New Technology Helps Prevent Failed MBS Trades; Originator Commission vs.Set Salary; FICO LLPAs; NMLS Identifier

Are the best and brightest bond trading and investor minds out there just now realizing that the true Fed policy goal of QE2 is inflation? And that inflation is not a good thing for fixed-income securities, such as MBS's? One can criticize the program all one wants, but a) betting against the Fed in the long run is likely to fail, and b) the Fed's securities purchases coupled with the gradual pick-up we're seeing in economic data is certainly pushing rates higher. Mortgage originators need to be careful what they wish for: low rates (which we've had), or a strengthening economy which in theory should help borrowers and housing values. MND Comments

MBS prices ended Wednesday worse by 1-1.25 point in price, and it seemed that half my e-mails were from investors ratcheting down their prices. (The 10-yr Treasury dropped almost 1.5 points.) MBS trading volume also picked up, as one would expect given a) hedging existing locks, and b) selling/hedging desperation locks. I was at a lunch yesterday, and when I told the loan agent that rates were getting worse she replied, "Darn, I knew I should have locked in my sister's refi - I may-as-well do it now."

Fannie 4% MBS's, containing 4.25-4.625% mortgages, are now around par (100). Once investors add some servicing released premiums, but then take off some profit margin... well, suddenly rate sheets are up in the 4.75% area instead of the 4.375%. And that means production is now going into 4.5% securities. And anyone who thinks that they might not be able to fill those 4% security trades (not to mention those 3.5's - remember those?) should be careful - of failing. READ MORE

Failed trades, where pools of mortgages are not delivered to their buyer, have become a significant problem for the market and reached a peak this summer, and according to Fed data $1.2 trillion this last month. Hedges are put on, but production doesn't close, or the loans go into portfolio. And securities firms that buy MBS's and sell them to investors expect delivery - and when that doesn't happen, it reduces the efficiency of the TBA market and increases the level of risk. READ MORE SEE CHARTS

Enter Tradeweb, BlackRock, Credit Suisse, and Goldman Sachs who teamed up to provide "new technology that enables institutional clients to pair-off TBA ("to-be-announced") mortgage pool transactions with dealers, reducing the amount of pools that need to be cleared and enabling more efficient resolution of round-robin fails between dealers. In the TBA residential mortgage markets the specific pools of loans which are deliverable against the TBA contract have yet to be determined, but will always fall within a very specific range of characteristics known to participants." As things stand now, a customer with offsetting buys and sells could either "assign" trades from one dealer to another or take delivery of mortgage pools from one dealer against a 'buy' position and deliver the same mortgage pools to another dealer against a 'sell' position. Many participants failed to deliver only because they failed to receive expected pools - perhaps these "electronic assignments" will correct this.

I have more reader feedback on the compensation issue. "I think shops will start segregating themselves by margin.  What I mean is that some shops will establish high margins and pay high commissions while others will do the opposite.  Since shops can't pay differently based on revenue - they will have to decide what their 'margin strategy' will be.  Some loan officers can sell higher rates and expect higher commissions while others have the selling skills of a penguin and can only peddle rate.  Currently, one shop can have both types of loan officers co-exist by paying "overage" on higher margin loans and assessing "shortage" on loans that go skinny.  That won't be the case after April.  It will be interesting to watch loan officers migrate as shops take their stance.  It will also be interesting to see shops start to compete on this basis - if they can."

And this comment from an industry vet regarding the recent Freddie Mac pricing change. "I really think the FICO risk pricing is wrong.  If you look at a rate sheet, loans above 740 have no fee hit, and 720-739 have a .25 hit at 80% LTV.  No other LTV's have a hit, either higher or lower.  Then 700-719 has a .5 hit for all LTV's except 80% then the hit is .75. The 80% LTV has the higher hit, but certainly an 80% LTV is where most borrowers are located. To charge a borrower 1.5 points for an 80% LTV with 680 FICO is criminal, and with the recent credit problems most potential borrowers seem to have FICO's between 680 and 720 - how are these new fees helping borrowers or the housing markets get back on their feet?"

Freddie Mac told homeowners who have lost their homes to foreclosure but are still occupied that they will not be evicted from their properties over the holiday season. "All evictions involving single-family homes and properties of two to four units would be suspended from Dec. 20, 2010, to Jan. 3, 2011. FULL STORY

Chase told its correspondents that "In order to ensure that all liens are legally enforceable, Chase requires certain riders be executed and recorded with all applicable FHA and VA transactions" and provided a list of required riders. Chase also addressed Reg Z Rate and Payment Disclosure Changes, Mandatory Price Cap Clarification (up to 107 on AOT/Direct Trade Mandatory), reduced the price adjustment for Agency Fixed Rate High Balance loans (lowering the hit by .375 - the price adjustment is limited to Agency Fixed Rate High Balance loans only. Agency ARM High Balance Loans and Agency Interest Only High Balance Loans are not impacted by this change at this time), and the MI changes that I mentioned yesterday.

Mountain West Financial gave brokers a warning that is certainly a sign of the times. In California, "Under the SAFE Act, any individual who performs mortgage loan origination activities under the authority of a real estate license issued by the California Department of Real Estate may not continue to perform those activities on or after January 1 2011, unless they have been issued their NMLS License Endorsement. Effective December 1, 2010, any loan submitted for underwriting must have the appropriate NMLS Loan Originator Identifier and the NMLS Loan Origination Company's Identifier. The NMLS License Endorsement must be in place for all loans funding on or after January 1, 2011."

Heartland Financial, headquartered in Iowa but doing business in 8 states, increased its residential mortgage lending range into Arizona. Under the name of National Residential Mortgage, the unit had previously operated as a division of a recently-failed Arizona thrift.

Are we suddenly in an ARM market? I doubt it, but Caliber Funding announced an increase to the max rebate on all Conventional Conforming Adjustable Rate Mortgage products from (2.000) to (2.500).

Kinecta Credit Union, located in Southern California, clarified its income documentation requirements for Kinecta ARM products. For Agency ARM's it requires the W-2, pay-stub and VOE for every loan, regardless of income type or DU finding. The borrower must sign the 4506-T at application and closing. For jumbo ARM's, Kinecta will continue to follow the DU finding for documentation requirements. Additional documentation may be required on a case-by-case basis.

And now, back to the economy. The ADP numbers started us off yesterday. The 3-month moving average of this number on private sector hiring of +136k as "good but not great"-the favorable change in hiring momentum could have positive economic consequences as rising employment income spurs a faster pace of consumption, and hence further acceleration in the pace of hiring. If employment picks up, income picks up, spending picks up, and so forth. A strong Construction Spending and ISM number kept "the economy is picking up a little" vein of thought going, and even the Fed's Beige Book noted further improvement in economy (in 10 out of 12 districts but not in housing). Up went equities while the yield on the 10-yr hit its highest level since early August. Mortgage banker selling also weighed with supply reportedly in the $3 billion area. Overall, volume was above normal with much better selling.

Three men died on Christmas Eve and were met by Saint Peter at the pearly gates.

"In honor of this holy season' Saint Peter said, 'You must each possess something that symbolizes Christmas to get into heaven."

The man from England fumbled through his pockets and pulled out a lighter. He flicked it on. "It represents a candle," he said.

"You may pass through the pearly gates," Saint Peter said.

The man from Scotland reached into his pocket and pulled out a set of keys. He shook them and said, "They're bells."

Saint Peter said, "You may pass through the pearly gates."

The Irishman started searching desperately through his pockets and finally pulled out a pair of women's panties.

St. Peter looked at the man with a raised eyebrow and asked, "And just what do those symbolize?"

The Irishman replied, "These are Carols."