The Fed, The Economy, And Mortgages; Loan Production Picks Up; Wholesale Lender Updates

Yesterday I did a little primer on manufactured housing. One industry vet wrote, "The reason no one wants to finance mobile homes is they are a depreciating asset. Oops - so are single family homes... never mind."

Regarding investors, it turns out that US Bank also purchases loans secured by manufactured housing. There are obviously minimum requirements (680 FICO, 80% LTV, $200k maximum loan amount, permanently attached, etc.) US Bank's Home Mortgage channel allows manufactured housing through its Freddie programs.

It seems that Congress is tied up in knots and compromises lately ("lead, follow, or get out of the way), so Federal Reserve officials may be taking matters into their own hands for improving the economy. The Fed has a limited set of tools with which to work, especially with its overnight Fed Funds target rate already near 0%. It would appear that massive infusions of cash are not in the cards, but that risks of the recovery losing steam have increased.

There is certainly little chance of the Fed selling off its holdings of MBS's - much of which has been going away with lower rates leading to some refinancing - and discussion has actually begun about the chances of the Fed buying more MBS's. The Fed could change the wording of its statements to make sure that the market knows that rates will stay low for a long period of time. It could also cut the interest rate paid to banks for extra money they keep on reserve at the Fed from 0.25% to 0%, which would give banks more incentive to lend money to customers rather than leave it with the Fed.

From the mortgage industry's view point, the Fed buying mortgage backed securities certainly help push home loan rates down - but few people at this point believe that rates are the big issue with housing. Just ask anyone who has had a loan fall through due to the property not qualifying, the borrower's credit being an issue, or the borrower's debt loan being too great.

Recently my high-school age daughter said, "The economy wasn't as bad as the Great Depression, was it?" Maybe this will be the Great Credit Crunch. Of course, memories may fail to remember the huge amount of government intervention, much of it from the Fed, that probably prevented a much worse outcome. Incentives for excessive risk taking will re-emerge, and loan officers, rating agency employees, hedge fund managers, etc., will all climb back on.

Mortgage production, or at least selling, as picked up this week, and traders reported about $2.4 billion yesterday. The production coupons have been 4% and 4.5%, which contain 4.25%-5.125% mortgages. As one would expect, investors have been carefully watching the early pay-offs of existing pools. Servicers buyouts have increased lately, but generally higher coupons and seasoned pools have been slower than expected for Fannie, Freddie, and Ginnie securities. Still, early pay-offs have picked up as one would expect with lower rates which is anticipated to continue through the summer - there are still folks out there who can, and will, refinance, which in turn makes investors cautious about buying higher-rate pools of mortgages.

Although some rates sheets have dipped to 4.125% or below for 30-yr mortgages, practically the entire MBS universe is above par - mortgages securities are trading at a premium. This seems to be leading to lower mortgage rates, interestingly enough, relative to Treasury security rates. This definitely helps originators. If/when the housing market starts heating up, especially with the tight u/w guidelines, then the MBS market should do very, very well and can return to trading poorly in rate rallies and better when rates go up - if that makes any sense. But for now, we will enjoy the low mortgage rates.

It has been a pretty quiet week for investor changes from the large investors (Wells, BofA, Citi, Chase). Looking at the overall industry, there have been some minor "tweaks", however, and some of them are encouraging. Flagstar clarified its appraisal policy for IRRRL transactions specifying the loan characteristics that require an appraisal from a Flagstar-approved appraisal management company (2-4 unit properties, Double-wides, Manufactured homes that payoff an existing Flagstar-serviced loan, Florida condos, etc.). "While VA still does not require an appraisal for IRRRLs, they permit the borrower to pay for an appraisal. Flagstar continues to limit the LTV to 100% for IRRRL transactions."

Flagstar also clarified its appraisal portability procedures that apply to FHA appraisals transferred to Flagstar Bank (although they do not apply to FHA DE Delegated correspondents since they underwrite their own loans), expanded its Home Affordable Refinance programs to include a 10-year term, updated its "Credit and Liabilities" guidelines for conventional loans, and told clients recently that it will only accept one GFE History per loan, and that a new Borrower Acknowledgement of Receipt of GFE will not be permitted as a reason to change the GFE History document.

Icon Residential introduced its $2 million, 80% LTV jumbo product their jumbo product. Plaza Home Loans improved its price adjustment on the High-Balance FHA/VA and low conventional conforming products, although Provident Bank worsened its hit for IO. Stearns Lending added a 15-year term to their high-balance conforming product, as well as their portfolio conforming product. Mountain West eliminated its Home Possible, and Optimal Blue has released Affiliated's Jumbo product line (Affiliated requires approval to access these products).

It has also been a very, very light week for economic news. Today the only scheduled release is a minor wholesale trade number - hardly a market-mover. Regardless, it was another good day with stocks yesterday, adding to the gains for the week, but on the fixed income side analysts are wondering if rates can go too much lower without more firm data that our economy is still muddling along. It seems that much of the news flow since last week has been uniformly negative for Treasuries, but 10-yr notes are locked in an 18 basis point range between 2.90 and 3.08%. Certainly inflationary pressures will remain subdued for quite some time, and with continued problems in Europe combined with our slow employment and housing markets, get used to these rates!

Next week things pick up a little, news-wise. The US Treasury Department will be looking for buyers for $35 billion in new 3-year notes on Monday, $21 billion in 10-years (a "re-opening" of last month's notes), and $13 billion in 30-year bonds (also a re-opening). Releases really pick up toward the 2nd half of the week, with trade and inflation data. Today we find, after a solid up day in Asian stock markets, our 10-yr sitting around 3.05% and mortgage prices slightly worse.

A guy goes into a bar, there's a robot bartender.

The robot says, "What will you have?"

The guy says, "Martini."

The robot brings back the best martini ever and says to the man, "What's your IQ?"

The guy guesses, "168."

The robot then proceeds to talk about physics, space exploration and medical technology.

The guy leaves, but he is curious...

So he goes back into the bar.

The robot bartender says, "What will you have?"

The guy says, "Martini."

Again, the robot makes a great martini gives it to the man and says, "What's your IQ?"

The guy says, "100."

The robot then starts to talk about NASCAR, Budweiser and John Deere tractors.

The guy leaves, but finds it very interesting, so he thinks he will try it one more time.

He goes back into the bar.

The robot says, "What will you have?"

The guy says, "Martini," and the robot brings him another great martini.

The robot then says, "What's your IQ?"

The guy says, "Uh, about 50."

The robot leans in real close and says, "So, where are interest rates headin'?"