The Future of Rate Sheets; Industry News That Isn't Pessimistic; High Opportunity Cost Investing

Assuming the Financial Reform Bill passes next week, what will eventually happen to rate sheets everywhere? How will correspondent and wholesale rate sheets look?

Some believe that sheets will only offer rates at a cost to borrowers or a par rate with no rebate. So a broker or loan agent, who is receiving their compensation based on whatever their fee is per loan, will offer a much more limited set of pricing to borrowers. Others believe that rate sheets won't change much, and that investors and brokers will figure out a way around it. One veteran said, "In the old days I had a Fannie Goldbook on my desk, which showed different prices for different rates. And bond math dictates that, given the same risk, maturity, etc., an investor will pay a higher price for a higher yield."

Many years ago The Cars sang, "Since you're gone, I missed the big sensation. Since you're gone, I took the big vacation..."

We find ourselves in one of the big vacation weeks of the year, since workers, many with summer vacation kids, have to use up only 4 vacation days to gain 9 days away. Whether they work trading mortgage-backed securities, underwriting, funding, etc., many companies find themselves with reduced staffs, and things seem pretty quiet out there. At least, underwriting and policy changes seem few and far between.

But what we're lacking in company changes is made up for by some good news in the mortgage banking ranks. With all of the negative press we always hear about mortgage companies and our industry, it is needed, and here are several pieces of optimistic/interesting news:

Recently the founder, president, and CEO of mortgage lender MegaStar Financial received the Ernst & Young Entrepreneur of the Year Award in the Rocky Mountain region. Anita Padilla-Fitzgerald was recognized as an outstanding entrepreneur who is "building and leading dynamic, growing businesses."

What do mortgage bankers do when they're done being mortgage bankers? They get published! Cindy Sample is the ex-CEO of Western Sunrise, which was part of CrossLand, which was part of First Security, who got purchased by Wells Fargo in 2000... (Well, you get the picture). Ms. Sample has written a murder mystery book: "Dying for a Date". (This title narrowly beat out "This Option ARM is a Killer".) 

Some folks are exiting the business, others are seeing opportunities. Back in the late 1980's one of my first pipeline hedging and risk management clients was J.I. Kislak. The company sold its servicing and exited the business several years ago, but has now decided to re-enter the fray.  Kislak is opening two new divisions focused on residential consumer mortgages and providing back-office mortgage services to community banks and other lenders (a la Taylor Bean). The focus will be on Florida and the Southeast.

If one is so inclined, one can review and bid on PennyMac Portfolio Property Notes online. And you don't even have to buy huge numbers of them - PennyMac is selling a small percentage of its non-performing notes through three different online listing sites. It could be a decent way to unload some of its portfolio: GO HERE

In the Great State of Texas, Pentagon Federal Credit Union's subsidiary, PenFed Realty, LLC joined with the former owners of Exit Slater Realtors in San Antonio, to offer discount real estate brokerage and to expand mortgage originations.

The Mortgage Bankers Association reported that apps were up almost 7% last week, hitting a 9-month high mostly due to refinancing. And as one would expect, purchase apps sunk to a 13-year low. Refi's were up over 9% last week, but purchase apps fell 2%.

Here is an interesting investment phenomenon. No one can foretell the future, but currently the dividend yield on the Dow Jones Industrial Average's 30 stocks is roughly 3%. If you purchased a 10-yr Treasury Note, you would earn a risk-free yield of about 2.92% for the next ten years. So if the Dow's stocks, and their dividends, go absolutely nowhere over the next 10 years, they will still outperform Treasury notes! Of course, stocks and bonds could both go up or down in price in the next 10 years, but still, stocks are increasingly attractive, on a relative basis, when compared to bonds. Heck, the dividend yield on many utility stocks is between 5-6%, and who doesn't want to make money every time someone recharges their Blackberry or turns on their air conditioning?

Mortgage security prices, whether or not the price improvements are passed along by mortgage accumulators, continue to "grind tighter and even higher". Recent prepay (early pay off) numbers indicate that older pools of mortgages, filled with 30-yr loans above 5%, are not prepaying very fast, which in turns helps ease prepayment fears. Fannie & Freddie 4.5% & 5% securities (made up of 4.75%-5.625% loans) are deemed the most "refinance-able" due to their strict underwriting and pristine borrower credit scores, but they may be somewhat capped out equity-wise with home values not having changed much since the original loan was funded. This is tough, since 4.5% pools are trading at a price near 104-00 (4 point rebate!). No one is looking for much, if any, increase in rates through 2010, given the world-wide economic climate.

Speaking of refinancing, recent business school graduate analysts estimate that just over 30% of the mortgage universe is "refinanceable" given the tight underwriting standards and poor housing market conditions. They believe mortgage rates to the consumer would have to drop below 4.50%, with the 10-yr yield falling well below 2.80%, to achieve much pick up in the refinancing. And one has to ask - what will our economy look like if it gives rates that much reason to fall to those levels?

Yesterday stocks started off the day with a good bid, attempting to end 7 straight days of being down, and bond prices were relatively flat. That changed as the day progressed, with stock prices sliding and bond prices (including mortgages) improving - leading to many investors offering intra-day price improvements. We learned that the U.S. service sector expanded in June for a sixth straight month but the rate of growth slowed to its lowest pace since February, the latest evidence that the economic recovery is cooling. By the end of the day roughly $2 billion in originations had been sold - "average" - and mortgage prices actually improved relative to Treasury prices due to investor interest. The yield on the 10-yr went down to 2.94% and by the end of the day 30-yr mortgage security prices were better by .375.

Drug companies continue to do research on new drugs, many aimed at women.

DAMNITOL
Take 2 and the rest of the world can go to hell for up to 8 full hours.

EMPTYNESTROGEN
Suppository that eliminates melancholy and loneliness by reminding you of how awful they were as teenagers and how you couldn't wait till they moved out!

ST. MOMMA'S WORT
Plant extract that treats mom's depression by rendering preschoolers unconscious for up to two days.

PEPTOBIMBO
Liquid silicone drink for single women. Two full cups swallowed before an evening out increases *** size, decreases intelligence, and prevents conception.

DUMBEROL
When taken with Peptobimbo, can cause dangerously low IQ

FLIPITOR
Increases life expectancy of commuters by controlling road rage and the urge to flip off other drivers.

MENICILLIN
Potent anti-boy-otic for older women. Increases resistance to such lethal lines as, "You make me want to be a better person".

JACKASSPIRIN
Relieves headache caused by a man who can't remember your birthday, anniversary, phone number, or to lift the toilet seat.

ANTI-TALKSIDENT
A spray carried in a purse or wallet to be used on anyone too eager to share their life stories with total strangers in elevators.

BUYAGRA
Injectable stimulant taken prior to shopping. Increases potency, duration, and credit limit of spending spree.