Approved Advisor

On March 19, 2008 the OFHEO announced that Fannie Mae (“FNMA”) and Freddie Mac (“FHLMC”), the two U.S. home financing lenders were granted government approval on Wednesday to pump $200 billion of immediate liquidity into the troubled U.S. mortgage markets. This is the latest step to stabilize credit markets and avert a deep recession. It is now estimated that FNMA and FHLMC now have the ability to buy up to $2 trillion in mortgages this year.

The News…

SAN FRANCISCO (Thomson Financial) – The government is near a deal to reduce the excess capital requirement in place for Fannie Mae and Freddie Mac, according to a media report late Wednesday that cited sources.

The move by the Office of Federal Housing Enterprise Oversight would enable Fannie and Freddie to bolster their support for the mortgage market by buying and guaranteeing more home loans, the Wall Street Journal reported on its Web site.

The current capital requirement forces them to hold 30% more capital than their normal minimums, the Journal noted. An announcement could come as early as this week, according to the report.

So what does this mean?

In my opinion, this will most likely be VERY beneficial to mortgage rates. Right now, very much like the almost defunct Bear Sterns, Fannie and Freddie work off of “leveraging their balance sheets” and creative financing. They have been feeling a crunch just like everyone else, plus added Congressional scrutiny ever since their accounting scandals a few years back. 

Obviously the new “Agency Jumbo” program had little to NO IMPACT on helping the current mortgage market. The product was released last week, but the rates and restrictions are too excessive to have any benefit to customers. Hopefully with some freedom to compete, Fannie and Freddie will get cheaper funding (much like the Fed is giving other banks by allowing them to go to the Fed Discount window), and give us better rates, terms and products!

There was a very eye-opening advertisement – “open letter” in today’s Wall Street Journal to Ben Bernanke. I completely agree with this ad, and believe that while the recent Fed actions may be a short term fix, the devastating effects it will leave on the US economy will be catastrophic.

Here’s the text, including the original bolding and caps.


To: Mr. Ben Bernanke

Please DON”T PUT GARBAGE in the FEDERAL RESERVE

“Dear Mr. Bernanke:

I was afraid that if simply wrote you this letter you might never see it. I thought this message was important and worthy of effort to attract your attention.

I am sure that you are hearing from the Wall Street crowd about how stupid the marketplace is because the market won’t buy all the great loans that Wall Street has produced and how stupid or illiquid the market is because AAA RMBS are being offered at 60 cents on the dollar with no takers. First mortgage syndicated bank loans are offered for 70 cents on the dollar and Wall Street simply cannot believe buyers aren’t standing in line to buy.

Consider for a moment that many corporate bonds are trading at premiums above par value. How can this be? If the market is so stupid and there is no liquidity, who is buying those good corporate bonds at 105 cents on the dollar??

Many AAA mortgage bonds are actually extremely high risk because of little-considered nuances in the hundreds of pages of trust indentures and servicing agreements. In addition to widely understood mortgage default and other concerns, these contracts permit the loan servicers to advance payments on behalf of defaulted homeowners for years and years and years at interest rates of 12% and more. These “servicer advancements” put funds back into the trust to be paid out to junior security holders. The “servicer advances” are subsequently repaid FIRST from foreclosed home sales. Therefore, foreclosed home sales may result in little or no proceeds, or even a liability, to the AAAs. This mechanism effectively transfers funds that really should belong to the AAA securities to junior securities. Servicers that own junior securities are incredibly motivated to drag their feet resolving defaulted loans, which results in great loss to the AAA holders. This is not a misprint: Defaulted first mortgage home loans may become a net liability, not an asset, to some of the AAAs. This is still not widely understood.

Simlarly, “first mortgage syndicated bank loans” issued since about 2004 are routinely garbage and not traditional first mortgages on anything determinable at all. Many, if not most, of these loans permit the borrowers to sell the collateral, keep the money, and reinvest in almost anything they want to, including stock, junk bonds, defaulted loans, or perhaps ice cream cones. Many, if not most, of these syndicated bank loans also permit UNLIMITED amounts of additional swap debt that is either senior to or of equal priority with the syndicated loan. These provisions are also no widely understood and are sometimes even disguised in the loan documents.

Falling prices for these type assets reflect people finally reading the hundreds of pages of fine print, not a problem with the marketplace. Prices should continue to fall as people wake up to the true nature of these assets. Many “last out” AAA RMBS are still overvalued at 60% of par. Many first mortgage syndicated bank loans are overvalued at 70% of par. Smart buyers won’t touch any of this garbage at any price remotely close to what it originally sold for.

The Fed may be walking on very slippery ground. My fear is that the Fed has little more understanding of the stench of the garbage than many of the current owners who bought all these debt instruments issued about 2004.

Is the US Government taking some of this garbage on its balance sheet as collateral for Federal Reserve loans? The AAA rating means absolutely nothing. Garbage is garbage even in a fancy wrapper that the ratings agencies love.

I do not pretend to know how the Fed is collateralizing loans. Perhaps I am naive in underestimating the insightfulness of the Feb, but many intelligent people were caught up in complacent decisions involving these assets. I know nothing more than what I read in the media about collateral for these Fed loans, but it sure sounds troubling.

Sincerely,
Andy Beal
6000 Legacy Drive
Dallas, Texas 75024″

Everyone has access to the websites that told them the Fed cut the rate. That’s not news anymore.  In fact, at 2:16pm, that became old news!  The bottom line is how does the “Fed Cut” effect mortgage rates?  For those clients and business partners that were in touch with me in the morning, I basically outlined how the different cuts would have different effects on the mortgage bond market. True to form – the .75% cut disappointed the Bond Market because of inflationary concerns, and MBS (Mortgage Backed Security) market bowed driving up short term mortgage rates.  The chart below shows the Fannie Mae MBS before and after the Fed announcement.  As you can see, mortgage bonds were trading lower, even before the Fed announcement. That was largely due to profit taking from yesterdays bond rally, as well as the positive news from the Goldman Sachs and Lehman Brothers quarterly shareholders update. 

There is a misconception in the marketplace about how rate cuts effect mortgage rates. Click here to read a recent CNBC article about the disconnect between the different rates.

Click Here for the Report:  Fed Rate Cuts and Mortgage Rates

Also review my post on “Prime Rate”, “Discount Rate”, “Fed Funds Target Rate”, and “LIBOR Rate”

Mon Mar 17, 2008 7:35pm EDT

BOSTON (Reuters) – A computer hacker stole thousands of credit card numbers after breaching security at two U.S. grocery store chains owned by Belgium-based Delhaize Group SA, the companies said on Monday.

Nearly 2,000 cases of fraud have been linked to the breach, but no personal information such as names or addresses was accessed when the hacker broke into the Hannaford Bros. stores in Massachusetts, New England and New York, and Sweetbay customers in Florida, Hannaford said in a statement.

Boston’s WBZ radio said 4.2 million credit and debit card numbers were stolen. Company officials were not immediately available to confirm the number of stolen card numbers.

Hannaford, headquartered in Scarborough, Maine, said it became aware of unusual credit card activity on February 27 and began an investigation. It said the data was illegally accessed during the credit card authorization process.

Hannaford Chief Executive Ron Hodge offered an apology for the intrusion. There are 165 Hannaford stores in the U.S. Northeast and 106 Sweetbay supermarkets in Florida.

“We sincerely regret any concern or inconvenience this has caused,” Hodge said in a statement. “We have taken aggressive steps to augment our network security capabilities.”

The breach is the latest at a big U.S. retailer and comes after U.S. retail group TJX Cos Inc disclosed last year that data from 45.7 million credit and debit cards were stolen by hackers over a period of 18 months, as well as personal information for 451,000 people.

A group of banks later asserted in court documents that the number of consumer accounts were affected was closer to 94 million, a charge Massachusetts-based TJX denied.

By PETER LATTMAN March 17, 2008;

(Wall Street Journal) Carlyle Capital Corp. announced late yesterday that it would wind down operations and liquidate the remaining assets in its mortgage fund.

The news, which was widely expected, comes less than two weeks after its lenders began to pull support for the fund, which owned about $22 billion in highly rated mortgage-backed securities issued by Fannie Mae and Freddie Mac.

“All remaining [Carlyle Capital] assets will be liquidated,” the fund said in a statement. The company said it “believes that its lenders have now taken possession of substantially all of its” securities.

The fund’s collapse has roiled the financial markets, demonstrating how Wall Street banks — concerned with their own wobbly balance sheets — are refusing to cut even prized clients any slack on its lending terms, even when the clients hold what are thought to be safe securities. In recent weeks, the prices on Carlyle’s mortgage securities have dropped to levels not seen in more than 20 years. This worried the banks, which held the securities as collateral.

It is also an embarrassment for Carlyle Group, the Washington private-equity firm that manages the fund and whose executives own 15% of it. Although it is registered in Guernsey, United Kingdom, and trades in Amsterdam, Carlyle Capital is run by Carlyle Group out of the firm’s New York offices.

On March 5, Carlyle Group began asking some of the world’s largest banks to hold off on margin calls and the liquidation of its assets. Several of the lenders, led by Deutsche Bank AG and J.P. Morgan Chase & Co., ignored Carlyle’s request and began seizing the fund’s securities.

Carlyle Capital has struggled since the summer. The fund, which started in 2006, had to postpone its initial public offering in June just as the credit crisis was first taking hold. A month after its IPO, Carlyle Group had to extend $200 million to the fund to meet margin calls.

More than a week early, the Department of Housing and Urban Development (HUD) released the new FHA and GSE (Fannie/Freddie) loan limits for 2008.The new loan limits for the entire country can be accessed from HUD’s website. To filter your search results, go to the Limit Type drop-down box and select FHA, Fannie/Freddie, or HECM and click submit.

Authorized by The Economic Stimulus Act of 2008, which was signed into law on February 13, 2008, the new FHA limit is based on 125% increase of each county’s median price, with a minimum of $271,050 and a maximum of $729,750. The increased Fannie Mae and Freddie Mac loan limit follows the same formula , with a minimum of $417,000 and a maximum of $729,950. For the most part, these number are the same as the FHA limits except in lower-cost counties, where the Fannie/Freddie limits will be higher.

In an unusual weekend announcement, the central bank lowered the Discount Rate by a quarter of a percentage point to 3.25 percent. It was the first such weekend emergency action in almost three decades.

The emergency lowering of the discount rate and the broader access to the window were “designed to bolster market liquidity and promote orderly market functioning,” the Fed said in a statement Sunday.

MBA 2007 MARI Report Exposes and Explores Residential Mortgage Fraud against Lenders in US

WASHINGTON, March 13 /PRNewswire-FirstCall/ — The Mortgage Bankers Association (MBA) today announced that the Mortgage Asset Research Institute, LLC (MARI(SM)), a ChoicePoint(R) company, has completed its 10th Periodic Mortgage Fraud Case Report to MBA. The report examines the current state of residential mortgage fraud and misrepresentation in the U.S. based on participating subscribers’ reports to MARI.

The report, which sites Florida as topping the MARI Fraud Index list for the second consecutive year and Nevada climbing to the No. 2 ranking, was released during MBA’s annual National Fraud Issues Conference in Chicago.

“The current market conditions, compounded by mortgage fraud, are having a detrimental impact on our entire national economy,” said David Kittle, CMB, Chairman-Elect of the MBA. “The MARI report provides critical insight for those in the real estate finance industry to better understand the factors contributing to these circumstances so that our communities and member companies are protected.”

According to the Mortgage Fraud Case Report, “The conditions in the mortgage industry for the last half of 2007 made the year one for the record books.” Overall, 2007 marked the lowest volume of mortgage loan originations since 2002, the highest number of delinquencies and foreclosures, rapid and near complete shutdown of the non-conforming secondary market and hundreds of announced closures of mortgage originators.

“Because fraud is persistent, it is imperative for the mortgage industry to collaborate in its efforts to combat mortgage fraud against lenders,” said Merle D. Sharick, ChoicePoint Vice President and MARI’s National Manager of Business Development. “MARI will continue its efforts to disseminate current data for use by MBA’s members through our annual fraud report.”

Highlights in the Mortgage Fraud Case Report include: — In addition to Florida and Nevada, the remainder of this year’s top ten (in order): Michigan, California, Utah, Georgia, Virginia, Illinois, New York and Minnesota; — Colorado showed the greatest improvement from prior years’ rankings, dropping out of the top ten for the first time in five years; — The most common types of fraud found in 2007 originations continue to be in the areas of employment history and claimed income; and — The continuing unsettled state of the mortgage market as a whole does not bode well for any improvement in avoiding fraud in the coming year.