To Our Clients, Colleagues and Friends,

• Another comment from a client on the cost of repurchases:  “One had so much equity that the investor allowed us to indemnify in lieu of repurchase. Unless the housing market falls another 35%, we’ll never pay a penny out on it. The others we settled for about 50-60% of the estimated liquidated losses. It really helps to have an experienced attorney with these issues!”

• This is an interesting 1939 photo of members of the baseball Hall of Fame.  At that time, the Hall had only eleven inductees, ten of whom are in this photo.  The reason we like it is that nine of them are wearing ties, Base Ruth, front and center, being the only one who didn’t.  Just further proof of what a cool guy he was.  Did you notice that Ruth and Eddie Collins sitting next to him are both wearing two-tone shoes?
  
  With the exception of the Babe, don’t they all look like bankers?  Also interesting is that the one missing person was Ty Cobb, and it fits with his anti-social personality. Actually, many baseball historians think he was more than misanthropic, that he was mentally deranged and a true psychotic.
• The people in the back row above, left to right: Honus Wagner. Grover Cleveland Alexander, Tris Speaker, Nap Lajoie, George Sisler and the great Walter Johnson. The front row is Eddie Collins, Babe Ruth, Connie Mack, and Cy Young.
• Why do people seem to read this trashy little newsletter?  We just finished re-reading a random sample of 30 e-mails we’ve received about this newsletter over the past two years.  Four were related to something we wrote about the industry, and 26 were about such weighty matters as Michael Jackson’s dance moves, Pamela Anderson’s age, and why Spam and Twinkies are such good food items.  If we never mentioned banking or mortgage banking ever again, would anyone notice?  And if we dropped the human interest stuff, would anyone even read it?  Two sobering questions.
• Here’s another comment on how much you lose when buying back loans: “I have settled mine for an average of 60 cents on the dollar, and usually no cash, just a volume clip over 12 months.”

• How big is New York City ? Its $59 billion annual budget is bigger than all but 36 countries. Its 260,000 municipal workers would make it one of the 50 largest employers in the world. Its police force of 37,000 uniformed officers is larger than the FBI.

• We were reading an analyst’s report on banks of the Pacific Northwest .  Banks they cover there are trading at 44% of tangible book value.  If you invest in a basket of community bank stocks and can wait 2-3 years, a few will have been shut down, but many will be 10-baggers.

• Guess what we just saw at the grocery store? Budweiser in a can pre-mixed with Clamato juice. Mixing beer with tomato juice sounds bad enough, but clam-flavored tomato juice????  Does that sound disgusting, or what?

• We wrote last week about how irritating the French can be, and we got this from Pete Davis : “When Dean Rusk, Kennedy’s Secretary of State, was in France and Charles DeGaulle told him that he wanted "All US Troop off French soil, immediately" Rusk responded "Does that include the ones that are buried here?”  You wonder if he came up with that on the spot or had been holding it in reserve for years and just waiting for the perfect moment.
  
• The Pete Davis who sent this item about France is sort of a legend in California .  He took over a floundering Bank of Commerce in San Diego , grew it, and sold it for just shy of 5.0 times book!  That was around 1998 or 1999 if we remember correctly.
• We accidentally listed Rafael Palmeiro as a home run hitter who didn’t take steroids.  What were we possibly thinking? A few dozen of you wrote to us about this. One of these days when we’re really huge, we’ll hire a fact checker.
• Weren’t The Who pretty pathetic at the Super Bowl?  When we saw them at 19 at an upstairs joint at Geary & Fillmore in San Francisco , the energy on stage had a few hundred people jumping up and down.  But 40+ years later, it’s, like, embarrassing.  Guys, what are you talking about, teenage wasteland?  You’re in your late sixties.   By the way, they ended their show that night by smashing their guitars and drums to pieces. And any members of the Grammar Police: Is it “Weren’t The Who pathetic?” or is it “Wasn’t The Who pathetic?”’
• One of the more interesting questions having to do with troubled banks is why they did so many construction loans.  One answer is that they had yields quite a bit higher than many other loans. But if you assume the construction loan balance is essentially zero on day one and not fully funded till day 365, that means that the loan balance outstanding averages around 50% during the year.  On a $3.0 million construction loan, doesn’t it then throw off the revenue of a $1.5 million loan? And doesn’t the smaller outstanding balance offset much or the entire higher yield? 
  Take your choice, a $3 million construction loan yielding 6.0% or a $3 million C&I loan yielding only 4.0%?  All else being the same, 6% sounds much better than 4%, right?  No way, Jose. And no way, Jose Conseco!  Assuming an average balance on the construction loan during the year of $1.5 million, that loan throws off (at interest only) $90,000 during the year, but the loan at only 4% but which is fully disbursed on day one would throw off $120,000!  You’d make an extra $30,000 on the lower yielding loan.
• This writer never got much past being a Weblos, but did you know that Mike McAuley was an Eagle Scout?  Not only that, but both his brothers also became Eagle Scouts, possibly one of the only families with three such high achievers.
  

• We take it quite seriously when we see people who were Eagle Scouts. When going through resumes to hire someone, we’ll put a resume at the top of the A-pile if it shows that the person was an Eagle Scout. 
• We just finished re-reading The Ugly American, Eugene Burdick’s 1958 fictional book about American foreign policy. This book pre-saged the Peace Corp and applies just as much today to our relationships with the Muslim world as it did about our dealings with Asian nations fifty years ago. Burdick was a Cal Professor of Politic Science who also wrote Fail Safe, the ultimate Cold War thriller.  Burdick died at a young age on his Berkeley tennis court, and to this day conspiracy minded lefties believe the CIA knocked him off for knowing too much.
• Have you noticed fourth quarter earnings releases show that about half the banks are reporting profits?  You can’t have a healthy economy without healthy banks, so this is a very positive sign.

• This Saturday is the 65^th anniversary of the bombing of Dresden , Germany . In the evening of February 13, 1945, the British Royal Air Face Force sent 796 bombers that dropped 2,600 tons of incendiary bombs, starting a firestorm that burned 13 square miles of the Dresden ’s urban center.  A second wave of bombers later that night dropped bombs eastward and south of the city, and the next day, 431 Americans B-17’s released 700 tons of bombs over residential areas as well as rail yards. An estimated 25-40,000 people died within 24 hours.  A massive attack one a population center was a rational move to hasten the end of the war, but it was still immoral. Generals should stick to bombing military targets, not population centers.

The three of us will be, separately, in Sacramento , Seattle , North Carolina , Houston , Dallas , Baltimore and Pennsylvania in the next two weeks. And come see us February 23 where we’ll be the speakers at the Seattle Mortgage Bankers.

Garrett, Watts & Co.

Today’s bonus: TEN KEYS IN TOUGHT TIMES

“Helping lenders increase revenues, control costs, and better manage risk.”

• Mike McAuley   (MMcAuley@GarrettWatts.com)
• Corky Watts      (CWatts@GarrettWatts.com) 
• Joe Garrett      (JGarrett@GarrettWatts.com)

Commentary: Covered bonds may finally find a footing - By Prabha Natarajan – Covered bonds could be the ticket to the return of U.S. residential mortgage securitizations for U.S. investors. – MarketWatch

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Mortgage giants GSEs in limbo: In housing, a dangerous policy vacuum grows. – THERE IS NO END in sight to the federal bailout of Fannie Mae and Freddie Mac. President Obama’s fiscal 2011 budget proposal said as much in a few phrases that promised nothing more definitive than continued "monitoring" of the two mortgage giants, which have been operating since mid-2008 in the legal and organizational limbo known as government "conservatorship." – Washington Post

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Geithner Claims Mortgage Modifications a Success Despite House Probe – Millions more Americans are facing financial security as a result of stabilizing home prices, Treasury Secretary Tim Geithner said Sunday, even though only about 66,000 people have benefited from permanent mortgage loan modifications aimed to prevent foreclosure,a figure that has resulted in a House panel investigation. -  FOXNews.com

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LUMBER FUTURES SURGE BEFORE HOUSING’S LAST GASP – Lumber futures have surged nearly 60% since the beginning of October despite mixed signals in recent housing data … Lumber distributors have been forced to restock supplies as builders anticipate another strong Spring housing season largely due to the home buyers tax credit which ends April 30th. … – The Pragmatic Capitalist

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Mortgage Bankers Association Sells Headquarters at Big Loss – By JAMES R. HAGERTY – … On Friday, CoStar Group Inc., a provider of commercial real estate data, announced that it had agreed to buy the MBA’s 10-story headquarters building in Washington, D.C., for $41.3 million. The price is far below the $79 million the trade group says it paid for the glass-walled building in 2007, … – Wall street Journal Real Estate

Geithner says US credit rating safe despite debt - AP Forbes
- what else could he say? – BC
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has list – Seven US States worse off than PIIGS – Seven States of Energy Debt – by Gregor Macdonald – … I’ve identified seven large US states by four criteria that are sure to cause trouble for Washington’s political class at least for the next 3 years, through the 2012 elections. These are states with big populations, very high rates of unemployment, and which have already had to borrow big to pay unemployment claims. In addition, as a kind of Gregor.us kicker, I’ve thrown in a fourth criteria to identify those states that are large net importers of energy … – Gregor.us

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‘The Single Most Drastic Error in Policy in Modern History’ – Michael Panzner – PBS Newshour has posted a brief but fascinating interview with David Stockman, Director of the Office of Management & Budget during the Reagan era. … It was the single most, you know, drastic error in policy in modern history, going back to the 1930s. This was exactly the wrong thing to do.  It’s destroyed any basis for fiscal discipline in the United States … – Financial Armageddon
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Why The Next Round Of Government Stimulus Will Only Make The Jobs Crisis Worse – Peter Schiff – … In the end, I fully expect the government to directly provide make-work jobs to the armies of the unemployed. This will accelerate the pace of private sector job destruction and make our economy even less productive than it is today … – Business Insider

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G-7 Pledges Action to Force Banks to ‘Bear the Cost’ of Failure – By Gonzalo Vina – Group of Seven finance ministers said that they will agree to common rules to force banks to pay for possible failures after the financial crisis saddled taxpayers with trillions of dollars in liabilities. – Bloomberg

Let’s go after the banksters? – reparations did not work in the Weimar Republic. – BC
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Phoenix food tax increase a sign of failure – Byron Schlomach – …  Phoenix City Councilman Sal DiCiccio has pointed out that the average cost for a Phoenix city employee is $100,000, including all benefits.  The average private sector total compensation in the Phoenix-Mesa area, according to the U.S. Bureau of Labor Statistics, is $54,100 — about half the Phoenix average. … – Goldwater Institute 

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Texas Straight Talk – More Spending is Always the Answer – Ron Paul – Last week, the House approved another increase in the national debt ceiling.  This means the government can borrow $1.9 trillion more to stay afloat and avoid default.  It has been little more than a year since the last debt limit increase, and graphs showing the debt limit over time show a steep, almost vertical trend.  It is not likely to be very long before this new ceiling is met and the government is back on the brink between default and borrowing us further into oblivion. – Congressman Ron Paul Blog

No matter how much you push the envelope, it’ll still be stationery. (I know, keep my day job.)

Why wouldn’t investors want to gobble up securities made up of jumbo loans? Well, how about delinquencies? In a story out of Business Week, "US prime jumbo mortgages at least 60 days late backing securities reached 9.6% in January from 9.2% in December, the 32nd straight increase for "serious delinquencies," according to Fitch Ratings." This is almost 3x the rate in 2008. Folks in the business know that non-agency securities don’t have the guarantees/insurance of Freddie, Fannie or Ginnie Mae. So where do these beasts trade? According to the article, last March they hit a low of .63 (so a loss of almost 40 cents on the dollar versus the original principal balance) but are now up into the low 80’s.

This raises the question "Why would an investor buy a pool of mortgages?" In the past, banks, who were, and still are, making fees on originating the loans, didn’t have to hold on to them, but instead could pool them and make them attractive to buyers. The buyers did not hold the individual mortgages, but parts of huge packages of them. Kind of like thinking about how delicious the Orange Chicken is at Panda Express and not having to think about how it got there. On top of that, the rating agencies told investors that the pools were safe, especially so in light of recent appreciation trends. Unfortunately now the rating agencies can’t quite say that, and are having difficulty trying to figure out how to rate any pool of mortgages.

Here in Cal-e-for-ni-a, according to DataQuick, million-dollar home sales continue to decline.  In 2009, 18,621 California homes sold for $1m or more last year, down about 24% from 2008 and the fourth consecutive year of sales volume declines. At some price, however, houses see buyers; the drop in the number of higher-priced house sales was countered by higher sales in all price levels. Total California home sales increased 16.9% to 460,166 in 2009, from 393,703 in 2008.

Yesterday I mentioned that, on Friday, the FDIC closed a bank, and that "the loss of $11.7 million will be shared with the taxpayer picking up about $3 million of the expense." An executive from the FDIC reminded me that, "All of FDIC’s expenses, including losses on liquidating failed banks, are paid for by the insurance premiums that open banks pay and from earnings on investments in U.S. Treasury securities.  Taxpayers pay nothing, and FDIC receives no Congressional appropriations." As best I could tell, however, currently income tax makes up between 45-50% of our government’s revenue, which in part goes to pay the interest on U.S. Treasury securities – but point well taken about the FDIC.

Brokers selling loans to Bank of America’s wholesale group were reminded that they must pre-register with an appraisal management company for all case numbers assigned past February 15th. Appraisals can be initiated on behalf of Bank of America by using LandSafe Appraisal, for from one of the following AVM’s: ISGN, LSI, or First American. BofA also stated that FHA lenders are prohibited from accepting appraisals "prepared by appraisers who are selected, retained or compensated by mortgage brokers and commission-based lender staff. In addition, enforces appraiser independence by prohibiting the mortgage broker from having substantive communications with the appraiser regarding valuation, ordering, or managing the appraiser assignment."

I don’t know how I let this one slip by me, especially since I need a new washing machine – so why not buy an REO property to go along with it? Some time ago Fannie Mae announced their "HomePath Appliance Incentive" program, which smaller investors such as Flagstar are following. So for purchase agreements signed after 1/28 and closing before 5/1, Fannie Mae is offering buyers an incentive of up to 3.5% of the final sales price to be used towards the purchase of new Whirlpool appliances by Fannie Mae. In Flagstar’s case, if "the buyer wishes to utilize any portion of funds towards the purchase of new appliances, the maximum appliance allowance is limited to 3.5% of the final sales price. Borrowers may take advantage of additional seller contributions towards closing costs and prepaids. Total appliance allowance plus seller contributions to closing costs and prepaids may not exceed 6% of the final sale price." (Section 38 of the Real Estate Addendum will note what funds are used for closing costs and what amount is used for appliances.)

more news on Pulte, Caliber Funding, markets and origination flows, treasury refunding, and joke of the day … <<< CLICK HERE TO CONTINUE

Study Shows Credit Card Debt Getting Paid Before Mortgages – By Robin Cassella – A recent trend of consumers paying off their credit card bills before their mortgages is gaining steam, according to a study released by TransUnion.  The phenomenon first appeared in early 2008. The reversal is representative of the change in conventional thought surrounding the payment hierarchy, or which debt consumers decide to pay off first. – FOXBusiness

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S&P: US banks back from the brink but mortgages still a problem – …“We believe that smaller and regional banks–those most exposed to depressed local economies–will be most likely to succumb eventually to these conditions. Regulators might ultimately nudge many of them into the corporate arms of stronger competitors, as happened to approximately 140 such banks in 2009. But we think it’s unlikely that any major bank (with more than $100 billion in assets) will fail this year.” … – Research Recap

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When refinancing, people now often cash-in rather than cash-out – Ken Harney – … Now the pendulum in consumer psychology appears to be swinging toward reduction of household debt – whether credit cards or mortgages. In Freddie Mac’s latest quarterly survey of refinancings, 33 percent of homeowners put cash into the deal to lower their mortgage balances, which was the highest ever. By contrast, only 27 percent of refinancers took cash out – the lowest percentage on record. … – Chicago Daily Herald

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Reverse Mortgage Origination Volume Grows to $30.2 Billion in 2009, Up 25% – … Despite only a slight increase in units endorsed in FY 2009, max claim volume grew 25% compared to the prior FY total of $24.2 billion.  According to data from Reverse Market Insight, 22% of the increase in volume comes from the lending limit increase and the remaining 3% stems from the additional units in FY 2009.  In addition, the shift to the fixed rate product has also been a factor. … – Reverse Mortgage Daily

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GMAC Continues To Pare Down Loan Portfolio – by Daniel Indiviglio – Troubled U.S.-owned lender GMAC continues to shrink its investment holdings, preparing to sell another $6.5 billion in mortgage assets. – The Atlantic

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Fifth Third targets mortgage modifications – Fifth Third Mortgage Co. says it has achieved four times the national average in mortgage modifications.  Of the 89 percent of the company’s portfolio eligible for Home Affordable Modification Program consideration, nearly 35 percent of trial modifications have been converted to permanent modifications. -   Charlotte Business Journal

Do We Need A Dow 2.0? – By Peter G. Miller – It’s likely true that home values have stayed level for 20 years at a time. However, the context is that real estate is not alone. Securities values have also stayed level for 20 years at a time. As to what will happen in the future, no one knows — not even Suze Orman…. – hattip   Peter Miller  -   Our Broker
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on securitization – In the Packaging of Loans, a Bust With Precedent – By FLOYD NORRIS – NY Times
and
Seeking a Safer Way to Securitization - By FLOYD NORRIS – … There are several essential elements to any fix. The underlying loans have to be of better quality. The investors have to believe that is the case and that they are being compensated for risks that were much higher than they previously believed. Another 30 percent collapse in home prices is unlikely, but it will be a while before anyone’s models deem such a thing impossible.  There are two ways being suggested to deal with the quality issue. Mr. Dugan favors using government edicts to set lending standards. Other officials want to find ways to use the market system to promote better lending. … – NY Times

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Wells Fargo Shuns Carry-Trade, Braces for Risk of Higher Rates – By Dakin Campbell -  Wells Fargo & Co., unlike its three biggest competitors, is so convinced interest rates will rise that it sacrificed as much as $1 billion last year cutting back on fixed-income investments. – BusinessWeek

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Default Risk For Financials Shoots Up – Bespoke Investment Group

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The Goldman Sachs Guide To Surviving 2010 – Vincent Fernando – Here’s a cut of key slides we pulled from Goldman’s massive February ‘Global Themes and Risks’ presentation pack – Money Game at Business Insider

Bill Gross: The Sovereign Debt Crisis Is "Subprime" All Over Again - Joe Weisenthal – … As for the question of magnitude, in a way it’s not about the size of the defaults. Subprime loans were never that big. Lehman wasn’t that big. Greece and Portugal aren’t huge countries. But it’s about nervousness and contagion. Who owns what, and what will they sell to raise cash? … text and video – - Money Game at Business Insider

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Nonperforming Loans in China Rise to "Trillions of Renminbi" – MISH’S Global Economic Trend Analysis   
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Taleb Says ‘Every Human’ Should Short U.S. Treasuries – By Michael Patterson and Cordell Eddings – … “Deficits are like putting dynamite in the hands of children,” Taleb said in an interview with Bloomberg Television. “They can get out of control very quickly.” … –
Bloomberg

I thought about taking today off from the commentary to celebrate, since yesterday I won all 4 quarters of my office’s Super Bowl pool! And then I remembered that I was the only one in the pool, don’t really have an office, and that the net effect of my $50 a square winnings was about the same as the US Government buying back their own securities. Oh well.

Those dues that you pay to the Mortgage Bankers Association – where does the money go? Education, lobbying, etc., but some probably went into buying the MBAA its $90 million headquarters in downtown Washington which it sold last week for $41 million after 3 years. Ouch! CoStar Group, who is moving its headquarters from Maryland to DC, also received a $6 million property tax break – hats off to them. Not only did the MBAA’s interest rate expense increase, but it had trouble finding tenants for its additional office space. To make matters worse, and this should be of no surprise, according to the MBAA their membership has been noticeably falling off, resulting in less revenue.

Secondary marketing employees, especially those that sell loans, are notorious for splitting off the CRA loans (Community Reinvestment Act, designed to meet local credit needs) and selling them to investors for a point or two more than the broker or agent was paid for them without a rate sheet adjustment. That entirely aside, as it turns out, the FDIC monitors institutions and their compliance with CRA regulations. The FDIC announced that it has come out with a new drug to treat small banker heart palpitations. Okay, I was just kidding to see if anyone reads this stuff. Late last week, however, the FDIC did issue its list of state nonmember banks recently evaluated for compliance with the Community Reinvestment Act (CRA).

I ain’t no tax expert, so when a broker from Idaho wrote to me and asked, “How long do I have to keep statements from banks that don’t exist anymore?” I was flummoxed.

“Only” one bank was shut down by the FDIC on Friday. It was in Minnesota (1st American State Bank of Minnesota), and Community Development Bank, also in Minnesota, agreed to assume the assets and deposits of the failed bank. The loss of $11.7 million will be shared, with the taxpayer, picking up about $3 million of the expense.

Fannie Mae and Freddie MAC both updated their Home Affordable Modification Program (HAMP) program, addressing issues that primarily concern servicers of the product. Previously Fannie & Freddie had set forth eligibility, underwriting and servicing requirements for the Home Affordable Modification Program (HAMP), and last week amended key features of the program. For example, starting June 1 (how do you like that for advance notice?) F&F changed the verified income documentation “for all HAMP trial period plans.” F&F’s amendments, which can be viewed on their respective websites, concern the process of modifying a loan, the initial package, income & asset documentation, timelines, making a modification permanent, eliminating the stated income trial plans, etc.

Investors in mortgage securities usually are betting on how long they will hold a particular pool of loans. Some want them to be paid off quickly; others would prefer that the loans stay on their books for a long time. When either group sees unexpected prepayments, for whatever reason, that is cause for concern. Last week prepayment information was released showing that fixed rate prepayments declined 15% in the latest survey, due to a lower day count and weaker housing “seasonals”. Higher coupons saw some buyouts, although the new SFAS 166/167 implementation (where the delinquent loans that are bought out by the GSEs no longer have to be marked at their market values, and possibly requiring the agencies to issue short-term debt in order to accomplish the buyouts) did not appear to be a driving force. Of interest to originators, however, is the expectation that with rates steady, and the percent of refi’s expected to drop, prepayment speeds are also expected to drop.

more news on GMAC correspondent, Franklin American, Bernanke speaking on Wednesday, Fed support of mortgages, soverign debt crisis, markets, treasury auctions, and joke of the day … <<< CLICK HERE TO CONTINUE

CHART OF THE DAY: US debt vs. GDP in 2009 – The Prudent Investor Blog

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Unemployment: The Government’s Scary Projections – Tom Lindmark – … What do they think happens to U-6? If it follows the same trends then we’re talking about millions of working Americans consigned to marginal existence for the foreseeable future. … – But Then What

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Census Bureau: 130.6 Million Housing Units in the US; 18.9 Million are Vacant – by Adam Quinones – The Census Bureau today released the Report on Residential Vacancies and Homeownership. This data covered fourth quarter 2009. – has summary – Mortgage News Daily
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Biggest Bubble in History Is Growing Every Day: William Pesek – Real estate, stocks, credit. China sure has its share of bubbles. Oddly, little attention is paid to the biggest one of all.  China’s currency reserves grew by more than the gross domestic product of Norway in 2009. Its $2.4 trillion of reserves is a bubble all its own, one growing before our eyes with nary a peep out of those searching for the next big one. – Bloomberg
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Chart of the Day – Today, the Labor Department reported that nonfarm payrolls (jobs) decreased by 20,000 in January. Today’s chart puts that decline into perspective by comparing job losses following the beginning of the current economic recession (solid red line) to that of the last recession (dashed gold line) and the average recession from 1950-1999 (dashed blue line). …
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7 interesting charts: The Seven Faces of Malaise – Paper Economy Blog

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Conversation With My 14 Year Old Son – I do not have a son, nor daughters. However, I did receive an email from "Clyde" who does.  Clyde Writes … I had an interesting moment with my 14 year old son the other day. I had gone to the US Debt Clock website and was taking a minute to just watch the numbers roll up and down in the various amounts. … My 14 year old son walked by and I had him take a look at it all, explaining that someday my son, all this will be yours.  His first words were "Why the hell should I have to pay that back?" -   MISH’S Global Economic Trend Analysis   

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Foreigners Caused America’s Financial Crisis? A Closer Look – By Dian L. Chu -  … In the end, foreigners demand did not bring about the systemic risk. It is the lack of check-and-balance in our system allowing a concentration of risk into the hands of a few that almost brought the world to an utter collapse.  … Endgame and checkmate could come when unfettered financial institutions again push the economy to the brink, and there is no resources left for another bailout or rescue. … – Economic Forecasts & Opinions