$729,750 Loan Amount Update; News from SunTrust, FDIC, Lend America

The other day my boss commented that, "If every employee contributed half of their life savings to our firm, we'd be on the road to profitability!" I knew things were getting tough when they replaced "Bring Your Child to Work Day" with "Bring Your Child to do Work Day". On the other hand, the margarita machine in the executive lunchroom still seems to be working just fine, regardless of the unemployment statistics.

The business world is still talking about the unemployment data, which showed that the number of people claiming unemployment benefits was much larger than expected. How can we have an economic recovery if unemployment is so high? Well, remember that job growth tends to trail in a recovery but here in the US, as we continue to move away from manufacturing, economists believe that technology and manufacturing are either eliminating jobs or moving them elsewhere. The steps that the Fed has focused on relate much more to limit banking problems, which at this point they have done, and stabilize or grow GDP, which also appears to have been done, rather than on directly lowering unemployment.

Speaking of the desire to stabilize the markets, we have about 87 days until the end of the year. This is also the end of the “temporary” maximum conventional loan amount of $729,750. An informal, but thorough, poll of top investors out there indicates that SunTrust is the only investor, that I found, who has stated that as of November 1, they will reduce their maximum loan size. The overwhelming sentiment, however, is that the investors will follow Freddie and Fannie, who in turn are waiting for Congress to pass an extension. Therefore it appears that while they have all given it some thought, most have not put any plan in place to scale back the higher loan limits given the consensus that Congress should pass an extension and not roil the markets at this time.

(I would imagine that SunTrust believes that an extension will occur. But just to be on the safe side their bulletin read, “Important Reminder Regarding the Agency Plus Loan Program – Deadlines for Loans Originated Under the 2009 Temporary Loan Limits: all Agency Plus loans that are based on the 2009 temporary loan limit increase, must be closed, delivered to and funded by SunTrust by November 30, 2009. The maximum lock term offered will be seventy (70) days. Please note that available lock terms under the 2009 temporary loan limits will continue to be curtailed. In addition, lock-in extensions and re-locks will not be granted.”)

And while we’re on SunTrust, beginning today they have a new policy regarding privately held mortgages. Namely, SunTrust is implementing payment verification requirements, no extensions on previously locked loans, for all traditionally underwritten and AUS processed conventional and government loan programs. “If a borrower is financing a “privately held mortgage,” the following guidelines apply: The borrower must provide evidence that 12 months of mortgage payments have been made on the current mortgage. The mortgage payments must be verified with either 12 months of cancelled checks or 12 months of bank statements (if the payment is automatically withdrawn from the borrower’s account). Evidence must be included in the loan file that the lien being paid off is a current recorded lien against the subject property. All other credit history requirements follow the applicable loan program guidelines.”

The FDIC continues to close banks. Three days ago three smaller banks were closed, in Minnesota, Colorado, and Michigan, which brought us to 98 for the year. Jennings State Bank was taken over by The Central Bank in MN, Warren Bank re-opened us Huntington Bancshares, and Southern Colorado National Bank came under the control of Legacy Bank. The prior week the FDIC shut down Georgian Bank, one of the largest banks based in Atlanta. With both assets and liabilities of $2 billion, the estimated cost to the FDIC is almost $900 million which is 45% of assets and the most expensive (percentage-wise) among the 10 largest failures this year.

Brokers have had a lot to despair over in the last few years, what with restrictions on yield-spread premium payments, a loss or scaling back of a few large investors, and new national registration requirements and licensing costs. But brokers looking for an outlet for FHA production, however, may want to consider Lend America. Based out of New York, but licensed in over 40 states, they just started a wholesale channel for government loans. According to the press release, they have 25 “geographic focused teams” – so perhaps that is some good news for the wholesale channel.

Last week was a volatile news week, ending with unemployment data and Factory Orders (also weaker than expected). We can rest up this week, given that the only scheduled news of substance is not until Thursday with Jobless Claims, and some trade figures on Thursday and Friday. Of course we have yet another Treasury auction to deal with. Mortgage security prices, however, are at their best levels ever! Although the 30-year current coupon yield is still 35-40 bps higher than the historical low hit in early January, Fannie passthrough securities are trading at their highest dollar prices – investors sense values there, especially with the higher coupons that a) have not defaulted, and b) have not refinanced. This morning the good news continues, with the yield on the 10-yr at 3.20%, MBS prices better by about .125, and even stocks are pointed higher.

Hope springs eternal, and every loan agent/broker is sensing yet another refi boom – as long as the borrower qualifies and there is equity. If rates continue to rally, new originations will indeed increase but the standard MBS buyer base (banks, overseas investors and domestic money managers) might come to think that these prices are a little rich and perhaps move into buying Treasury securities. And as one Wall Street analyst put it, “It is also unlikely that servicer convexity hedging related buying dominates the overall market activity in this scenario because empirical durations of MBS have been running very short to model durations. In addition, model durations have been running much shorter than the durations implied by actual prepayment speeds (speeds have been much slower than predicted). Given that MBS have been trading extremely short relative to their model hedge ratios and that models are running short to actual prepayment speeds, we suspect that mortgage portfolios will be much less aggressive in chasing the rally than historical patterns would suggest.” Ah, I love that kind of talk!

It seems that every week investors absorb another auction, as opposed to only a few years ago when it was the “quarterly refunding”. In the United States, government auctions of this scale only started in the 1920’s. During World War 1 (“The War to End all Wars”) the US could either pay for the war by increasing taxes and tariffs or using debt. We couldn’t borrow money from other industrial countries, since they were also involved in financing their war efforts, so the burden was put on our citizens to pay both higher taxes and purchase War Bonds. The War Bonds matured in the late 1920’s, but the Treasury was unable to pay them off with limited budget surpluses. So the path was chosen to refinance the debt with variable short and medium term maturity securities being auctioned off to the highest bidder (thus allowing the government to pay the lowest rate) and then moved down in price, higher in rate, to the next highest bidder in order to sell all the securities. On December 10, 1929, the Treasury issued its first auction by selling $224 million 3-month bills. This carried on through the 1930’s, and after World War II, there has been a gradual rise of acceptance of treasury bills as marketable treasury securities.

Two women were out for a Saturday stroll. One had a Doberman and the other, a Chihuahua. As they walked down the street, the one with the Doberman said to her friend, "Let's go over to that bar for a drink."
The lady with the Chihuahua said, "We can't go in there. We've got the dogs with us."
The one with the Doberman said, "Just watch, and do as I do."
They walked over to the bar and the one with the Doberman put on a pair of dark glasses and started to walk in. The bouncer at the door said, "Sorry, lady, no pets allowed."
The woman with the Doberman said, "You don't understand. This is my seeing-eye dog."
The bouncer said, "A Doberman?" The woman said, "Yes, they're using them now.  They're very good."
The bouncer said, "OK, come on in."
The lady with the Chihuahua thought that convincing him that a Chihuahua was a seeing-eye dog, may be a bit more difficult, but thought, "What the heck," so she put on her dark glasses and started to walk in.
Once again the bouncer said, "Sorry, lady, no pets allowed."
The woman said, "You don't understand. This is my seeing-eye dog."
The bouncer said, "A Chihuahua?" 
The woman said indignantly, "A Chihuahua? You've got to be kidding me, they gave me a Chihuahua???!