A reader posted this on the comments section of the blog today....

(This email was not written by that user...just information passed along to MND. I felt it warranted a response. My thoughts in bold...)

food for thought - incase this hasn't been posted somewhere else - email msg from a major lender today...

5 Reasons why we won't see 4% rates anytime soon. 5 reasons to not get comfortable with refinances.

1.Supply and demand / Mortgage origination capacity: 70% of the industry capacity is gone or exiting the wholesale space. Those remaining will not price at unprofitable levels for market share. Pipelines are full. Despite lenders continuing to back off of price subsidy, registrations continue to increase. This dilutes the end rate to the consumer.

I agree that warehouse lines are tight and small lenders/brokers are having trouble funding. I however must disagree with the use of the statistic that "70% of the industry is gone". I believe this statement is misleading and must be clarified to add perspective. The mortgage industry was grossly over-occupied and has since corrected itself...the remaining professionals are generally seasoned and certainty "chomping at the bit" for lending activity.  Also  don't be too quick to discount the willingness of any TARP funded ban k to lend money via mortgages...well at least that is if President Obama indirectly forces banks  create some money. 

Also are registrations increasing or locks increasing? Registrations might be increasing but based on the recent originator supply levels borrowers haven't been aggressively committing new rates.

2. Bankruptcy code changes: Legislation is being introduced that will allow the courts (read judge), to alter the terms of a borrower's mortgage. This will impact the integrity of the MBS market and reduce demand for Agency MBS. China and other major investors will move away from MBS in favor of treasuries. Reduced demand for MBS increases the rate to the consumer.

HR 200 has been removed from our radar.  Unless of course your first assumption is accurate. Then we will reconsider the notion that the legislation would push rates up 1-2% in a quantitative easing interest rate environment. Oh...and we will only reconsider once the Fed spends $500bn on Agency MBS.

3. Agency Add On's: Across the board, FNMA/FHMC have implemented risk based add on's for loan purpose/LTV/FICOS. Average BP add on for a 660 FICO score/refinance is 200 BP's greater than a year ago. These new add on's (this week the cash out add on's increased again) have resulted in 200 BP's worse execution to the end consumer.

I agree with this one. Agency risk adjusters are too expensive. Especially considering the Personal Spending and Income data released by the BEA today. So Yes this a hurdle on the road to "it that shall not be named".

4. Investor's time frame from registration through shipping ready status: Closely related to Supply/Demand/Capacity is the amount of time it takes to move loans through investor's systems. This forces lenders to move roll schedules forward,(ie. roll to the next security for delivery earlier), further worsening the street price. Secondly, the longer term locks have a greater likelihood of fallout in a volatile market. This widens the spread between lock periods. The spread between a 10 day lock and a 70 day lock is now 90 BP's. This places further pressure on the end interest rate to the consumer, reduces lender's gross revenue.

Yes fallout did get out of control but lenders quickly nipped that problem in the bud by slowing the pace of activity via higher borrowing costs. Now mortgage rates are stagnant and originator supply is light....so OPS centers ought to be catching up soon. PLUS are we talking registrations or new commitments? It matters...registrations can generally sit as long as they like if the borrower is knowingly floating.

Turn times are still long but they are not getting longer.....have you noticed any investors closing their lock desk due to high volume? It is counterintuitive to assume that lenders don't want the new business. They just need to prepare themselves for it. There are many apt and able mortgage professionals who would fit assigned roles quite well too.....doing FN/GN business requires a good leader though. Someone who  knows the ins and out of government/gse lending products. Beyond that the details are manageable via assembly line production...with the experienced manager as the problem solver.

FYI some were choosing to roll early in today's session.

5. Government Influences: A. Only the government is buying MBS. Rather than periodically jump into the market as aggressive bidder, the treasury is buying at scheduled intervals. On Dec 17th we saw the positive impact on price with the 600B announcement. The rates quickly deteriorated when the treasury provided details / regular Thursday announcements and regular purchase schedules. The market has priced in the scheduled purchases. Until FNMA/FHLMC/Banks are functioning properly in the open market, Treasury action will have little or no impact. B. The market has not yet priced in the new administration's anticipated loss mitigation requirements to stem foreclosure. This will increase the fixed cost to service loans and prolong the recovery. The market will recognize this when the "new" plan is announced. This will further reduce the demand for MBS and adversely impact the end rate to consumer. C. Fed funds already at .25. Fed is out of bullets on reducing fed funds. Banks 'too big to fail' will continue to shore up their balance sheets. Without partners, and increased cost to service /exposure to value declines, banks won't lend residential. The resulting demand erosion for MBS will increase yields to the consumer. D. Disclosure restrictions/opaque new broker disclosure/code of conduct rules etc..etc..have combined to hasten investor exodus from wholesale lending. Too many moving parts to manage make leaving the space easier than managing/systems change to support the new regulatory environment. In summary, don't let a pipeline full of refinances waiting in line to UW provide any sense of security. We'll make it through this, but it is imperative that we identify relationships that will make it through and thrive. We have the best system out there and are poised to continue to take share. As housing becomes more affordable, we'll see a new flood of first time buyers in the marketplace to take advantage of the current value environment. Focus on purchases, and assume the floating loans in process may not close. THANKS

Two false statements were made to open this argument.... "ONLY THE GOVERNMENT IS BUYING MBS". False False False. Real money bidders are present in TBA market everyday!!! Yes the stack is currently stagnant....but there are nibblers ever present...just waiting for breakeven. Then the writer states that the TSY is buying at schedule times....this is incorrect as well. The Fed is buying on relative value. I have actually posted an entire blog on the subject...Why is the Fed buying FN 5.5 MBS???....check it out  by clicking on ME. The Federal Reserve has hired asset managers to make their MBS purchases,  your implied reasoning behind the  recent MBS sell off was a coincidence as movements were related to shifts in the yield curve and a general gyration in Fixed Income world.

As far as servicing goes...I have been researching MSRs for many reason. I cannot disagree that servicing valuations need to be adjusted.Oh and broker shops have been falling off since early 2008...as soon as FHA became the way...brokers scrambled for banks and retail shops with DE UWs. It is no secret that the wholesale lending environment in contracting. Remember once this hole mess clears up mortgage world is going to be in for some serious regulations and licensing requirements.

Thoughts?