Post-Closing's Impact on Hedging Costs; Bank Liquidity and Required Reserves; ADP's Accuracy; NMLS Training

My girlfriend thinks I'm a stalker. Well, she's not exactly my girlfriend - yet.

Given yesterday's economic numbers, suddenly the market thinks the US is heading into another recession. Well, it's not exactly a recession - yet. But many will argue that there should be no "suddenly" in that sentence, and that, since housing and jobs are languishing, the economy has never come out of its doldrums to begin with. In a recent article, however, Caroline Baum pointed out that the yield curve "says" that there will be no recession. "With the Federal Reserve's benchmark rate at zero to 0.25 percent and the 10-year Treasury note yielding 3.06 percent, the spread between the two interest rates is among the widest in history. It's the reverse configuration (an inverted yield curve with short rates above long rates) that augurs recession... When the yield curve is steep, as it is now, it's an inducement for banks to expand their balance sheets -- borrow short, lend long -- and increase the money supply. That bank credit isn't growing now owes more to the hangover from a period of excess leverage and new-found religion on lending standards than any restrictive policy on the part of the Fed...A $15 trillion economy doesn't turn on a dime. Listening to the media, you'd think that one day inflation is ready to take off and the next the economy is struggling to stay afloat."

Mortgage folks should take special note that in yesterday's weekly mortgage application number, the refi index was down 5.7% last week. Although it will bounce back this week, year over year the refi component of MBA index is down 26.8% - even with mortgage rates 25 basis points lower! Credit & appraisals & loan fees, credit & appraisals & loan fees...READ MORE

The ADP Private Sector Employment number only increased by 38,000 in May, far less than the 175k that was expected. But remember that the ADP number, while it grabs headlines, is of dubious predictive ability for tomorrow's government-produced employment number. Over the last 6 months alone ADP's initial figure has ranged from understating the gain in jobs by 5k to overestimating it by 184k!

But the ADP only started the market moving yesterday, making everyone who locked a loan earlier in the week wish that they hadn't. The ISM Purchasing Managers' index fell in May, and was much lower than expected. In fact, it was the lowest reading in a year. Construction Spending increased 0.4% in April although during the first 4 months of 2011, construction spending is 8.4% below the same period in 2010. These components, pointing to a slow economy, moved stocks lower but pushed 10-year UST note yields below 3% for the first time in 2011. Generally speaking, a slow economy helps keep rates low - but is that what the mortgage industry really needs? Low rates help, but be careful what you wish for.

Earlier in the week the commentary discussed bank liquidity, and received this astute note: "Another reason why banks are sitting on top of a large amount of cash is because of the uncertainty of Basel III and the intense reserve requirements needed.  All major G-20 financial centers must adopt the rules by the end of this year.  Mortgage servicing rights, deferred tax assets, and investments in financial institutions cannot surpass 15% of common equity.  Therefore, a major review of assets will be needed from bank to bank until the end of the year.  If you think the QRM is onerous... Jack Nicholson said it best in Batman when he said "wait until you get a load of me."  The OECD already pegged global GDP growth to be stymied by 5-15 bps.  With economies across the world hurting and additional lending needed to foster growth, my guess is that the projections will be severely underestimated.  The effective date of implementation is staggered to allow banks to meet certain periodic benchmarks, but maybe it will help if the initial date is postponed by a year.  After all, which bank would help facilitate another first-time homebuyer wave if the high LTV, high DTI, low fico loan traits are contrary to Frank-Dodd and Basel III?"

Another wrote, on general mortgage conditions, "Six years ago underwriting was 'anything goes' to 'nothing doing' now, which reflects banks attitudes that they are not willing to take the risks that they did prior to the housing crash and subsequent decline in economic growth. The private market for funding mortgages is broken and will take a long time to fix and the government is not helping by the talk that the FHA should tighten up when they are almost the only game in town. The FHA is under the microscope by Republicans as they want to raise the minimum down payment on FHA loans to 5% and drastically scale back the size of the federal mortgage insurance program. Is this what housing needs?"

Need some NMLS training for Federal Institutions? Much of it has already taken place, although later this month there will be a session in Maryland. NMLSTraining In addition, for information on FBI Criminal History Record Information in the context of mortgage-related licensing, go to FBINMLS.

In previous weeks this commentary has discussed hedge costs, and things that companies can do to lower them. But as a few readers have pointed out, one peripheral area that impacts a mortgage company's gain or loss is the post-closing process, more specifically delivery and purchase reconciliation. Many companies are moving to electronic delivery of files to expedite this and make it easier for investors to review loan documentation. Meeting delivery dates and making sure that all the required documentation is included in the file is critical in order to avoid extensions and the fees associated with rolling trades - which usually hit Secondary Marketing's P&L. (How many meetings have been held with company president's, secondary managers and Ops managers to complain about late file shipments or missed delivery dates?) When purchase documents are received from investors, they must be addressed and resolved in a timely fashion. "Did we actually receive a price of 102.125 on the Nguyen loan, and if not, why not?" When I visit companies, the more successful lenders have these policies in place, and are using them.

Although one can argue that timely file delivery and auditing purchase monies don't directly impact hedging costs, they still impact the bottom line and fall within reach of Secondary Marketing Managers in spite of being more in the realm of Ops and Accounting. As one publication noted, "Successful Secondary Marketing Managers wear many hats and oversee each loan lock from the time of origination until it is purchased by an Investor.  They are intimately familiar with each step along the way and have a hand in overseeing multiple departments, from sales and marketing all the way through to the post-closing team...managing the post-closing process helps avoid the costs associated with pairing out of and rolling commitments, and ensures that the loan is purchased at the anticipated price.  By constantly searching for ways to improve processes, procedures and best practices, SMM's can continue to find ways to maximize profits and reduce costs."

Turning the focus back onto the markets, remember that not only do we have issues in this country, but also overseas. Granted, the public's memory seems to be short, but the sovereign debt issues in Greece, Italy, Spain, etc. just won't go away and definitely have an impact on worldwide markets. Yesterday Greece once again stole the spotlight, as a possible bailout package began to take form - a deal in the 30 billion euro range was being discussed. Moody's gives Greece a 50/50 chance of default. And still, here in the US our government continues to be a role model for us all and bicker over debt ceilings while our economy slows to a crawl. As expected, law makers overwhelmingly voted against raising the debt Tuesday night. Why would they do anything without trashing the other side of the aisle first?

So yesterday, at the 3PM EST marks, the 10-yr was .75 higher and down to a yield of 2.97% (eventually hitting 2.94%), and rate sheet MBS prices closed higher/better by .625-.750. This morning's numbers came out pretty much in line: Initial jobless claims at 422,000, and Non-farm productivity 1.8%. Later at 11AM EST the Treasury announces details of next week's auctions of 3s, 10s and 30s - estimated at $66bln versus $72bln in the previous round. As one would expect after yesterday's big move, we're seeing a slight bounce back this morning.

I've sure gotten old!

I've had two bypass surgeries, a hip replacement, new knees, fought prostate cancer and diabetes.

I'm half blind, can't hear anything quieter than a jet engine, take 40 different medications that make me dizzy, winded, and subject to blackouts.

Have bouts with dementia.

Have poor circulation; hardly feel my hands and feet anymore.

Can't remember if I'm 85 or 92.

Have lost all my friends.

But, thank God, I still have my Florida driver's license.