Loss Mitigation vs. Borrower Assistance; Z-Spreads and ARM Pricing; Bank Earnings; Lots of Lender Specific News

"What does the mummy do when he goes to the bookstore? He gets all wrapped up in a good book!" But in three headlines from last night, a paradigm shift is evident. The cost of placing ads on Facebook is rising rapidly: the "cost per click" of an ad placed on Facebook has increased by 74% over last year. Reader's Digest Association, the 90-year-old publishing and marketing company that emerged from bankruptcy last year, is looking to sell itself for at least $1 billion (the company publishes more than 90 magazines and runs a successful direct marketing operation). And U.S. book retailer Borders is fast moving toward liquidation of the company's assets as it will begin to sell its remaining 399 stores on Friday after Borders failed to reach an agreement with a potential buyer. (Borders Group President Mike Edwards said they tried to avert liquidation, but could not prevent it because of the changes in the book industry, the rise of the electronic reader and the weak American economy.)

The high cost of living hasn't affected its popularity. But it does impact company earnings, and some came out this morning. Wells Fargo's came in slightly better than expected, 70 cents per share versus 68 cents. Bank of America came out in line with a loss of 90 cents per share. And Goldman Sachs did much worse: $1.85 per share versus $2.25 (primarily due to fixed-income trading).

Shares of MGIC tumbled yesterday after the company swung to a second-quarter loss. MGIC is the largest MI company, and its stock fell 23% in one day. Radian (#2) fell 14%, PMI dropped 13%. Group Inc. (PMI) dropped 13 percent, and Genworth Financial's stock was down almost 8%. MGIC reported a net loss of $151.7 million for the quarter, its 15th unprofitable period in 16 quarters.

Anything labeled "JPMorgan Chase overhauls troubled mortgage unit" catches one's attention: "In a sign of the bank's sensitivity to the issue of callousness to borrowers, it is re-christening its 'Loss Mitigation' department as 'Borrower Assistance', according to Frank Bisignano, JPMorgan's chief administrative officer who was assigned by Chief Executive Jamie Dimon in February to fix the bank's mortgage problems."  ChaseMortgageUnit .

What is happening with some of the non-top 10 lenders & vendors out there? Many are rolling out correspondent channels (seeing a huge opportunity calling on small banks and thrifts and credit unions, and offering customized correspondent service and servicing). Guild is seeing success in this channel. Others are expanding. Stearns Lending ($7.2 billion in 2010), which also offers retail, wholesale, and correspondent channels, announced that John Cady recently joined the organization as a SVP of Retail (after leaving Prime. Stearns also recently hired Greg Davis (ex-Impac) as its new SVP for Correspondent Lending.

For vendors, a la mode's Mercury Network is now listed as an appraisal submission platform for Fannie Mae and Freddie Mac's Uniform Collateral Data Portal (UCDP). The UCDP is the single portal for the electronic submission of appraisal data files to the GSEs. Lenders know that the GSEs announced that UCDP is now live, but that appraisal reports for all conventional mortgage loans delivered on or after March 19, 2012, must be submitted to the UCDP before the delivery date of the mortgage if the loan application is dated on or after Dec. 1, 2011 and an appraisal report is required.

New Penn Financial, a nationwide lender and wholly-owned subsidiary of Shellpoint Partners, spread the word that it has introduced a portfolio of "new mortgage programs designed to fill the gap where agency and government programs end." It is designed for borrowers with strong credit, significant reserves and disposable income, but who still fall outside Fannie Mae, Freddie Mac and Federal Housing Administration (FHA) guidelines. Sound familiar? The products are available up to 85% LTV without MI and loan amounts up to $2 million at lower LTV's, and will include loans to investors, foreign nationals, those with credit blemishes, and those who will rehab a home they intend to live in. For those playing along at home, Shellpoint Partners LLC is a joint venture between management and Ranieri Partners.

Real Estate Mortgage Network, Inc. (REMN), is continuing its retail expansion in Southern California with the opening of a new office in Pasadena headed up by Tami Murphy.

In the MI sector, Citi approved Essent Guaranty as an eligible mortgage insurance provider for Correspondent Lending. So at this point, Citi's correspondent channel has approved Essent, UGIC, MGIC, Radian, RMIC, Genworth, PMI, and CMG. (Essent is already an approved mortgage insurer in the correspondent channel for Bank of America, Wells Fargo, Chase, US Bank, GMAC/Ally, BB&T, SunTrust, PHH, Franklin American, Affiliated, & MetLife.)

Kinecta Federal Credit Union also announced that it has approved Essent Guaranty as its newest mortgage insurance partner.

Kinecta, for its jumbo insured ARM 90% LTV loans, told sellers that, "Radian has lowered the maximum loan amount, limited the LTV allowance and reduced the minimum FICO for their standard jumbo insured program. However, Kinecta has retained the ability to lend up to $250,000 over the agency high balance limits! There will now be two tiers of this program (standard and Kinecta), with reduced credit union rates on the standard tier but subject to the national rates for the Kinecta tier.

Kinecta's ARM changes remind us that ARM loans are still out there. It is common knowledge that fixed-rate mortgage rates are low - it is hard for a loan officer or borrower to complain about 4.625%. But at some point rates will head higher (whether it is in five weeks or five years) and the yield curve will steepen to the point where longer rates (mortgage rates) will elevate to a level where ARM's look sufficiently attractive to borrowers and adjustable rate mortgages will gain a larger share of total originations. And companies everywhere will examine ARM execution, best-effort to mandatory spreads, and try to figure out how to hedge their ARM production - if at all.

ARM loans have always been problematic compared to fixed-rate mortgages in terms of hedging production due to a lack of liquidity and the inefficiency of ARM MBS prices. But like fixed rate mortgages, ARMs can be securitized, delivered and sold into MBS's. But if "the Secondary Marketing Dude" wants to put the time and energy into it, ARM pricing can be derived & hedged, since Agency Hybrid ARMs are quoted and traded in terms of Z-Spreads or Zero-Volatility Spreads.  A Z-Spread is the "zero-volatility spread over the spot rate Treasury curve that causes the price of the security ARM to be equal to the Net Present Value ("NPV") of its cash flows." Another way to think about a Z-Spread would be that it is the excess yield an investor would demand/receive for investing in a risky asset like an ARM over a riskless asset like a treasury security with a similar term. The industry uses a 15% Constant Prepayment Rate ("CPR") for all coupons and products (3/1, 5/1, 7/1 etc.), and pricing also assumes that the borrower will make a balloon payment of the remaining principal balance at the end of the fixed-rate term of the loan. Without going in to the math, pricing models use Z-Spread quotes in order to calculate coupon pricing for ARM pools. And larger originators, instead of taking an investor's ARM prices and merely adding a spread, actually use Z-Spreads to capture market MBS pricing and produce rate sheet pricing by using Z-Spreads and current yield curves as part of their ARM rate sheet workflow.

Last week the 10-year note yield held below 3.0%, but that may change this week given this morning's housing numbers. Remember that our economy is struggling to grow and as long as the housing sector remains in a downward trend, and job growth is non-existent, that will continue. Unlike last week, this week there is no Treasury borrowing, and it is all about housing and earnings with expectations high for strong housing numbers - which is exactly what we saw this morning. Existing Home Sales are expected to be up about 2.0% and home prices are expected to be up slightly as well. It was reported that homebuilder sentiment increased slightly this month (but builders still have competition from distressed properties, inaccurate appraisals of new homes, and tight lending). Yesterday the 10-yr closed at a yield of 2.91%, mostly focused on the ongoing saga with US and European deficits. "Traders reported light buying from money managers and insurance companies; hedge funds were better sellers, particularly in 4s and 4.5s, while overseas was quiet with Japan closed for a holiday. Mortgage banker selling was on track for another limited session..."

This morning we learned that Housing Starts came in much higher than expected, up 14.6% at 629k. Building Permits were up 2.5%. After this strong news, as you would expect, rates moved higher, fixed-income prices lower. The 10-yr is sitting around 2.94% and MBS prices are worse by about .125.

A woman in a supermarket is following a grandfather and his badly behaved 3-year-old grandson.

It's obvious to her that he has his hands full with the child screaming for sweets in the sweet aisle, biscuits in the biscuit aisle; and for fruit, cereal and pop in the other aisles.

Meanwhile, Granddad is working his way around, saying in a controlled voice, "Easy, William, we won't be long...easy, boy."

Another outburst and she hears the granddad calmly say, "Its okay, William, just a couple more minutes and we'll be out of here. Hang in there, boy."

At the checkout, the little terror is throwing items out of the cart, and Granddad says again in a controlled voice, "William, William, relax buddy, don't get upset. We'll be home in five minutes; stay cool, William."

Very impressed, the woman goes outside where the grandfather is loading his groceries and the boy into the car.

She said to the elderly gentleman, "It's none of my business, but you were amazing in there. I don't know how you did it. That whole time, you kept your composure, and no matter how loud and disruptive he got, you just calmly kept saying things would be okay.  William is very lucky to have you as his grandpa."

"Thanks," said the grandfather, "but I'm William. This little idiot's name is Kevin."