Some good news has come out of Washington DC regarding "conditional funding" of loans through the USDA Rural Development loan program. There will be conditional commitments for single family homes issued, subject to "the availability of funds and statutory authority to obligate such funds to support the proposed guarantee, the statutory authority to charge a sufficient guarantee fee (if any is needed, to support the proposed guarantee with available funding), and should the lender pass on to the borrower a loan origination fee that is higher than the guarantee fee that RHS is ultimately authorized to charge on the proposed guaranteed loan, the lender agrees to promptly return the difference to the borrower." Rural Development has $2.5 billion to allocate, subject to these terms, and although the department accepting Section 502 applications, it is not reserving loan funds for applications. Lenders such as Sidus Financial have begun re-accepting applications with a guarantee fee of 3.5% for purchase loans and 2.25% for refinances.

Yesterday I mentioned jumbo loan buyers. It was a reminder for me to be very careful about quoting rates, which in this case (where I mentioned 7%) turned out to be incorrect. For example, both Wells Fargo, Chase, and Bank of America offer jumbo products well above $1 million with rates in the 5's or low 6's, especially with hybrid ARM (5/1, 7/1) programs. And Kinecta Credit Union offers loans up to $4 million for select clients. I apologize for any confusion.

According to a study released by the MBA (or the MBAA, depending on if you use "Mortgage Bankers Association of America"), multiple factors including poor data, incomplete performance metrics, and, short-term focus and unrealistic optimism among senior business managers contributed to the collapse in the US housing and mortgage markets. "As home prices increased, lenders were pressured to offer innovative products that could help borrowers afford a home. The resulting increase and expansion of risk layering and change in borrower behavior, left risk managers unable to offer reliable risk estimates." There was a decline in senior business management's loss aversion due to the lengthy period of strong home prices and low defaults, which led to relaxed underwriting and high levels of risk layering. When market conditions changed, mortgage performance models proved unstable and default rate increased. Is this late breaking news? Of course, it didn't help that investors were being pushed by the government to move down the credit curve, or that the rating agencies' models and credit ratings proved to be inaccurate.

Key findings from the study, which many involved in the business would argue are fairly obvious, include the evidence that subprime loan underwriting criteria along several risk attributes expanded between 1999 and 2006. In particular, combined LTVs increased over time as the percentage of loans with silent 2nd liens attached to the property also increased. Full doc loans declined, large lenders saw a relative lack of geographic and product diversification, etc. To obtain a copy of the report, visit the RIHA website HERE

Secondary marketing executives are often looking for investors in scratched and dented loans. (Of course, highly skilled and trained secondary marketing executives will always deny actually having any scratched and dented loans!) But the business is on the upswing, and MountainView Capital Holdings out of Denver seems to riding the wave. The company actually offers a daily rate sheet for S&D loans, which is pretty unusual. They represent sellers and buyers of these loans, the definition of "making a market". So if you're looking for a rate sheet to price these loans, or want to add an investor besides the Steel Mountains of the world, check out http://www.mvcg.com/ or write to Matt Maurer for a rate sheet: mmaurer@mvcg.com

I am a huge believer in market psychology. If people are confident, often times it will overcome the reality of not having a job, or having a house underwater. And given that consumer spending makes up 70% of GDP here in the US, confident consumers are important to our economy. Consumer sentiment and confidence surveys hit bottom in late 2008 and early 2009, and have trended higher in the last year. The Unemployment Rate tends to be a concurrent indicator in downturns, but a lagging indicator in recoveries, leading to apparent differences between the actual GDP of the US and consumer confidence. Folks are more likely to react to positive news as economic growth increases, especially if employment is growing.

Consumer confidence is expected to continue to increase, which helps spending. This is always helped by the employment picture, and nonfarm payroll numbers are improving. In fact, it has been up for four months in a row. And core retail sales are on their way up. But economists feel that with spending currently outpacing income growth and the impending wind-down of Census hiring, the current pace in consumer confidence will likely be unsustainable. We'll see!

How about this market? It certainly makes us appreciate a quiet market, as yesterday we saw more volatility after China calmed everyone down by saying it wouldn't sell European debt. (It is hard to know if they will or they won't.)  Even oil is volatile, with the price per barrel once again over $75. The best thing one can say about this week's Treasury auctions is that they are over with. With rates moving up, and bond prices moving down, originators did some selling, and MBS volumes picked up. Traders estimate about $3 billion came out of lenders. Fortunately, as one would expect, mortgage prices did better than Treasury prices. Still, by the end of the day, after many investors changed prices, 30-yr mortgages were worse by more than .5 or .75 (the 10-yr Treasury was worse by well over a point). READ MORE. SEE CHARTS

Today is the last business day of May, and if you're going to lock a loan it is probably better to do so early rather than late (after the bond market closes, and hedging loans becomes more problematic). We have already had Personal Income and Consumption.A critical component of any recovery is the establishment of household incomes improving. Tax receipts are up, indicating that someone's income is going up although unemployment is still high. (Stay tuned for next Friday's unemployment data, expected to show a large nonfarm payroll gain!) Coming in about as expected, April's Personal Income was +.4% and Personal Income/Consumption was unchanged. It is always nice to see savings is picking up although it is at the expense of consumption. After the news we find the 10-yr yield at 3.33% and mortgages between .125-.250 better in price than yesterday afternoon.

(Warning: PG - I'll probably get in trouble for this one)

Deep in Louisiana, Gordon walks into a bar with a pet alligator by his side. He puts the gator up on the bar, and turns to the astonished patrons.

"I'll make you a deal. I'll open this alligator's mouth and place my "manhood" inside. Then the gator will close his mouth for one minute. Then he'll open his mouth and I'll remove my "unit" unscathed. In return for witnessing this spectacle, each of you will buy me a drink."

The crowd murmured their approval. Gordon stood up on the bar, dropped his trousers, and placed his "credentials" and related parts in the alligator's open jaws. The gator closed his mouth and the crowd gasped.

After a minute, Gordon grabbed a bottle of Pabst Blue Ribbon and smacked the alligator really, really hard on the top of its head. The gator opened his mouth and the man removed his genitals unscathed as promised.

The crowd cheered, and the first of his free drinks were delivered. The man stood up again and made another offer.

"I'll pay anyone $100 who's willing to give it a try."

A hush fell over the crowd. After a while, a hand went up in the back of the bar. A blond tourist from Minnesota timidly spoke up..."I'll try it - Just don't hit me so hard with the beer bottle."