FHA Underwater Refi Option; MBS Issuance; TBW & Freddie Mac Relief Open Access; Wells Buying USDA Product; PHH and JP Morgan Loan Purchase Agreement

"What be having 8 eyes and 8 legs? Say nay, it not be a spider...but it be eight pirates! Aarrr!!!!"

What else has an "8 handle"? Mortgage applications here in the US last week were down 8.9%. Refinancing dropped 11% (but still account for about 80% of overall applications) and purchases were down 0.4%. Maybe this is giving some companies, big and small, some operational time to catch their breath. Others, of course, are hoping that it doesn't become a trend. Of course in the past interest rates have been the primary driver for refi's - this time it is homeowner credit and property values.

But by most accounts, volumes are still very good and it is easy to forget just how much is flowing through the system. A trader from Bank of America wrote, "Over the past 18 months, over $850 billion of Fannie/Freddie 4's and 4.5's (made up of 30-yr 4.25-5.125% mortgagees) have been created. In fact, nearly $1 trillion of these coupons now exist, mostly backed by loans to prime credit (high FICO, low LTV) borrowers. Gross agency issuance at this time is on track to total over $130 billion in September. Meanwhile, pay downs are estimated at $127 billion which indicates net supply being slightly positive for the month.YTD, however, net issuance stands at -$88bln.  Of course, pay downs from the Fed's portfolio adds to net supply as it is not reinvesting back into the MBS. 

On the good news side of the ledger, Royal Bank of Scotland is launching a $7.24 billion issue of securities backed by its mortgages in its first securitization deal of this type since the financial crisis began. RBS needs to increase the supply of loans it provides to households and businesses in order to meet its lending targets this year. The mortgage portfolio for the new deal is set to be agreed over the next few weeks.

In the last week or so the headline came across saying, "PHH Corp. Says its Unit Enters into Mortgage Loan Participation Sale Agreement with JPMorgan Chase Bank". What exactly does that mean? In the most basic sense, PHH will be selling a large number of loans to Chase under the terms spelled out in the agreement, with FHA, VA, and conventional loans backing securities that Chase will buy. Of course, PHH represents that the loans are eligible to back those securities. For the basic filing, which is not earth shattering but still represents more good news in the securitization market, go HERE. Or read more HERE

The Mortgage Bankers Association reported that independent mortgage bankers and subsidiaries made an average profit of $917 on each loan they originated in the second quarter, up from $606 per loan in the first quarter but still lower than the $1,358 profit a year earlier. Average production volumes were up, and so production operating expenses decreased from $5,147 to $4,677 per loan in the second quarter. "Fixed costs were spread out over more loans and lenders experienced higher pull-through rates." Of great interest to firms that hedge their production is that average pull-through (the number of closings divided by the number of loan applications) rose to 72% in the second quarter, compared to 68% in the first quarter. FULL STORY

FHA originator types are chattering about the FHA Short Refinance Option - an additional refinancing option for "responsible homeowners" who owe more on their mortgage than the value of their property. Candidates are borrowers who are underwater but current on their existing mortgage, AND whose lien holders voluntarily agree to write off at least 10 percent of the unpaid principal balance of the first mortgage. (Sometimes that is a tall order, given the way FHA loans are pooled, sliced and diced, and sold - it is usually not like ABC Bank owns the Hernandez loan.) Besides having negative equity and being current, there are other requirements such as the property being owner occupied, the homeowner must qualify for the new loan under standard FHA underwriting requirements and possess a FICO-based decision credit score greater than or equal to 500; and the existing loan to be refinanced must not be a FHA-insured loan. On the investor side, the existing first lien holder must write off at least 10 percent of the unpaid principal. In addition, the refinanced FHA-insured first mortgage must have a LTV of no more than 97.75% and a CLTV no greater than 115%. To facilitate refinancing, the Treasury Department will provide incentives to existing second-lien holders who agree to full or partial extinguishment of the liens.

Here is a question that came up last week "I have a potential refi where the loan is Freddie-owned. The LTV is about 110%, and the original loan was with Taylor Bean Whittaker. Through TBW's liquidation, the loan servicing was transferred to Cenlar. But Cenlar services loan only, they do not originate, so this person cannot take advantage of the Freddie Mac Relief Refi >105% <125% since their servicing company does not originate loans. What can I do?" It turns out that Freddie offers a "Relief Refinance (RR) Open Access" program where the Seller does not need to be the borrower's current servicer. Open Access RR allows to 125% LTV. Loans must be submitted to LP and chapter B24 of Freddie's guide outlines the requirements."

For investor news, Wells Fargo told its broker clients that it will again accept applications for Guaranteed Rural Housing loans. "The guarantee fee for Rural Development loans will increase from 2% to 3.5% effective with this change. USDA RD will complete their system changes in mid-September. Until that time, a Conditional Commitment will be issued - officially known as the Conditional Commitment for Single Family Housing Loan Guarantee."

On Monday Fannie suspended the California Housing Loan Insurance Fund (CaHLIF) as an approved mortgage insurer. CalHLIF ceased writing new mortgage insurance policies earlier this year anyway.

Where are rates going? Bank of America expects yields to drop more heading toward 2011. Goldman Sachs expects the U.S. unemployment rate to creep back up to 10% by early 2011 from 9.6% in August and to stay around that level for most of the year. Deutsche Bank sees low rates for a while. "We remain constructive on yields and expect lower for longer with a 2 percent target for 10 year Treasuries." Slow, yet positive, growth with no inflation is primarily the reason, although European problems still exist which could contribute to a flight to quality here in the US fixed-income market. No one can argue that over the summer, mortgage rates have fallen substantially - remember when we began this year every economist said that rates were going to go up - so much for forecasts. At this point, however, few analysts believe that the government will take further action which would push mortgage rates lower. The upcoming meetings of the Fed's policy-setting committee this year are Sept. 21, Nov. 2-3 and Dec. 14.

Yesterday rates improved but didn't do much, volatility-wise, which markets and investor tend to prefer. (Put another way, rates going way up or way down quickly creates anxiety.) Lower coupon mortgage prices did a shade better than higher coupon product, due to refi nervousness, but overall mortgage prices have done pretty well due to the lower supply that appears to be coming into the MBS markets. Last week the markets saw $2-3 billion a day; this week supply is less than $1.5 billion. (And as you learned in economics, when demand is constant and supply goes down, the price goes up, and with fixed income securities that means rates in turn drop.)

So when the dust settled Tuesday, 10-year notes rallied almost .75 (2.67%), current coupon MBS prices closed higher by about .250. This morning we learned that September's Empire Index was less than expected, dropping from 7-something to 4-something. Import Prices for August were up .6%, and Export Prices were +.8%. Later we have Industrial Production and Capacity Utilization. Industrial Production is projected at 0.2%, down from 1.0% in July, while Capacity Utilization is called slightly higher to 75.0 from 74.8.  Other events of interest include a House Financial Services Committee hearing on 'The Future of Housing Finance: A Progress Update on the GSE's." So far this morning we find the 10-yr at 2.71% and mortgage slightly worse.

For fans of "A Few Good Men", here's one view from Wall Street:

"Son, we live in a world that has traders, and those traders have to be guarded by salesmen. Whose gonna do it? You? The President? I have a greater responsibility than you could possibly fathom. You weep for those foreclosed loans, and you curse Wall Street. You have that luxury. You have the luxury of not knowing what I know. That those foreclosed loans, while tragic, probably saved someone's 401K. And my existence, while grotesque and incomprehensible to you, creates money. You don't want the truth because deep down in places you don't talk about at parties, you want my liquidity, you need my liquidity. We use words like Credit Score, Loan balance, Prepays. We use these words as the backbone of a life spent selling bonds. You use them as a punch line. I have neither the time nor the inclination to explain myself to a man who rises and sleeps in a home I provided subprime funding for, and then questions the money I made providing it. I would rather you just said 'thank you', and went on your way doing your gardening and going to Home Depot, Otherwise, I suggest you get a job without all the government perks, and pay taxes. Either way, I don't give a damn what you think you are entitled to."