Often I start the commentary off saying something witty, but I couldn't think of anything clever so I thought I'd suggest you take a look at this video about, of all things, seat belts. It is making the rounds, and with good reason. 

The Federal Reserve has a little more than ten business days to complete their well-publicized purchase of agency mortgage-backed securities (MBS). Last week it bought $10 billion, breaking their 3-week streak of $11 billion. Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are/were eligible assets for the program. Everyone knows that the end of the program is imminent.

I am going to go out on a limb here, which is rare for me, and suggest that the consultants, market gurus, bloggers, paid services, etc., who firmly believe that mortgage rates are going to go up 50 basis points after March 31st are wrong. If NASA told you that it was certain a meteorite was going to hit the US next Tuesday, would that change your behavior now? You bet it would. Yet dealers are not seeing companies sell their entire pipelines and/or expected production (currently estimated at less than $1 billion a day) for April and May. If speculators are stocking up on puts on MBS's, they are keeping it well hidden. (Of course, the option market for mortgage securities is practically nil.) Mortgages have been getting tighter and tighter to treasuries, which one wouldn't expect if mortgage rates were going to skyrocket, and yesterday current coupons were the tightest they'd ever been. And why would any mortgage investor (currently hedge funds and money managers) want to own pools at these price levels if they were going to be two points lower in three weeks? Of course, no one wants to sell something that they don't own in this market. I don't think that the supply is there, no one wants to sell what they don't have (exposing them to some extremely volatile swap and role markets), and with Fannie & Freddie buying back delinquent loans, I think mortgages hang in there with other rates.

Anyone who has tried to refinance a 1^st mortgage while having the 2^nd subordinated knows what a nightmare that can be. Apparently modifications are not much smoother, and last week House Financial Services Committee Chairman Barney Frank called on the CEOs of four major investors/banks (WF, BA, C, CH) to work with the Treasury Department and banking regulators to deal with second mortgages that have become an obstacle to modifying troubled first liens. These four have $452 billion of 2nds on their books, and writing them down is supposedly fraught with problems - especially since a lot of them are worthless. Gulp. The issue is that banks have not acknowledged these losses under the accounting rules and will adversely affect their capital ratios.

What is a "repo", and why should anyone in mortgage banking care about them? Also known as "repurchase agreements", the procedure allows a borrower to use a financial security as collateral for a cash loan at a fixed rate of interest. The borrower agrees to sell the security to the lender and also agrees to buy the same security back from the lender at a fixed price at a later date; therefore it is a combination of a cash transaction and a forward contract. The difference between the forward price and the current ("spot") price is the interest on the loan.

The Federal Reserve Bank of NY announced the beginning of a program to expand its counterparties for conducting reverse repurchase agreement transactions. This expansion, the first group being for domestic money market mutual funds, is intended to enhance the capacity of such operations to drain reserves beyond what could likely be conducted through the New York Fed's traditional counterparties, the Primary Dealers. "In terms of operational details, the New York Fed anticipates that any transactions would be offered to primary dealers and the broader set of counterparties, conducted at auction for a fixed (not floating) rate, settled through the tri-party repo system, and held against all major types of collateral in the System Open Market Account (SOMA), including Treasury securities, agency debt securities, and agency MBS securities.

Michael Ashley, a former senior official with LendAmerica, a nationwide lender of U.S.-backed mortgages recently shut off from government programs, was permanently banned from the industry by the FHA. In the March 3 judgment, Ashley was permanently banned from originating, marketing or submitting claims for FHA mortgages. He did not admit or deny liability regarding the allegations. The judgment also prevents Ashley from being employed in any capacity, including as a strategist or consultant, for any company connected to the FHA.

Provident Funding alerted brokers that, "Effective for loans locked on or after Friday, March 12, 2009, Desktop Underwriter will no longer be permitted for Interest Only loans. All Interest Only loans must be submitted to Loan Prospector."

Union Bank, formerly known as Union Bank of California, changed its guidelines last week for cash-out refinances. Six (6) months of seasoning are now required, and "if the property was purchased in the 6 months preceding the date of the application, the borrower is ineligible for a cash-out refinance." And the continuity of the loan obligation must be established - at least one of the borrowers obligated on the new loan was also obligated on the loan being refinanced, or the borrower has been on title and residing in the property for at least 12 months and has either paid the mortgage for 12 months or can demonstrate a relationship (relative, domestic partner, etc.) with the current obligor, or the borrower recently inherited the property or was legally awarded the property through divorce or separation (see below for restrictions on inherited properties).  (If you can't do this, with UB the borrower would only be eligible for a No Cash-Out Refinance with a maximum 50% LTV.) And if the property was recently purchased and the borrower wants some money back, the same rules apply. The actual announcement goes on to list more details regarding inherited properties, short pay-offs, etc.

A story from Bloomberg yesterday pointed to the impact on small banks from the FDIC's plan to auction more than $1 billion in failed bank assets next month. (Remember, for a bank assets are loans owed them, liabilities are deposits.) Almost half of the loans were originated by Silverton Bank out of Georgia. The article points out that of the loans seized from failed banks currently held by the FDIC, "63% involve participations by other lenders." The fear among small banks and commercial lenders is that the loans are going to be sold to someone who will flip them and cause them serious losses.

Today we start yet another Treasury auction, with the usual worries about financing our increasing debt. Who will buy the $74 billion? The usual suspects come to mind, and let's hope that demand is strong because otherwise we could see all rates shoot up in a hurry. Given that there isn't much data until the end of the week (weekly unemployment claims on Thursday and February retail sales on Friday), these auctions will be important. In spite of there being no data, the 10-yr has rallied back down to a yield of 3.68% and mortgage prices are better by roughly .250 this morning.

(Best read out loud.)
Boudreaux was out in da field talkin' with his friend Thibodeaux.

Thibodeaux said "Boudreaux, you see dat ole barn out dere? Well man, it is completely infestered wit rats. I tried everything I know an can't get rid of dem."

Boudreaux say, "Thibodeaux, I know xactly how to get rid of dem rats. You gotta get you one of dem bull constriptors."

Thibodeaux say, "What's a bull constriptor?"

Boudreaux explains, "Man, dats one of dem big ole snakes and he loves to eat rats and swallers dem whole, all at once".

Well, da nex day Thibodeaux went down to Kliberts reptile farm and bought him da biggest bull constripter dat dey got. He brought dat snake to da barn an let him loose right in da middle and just sat dere and watched. 

Well, Thibodeaux was watchin' for a long time, I mean long, an dere wasn't nuttin ' happening. Dat big ole snake jus curled up hiself in da middle of dat barn and slept all day. He didn't even move and dem rats jus run all around.

So Thibodeaux got real frustrated and he called up Boudreaux on da phone, "Boudreaux, man dats some bad advice bout dat snake. Dem rats is still runnin' al around and dat snake jus lays dere sleepin' all day long."

Boudreaux says, "Man, Thibodeaux, I know just what to do. Give dat snake some Viagra."

Thibodeaux say, "What! Viagra! What's dat gonna do?"

Boudreaux say, "I was just listening to da radio and de man say dat Viagra is da best ting to use for a reptile dysfunction."