· Investors who own ResCap bonds have to pay $8 million upfront to insure $10 million in ResCap bonds for five years.  Ouch.  These are through so-called Credit Default Swaps. 

· Our newsletter earlier this week was filled with typos, as many readers pointed out to us. It’s tough to edit your own writing, so let’s see if we do better this time. 

· As an example of investors’ bearish feelings about GMAC or ResCap, the 8.375% ResCap notes due in 2010 are trading at 30 cents on the dollar last week.  Uh oh.

· In 2002, the federal government was running such huge surpluses that the national debt was on schedule to be paid down to zero in the year 2011.  Instead, it now sits at $9.4 trillion. Whether you’re a Democrat or a Republican, we can all agree that the current administration has been the biggest spender in our nation’s history.

· Did anyone read the article a few days ago about how Iraq is on target to run a $79 billion budget surplus this year? Only 1% of their budget goes to maintaining U.S. and Iraqi reconstruction projects such as water, roads, and electricity.  Why is this happening, people?  Why are we spending our money on them to the point of massive U.S. deficits when they won’t spend their own money on rebuilding their own country?

· France gets it.  They have 59 nuclear power plants that supply fully 80% of their electrical power.

· From a research note from a highly regarded Wall Street securities firm: “(Freddie Mac’s) deferred tax asset was $18.4 billion on June 30, exceeding GAAP capital… of $13 billion and equal to more than half of regulatory core capital.”  The Garrett, Watts (obvious) prediction:  Watch for Freddie to raise much needed capital later this year.

· Wamu stock is down 90% the past twelve months, mostly from loan problems. But they’ve had problems on the deposit side as well.   Wamu opened up 147 branches in Chicago in a few short years, but they never got market share above 0.3% there.  They’re perfectly capable of doing better.

· In the 1950’s, 60’s and 70’s, Playboy Publisher Hugh Hefner represented a certain image of manliness.  He still runs around with young women (60 years younger!), and supposedly keeps huge bowls of Viagra in the entryway of his mansion.  But the weird thing is that he’s now 86 years old.  Strange.

· By the way, look at the earnings for Playboy Enterprises and then look at how much they spend on his Playboy Mansion and the rest of his lifestyle.  When he dies, earnings will skyrocket once they discontinue supporting his search for the Fountain of Youth.  Could be an interesting stock to own.

· Hillary Clinton’s financial disclosures for the U.S. Senate revealed that her husband earned $10 million last year giving speeches at $150,000 per speech. Nice work if you can get it.

· If you’re having issues in the area of compliance, we know one consultant, one attorney and one CPA who know this stuff cold, each of whom has 20-30 years experience with regulations, disclosures, and so on. They’re Dave Medlin, attorney, (510-832-2900), Jeff Spiegel, CPA (925-974-4000), and Pam Strickland, consultant (805-682-8784).  Have them get things working properly at your shop before the regulators come in and start imposing fines. An ounce of prevention is worth a pound of cure.

· We just read that a favorite treat at the Iowa State Fair is deep-fried Twinkies.  How could you dare ruin one of the world’s greatest food items?  Twinkies may be dipped in hot fudge or sometimes a bit of whipped cream, but never deep fried.  What is wrong with these people?

· One of the warehouse lenders we do FOCIS Reports for told us recently “One of the key things we look for in assessing a new applicant for a line is what they do with their earnings.  Do they keep it in the business, or do they just take it out?  We also want to know if they can articulate how they make money.  Can they also put in writing in a way that makes sense?”

· Another warehouse lender told us that a real way to not get a line is to pursue a Theme of the Month strategy, taking a shotgun approach, never really sticking to a plan, and chasing new ideas constantly. We completely agree.  It’s a tough business right now, but basic mortgage banking – and execution – is what most companies should stick to.  Now is not the time to pursue exotic products and unusual strategies.

From the Keene, New Hampshire Daily Sentinel, a perfect example of why good writing matters:  “Gregory Pregent shows off some of the many antiques he will auction off from the Masonic Temple tonight along with his father, Dale.”  Have a good weekend – and try not to auction off your father. 

Garrett, Watts & Co.  -  Joe Garrett and Corky Watts

Wachovia will cease mortgage origination in its branches in Illinois as well as 18 other states, and will be doing lay-offs. Their retail branches are expected to remain open. Here is the story for your perusal.

Assuming that a mortgage company knows what their closing costs are, where do they rank? The survey includes lenders’ origination fees, title and settlement fees and excluded taxes and prepaid items. A study from Bankrate Inc. shows that North Carolina has the lowest mortgage closing costs in the country, with the average closing cost for a $200,000 mortgage at $2,650 compared to the national average of $3,118. New York is on top at $4,016. Bankrate obtained four to nine “good faith estimates” from the Web sites of lenders, it says. “Researchers selected ZIP codes in some of the largest cities in each state and requested information on the closing costs from a $200,000 loan. They requested fees on a 30-year, fixed-rate mortgage for a borrower with a 20 percent down payment and good credit to buy a single-family home.”

Fannie Mae cuts its dividend and posted its fourth straight quarterly loss: a greater-than-expected $2.3 billion. (That compared with a profit of $1.95 billion a year earlier.) One may recall that Fannie had a loss of $2.51 billion in the first quarter. Fannie’s CEO was quoted as saying, “Volatility and disruptions in the capital markets became even more pronounced in July. In addition, credit performance has continued to deteriorate and, based on our experience in July, we anticipate further increases in our combined loss reserves. Given this volatility and the build-up of our reserve, as well as the uncertainties inherent in the U.S. economy and the housing market, we are taking a series of additional actions that reflect our ongoing focus on conserving and enhancing our capital, as well as managing our credit risk through the balance of this cycle.”

“Mr. Mozillo, line 3 is for you…” Countrywide Financial has received subpoenas from the Securities and Exchange Commission as part of a formal investigation. Countrywide has been under scrutiny by federal authorities and also faces numerous lawsuits related to its mortgage lending practices.

The U.S. Census Bureau released some interesting county-level news. La Paz County, in Arizona, has the country’s oldest population (32% of its population is 65 years or older) while Webb County (Laredo, Texas, on the Mexican border) has the country’s youngest population (with children younger than 5 comprising 13% of the population). 302 counties, or nearly one in every 10, are “majority-minority” meaning the county had a population with more than 50% minority residents. Among the majority-minority counties with a minority population of 1 million or more were Bronx, N.Y.; Miami-Dade, Fla.; Los Angeles, Calif.; Queens, N.Y.; Bexar (San Antonio) and Dallas, Texas; San Bernardino, Calif.; Kings (Brooklyn), N.Y.; Harris (Houston), Texas; Santa Clara (San Jose) and Riverside, Calif.; Cook (Chicago), Ill.; and Orange, Calif. Los Angeles County had the largest minority population in the country in 2007. At 7 million, or 71 percent of its total, Los Angeles County was home to one in every 14 of the nation’s minority residents.

We had a nice rally yesterday, with rates dropping after a good 30-yr bond auction. Pending Home Sales, known to be volatile, unexpectedly rose 5.3%. That is good news! The index tracks homes under contract that have not yet closed. Foreclosure sales could be distorting this index to the upside, as those that are handled by realtors are counted as sales of existing homes and presumably also get into the pending sales index. This morning we already saw that U.S. productivity grew at a weaker-than-expected 2.2 percent during the second quarter despite a rise in output and lower unit labor costs than during the first quarter, according to the Labor Department. Compared with the second quarter of 2007, non-farm productivity was up 2.8 percent. Unit labor costs, a gauge of inflation and profit pressures closely watched by the Fed, were up 1.3% in the second quarter, much lower than the 2.5% increase during the first three months this year. With no more substantial releases for today (or Monday) the 10-yr stands at 3.94% and mortgage prices are unchanged from yesterday afternoon – which is an improvement from yesterday morning!

A man was driving down the road and ran out of gas. Just at that moment, a bee flew in his window.
The bee said, “What seems to be the problem?”
“I’m out of gas,” the man replied.
The bee told the man to wait right there and flew away. Minutes later, the man watched as an entire swarm of bees flew to his car and into his gas tank. After a few minutes, the bees flew out.
“Try it now,” said one bee.
The man turned the ignition key and the car started right up. “Wow!” the man exclaimed, “what did you put in my gas tank?”

“BP”

Rob Chrisman

Continuing Job Claims and the “L” Shaped Recession - Minyanville Professor Bennet Sedacca posted a stunning chart this morning on continuing unemployment claims. Here it is. - MISH’s Global Economic Analysis
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Is retiring early unpatriotic? - By staying on the job longer, boomers could help spur the economy and ease America’s worker shortages, the Social Security mess and the national debt. - Bankrate.com MSN Money

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Report: US: Taking stock of the bear market - DanskeBank

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1.  Wall Street Report Tries to Dissect Financial Meltdown - Louise Story - A group of Wall Street executives released a report on Wednesday that outlined how the industry failed to foresee the financial meltdown of the last year and what companies can do to improve risk management.  - NY Times
2.  Full Report - in sections - Containing Systemic Risk: The Road to Reform - The Report of the CRMPG III
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Is Countrywide Financial Headed for Bankruptcy? - Christopher Whalen - … we got the Blackberry to work well enough to receive an important missive from one of our colleagues at Bloomberg News, “BNY Mellon Sues Countrywide Over $2 Billion in Notes.”  As you know, we’ve been pondering the possibility of a bankruptcy for Countrywide Financial and now that horrific prospect seems to be in view. … - The Institutional Risk Analyst 

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yuck: America’s Most In-Debt Households - Matt Woolsey - Twenty spots where property owners have the least equity in their homes. - Forbes

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Should We Now Be Thinking About Relative Deflation?  - The Finance Professor
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First Fed - should anyone be surprised? - Well, First Fed (NYSE:FED) is in the news again. Should anyone be surprised? The Wall Street Journal reports the company is having difficulty with losses as a result of delinquencies on its portfolio of option-ARM loans, most of which were made to borrowers with excellent credit, many of which are now souring like a bottle of wine with a bad cork.- lots of charts and details - Tim Iacono - themessthatgreensapnmade

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FINANCE: Servicing fees discounted - GMAC LLC, an auto and home lender, said a subsidiary sold interests in some mortgage-servicing rights to its majority owner, Cerberus Capital Management LP, at a discount…. Detroit Free Press
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Big loss, grim outlook at Freddie Mac - Troubled mortgage finance firm says its quarterly losses rose to unexpected depths - cuts dividend at least 80% - …Syron was asked Wednesday if Fannie and Freddie, known as government sponsored enterprises or GSEs, can continue to operate in a way that both helps the housing market and makes the profits that shareholders demand. He said he believes they can continue to serve both missions going forward, despite these losses…. - Money CNN

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Global Standards: Jilted at the Altar? - Despite glowing words for International Financial Reporting Standards, Securities and Exchange Commission Chairman Christopher Cox seems no closer to pulling the trigger on U.S. conversion. - David M. Katz - CFO.com

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JP Morgan, Morgan Stanley Pull Back on Mortgages - PAUL JACKSON - housingwire

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1.  40% of U.S. homeowners say their houses have risen in value - STEVE BROWN  - Dallas Morning News

2.  Homeowners delusional on value of property - James Temple -  San Francisco Chronicle 

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Pimco’s Gross Says U.S. Will Rescue Fannie, Freddie - Kathleen Hays and Shannon D. Harrington - Bloomberg

Remember the “old days”, where when someone used the word “vintage” you knew they were talking about wine? In an article today in the WSJ, “mortgages issued in the first part of 2007 are going bad at a pace that far outstrips the 2006 vintage, suggesting that the blow to the financial system from U.S. housing woes will be deeper than many people earlier estimated.” Although the numbers are still in percentages less than 1%, the story reminds us that “the data from the FDIC and others suggest that lenders didn’t substantially tighten standards until at least July or August 2007…” 2008 will definitely be the cream of the crop!

Jim Giraldin, the president of First Fed Financial, commented on the recent article in the Wall Street Journal. He relayed, “FirstFed has seen its total delinquencies declining for 3 consecutive months.  More than half of our Option ARM loans have already ‘recast’ so the problem is further behind us than most others. Our SFR business was not our only product line; 30% of our assets are multifamily loans which have no delinquencies.” Speaking of FirstFed, they reported a net loss of $35.5 million for the second quarter, citing a $90.2 million provision for loan losses linked to charge offs, modifications, and nonaccrual of single-family mortgage loans.

And speaking of inaccuracies from yesterday’s post,  the ‘ol Starbucks/internet coupon… was bogus.  http://www.snopes.com/inboxer/nothing/starbucks.asp

Citi wins the award for the first one to change their pricing (today) as a result of Fannie’s change in October. “The updated Adverse Market Charge announced by Fannie Mae in Announcement 08-18 and distributed Monday, 8/4/08, will be incorporated into our base pricing effective today, 8/6/08. However, for our Mandatory Trade Desk Clients, we will offset that charge with a 25 bps price improvement via the carry adjustor for any Trade Desk loan that is purchased by 9/3/08. Trade Desk loans purchased after 9/3/08 will be subject to the Adverse Market Charge.” AgFirst quickly followed.

AIG’s mortgage insurer, which reimburses lenders when borrowers don’t pay, may be unprofitable through the middle of next year, the company said. Overall, American International Group Inc., the world’s biggest insurer, lost money for the third straight quarter. The loss of $5.36 billion was worse than analysts expected and renewed concern that the New York-based company may need more capital. AIG wrote down the value of credit-default swaps by $5.56 billion before taxes in the second quarter. The contracts, which are guarantees AIG sold to protect fixed-income investors, drove the company to record losses in the two previous periods, accounting for about $25 billion in write downs over nine months!

Some analysts are pointing to the weekly Jobless Claims number as a good indicator that the economy is not as healthy as some would think. (Actually, does anyone think that it is really healthy?) Last week claims for jobless benefits increased sharply, up to the highest level since early 2003.  The total number of claimants also moved past 3.2 million. Today’s number was expected to confirm or deny this trend. If this pace were to continue through next January, the pool of jobless would be as large as it was at the peak of the 2001-2003 labor market downturn. The labor market certainly appears to be weakening—job advertising is declining, layoff announcements are picking up, consumers are reporting more difficulty finding employment, and so on.  The reason is that Congressional extension of eligibility for jobless benefits may have allowed some individuals whose benefits had elapsed to reapply for benefits. Today it was reported that the number of U.S. workers filing new claims for jobless benefits rose 7,000 last week to the highest level in more than 6 years (455k).

Today for economic news we had Initial Jobless Claims (expected: -23K, a decline versus last week’s +44K), and later we’ll have June’s Pending Home Sales (expected: -1.0%. Previous: -4.7%). Tomorrow we have the 2nd quarter Preliminary Nonfarm Productivity and Unit Labor Costs, with nothing on Monday. After this morning’s Jobless Claims data mortgages are roughly unchanged, and the 10-yr continues to hover around 4.01%.

You know you’re from California if:

1. Your coworker has 8 body piercings and none are visible.
2. You make over $300,000 and still can’t afford a house.

3. You can’t remember…is pot illegal?
4. You take a bus and are shocked at two people carrying on a conversation in English.
5. You’ve been to a baby shower that has two mothers and a sperm donor.
6. You have a very strong opinion about where your coffee beans are grown, and you can taste the difference between Sumatran and Ethiopian.
7. You can’t remember…is pot illegal?
8. Gas costs $1.00 per gallon more than anywhere else in the U.S.
9. Unlike back home, the guy at 8:30 am in Starbucks wearing a baseball cap and sunglasses who looks like George Clooney really IS George Clooney.
10. Your car insurance costs as much as your house payment.
11. You can’t remember…is pot illegal?
12. You pass an elementary school playground and the children are all busy with their cells or pagers.
13. HEY!!!! Is pot illegal????

Rob Chrisman

Housing Collapse Ahead? - Not According to the Data - By Charles W. Calomiris, Stanley D. Longhofer, William Miles - Washington Post   AEI 

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1.  The Sun Will Come Out… In 2010, Part 1 - Bennet Sedacca - Minyanville.com 

2.  The Sun Will Come Out… In 2010, Part 2 - Minyanville.com 

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Book Review: ‘Greenspan’s Bubbles’ by Bill Fleckenstein -   Toro’s Running of the Bulls Market Blog

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Homebuilder Bankruptcies: Who Might Be Next? - In light of the WCI Chapter 11 Bankruptcy Filing, inquiring minds have been asking “Who’s Next?”  While that question cannot be directly answered, we can take a look at how the credit market players perceive the situation. - MISH’S Global Economic Trend Analysis
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NYT - ‘Prime Loans About to Implode’: Where’s the Evidence?  - Matt Stichnoth of bankstocks.com   - seeking alpha

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has MGIC memo - MGIC Reduces Mortgage Insurance LTV’s in CA, NV, AZ and FL…This Leaves Two - There could be a big problem brewing for the housing market. One that many may have not considered.  Could a large portion of the purchase market and a good chunck of Fannie and Freddie’s loan production in four states with the largest housing markets ride with two of the smaller sized mortgage insurers? - MR Mortgage

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Why Eliminating The HECM Advisor Program Will Hurt The Reverse Mortgage Business - Reverse Mortgage Daily

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Morgan Stanley Said to Freeze Home-Equity Credit Withdrawals - Christine Harper - Bloomberg 

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JPMorgan: Credit card rules could mean big losses - Proposed rules could erase $10.6B in annual interest for banks, JPMorgan Chase says - … The bank also said the proposal will negatively affect the credit card asset-backed securities market by reducing the amount of secondary market capital, and make credit less available to customers. … - AP CNN Money

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US First-Half CMBS Issuance Lowest in a Decade - … totaling just over $12 billion in the first half of 2008, the smallest first-half total since 1996, according to Moody’s.  The 2008 half-year total represents a 91% decline from first half 2007, which saw almost $137 billion in new issuance. … - Research Recap

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Freddie CEO Feels Strain Of Firm’s Twin Missions - Jeffrey H. Birnbaum and David S. Hilzenrath - … On the eve of Freddie Mac’s quarterly earnings report, Syron said that the McLean company has been whipsawed by the dual tasks of creating profit for private investors and serving the public by boosting the housing market. … - Washington Post

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Shifting down the gears: Big Freeze Part 3 - The economy - Chris Giles - FT

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Agency Mortgage-Bond Yield Spreads Rise to Four-Month High - Jody Shenn - Bloomberg 

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The oil price is dropping. Reasons not to cheer - The Economist