I don't know where I am going to eat lunch today, much less predict where things like unemployment are going to be in a year.

I love it when someone or some company predicts where interest rates or unemployment is going to be a year from now, or even five years from now. What were these folks saying five years ago about where the economy would be today? Is their livelihood based on talking a good game, or actually betting their own money on whether or not their prediction is correct? And if they're dead wrong, are they really good at explaining why they were wrong? Just something to keep in mind.

The European Union is made up of 27 countries, though it may be 28 soon when Croatia is added. But only 16 countries use the euro, and those 16 make up the "euro zone". Many potential countries - those that have been considering joining up - are now waiting. These include Poland, the Czechs, and several smaller Eastern European countries. Many of the entry rules and restrictions (like deficit size) are being broken by current members! Who wants to catch a falling knife? As it relates to us, euro zone concerns seem, on the surface, to make it less critical that we address our own problems in this country. Economists point out that with Treasury rates low the expense on debt service is low, but if politicians refuse to adopt fiscal sustainability then the markets will do it for them and the cost of borrowing will be much higher.
 
In 2009, mortgage lenders were worried about a lack of warehouse lenders. Although most companies are seeing lower volumes, in theory freeing up warehouse capacity, apparently warehouse issues are still present. The Mortgage Bankers Association stated that the number of warehouse lenders has gone from 200 in 2007 to about a dozen last year! (These include firms such as BofA, Wells Fargo, Southeast Securities, Flagstar, ViewPoint Bank, Florida Capital Bank, etc., etc.)

In an associated study, the Reynolds Group reported total commitments by warehouse lenders to mortgage bankers fell from a peak of $2.25 trillion in 2006 to just $340 billion in 2009. The MBA, whose dedication to smaller lenders has come under question recently, issued a release saying, "Warehouse lenders going out of business, terminating, or adding restrictions to their warehouse lines of credit are causing independent (non-depository) mortgage lenders to struggle to maintain their ability to serve borrowers by providing funding on schedule and offer consumers options when shopping for a mortgage." Some banks issue captive lines, restricted warehouse lines, ceased to issue new lines or stopped increasing existing lines and increased pricing and restricted terms have closed down lines altogether - and anyone looking for a line had better have a good track record, decent profits, be lawsuit free, and a bullet-proof business plan.
 
Along these lines, the Bank of New York Mellon is working closely with MERS to create eVaults for warehouse lending. The reported goal of this is to improve a model for compliance and speed to deliver warehouse lines of credit. Once a loan is registered through MERS and comes to the custodian, BONY (in this case) can provide the asset on paper or electronically. One official stated, "We use the one custodian to get the risk mitigation without touching paper. When the loan is actually created, and certified the first time, it satisfies the direct deposit, the warehouse and the agency's requirements. It speeds up sale to the secondary market." Nice!
 
Bank of America Correspondent Lending weighed in on the USDA Rural Housing program. It, along with other investors, state that given the uncertainty about the current funding and guarantee fee, "Feel it is prudent to cease origination of this program until all details are finalized. As a result, effective Thursday, June 3, Correspondent Lending will suspend all commitments (including all trade commitments) on USDA Rural Housing programs. Existing locks will not be impacted by this announcement provided they are for loans with conditional commitments restrictions." BofA also updated its rural property eligibility requirements. For properties located in agriculturally-zoned areas, "Bank of America will purchase loans on properties that have an agricultural prefix in the zoning where the allowable and primary use is residential. Bank of America does not allow agricultural-type properties such as farms, orchards, or ranches."
 
Lastly, BofA addressed the flood insurance nightmare. "When a lapse of the NFIP authority occurs, Bank of America policy and requirements on flood insurance do not change. In this instance however, special requirements have been enacted for loans closed during this period. Clients may deliver evidence of application and payment for NFIP flood insurance and have loans purchased subject to a post purchase requirement of evidence of coverage. Acceptable evidence of pending issuance of a final NFIP policy includes a completed and executed NFIP flood insurance application plus a copy of the borrower's premium check or agent's paid receipt; or a completed and executed NFIP flood insurance application plus the final HUD-1 form reflecting the flood insurance premium collected at closing; or a completed and executed NFIP General Change Endorsement Form showing the assignment of the current flood insurance policy by the property seller to the borrower; or an agent-executed NFIP Certification of Proof of Purchase of Flood Insurance." BofA goes on to give policy recommendations to clients.

According to one news source, Liberty Mortgage Corp., a division of Branch, Banking & Trust (BB&T), is exiting the wholesale channel, a move that could change its focus to the bank ramping up both its correspondent and warehouse lending divisions. BB&T ranks 12th in the United States in terms of assets.
 
Chase has revised its property type eligibility rules on agency loan transactions to indicate that detached PUDs are restricted to Fannie Mae fixed market types, agency ARMs evaluated through DU only, agency IO evaluated through DU only, and the MyCommunityMortgage program. (You will notice that any fixed rate loan going to Freddie Mac, any ARM that goes through LP only, and the HomePossible program are not included.)

Chase also reminded its clients that over the June 19 weekend, correspondents will no longer be able to submit or resubmit loans to DU Version 7.1. "If a loan originally created in DU 7.1 requires an updated underwriting recommendation after the weekend of June 19, 2010, the Correspondent must create and submit under a new loan case file in the 8.1 version of DU. All Interest Only loans and Amortizing 5/1 ARM loans originated under guidelines in effect prior to the DU 8.1 update (i.e. submitted to DU version 7.1) must be delivered to Chase in fundable Condition by July 30, 2010." And although ARM production is down to next-to-nothing everywhere (why obtain an ARM loan when fixed rates are so low?) Chase adjusted its rates used in qualifying borrowers based on program, mostly using the fully indexed rate plus a margin. Lastly, Chase revised its 4506T requirements to bring consistency to requirements for tax transcripts by eliminating the requirement for the initial 4506T, signed at application, to be included in the file at the time of loan purchase and requiring that all loan files include the tax transcripts for the income used to qualify the borrower, regardless of loan type, transaction type, or income type.
 
Yesterday morning NAR announced that Pending Existing Home Sales increased by 6% in April, its third gain in a row. A sample of 20% of transactions showed that sales were up 30% in the Northeast, up nicely in the West and Midwest, down a shade in the South. And compared to a year ago, sales were up 25%. Remember that these numbers measure housing sales contract activity - a signed contract is not counted as an actual existing home sale until the deal closes. A sale is listed as "pending" when a contract to purchase an existing home (single-family, condos, and co-ops) has been signed but the transaction has not closed. Combine that with the current demand for home loans falling and you have...confusion. But if the supply of mortgages is down, and demand is strong, look for mortgages to perform well against duration adjusted hedges.
 
Regardless, rates moved higher and prices worsened after this number came out. Fortunately mortgages tightened, meaning that they did not do as poorly, but MBS volumes were still reported as "lower than normal". Keep in mind that although current rates are in the high 4's, most trading volume occurs in MBS's made up of 5.25-6.125% mortgages - those are more liquid and easily tradable. The U.S. 30-year Treasury bond fell to a full point loss and 10-yr Notes were down about .75 in price and up to 3.34% in yield.
 
This morning we had the private ADP jobs number, with usually a dubious correlation between this number and the unemployment data which will come out tomorrow. ADP's report, for example, does not include census hiring (since it is government related), but still showed a gain of 55,000 for its 4th consecutive increase. Tomorrow's nonfarm number is expected to be up over 500,000, a strong number for the economy. That isn't to say that rates won't move higher even if the number comes in as expected - they already are! We also had Initial Jobless Claims out this morning, -10,000, down from a revised 463,000, with the 4-week moving average creeping higher. Also, 1st Quarter Productivity came out at 2.8% with Labor Costs -1.3%, with little change in rates. With all of this we find the 10-yr up to 3.40% and mortgage prices worse by about .250.
 
 (As always, the joke does not necessarily reflect the views of the writer.)
 
A man was leaving a convenience store with his morning coffee when he noticed a most unusual funeral procession approaching the nearby cemetery.   A long black hearse was followed by a second long black hearse about 50 feet behind the first one.  Behind the second hearse was a solitary man walking a dog on a leash.  Behind him, a short distance back, were about 200 men walking in single file.

The man was overcome by curiosity. He respectfully approached the man walking the dog and said, "I am so sorry for your loss, and this may be a bad time to disturb you, but I've never seen a funeral like this. Whose funeral is it?"

"My wife's."

''What happened to her?"

The man replied, "My dog attacked and killed her."

He inquired further, "But who is in the second hearse?"

The man answered, "My mother-in-law. She was trying to help my wife when the dog turned on her."

 A poignant and thoughtful moment of silence passed between the two men.

"Can I borrow the dog?"

The man replied, "Get in line."