Citi, BofA, MGIC Earnings; Every Mortgage Banker's Nightmare; More Loan Fraud Charges

Rumors that Barack Obama has won the Heisman Trophy after watching a college football game appear to be unfounded.

However, a convicted insane killer in Washington State escaped while on a field trip to a county fair.  In the prison's defense, who could have seen anything going wrong with that scenario?

That sounds like a nightmare. What is every mortgage bank's nightmare? Some out there wake up in a cold sweat thinking about the Fed stopping their purchase program, leading to higher rates, the production volumes sink to half of what they are now, the company hasn't set aside any money for a rainy day, and they're hit with MI rescissions or investor buy backs. Gulp.

Did someone mention MI rescissions? MGIC reported its ninth-straight quarterly loss: over $500 million in red ink for the quarter and over $3 billion total. An increase in prime delinquencies is obviously not helping. No one in the MI sector wants to lose another company at this point. In an interesting twist, a new MI company (Essent Guaranty) backed by Goldman Sachs and JPMorgan is supposed to start operations soon.

And talking about earnings, yesterday Citigroup posted a $101 million net income and a $0.27 loss per share. This morning Bank of America posted their earnings, which were lower than estimates and the second quarterly loss in less than a year. BofA lost $1 billion due to home lending and credit cards, while their Merrill Lynch group actually made a profit. Both Citi and Bank of America each still owe the taxpayers about $45 billion. So to sum things up, JPMorgan Chase reported a profit of about $3.5 billion, and Goldman Sachs made a little over $3 billion. Bank of America's stock price, however, has done very well this year, and after hitting a low of $3 per share in February closed above $18 per share yesterday.

Let's talk about the Fed for a minute. Last week they bought $16 billion net in agency MBS over the past week, bringing its total net purchase to $941 billion. Yes they are slowing down. For those playing along at home, the largest purchase week was about $33 billion in early April as opposed to this last week which, not counting the start of the program, was the lowest Fed purchase volume. Pools purchased are running at 58% Fannie, 33% Freddie, and 8% Ginnie.

How are those pools paying off? Funny you ask: the aggregate 30-year prepayment speed for Fannie Mae pools dropped 11% in September - lower than expected. Combined fixed-rate pay-downs for the three agencies were at $73 billion in September resulting in net issuance of $49 billion, or a little over $2 billion per day. So if the Fed is buying $3-4 billion per day...

Earlier in the week I mentioned how jumbo production was not only a small percentage of overall volume, but how banks were placing the loans in their portfolio. One reader, from American Capital Broker Network, wrote how they are "actually seeing this product come back into the market.  Currently we have 3 different investors for these. (GMAC, SunTrust and US Bank)  Yes the guidelines are tight and they are taking the low fruit but, there is an appetite for this debt and the ARM pricing is outstanding! Not sure if they are holding this or selling it.  But for now, at least there's some options." 

In the news yesterday was another large set of fraud charges, this time against 41 lenders, lawyers and others in the real estate industry who they said used fraud to obtain more than $64 million in loans connected to more than 100 residential properties in New York State! Apparently the FBI, Secret Service, and the New York State Banking Department were all in on the investigation which turned up wire fraud, bank fraud and conspiracy charges against the lawyers, mortgage brokers and loan officers. It appears that mostly it was people accused of "obtaining loans through fraudulent means by falsifying mortgage applications, flipping properties and stripping equity from properties."

Effective for all loans funding on or after November 1, 2009, Flagstar will be requiring a Verbal Verification of Employment to be submitted with all requests for funding (not just conventional loans) and recommends that their clients do it as close to funding as possible. And beginning on 11/10, Flagstar will no longer consider the upfront MIP refund as an item in their APR calculation, which may affect the APR calculation for any FHA streamline refinance with an upfront MIP refund that has been submitted.

After the 8:30AM numbers came out yesterday showing that inflation was tame and the job market may be stabilizing somewhat, we had some mixed news. The New York Empire Factory Index hit its highest level in 5 years, and marking the first time the measure has shown expansion for at least three months in almost two years. But then the Philadelphia Fed's Factory Index dropped more than expected, with the result being, after all these numbers, that bond prices held in well and the stock market ended up improving on the day. For those fans of ARM loans, the difference between yields on 2- and 10-year notes moved to over 2.50%, the most since early September.

Today we have September's Industrial Production report, which is expected to be up only +0.1% from +0.8% in August, along with Capacity Utilization. Strong exports have helped industrial production levels in recent months, but capacity utilization remains extremely low because consumer demand is so low. The 10-yr is yielding 3.45% and mortgage security prices are unchanged from yesterday's close.

A man walked into a very high-tech bar. As he sat down on a stool he noticed that the bartender was a robot. The robot clicked to attention and asked, "Sir, what will you have?"

The man thought a moment then replied, "A martini please."

The robot clicked a couple of times and mixed the best martini the man had ever had.

The robot then asked, "Sir, what is your IQ?"

The man answered, "Oh, about 164."

The robot then proceeded to discuss the 'theory of relativity', 'inter-stellar space travel', 'the latest medical break throughs', etc.

The man was most impressed. He left the bar but thought he would try a different tact. He returned and took a seat. Again the robot clicked and asked what he would have. "A Martini, please."

Again it was superb. The robot again asked, "What is your IQ, sir?"

This time the man answered, "Oh, about 100". So the robot started discussing NASCAR racing, the latest basketball scores, and what to expect the Dodgers to do in the playoffs.

The guy had to try it one more time. So he left, returned and took a stool. Again a martini and the question, "What is your IQ?"

This time the man drawled out "Uh... 'bout 50."The robot clicked then leaned close and very slowly asked, "H-o-w   w-a-s   t-h-e   m-o-r-t-g-a-g-e   b-a-n-k-i-n-g   c-o-n-f-e-r-e-n-c-e?"