Countrywide & Guam's Settlement; PMI Files for Bankrupcty; Primer on Fannie & Freddie's Impact on Fed Funds

If you say "raise up lights" really fast, it sounds like "razor blades" in an Australian accent.

If you say "VA Funding Fee" really fast, nothing cool happens. But it is good to know the details of what it will be for the next few years: http://www.benefits.va.gov/HOMELOANS/circulars/26_11_19.pdf.

I hope that the folks in Guam are sleeping better at night given the settlement of "Government of Guam Retirement Fund v. Countrywide, 11-6239, U.S. District Court, Central District of California (Los Angeles)." Bank of America settled securities fraud claims by a group of Countrywide Financial investors including the California Public Employees' Retirement System that opted out of a $624 million class-action settlement last year. For more details at Bloomberg visit: http://www.bloomberg.com/news/2011-11-22/bank-of-america-settles-countrywide-fraud-claims-with-calpers.html.

"In the old days," and in Monopoly, declaring bankruptcy meant throwing in the towel and the filer would disappear. I don't know exactly what it means anymore, but PMI Group Inc. filed for bankruptcy protection after it lost a court bid to undo the takeover by Arizona regulators of PMI Mortgage Insurance Co. (MIC), its main unit. After posting 16 straight quarterly losses, and with assets of $225 million and debt of $736 million (as of Aug. 4), I'd probably file Chapter 11 too. The company is headquartered in California, the petition was filed in Delaware, and the regulators are in Arizona - attorneys in three states are salivating.

Mortgage News Daily reports that, "Spurred by a strong demand for rental housing and low property prices, investors are buying more houses according to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.  The report says that investor purchases represented about 22% of closed transactions for the month of October, the third straight month that investors have held a share greater than 20 percent...The gap between the supply of distressed properties and their absorption by first-time homebuyers has now widened to 13.7 points in October compared to 8.8 points in September, indicating that first-time homebuyers have become less active in the distressed property housing market. The retreat of first-time buyers, the prime market for the kind of starter-level house favored by investors, coupled with low prices are starting to make buying, repairing, and renting more attractive to investors than flipping properties." Does that mean that the flippers can't find credit-worthy buyers for their properties, and are "stuck" renting them out?

When I visit with folks in the biz around the country, I am sometimes asked, "Hey, you with the corny jokes, if Fed Funds are 0%, why are 30-yr mortgage rates 4% or higher?" Aside from how it is often phrased, it is a good question, and an answer starts with knowing how the Fed Funds determined, if government-sponsored enterprises are involved, and what is "effective Fed Funds?" FF effective is the weighted average rate on overnight brokered fed funds transactions over the course of a business day. Currently these transactions fall into two types: a smaller volume of trades involving banks that occur at higher interest rates, and a larger volume of trades between the GSEs and banks with strong balance sheets that tend to occur at lower rates since the GSEs are presented with few viable options for investing their cash given their daylight overdraft restrictions. It is this second type of trade that dominates averages given the sheer volume of GSE cash. Domestic banks that borrow in Fed Funds pay FDIC-insurance assessments for doing this trade because it grosses up the balance sheet, which is a key reason why the effective is so far below IOER (the Fed's interest on excess reserves).

But before you ask, if you've read this far, "How might lowering the rates paid on excess reserves impact 'FF effective'?" you should know that the GSEs are significant sellers of funds on a daily basis and yet are not legally eligible to earn interest on balances held with Reserve Banks. Those banks willing and able to borrow funds from GSEs have been able to pay them rates under the IOER that they earn. For example, banks receive 25bps IOER and pay GSEs something like 10bps. A small reduction in IOER might leave this arbitrage intact (and economically attractive to banks), although we would still expect banks to pass through this cost to the GSEs, which would push FF effective rates lower. At some point, though, these rates could get so low that the GSEs would prefer to just leave their funds at the Fed and earn nothing on them rather than be under-compensated for assuming the counterparty risk. Historically, the GSEs have been lenders of funds. The Home Loans have typically used this market as a liquid warehouse for cash to be drawn upon to meet unexpected borrowing demands from member banks. Freddie and Fannie have also been net sellers, using the Fed Fund market for short-term investments for cash earmarked for later principal and interest payments.

Right now, GSE transactions dominate Fed Fund transactions and while lower IOER forces lower the rates that banks are willing to pay GSEs for funds, there is little reason why the GSEs would pay banks for the opportunity to lend them cash - so don't look for a negative interest rate. Fed funds have never traded at negative rates, even on quarter-end dates when repo and bills have traded negative. And probably the same with LIBOR, which, basically, represents the rate at which banks borrow unsecured funds from one another, there isn't much reason why any bank would pay to assume counterparty risk and make an uncollateralized loan.

MSI sent out a release addressing USDA funding and the changes to the VA Funding Fees. The company reports, "USDA Funding GRH FY 2012 funding has been allocated and will be in place in the next couple of weeks on USDA purchases. We expect that allocation for refinances will follow shortly. The agency is still issuing commitments on refinances with 'subject to' verbiage at this time." MSI reinstated locks for USDA refinance transactions and "will continue to close and fund USDA loans: purchases - the Conditional Commitment (RD Form 1980-18) must be in the loan file with no "subject to ..." language. For refinances, the Conditional Commitment (RD Form 1980-18) will be accepted with "subject to availability of commitment authority" language until the refinance funds are available. Both are subject to restrictions. And regarding the VA Funding Fee update, I noted the website at the top of the commentary.

Bank of America clients are reminded that loans with application dates of December 1, 2011 or later will not be eligible for purchase by Correspondent Lending.

GMAC, SunTrust, and other investors stated that federal legislation setting VA Funding Fees for VA Home loans until September 30, 2016 has been signed by the President and will become effective immediately for all VA loans closed on and after November 22, 2011.

Chase eliminated its Rate Cap Program.

Over in the MI space, Genworth Financial is implementing changes within its mortgage insurance segment to make it easier for lenders to participate in HARP 2.0. For example, one of the incentives of HARP 2.0 is to waive reps and warranties on mortgages to mitigate the risk of lenders having to repurchase certain loans. Genworth said it will make a description of the changes available within its mortgage insurance underwriting guidelines by Dec. 1.

United Guaranty sent word out to clients that it "fully supports helping borrowers through participation in HARP... Upon careful analysis of the GSEs' announcements, United Guaranty has opted to responsibly expand our participation in HARP, introducing streamlined processes and waiving our reps and warrants rights for certain HARP loans." UG will agree to waive its reps and warrants rights with respect to the original loan file "for the following 'Same Servicer' and "New Servicer" HARP loans only: all full-file loans originally underwritten by United Guaranty, or all loans that were closed on or before December 31, 2003. The new HARP loans must meet United Guaranty and GSE HARP requirements in effect at the time of submission."

Turning to the markets, and remembering back past the mashed potatoes to Wednesday, we had a surprisingly solid 7-yr note auction. But although Treasury prices & rates did ok, MBS prices were worse a shade. Most originators are closed today, although the bond markets are open for a shortened day. Today the economic calendar draws a blank, so, aside from chatter about last night's shopping volumes, news from Europe takes the center stage.  For Friday's session as there are no major economic releases on tap. The 10-yr note closed Wednesday at 1.88% and in the early going this morning we find it at 1.93%, with both stocks and MBS prices slightly worse.

For the older folks out there:

a) A grandmother was telling her little granddaughter what her own childhood was like. "We used to skate outside on a pond. I had a swing made from a tire; it hung from a tree in our front yard. We rode our pony. We picked wild raspberries in the woods."
The little girl was wide-eyed, taking this all in. At last she said, "I sure wish I'd gotten to know you sooner!"

b) I didn't know if my granddaughter had learned her colors yet, so I decided to test her. I would point out something and ask what color it was. She would tell me and was always correct. It was fun for me, so I continued. At last, she headed for the door, saying, "Grandma, I think you should try to figure out some of these colors yourself!"
c) When my grandson Billy and I entered our vacation cabin, we kept the lights off until we were inside to keep from attracting pesky insects. Still, a few fireflies followed us in. Noticing them before I did, Billy whispered, "It's no use Grandpa. Now the mosquitoes are coming after us with flashlights."
d) When my grandson asked me how old I was, I teasingly replied, "I'm not sure." "Look in your underwear, Grandpa," he advised, "Mine says I'm 4 to 6."

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog reminds everyone about how government intervention in the housing market is nothing new. If we forget history, we are doomed to repeat it, and it is important to know the last 15 years of the history of the agencies. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.