Markets” which monitors the residential finance industry. His group is responsible for how rules impact both consumers and lenders, per reporter Brian Collins. It is interesting, if this indeed came from the CFPB since there is open disagreement about its exact role, how to accomplish it, where to draw the lines, and how to examine for it.

I can’t ignore the clamoring about ewarehouse – comments are really testing the “Any publicity is good publicity” motto. I received this note from the owner of a mortgage bank in the western U.S.: “I also suspect ewarehouse is a scam. The rep who came to visit us is someone we have known for many years. We stroked a $1,000 check. Oh well. They came back to us with a massive list of requests. We had decided to give them nothing until they were able to give us some references. Their response was that at this time all their clients who are actually funding are on the East Coast. We said, “Fine. Who are they?” – Stone silence. I checked on who owns the ewarehouseone web site, and tried to find any affiliations. It is impossible. Something about the site and its ownership is not passing the ‘smell test’.”

Comments also continue about Fannie & Freddie doing principle reductions, especially with the comments from Treasury Secretary Geithner this week. But what the proponents of principal reductions at Fannie and Freddie don’t talk about is what a transfer of wealth from taxpayers (again) to large banks such a program would represent. As of last September, only 2.5% of Fannie and Freddie mortgages were seriously delinquent, versus about 7% for banks’ mortgages. But Fannie and Freddie write-downs are an easy thing to suggest, even though they would constitute a direct and sizable gift from taxpayers to the largest banks.

As any LO who has been around for a while will tell you, many banks hold second liens on the same properties for which Fannie and Freddie either own the first mortgage or have guaranteed. If principal amounts on these first mortgages are reduced while leaving the second liens intact, those seconds become much more likely to be paid off over time. With no principal reduction, the banks would have to write off many of those second liens. As such, principal write-downs would help our banks – which is a whole ‘nother debate.

Through all of this, at least mortgage rates remain relatively stable. Yes, they’ve gone up some, but have come back down a little. Although Europe has been quiet for many weeks, if the issues there begin to increase look for another flight to safety in our market, which tends to push rates down. Greece may have to restructure their debt again. On top of that, Portuguese yields have reversed their recent tightening – the WSJ suggests their day of reckoning is coming.

Today is week-end, month-end, quarter-end, and Japan begins a new fiscal year on Monday. After a relatively quiet overnight, and this morning’s Personal Income (+.2%) and Personal Consumption (+.8%), we find the 10-yr down to 2.15% and MBS prices pretty much unchanged. Recently mortgage prices have done very well, given the pick-up in supply (which could be reflected in next week’s MBA numbers). Will the Fed do QE3? Will Asia Buy once quarter end is over? Will Louisville beat Kentucky? “Would you come back to work if you won Mega Millions?”

An elderly man in Florida had owned a large farm for several years. He had a large pond in the back, fixed up nicely: picnic tables, horseshoe courts, a volleyball court, and some apple and peach trees. The pond was properly shaped and fixed up for swimming.
One evening the old farmer decided to go down to the pond and look it over, as he hadn’t been there in a while. He grabbed a five-gallon bucket to bring back some fruit. As he neared the pond, he heard voices shouting and laughing. As he came closer, he saw it was a bunch of young women skinny-dipping in his pond. He made the women aware of his presence and they all went to the deep end.
One of the women shouted to him, “We’re not coming out until you leave!”
The old man frowned, “I didn’t come down here to watch you ladies swim naked or make you get out of the pond naked.”
Holding the bucket up he said, “I’m here to feed the alligator.”
Old men can still think fast. 

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