At the last company Christmas party, loan agents lined up on one side of the room and the underwriters on the other side. The loan agents throw fire cracker at the underwriters...and the underwriters lit them and threw them back.

A long-time underwriter wrote to me and opined, "Consumers always want more than what they can afford and we gave them exactly what they wanted for the last 10 years (without any prudent financial advice). I actually like the guideline changes and feel it is necessary to eradicate some of the lackadaisicalness that I hear in some underwriter's voices.  Manufacturing quality is still a problem for the Agencies, and originating mortgage companies are still closing loans that are not 100% purchasable by the aggregators upon delivery.  Fannie and Freddie have technology in place to turn the lender's cash immediately, and then are rejecting the loans once they figure out all the doctoring that happened to make a square peg fit a round hole."

Another wrote saying, "I oversee the secondary desk at our company and I also originate loans. [Interesting.] As difficult as the last three years have been, I am still seeing mistakes due to a lack of educated and qualified workers in our industry.  Unfortunately some of those people are compensated on a per loan basis, possibly even the underwriter.  So until quality becomes a part of our DNA, expect more of the same for the next few years."

Yesterday I mentioned how the spread between mortgage rates and Treasury rates were the lowest (tightest) they'd ever been. (Remember that any difference is due to a number of factors, including the higher risk in owning mortgages, the possible difference in duration, etc.) Mortgages continued to tighten yesterday - so even if Treasury rates moved higher, mortgage rates might stay the same. Investors want to "own yield". The usual suspects were in buying: the Fed, money managers, and hedge funds, and it would appear that production volumes are lagging. So although traders were fretting over swap and roll levels, originators are more consumed with the general level of rates, which really hasn't moved that much in quite some time.

Fair Isaac Company, known as FICO, reported that credit score trends indicate that mortgage default risk for consumers with high FICO scores is now moving toward exceeding their credit card default risk, in spite of the fact that credit cards are generally unsecured and mortgages are secured by real estate. In 2005 bankcard accounts were more than three times more likely to become 90 days delinquent, but in the last few years this has dropped to only 1.6 times more likely. And FICO reports for borrowers scoring high on the FICO score's range (300-850) the level of repayment risk actually has become greater for real estate loans than for bankcards! And for more fun with numbers, in 2005, 46% of consumers who opened a new mortgage had a FICO score less than 700. In 2008 this percentage had dropped to 25% of the newly booked mortgage population. Fair Isaac reports that borrowers in the Northeast continue to present the least amount of default risk nationally for real estate loans.

Wells correspondent customers were reminded that if at any time a new GFE is required per RESPA regulation, "Wells Fargo will require closed loans submitted for purchase to contain Changed Circumstance documentation explaining the reason for the new GFE." Wells requires "the initial GFE and any subsequent GFE(s) re-disclosed as a result of RESPA compliance to be included, in the closed loan file, in order of date" and sellers are suggested to use "documentation generated by their own systems and process, or use the optional Changed Circumstance Detail Form 30 (Seller Guide Form 30)."

A new test allows men to check their sperm count at home. At least that's what the men say they are doing... (This has nothing to do with mortgages, but figured I'd throw it in to see if folks actually read this.)

We began the year believing that rates were heading higher, with the Fed "tightening" and making credit costs higher - but this tightening cycle will be different. There are two policy decisions for the FOMC to make, the first being increasing short term rates, but also having to deal with its asset holdings (all those securities it owns). Obviously some mortgages pay off, but the Fed doesn't necessarily want to own mortgage-backed securities or agency debt until their maturity in 30 years - they prefer Treasury securities. Watch for selling to start this summer - which could lead to mortgage spreads increasing. One scenario I'd read about stated that if the Fed chooses to leave $1 trillion of 4.5% mortgages on its books as it starts to raise rates, and inflation really picks up, the Fed could find itself paying out 10% or more as interest on excess reserves and receiving only 4.5% on the assets. This, in turn, would lead to $55 billion of annual losses (and $300 billion in mark-to-market losses) will set them up as a politically weak inflation fighting central bank.

How are rate lock periods determined? Companies certainly don't want to run up against GFE and RESPA issues, for one thing, in setting deadlines. On the investor side, for brokers, Wells Fargo reminded them that "We're serious about closing purchase deals on time!" Wells will "provide an initial decision within two business days of receipt of the complete file for all first mortgage purchase loans. If you submit your loan with a Wells Fargo Home Equity Line of Credit product, it will also be decisioned within two business days of the first mortgage approval. We can meet the closing date if the loan has been locked and all prior to close conditions (including all pre-close documents) are received at least 10 business days prior to the closing date." Wells doesn't outright tell brokers that it will close a loan within whatever lock period the broker sets, but it is almost the other way around. Wells goes on to tell brokers what pre-close documents are needed, how many days ahead of closing brokers should submit a complete file (20 business days), etc.

The MBAA released its weekly survey of applications for the previous week. Apps were up slightly versus the previous week, with refinancing was down 1.5% but purchases showed some life and increased 5.7%.

Yesterday's 3-yr T-note auction of $40 billion was the fifth consecutive month of this size, and the auction went well. If you think about it, the short end of the Treasury market continues to be well supported with the ongoing sovereign debt issues (there is still some flight-to-quality bid) and outlook of rates. We've had three days (including today) of no real economic news, so supply (mortgage selling and the Treasury auctions) is continuing to be the main driver in the market. We have $21 billion of 10-yr notes to buy today. The current 10-yr is yielding 3.72%, and mortgage prices are about unchanged from Tuesday's close.

Father Murphy walks into a pub in Donegal, and asks the first man he meets, "Do you want to go to heaven?"
The man said, "I do, Father."
The priest said, "Then stand over there against the wall."
Then the priest asked the second man, "Do you want to go to heaven?"
"Certainly, Father," the man replied. 
"Then stand over there against the wall," said the priest.
Then Father Murphy walked up to O'Toole and asked, "Do you want to go to heaven?"
O'Toole said, "No, I don't Father."
The priest said, "I don't believe this. You mean to tell me that when you die you don't want to go to heaven?"
O'Toole said, "Oh, when I die, yes. I thought you were getting a group together to go right now."