The "Never-Ending" Mortgage Program From ING; Are Home Loans Now Worthless?; Bank Closures; Barclays To Sell Servicing Unit

I have a money making idea! I will put an ad out there, stating that mortgages are unconstitutional and guaranteeing to do away with everyone's home loan - for only a non-refundable fee of $25! Oh, wait a minute - someone named Scott Wright beat me to the punch. I am sure that he is tired of people in the mortgage business having bad reputations, and has only the best intentions: http://condemoserv.com/blog/. This is great news, since if he is correct, trillions of dollars of home loans are worthless, and now all properties will be purchased with 100% cash. But something tells me Wright is wrong, in spite of the wording, "This is not a scam."

Homebuyers in Australia may be offered "never-ending" mortgages from ING, the fifth largest lender down under. This loan program offers loans that have no fixed term and no requirement to repay any capital along the way. The original press release, from ING Direct's CEO, stated that Australians need more affordable options, and that borrowers should be able to choose whether they want to repay principal or not. Borrowers would carry the IO loan on the property for a long period of time, then sell their property for a big enough profit to pay off the original loan and buy a smaller place outright, leaving them mortgage-free. Or, they could keep the mortgage going and repay the original capital from their estate, after death, as they do in the UK and Europe. Critics, as you might imagine, are quick to point out that if the person living in the house never pays off the principal, they never really own the home - they're more like tenants. Borrowers can come out ahead if they take the money saved from the difference between an IO and an amortizing mortgage and invest it - often not the case. There is no equity as a buffer, and the (in effect) forced savings plan from an amortizing mortgage is gone. As one writer noted, "A generational shift has occurred. My parents' bank manager encouraged them to pay off their mortgage as quickly as possible. Today my bank's customer service center may provide me with strategies to encourage me to never pay it back." Sound familiar?

No one can make this stuff up. Late last week the Federal Reserve Bank of New York sent out a study with the first few sentences reading, "Employing the "small-bandwidth" asymptotic framework of Cattaneo, Crump, and Jansson (2009), this paper studies the properties of several bootstrap-based inference procedures associated with a kernel-based estimator of density-weighted average derivatives proposed by Powell, Stock, and Stoker (1989). In many cases, the validity of bootstrap-based inference procedures is found to depend crucially on whether the bandwidth sequence satisfies a particular (asymptotic linearity) condition. An exception to this rule occurs for inference procedures involving a studentized estimator that employs a "robust" variance estimator derived from the "small-bandwidth" asymptotic framework." WHAT?

Five more banks disappeared Friday, bringing the total to 78. Bank of Florida Corp.'s three lenders were closed by regulators today who sold about $1.2 billion in deposits to EverBank Financial. Out west, City National (Los Angeles) enveloped Sun West Bank (Las Vegas), and in Sacramento Granite Community Bank became part of Tri Counties Bank (CA).  The three lenders run by Bank of Florida all received "prompt corrective action" notices from the FDIC in March requiring them to raise capital within 30 days, so it is worth paying attention to those corrective action bulletins.

In other FDIC news, it is looking to sell $1 billion worth of mostly nonperforming residential whole loans that belonged to the now-defunct AmTrust Bank of Cleveland through a structured sale. Although the mortgage company continues on, AmTrust's thrift failed late last year and was taken over by New York Community Bank. But NYCB did not want the thrift's servicing portfolio or NPLs so the $23 billion in servicing will also be sold.

Barclays Bank will be selling off its HomEq Servicing business, which is the servicing operation owned by Barclays here in the US, to Ocwen Financial. ("Ocwen" is "Newco" spelled backwards, for mortgage trivia experts.) Barclays bought HomEq four years ago, and is selling it for $1.3 billion (and providing $1 billion in financing to help things along). Barclays may not want to be in the servicing business, but it will continue trading and issuing mortgage securities. And thus Ocwen finds its servicing portfolio larger by 190,000 loans, bringing its total to 590,000.

Is this recovery we're seeing here in the US enough to overcome Europe's problems? The bond and stock markets remain dubious. Last week stocks were roughly unchanged, but the S&P 500 was still down about 8% for May. Here consumer confidence, durable goods orders, and various other measures showed improvement, but GDP and home price figures were not great. There are two ways by which sovereign debt issues in Europe can affect the U.S. economy: fiscal tightening in Europe can restrain U.S. export growth (probably a small impact), and also (and more importantly) the tightening in bank funding markets. LIBOR is moving higher, and that is what worries analysts - another credit crunch would have a very negative effect not only on the U.S. economy, but on the global economy as well.

In our business, few believe that lending is becoming easier, that property values are moving steadily higher, or that potential borrowers are suddenly in better qualifying shape. Part of the picture, of course, is the continued high unemployment rate, and many economists feel that the employment picture here in the US has begun to improve.  Maybe it isn't in the weekly Initial Jobless Claims, but improvement is being seen in areas such as "withholding tax receipts". Tax receipts are volatile but an important forecasting input for the labor market, because they are timely and not subject to revision. And lately they have turned positive (up 6% year-over-year), which tells us that employment income is expanding due to higher wages, more hours worked by the existing workforce and an influx of new workers.

On Friday we will have the usual "first Friday of every month" employment data, and estimates are already running around a gain of nearly 500,000 jobs. This seems a little high, given recent Thursday Initial Claims numbers and April's Nonfarm Payroll being up less than 300,000. But census hiring is expected to kick in, and private sector job growth is showing an upward trend. This Friday's jobs report will be the last ahead of the June 22-23 Fed meeting, but a few more or less people working here in the United States is easily overshadowed by problems in Europe and the sovereign credit risks and equity market volatility. (In other words, don't look for any change in overnight rates from the Fed in three weeks.)

It is a semi-busy week for news.  Tomorrow is Pending Home Sales, Thursday Initial Claims, Productivity, Factory Orders, and then on Friday, as mentioned above, all the employment data. Last Friday, as you may recall, just when folks were hoping for a quiet Friday we received news that Spain had its credit rating lowered by Fitch from AAA to AA+ ("outlook stable"). Moody's still has Spain at AAA (stable); S&P had already gone to AA (outlook negative). Stocks dropped, rates improved, and this appeared to be continuing this morning until ISM Manufacturing and Construction Spending numbers beat expectations. The 10-yr yield is down 2.2 basis points at 3.283% and mortgage prices are better by about .125

A couple was celebrating their golden wedding anniversary on the beaches in Montego Bay, Jamaica. Their domestic tranquility had long been the talk of the town. People would say, "What a peaceful & loving couple."

The local newspaper reporter was inquiring as to the secret of their long and happy marriage. The husband replied, "Well, it dates back to our honeymoon in America. We visited the Grand Canyon, in Arizona, and took a trip down to the bottom of the canyon, by horse. We hadn't gone too far when my wife's horse stumbled and she almost fell off.

"My wife looked down at the horse and quietly said, 'That's once.'

"We proceeded a little further and her horse stumbled again. Again my wife quietly said, 'That's twice.'

"We hadn't gone a half-mile when the horse stumbled for the third time my wife quietly removed a revolver from her purse and shot the horse dead."

The man continued, "I shouted at her, 'What's wrong with you, woman?! Why did you shoot the poor animal like that, are you *%&#@$ crazy!?'

She looked at me, and quietly said, 'That's once.'

And from that moment we have lived happily ever after."