Jumbo Loan Delinquencies; BoA and Landsafe; Fannie Mae HomePath Incentive; Mortgage Pooling and Ratings Agencies;

No matter how much you push the envelope, it'll still be stationery. (I know, keep my day job.)

Why wouldn't investors want to gobble up securities made up of jumbo loans? Well, how about delinquencies? In a story out of Business Week, "US prime jumbo mortgages at least 60 days late backing securities reached 9.6% in January from 9.2% in December, the 32nd straight increase for "serious delinquencies," according to Fitch Ratings." This is almost 3x the rate in 2008. Folks in the business know that non-agency securities don't have the guarantees/insurance of Freddie, Fannie or Ginnie Mae. So where do these beasts trade? According to the article, last March they hit a low of .63 (so a loss of almost 40 cents on the dollar versus the original principal balance) but are now up into the low 80's.

This raises the question "Why would an investor buy a pool of mortgages?" In the past, banks, who were, and still are, making fees on originating the loans, didn't have to hold on to them, but instead could pool them and make them attractive to buyers. The buyers did not hold the individual mortgages, but parts of huge packages of them. Kind of like thinking about how delicious the Orange Chicken is at Panda Express and not having to think about how it got there. On top of that, the rating agencies told investors that the pools were safe, especially so in light of recent appreciation trends. Unfortunately now the rating agencies can't quite say that, and are having difficulty trying to figure out how to rate any pool of mortgages.

Here in Cal-e-for-ni-a, according to DataQuick, million-dollar home sales continue to decline.  In 2009, 18,621 California homes sold for $1m or more last year, down about 24% from 2008 and the fourth consecutive year of sales volume declines. At some price, however, houses see buyers; the drop in the number of higher-priced house sales was countered by higher sales in all price levels. Total California home sales increased 16.9% to 460,166 in 2009, from 393,703 in 2008.

Yesterday I mentioned that, on Friday, the FDIC closed a bank, and that "the loss of $11.7 million will be shared with the taxpayer picking up about $3 million of the expense." An executive from the FDIC reminded me that, "All of FDIC's expenses, including losses on liquidating failed banks, are paid for by the insurance premiums that open banks pay and from earnings on investments in U.S. Treasury securities.  Taxpayers pay nothing, and FDIC receives no Congressional appropriations." As best I could tell, however, currently income tax makes up between 45-50% of our government's revenue, which in part goes to pay the interest on U.S. Treasury securities - but point well taken about the FDIC.

Brokers selling loans to Bank of America's wholesale group were reminded that they must pre-register with an appraisal management company for all case numbers assigned past February 15th. Appraisals can be initiated on behalf of Bank of America by using LandSafe Appraisal, for from one of the following AVM's: ISGN, LSI, or First American. BofA also stated that FHA lenders are prohibited from accepting appraisals "prepared by appraisers who are selected, retained or compensated by mortgage brokers and commission-based lender staff. In addition, enforces appraiser independence by prohibiting the mortgage broker from having substantive communications with the appraiser regarding valuation, ordering, or managing the appraiser assignment."

I don't know how I let this one slip by me, especially since I need a new washing machine - so why not buy an REO property to go along with it? Some time ago Fannie Mae announced their "HomePath Appliance Incentive" program, which smaller investors such as Flagstar are following. So for purchase agreements signed after 1/28 and closing before 5/1, Fannie Mae is offering buyers an incentive of up to 3.5% of the final sales price to be used towards the purchase of new Whirlpool appliances by Fannie Mae. In Flagstar's case, if "the buyer wishes to utilize any portion of funds towards the purchase of new appliances, the maximum appliance allowance is limited to 3.5% of the final sales price. Borrowers may take advantage of additional seller contributions towards closing costs and prepaids. Total appliance allowance plus seller contributions to closing costs and prepaids may not exceed 6% of the final sale price." (Section 38 of the Real Estate Addendum will note what funds are used for closing costs and what amount is used for appliances.)

Pulte Homes reported a net loss of $117 million for the fourth quarter. The company ended the year with $1.9 billion in cash, but a year-end backlog of almost 6,000 homes. Their home-building revenue totaled $1.7 billion, 5% higher than 2008.

Caliber Funding updated its "Conventional Conforming Condominium Underwriting Guidelines for the Limited Review Process" with regard to the requirements when warranting a project as a Type Q project (limited review). These requirements include "No more than 15% of the total units in a project may be 30 days or more past due on their HOA dues", the necessity of environmental hazard assessments, the impact of right of first refusal on the rights of the mortgagee to foreclose or take title, etc. "With the need for the additional items, the Limited Review Condominium Questionnaire is being removed from the Caliber forms and docs. The Condominium Questionnaire or its equivalent should now be used in all cases." Check Caliber's bulletin for exact details.

Tomorrow we find out where mortgage applications were last week, but currently Wall Street firms are reporting decent origination volumes and flows. And, of course, the Fed is in buying. Given the recently reported drop in prepayments, there appears to be some interest in the higher coupon mortgages - they may be on the books longer than previously expected. With no news, the bond market was watching the stock market sink again, and the DOW closed below 10,000 for the first time since early November. It is also believed that overseas investors share the same question about mortgage-backed securities that we do here in the US: "What is going to happen to MBS when the Fed exits?  How high will mortgage rates go relative to Treasury rates (the spread)?" There is, however, large amounts of cash "sitting on the sidelines" that, should MBS prices drop much and yields go up, are expected to come in to the market. It will be interesting to hear what Ben Bernanke has to say this week about the situation.

The refunding kicks off with $40 billion of 3-yr notes today, followed by $25 billion 10's tomorrow and $16 30's on Thursday. It isn't helping that the Northeast has an impending snowstorm. And with stocks appearing to bounce a little, and the auctions, it should come as no surprise that bond prices are down a little and rates are up a little this morning. The 10-yr is at 3.61% and mortgage prices are worse by about .125.

One winter morning a husband and wife in northern Michigan were listening to the radio during breakfast. They heard the announcer say, "We are going to have 8 to 10 inches of snow today. You must park your car on the even-numbered side of the street, so the snow plows can get through."

So the good wife went out and moved her car.

A week later while they are eating breakfast again, the radio announcer said, "We are expecting 10 to 12 inches of snow today. You must park your car on the odd-numbered side of the street, so the snow plows can get through."

The good wife went out and moved her car again.

The next week they are again having breakfast, when the radio announcer says, "We are expecting 12 to 14 inches of snow today. You must park...." Then the electric power went out.

The good wife was very upset, and with a worried look on her face she said, "Honey, I don't know what to do. Which side of the street do I need to park on so the snow plows can get through?"

With the love and understanding in his voice that all men who are married to blondes exhibit, the husband replied, "Why don't you just leave it in the garage this time?"