Although the recently confirmed 3.875% Best-Execution level remains intact for 30yr fixed, conventional loans, Mortgages Rates moved slightly higher today in terms of the costs required to obtain those rates.  Weakness in Treasuries today was more pronounced than MBS, the "mortgage-backed-securities most directly responsible for determining mortgage rates.  (learn more about how we calculate Best-Execution in THIS POST). 

Initially driving today's market movements was news that political leaders would meet in Greece to vote on a soon-to-be-drafted bailout package.  Greek officials have been reluctant to stand up in favor of creditor-imposed austerity.  Even though they likely realize the dire implications of such reluctance, the political backlash from Greece's populace is pretty dire in it's own right.  But that realization has been slow to work its way through markets, which seem to be willing to wait in upbeat anticipation for new developments in Greece that never seem to happen--at least not on time.  

It was the same again today.  Markets were initially upbeat on the promise of ongoing negotiations being concluded.  When we say "markets" in this context, it's more to do with equities/stocks, whereas mortgage rates are part of bond markets.  When markets are upbeat in this way, it decreases the demand for less risky investments such as Treasuries and MBS.  When demand decreases for MBS, prices fall, and that means that lenders will earn less by selling pools of loans on the secondary market, and must raise rates to keep pace with their various cash-flow considerations. 

Even after news came out that the meeting in Greece would not take place until tomorrow, stocks only faltered momentarily, deciding that the nature of the news (no material objections to the proposal on the table, simply a delay in getting it drafted) wasn't enough to reverse the current course.  Bond markets, however, were able to put an end to a somewhat ugly slide weaker.  The damage had already been done as far as mortgage rates would be concerned, but the silver lining is that it only amounted to minimal increases in borrowing costs while most scenarios will still be best-executed at the same rates today as yesterday's.

With the NEW potential resolution on Greek negotiations tomorrow as well as an important 10yr Treasury Auction, there are some sizable risks ahead for mortgage rates, which heretofore have done a good job of holding onto 3.875% Best-Execution through some rough waters.  As always, markets and rates can move in either direction, but we would point out that those movements could be bigger-than-average tomorrow.

Today's BEST-EXECUTION Rates

30YR FIXED -  3.875% mostly, less 3.75 today, 4.0's getting closer
FHA/VA -3.75%
15 YEAR FIXED -  3.25%
5 YEAR ARMS -  2.625-3.25% depending on the lender

Ongoing Lock/Float Considerations

Rates and costs continue to operate near all time best levelsCurrent levels have experienced increasing resistance in improving much from hereThere are technical reasons for that as well as fundamental reasons
Lenders tend to get busier when rates are in this "high 3's" level and can throttle their inbound volume by raising rates or costs.While we don't necessarily think rates are destined to go higher, given the above facts, there seems to be more risk than reward regarding floatingBut that will always be the case when rates operating near historic lows(As always, please keep in mind that our talk of Best-Execution always pertains to a completely ideal scenario.  There can be all sorts of reasons that your quoted rate would not be the same as our average rates, and in those cases, assuming you're following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).You can see a list of all comments on MND by clicking the 'Read the Latest Comments' option under the 'Community' menu.

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Bond markets had already been trending into negative territory leading up to today's 3yr auction, but took a turn for the worse afterwards with some help from a few newswires out of Greece.  All that is detailed in the following alert from MBS Live. 

3 Year Auction Moves The Whole Stack. Greece Piles On. Negative Reprices - 1:34PM

10yr spiked up just after 1pm and MBS prices fell past their 103-19 pivot in Fannie 3.5's. Does that mean that the 3yr note auction is exclusively behind that market movement? Yes and no... 

In and of themselves, 2 and 3yr auctions aren't enough to move the whole pile of Treasuries as they ostensibly have today. But given the current backdrop of bond market weakness following last week's NFP, and the fact that any bounce back versus that weakness was largely due to ongoing uncertainty over the Greek bailout negotiations, there's a fair amount of inherent bearishness seeking to run its course within the range in bond markets. This was actually likely to be the case even BEFORE NFP, and now the higher probability scenario is simply playing out. 

That means that while the 3yr auction wasn't quite weak enough to justify current losses, it was enough to add on to the pre-existing momentum. News out of Greece is now exacerbating the problem. 

At first, it looked like breaking news that today's meeting was postponed until tomorrow would HELP bond markets. Indeed this was the case at first. But then a second wire crossed that clarified the reason for the postponement was that political leaders had yet to get a draft of the bailout agreement. This apparently was less of a concern to the general "risk-on" sentiment compared to other potential reasons for meeting postponement. 

MBS are currently trying to dig their heels in at 103-19 and treat those levels as a floor for the rest of the day, and seem to be capable of such things as long as 10yr yields treat 1.99 as a ceiling, a feat they've been trying to demonstrate for the past 15 minutes or so. 

Even so, the current level of weakness is very likely enough for a few lenders to be considering reprices for the worse, and just as it was earlier in the day, those risks would increase with prices of Fannie 3.5's falling below 103-19.

Since then, bond markets have made some small attempts to bounce back, and we suggested a few price/yield levels to watch that could be useful in assessing that progress (or lack thereof)

Even if there's no sustained bounce back, simply "not losing any more ground" would be nice as we're operating near some longer term technical support levels.  If markets were to casually blow through them, the sudden, excessive weakness would be cause for concern and the volatility would create problems for loan pricing. 

The intermediate support level for MBS (longer term, it's a pivot) is actually right at the 103-19 level from the shorter term chart above.  I included the next major pivot higher and lower for reference.  Incidentally, the lower pivot is right where next month's coupons are currently trading (the roll takes place on Thursday afternoon).

Whether or not MBS are able to hold near or above current levels between now and then may have as much to do with tomorrow's 10yr auction as it does with the potential Greek debt negotiations either being finalized tomorrow (less likely) or instead being extended in some way or at least fraught with caveats (more likely).  10yr yields have their own set of technical considerations at the moment.  Today's moves threaten to break yields out of the trend channel seen within the red lines.  Today would be considered the breakout test with tomorrow acting as potential confirmation or rejection of that breakout.

Whether we want to look at trends as "moving" or "sideways," there are trendlines for each.  In addition to the red trend channel above, the horizontal lines (teal and white) have also been important levels for a longer period of time than the chart shows.  Although yields have fallen just lightly below the upper line between now and the time I snapped this chart, the lower two have acted more as pivot points higher in yield and less as ceilings of support.  That upper line will crumble in short order if tomorrow's auction is rough or if any news out of Greece is well-received.  Beyond that, we'd be looking for pivot points around 2.01 and 2.04, with more grim scenarios closer to 2.09.

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A sub-committee of the House Financial Services committee today approved the FHA Emergency Solvency Act which is intended to shore up the finances of the Federal Housing Administration (FHA).  The legislation strengthens FHA's Mortgage Insurance Fund by establishing minimum annual premiums for mortgage insurance; barring unscrupulous lenders from participating in the program, improving the FHA's internal financial controls, transparency, and disclosure requirements, and requires lenders who commit fraud to repay any losses suffered by FHA as a consequence.

FHA's cash reserves have been hard-hit by the housing crash and have fallen below 2 percent Congress has mandated it must maintain.  According to the subcommittee's press release, the agency's finances have deteriorated to the point where a bailout might be required in 2012 if the housing market worsens further.   

 "The FHA's cash reserves are down to dangerous levels, and taxpayers cannot afford another Fannie- and Freddie-style bailout," said Rep. Biggert.  "This Administration needs to enforce stronger standards and create room for the private sector to replace taxpayers as the primary source of funding.  The FHA is facing an urgent fiscal crisis, and this proposal gives HUD Secretary Donovan emergency tools to wind down the risk before it's too late."

Also on Tuesday the Subcommittee approved the Affordable Housing and Self-Sufficiency Improvement Act, which is intended to expand opportunities for low-income families that receive housing assistance to achieve self-sufficiency and reduces the costs of HUD's affordable housing programs and the Homeless Children and Youth Act, which harmonizes HUD's definition of homeless children with that of other agencies like the Department of Education, allowing HUD to more accurately estimate the number of homeless in the U.S.

All three measures were passed by voice vote.

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Gain access to the most accurate real-time back month TBA indications from Thomson Reuters and Tradeweb. LEARN MORE A recap of MBS Market Updates provided by MND Analysts and streamed live to the MBS Live Dashboard.3:19PM  :  ECON: Consumer Credit Expands More Than Expected Novembers expansion of total Consumer Credit was revised to +$20.38 bln, very close to the original print. Today's report for December shows only a slight decrease in the pace to $19.31 bln. Economists had been expecting a bigger contraction to $7.7 bln.

Underlying the strength was the biggest expansion in non-revolving credit (auto loans and federal student loans) since 2001. This was offset by a drop in revolving credit from +$5.58 bln to +$2.76 bln.

Stocks hit their highs of the day following the release but bond markets haven't done much with it, not to mention that volume didn't pick up much.

1:34PM  :  ALERT: 3 Year Auction Moves The Whole Stack. Greece Piles On. Negative Reprices 10yr spiked up just after 1pm and MBS prices fell past their 103-19 pivot in Fannie 3.5's. Does that mean that the 3yr note auction is exclusively behind that market movement? Yes and no...

In and of themselves, 2 and 3yr auctions aren't enough to move the whole pile of Treasuries as they ostensibly have today. But given the current backdrop of bond market weakness following last week's NFP, and the fact that any bounce back versus that weakness was largely due to ongoing uncertainty over the Greek bailout negotiations, there's a fair amount of inherent bearishness seeking to run its course within the range in bond markets. This was actually likely to be the case even BEFORE NFP, and now the higher probability scenario is simply playing out.

That means that while the 3yr auction wasn't quite weak enough to justify current losses, it was enough to add on to the pre-existing momentum. News out of Greece is now exacerbating the problem.

At first, it looked like breaking news that today's meeting was postponed until tomorrow would HELP bond markets. Indeed this was the case at first. But then a second wire crossed that clarified the reason for the postponement was that political leaders had yet to get a draft of the bailout agreement. This apparently was less of a concern to the general "risk-on" sentiment compared to other potential reasons for meeting postponement.

MBS are currently trying to dig their heels in at 103-19 and treat those levels as a floor for the rest of the day, and seem to be capable of such things as long as 10yr yields treat 1.99 as a ceiling, a feat they've been trying to demonstrate for the past 15 minutes or so.

Even so, the current level of weakness is very likely enough for a few lenders to be considering reprices for the worse, and just as it was earlier in the day, those risks would increase with prices of Fannie 3.5's falling below 103-19.

Michael Tadros  :  "REPRICE: 3:39 PM - Interbank Worse" Matthew Graham  :  "This wire is about 15 minutes old at this point, but potentially contributing to afternoon stock gains as well as firming up the floor under 10yr yields (or ceiling over MBS prices): RTRS - IIF SAYS TALKS ON GREEK BOND SWAP, REFORMS "CONSTRUCTIVE", CONSULTATIONS WITH INVESTORS TO CONTINUE IN PARIS " Matthew Graham  :  "Also, Berliner has another piece out today on relative value in an environment where the short end of the curve has been so steady relative to the long end. Great read for those seeking deeper thoughts on capital markets: http://www.mortgagenewsdaily.com/channels/secondary_markets/02062012-relative-performance-duration.aspx" Matthew Graham  :  "RTRS - U.S. DECEMBER CONSUMER CREDIT UP $19.31 BLN VS REVISED $20.38 BLN INCREASE IN NOVEMBER" Paul Carlin  :  "REPRICE: 2:18 PM - Wells Fargo Worse" Matthew Graham  :  "REPRICE: 2:17 PM - Suntrust Worse" Tom Schwab  :  "REPRICE: 2:12 PM - Flagstar Worse" Dan Clifton  :  "REPRICE: 1:48 PM - 360 Mortgage Worse" Brett Boyke  :  "From what I understand the 20th is the true deadline in order to get eveything in order to issue the debt come March. It looks like they intend to use every minute of it with their can kicking routine" Matthew Graham  :  "RTRS - GREEK MEETING POSTPONED BECAUSE POLITICAL LEADERS HAVE YET TO GET DRAFT OF BAILOUT AGREEMENT- PARTY OFFICIAL " Matt Hodges  :  "seriously, that's just one of the issues they need to get straight, plus tax rate, retirement age, # weeks vacation - they need to understand work in the 21st century" Matthew Graham  :  ""um yeah... we'd like to respond to you, but we've already implemented the labor scale-backs you've requested, so it's gonna have to wait"" Matt Hodges  :  "32 hour work week is over already; legally can not continue until next week" Matthew Graham  :  "who could have ever guessed that any sort of negotiations in Greece would run over a previously discussed time frame!? I, for one, and appalled. " Matthew Graham  :  "RTRS- GREEK POLITICAL LEADERS' MEETING ON BAILOUT PACKAGE POSTPONED TO WEDNESDAY--GREEK GOVT OFFICIAL " Brett Boyke  :  "Greece Groundhog Day - Stocks rally on Greek deal hope - Ned, Ned Ryerson, bing!" Discuss the MBS and Mortgage Markets on Our Streaming Dashboard

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Details are still sketchy, but apparently a settlement has been agreed upon between five major banks and a majority of the states' attorneys general.  The settlement involves Bank of America, Wells Fargo, Citigroup, JPMorgan Chase, and Ally Financial and arises out of charges that the banks and their subsidiary servicers used robo-signing and other abuses in processing thousands of foreclosures.

The settlement was announced by lead negotiator, Iowa Attorney General Tom Miller who, according to CNBC said of the deal, "This enables us to move forward into the very final stages of remaining work. Federal and state officials, as well as representatives from the banks, continue to address matters that they must complete before finalizing any settlement," Miller said in a statement released late Monday."

There were no further details available on the Miller's office website and he refused to provide more information to CNBC including the number of states who have signed.  The deadline for reaching an agreement was Monday night, however bright lines in these talks have been fungible in the past.

The agreement has been reported to involve cash in the amount of $25 billion from the banks. $17 billion of which would go toward writing down mortgage principal balances for some 850,000 troubled homeowners.  Of the remainder, $3 billion would go to restitution payments of $1,500 each to borrowers who lost their homes to foreclosure and the rest toward state funds for foreclosure relief. 

CNBC is speculating that 40 states have agreed to participate in the settlement.  Delaware AG Beau Biden was clear in an interview on MSNBC Monday night that his state was not party to it and there is speculation that New York's Eric Schneiderman, head of the President's new mortgage fraud office has not agreed to it either.   California's AG Kamila Harris is the big IF.  She walked away from negotiations four months ago claiming that the settlement did not do enough for homeowners in her state which has led the nation in the number of foreclosures. 

According to Inside Mortgage Finance, Harris recently returned to the table "in exchange for a commitment of a solid dollar amount from the banks" and other sources say that might involve raising the settlement from $19 billion to the $25 billion referenced above. The Wall Street Journal, reported that any special treatment of California would leave other AGs feeling disgruntled, specifically mentioning Florida's Pam Bondi. 

In addition to any cash from the banks, the settlement will include a mandate for new regulations for servicers.  A tentative settlement document was proffered last March that, as most of the standards have since become part of the general discussion about servicing, is probably a good indication of the contents of this part of the final document.  These include:

Enforcing firm modification timelines for servicers to meet, including notifications to borrowers of actions on modification requests.Providing a single point of contact for borrowers over the course of the modification process.Requiring a freeze on foreclosures during modification considerations and providing methods for penalties and enforcement.Outlining steps for banks to verify the accuracy of amounts owned and placing limits on fees the banks can charge distressed borrowers.Adopting directives to improve tracking of mortgage notes and chain of title.Increasing supervision of foreclosing law firms and other third-party vendors.

The settlement agreement apparently contains nothing that would preclude the states from continuing to investigate the banks, especially in the case of suspected criminal actions.  It also would do nothing to interfere with suits by individual borrowers against the banks or their servicers.

MND will update this story as more information becomes available.

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Gain access to the most accurate real-time back month TBA indications from Thomson Reuters and Tradeweb. LEARN MORE A recap of MBS Market Updates provided by MND Analysts and streamed live to the MBS Live Dashboard.10:31AM  :  ALERT: Negative Reprice Risk Increasing as MBS Hit Lows 10yr benchmarks are on the verge of a fairly meaningful technical breakout, at least as far as the yields themselves are concerned. Volume, on the other hand, while much higher than yesterday is not high enough to do justice to the very important horizontal pivot point in the high 1.95's.

Even so, MBS haven't much enjoyed the mere fact that benchmarks are close to such a shift. Fannie 3.5's dropped to their lows of the day moments ago (103-20), but have since bounced back up to 103-22. We'd start to watch out for the early reprice crowd unless the bounce back continues to take prices higher. Conversely, if prices start falling again, assume reprice risks increasing in a fairly linear fashion with each tick lower from current levels, turning from "possible" to "likely" around 103-18.

10:17AM  :  Job Openings Rate Rises in December - BLS Survey The excerpt and link below are from today's JOLTS survey released each month by the Bureau of Labor Statistics. The data speaks to December, but historically sheds light on the broader trends in private payrolls. In the current case, it's plain to see that private payrolls are generally improving according to the Employment Situation Reports, and today's JOLTS survey is basically just another piece of data in agreement with that trend. Not a major market mover, but something to add a small bit of detail to the big picture.

"There were 3.4 million job openings on the last business day of December, up from 3.1 million in November, the U.S. Bureau of Labor Statistics reported today. The hires rate (3.1 percent) and separations rate (3.0 percent) were unchanged over the month. The job openings rate has trended upward since the end of the recession in June 2009. (Recession dates are determined by the National Bureau of Economic Research.) This release includes estimates of the number and rate of job openings, hires, and separations for the nonfarm sector by industry and by geographic region."

9:37AM  :  Greek Government Finalizing Agreement on Bailout Greece's government is preparing the text of an agreement on a 130 billion euro bailout that must be put to political leaders for approval, a Greek government official said, suggesting Athens had largely wrapped up talks with lenders on the rescue.

The political leaders are due to discuss that agreement late on Tuesday.

"The Greek government is working on the final document that will be discussed at the political leaders' meeting later in the day," a government official, who declined to be named, told reporters.

Prime Minister Lucas Papademos negotiated through most of the night with Greece's European Union and IMF lenders, ending at 4 am (2 am London time) when the 24-hour strike was about to begin, closing ports and tourist sites and disrupting public transport.

9:20AM  :  ALERT: Bond Markets Weaker After Greece Says Drafting Bailout Agreement Treasuries weakened significantly into the domestic session this morning on news that the Greek government is drafting an agreement on the bailout deal to be voted on later today. 10yr yields rose another 3bps in short order reaching 1.9434, which is getting into the thick of a band of yields that comprise a long-standing pivot point. MBS have been less damaged by comparison with Fannie 3.5's only down 2 ticks on the day at 103-25.

Keep in mind that market participants are getting about as tired of unmet deadlines and changes of plan as we all are. Thus, we would expect a more significant reaction to something actually happening as opposed to what we have now, which is merely an announcement that a proposal is being drafted. Volume has quickly surged to its two day highs and there's a risk that this could be identified as something of a turning point in the momentum that had been fighting against Friday's jobs-data-inspired losses.

Bottom line, this is that "unscheduled market mover" for which we were waiting, but the risk is that there are more to come if Greece manages to actually get this done today. Pricing in that possibility in conjunction with setting up for tomorrow's 10yr auction could quickly take the long end of the yield curve on an unpleasant ride as far as MBS are concerned. Even as this alert is typed, they're down another tick to 103-24 as 10yr yields push over 1.95.

Matthew Graham  :  "relative to yesterday, big rally in stocks, from just below yesterday's lows to just above the highs in 1 hour. " Matthew Graham  :  "RTRS- BERNANKE SAYS EXPECTS INFLATION TO REMAIN VERY SUBDUED, PROBABLY BELOW 2 PCT TARGET, THROUGH 2012 OR 2013 " Matthew Graham  :  "if you are confident in a smooth left foot on the clutch, then this can make a lot of sense. Bernanke is confident: " Matthew Graham  :  "kinda like learning to drive a stick shift. there's that school of thought that says "better to give it too much gas than not enough." (granted, this is debatable, and I'm sure more than a few people will be happy to point out)" Andy Pada  :  "and there you have it." Matthew Graham  :  "RTRS - BERNANKE SAYS THERE IS A CONCERN THERE THAT A VERY SHARP CHANGE IN THE FISCAL POSITION IN A SHORT TIME COULD SLOW THE RECOVERY " Matthew Graham  :  "RTRS - BERNANKE SAYS RECOVERY IN MANUFACTURING SECTOR HAS BEEN ENCOURAGING, HAS LED BROADER RECOVERY " Matthew Graham  :  "RTRS - BERNANKE SAYS FED IS CONCERNED THAT THERE HAS BEEN A MODEST INCREASE IN THE SUSTAINABLE RATE OF U.S. UNEMPLOYMENT " Matthew Graham  :  "anything interesting from Bernanke's testimony will have to come in Q&A. This was generally expected, and that last wire confirms" Matthew Graham  :  "RTRS- BERNANKE'S PREPARED TESTIMONY TO SENATE BUDGET PANEL NEARLY IDENTICAL TO TESTIMONY TO HOUSE PANEL ON THURSDAY " Andrew Horowitz  :  "this made me laugh out loud "The troika was also demanding that private firms' labor costs be cut by about a fifth. This would be done by a combination of reducing the minimum wage by as much as 20 percent — a move that would drag the entire wage scale lower — by cutting holiday bonuses or by scrapping some industry-wide wage bargaining agreements. "" Victor Burek  :  "yep...cant just buy a bigger home as the reason" Sung Kim  :  "be careful on that one, current home must have 75% LTV or lower... just got burned on that one" Discuss the MBS and Mortgage Markets on Our Streaming Dashboard

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MBS went through an interesting Employment Friday.  I know it’s hard to remember back after a long weekend (especially for N.E. fans), but the bond market sold off pretty substantially on Friday after a better-than-expected employment report.  The interesting aspect of the selloff was how it was focused on intermediate- and long-maturity Treasuries.  While the yield on the 2-year barely budged, the 5-year yield rose 6 basis points on the day, and the yield on the 10-year was more than 10 bps over the previous day’s close.

This type of move impacts MBS investors, since they always want to see how MBS are performing versus some benchmark.  One way to measure "relative performance" is to compare the price change for a security versus what it should have done, based on its duration relative to that of the benchmark.  An easy way to calculate the projected price change for a security is to multiply the price change of the benchmark by a security’s “hedge ratio,” which is the duration of the subject security as a percentage of the benchmark’s duration.  An easy example now is that 30-year Fannie 3.5s had, after Friday’s move, a duration of 4.0; using a duration for the 10-year of 8.9 results in a hedge ratio for Fannie 3.5s of around 45%.  Therefore, if the 10-year note declined by a full point, Fannie 3.5s should have dropped by roughly 15/32s.  (This is sometimes also referred to as “duration-neutral performance.”

There are a few challenges implicit in this discussion.  One is that the relative performance (i.e., the price change of a security adjusted for hedge ratios) is going to vary if you have a significant shift in the yield curve, such as what we had on Friday.  That’s why most MBS underperformed the 5-year Treasury while tracking the performance of the 10-year.  (By my measure, Fannie 3.5s underperformed the 5-year by 5/32s while performing roughly in line with the 10-year.)  Some people will attempt to measure performance using a different benchmark, such as the 7-year Treasury.  However, the 7-year is not nearly as liquid as 5s or 10s, making it less useful as a “benchmark.”  It’s also possible to measure performance versus a blend of the 5- and 10-year Treasuries, although this just splits the difference between the two Treasury securities.

The other qualifier is that there is no single “duration” for MBS, mainly because of prepayments.  The subject of duration can be fairly complex; without getting highly technical, I think it will be helpful to briefly address the issue.  Keep in mind that “duration” itself is simply the measure of the expected percentage change in price, given some standard change in the subject security’s yield.

The duration of a fixed-maturity bond is easy to calculate, since the cash flows are fixed.  The durations quoted are “modified durations,” which are essentially calculated as the amount of time the present value of a cash flow is outstanding.  (The basic calculation is call “Macauley duration, and it’s quite similar in concept to “weighted average life,” or the amount of time a bond’s principal is outstanding.)  With a few adjustments or “modifications,” the modified duration gives the price sensitivity of a bond for small moves in interest rates.

However, MBS durations can be calculated in a variety of ways.  The duration of 4.0 for Fannie 3.5s quoted above is based on the calculations of an OAS model (YieldBook , in this case, which is owned and marketed by Citigroup).  The durations from an OAS model are, fittingly enough, call “OAS durations.”  OAS durations (or OADs) are complex to calculate, but relatively simple in concept.  The models calculate prices for a move up and down in interest rates, and the prices in the two scenarios are then used to calculate the duration.

There is also a simpler measure in MBS called “cash flow durations,” which are simply the modified durations for securities using some prepayment assumption.  (The cash flow is generated using a prepayment assumption; the modified duration is then calculated for the cash flows.)  Cash flow durations are often used by investors, particularly for MBS pools and fairly straightforward securities.  A separate category of durations are calculated using historical price changes for the subject security relative to yield changes for a benchmark.   An analysis could “regress” the daily percentage price change of Fannie 3.5s versus the daily yield change of the 10-year Treasury.  The slope of this regression line is the “empirical duration.”  I don’t like to use empirical durations (“empiricals”) directly as a hedging tool, since they’re backward-looking.  (I think of them like trying to drive down the highway using your rear-view mirror; as long as the road doesn’t curve, you’ll be okay.  But it always does, eventually.)

However, empirical durations are useful in describing MBS performance.  For example, if the empirical duration for an MBS is longer than its OAD, the security is said to be “trading long.”  This is a good thing for bondholders if bond prices are rising, but hurts performance when bond prices are soft and Treasury rates are rising.  It’s best to think of all forms of duration as tools that allow you to calculate expected performance and measure portfolio risk.

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Google Ends Mortgage Ads; Streamlines to be Nixed from FHA Compare Ratios; Servicing Agreement Bumping Along

This is Black (African-American) History Month. The event began as Black History Week in 1926. For many years, the second week of February was set aside for this celebration to coincide with the birthdays of abolitionist/editor Frederick Douglass and Abraham Lincoln but then expanded in 1976 into Black History Month. The 2010 census counted 42 million black (either a single ethnicity or a combination of races) people in the U.S., nearly 14% of the population. Looking at the states, New York had the highest population with 3.3 million blacks, followed by Florida, Texas, Georgia, California, North Carolina, Illinois, Maryland, Virginia and Ohio. In terms of percentages of overall state population, Mississippi led the nation with 38%, followed by Louisiana (33), Georgia (32), Maryland (31), South Carolina (29) and Alabama (27).

When NASA first started sending up astronauts, they quickly discovered that ballpoint pens would not work in zero gravity.  To combat the problem, NASA scientists spent a decade and $12 billion to develop a pen that writes in zero gravity, upside down, underwater, on almost any surface including glass and at temperatures ranging from below freezing to 300 centigrade. The Russians used a pencil. There's a lesson in that amusing tale for mortgage bankers and Realtors - I just don't know what it is. I do know that the definition of "deleveraging" is, "The process or practice of reducing the level of one's debt by rapidly selling one's assets." As it turns out, Equifax reported that U.S. consumers sharply reduced their debts by 11% last year, from $12.4 trillion to $11.1 trillion.

This news will prompt many lenders to throw a ticker-tape parade that will rival the NY Giants football event today. HUD and the FHA have long promoted the FHA Streamline Refinance as a useful tool to allow responsible homeowners to save thousands of dollars by refinancing at today's low interest rates. FHA-insured borrowers must be current, and in theory they can refinance into today's lower rates without requiring additional underwriting. "However, it has become apparent that some of our lending partners are reluctant to offer this product widely because of concerns about taking on the risk of a loan which they may not have underwritten and the potential adverse impact such a loan may have on their FHA Compare Ratio. In order to expand the availability of this product for eligible borrowers, FHA will make changes to the way in which FHA Streamline Refinance loans are displayed in the Neighborhood Watch Early Warning System (Neighborhood Watch). Streamline Refinances will be removed from the public compare ratio in Neighborhood Watch, but lenders will still be able to view their own traditional compare ratio (with streamlines included)." The Announcement

All eyes are on California as the deadline approaches for state officials to sign onto the multibillion-dollar foreclosure abuse settlement.  As the largest remaining holdout, California appears to leaning towards signing, which could potentially increase the settlement from $19 billion to upward of $25 billion. New York seems to be acting on the same lines. (Do you think the AG's are texting with each other?) Part of the deal for these two states would be the preservation of the right to investigate banks' past misdeeds and adding regulation to ensure that financial institutions adhere to the deal and that the money actually reaches struggling homeowners.  As it stands now, the deal would allocate $17 billion specifically for principal reductions and other relief for up to one million borrowers whose homes are underwater. The 750,000 families whose homes have been foreclosed would receive checks for about $2,000. A deal has been in the making for the past 13 months, as the settlement has been delayed on multiple occasions, so a lot is riding on the decisions of the California and New York Attorneys General - if they do sign on, a finalized deal will come much sooner than later.

As the foreclosure abuses settlement deal finalizes people are getting a better idea of the numbers involved.  The amount that home mortgage securities investors will have to pay is now projected to be up to $40 billion, which, according to the government, would act as a "down payment" for future principal reduction initiatives from future settlements. The White House plans to litigation as a key tool for procuring additional sums from large financial institutions that will be used to further aid for struggling borrowers.  This is part of a trend that has seen the Obama administration escalate efforts to help US borrowers-in addition to the finalization of the foreclosure and loan abuses settlements, a new state and federal unit has been created to investigate mortgage-related fraud.

I will never be an internet mortgage marketing whiz kid. And I guess Google thinks something similar - on the heels of several office closures, Google has discontinued its mortgage rate advertising platform Google Mortgage Advisor after two years of operation.  Apparently the decision was based on the product's poor performance and a company initiative to de-clutter by shutting down programs that aren't as successful as projected. From the Google website: "Google Advisor mortgages has been discontinued We’ve been prioritizing our product efforts across Google, which means taking a hard look at products that haven’t been as successful as we would have hoped. To that end, we’ve closed down the mortgage search feature of Google Advisor and are focused on building continued improvements into the rest of the product."

"Recent changes to the Home Affordable Refinance Program (HARP) present both opportunities and challenges to lenders and services. DataQuick, a provider of advanced real estate information solutions powered by data, analytics and decisioning, has already responded with timely new offerings that quickly identify eligible loan modification candidates. Through the application of proprietary analytics on its nationwide property database, DataQuick has identified 6.7 million borrowers who meet the new eligibility requirements and will most likely benefit from the revised program. Lenders and servicers can easily match their current portfolio to the database to identify the best candidates for loan modification. HARP eligibility requires that candidates have no late mortgage payments in the past six months and no more than one late payment in the past 12 months." Sounds pretty nifty - for more information contact your DataQuick sales representative or Wendy Barnett at wbarnett@dataquick.com. (And nope, this wasn't a paid ad.)

I am not an expert in compliance, but this caught my eye: in the January 24th Federal Register, HUD has proposed a rule  (ECOA/Reg B) that prohibits banks from discriminating against borrowers based on ethnicity, religion, national origin, gender, marital status, age (provided the applicant has the capacity to contract), income from public assistance, or the exercise of any Consumer Credit Protection Act.  The Fair Housing Act prohibits discrimination on account of familial status or handicaps. These are very, very recent developments-both rules go into effect on March 5.  It boggles the mind a bit, but better late than never, one supposes. The January 24th Federal Register entry can be read by clicking http://edocket.access.gpo.gov/2011/pdf/2011-1346.pdf.

The markets certainly don't care about marital status or gender, and yesterday we saw a nice little half-point rally (improvement) in the U.S.10-yr with it closing at 1.90%. With no scheduled news in this country, Treasuries gained today as "risk aversion" was back on worries about Greece. MBS prices improved from nearly .5 on 30-year 3.0% coupons to just roughly unchanged on 4.5's through 6.5's, as one would expect. And then overnight Greece's main political parties reportedly missed a deadline for responding to demands for more austerity measures. Negotiations between Greece and its private creditors are on hold while officials work on a rescue program with the EU, the International Monetary Fund and the European Central Bank. Greece faces a 14.5 billion euro bond repayment in less than six weeks. It won't be able to make the payment without international help.

Here in the states, once again there is no news of substance although we do have a $32 billion 3-yr note auction at 1PM EST. Chairman Bernanke is scheduled to repeat his recent testimony before the House Budget Committee to the Senate Budget Committee beginning at 10AM EST, but don't look for anything new. MBS Prices are down.

HIGH SCHOOL -- 1957 vs. 2010 (Part 2 of 2)
Scenario 5:
Mark gets a headache and takes some aspirin to school.
1957 - Mark shares his aspirin with the Principal out on the smoking dock.
2010 - The police are called and Mark is expelled from school for drug violations. His car is then searched for drugs and weapons.
Scenario 6:
Pedro fails high school English.
1957 - Pedro goes to summer school, passes English and goes to college.
2010 - Pedro's cause is taken up by state. Newspaper articles appear nationally explaining that teaching English as a requirement for graduation is racist. ACLU files class action lawsuit against the state school system and Pedro's English teacher. English is then banned from core curriculum. Pedro is given his diploma anyway but ends up mowing lawns for a living because he cannot speak English.
Scenario 7:
Johnny takes apart leftover firecrackers from the Fourth of July, puts them in a model airplane paint bottle and blows up a red ant bed.
1957 - Ants die.
2010 - ATF, Homeland Security and the FBI are all called. Johnny is charged with domestic terrorism. The FBI investigates his parents - and all siblings are removed from their home and all computers are confiscated. Johnny's dad is placed on a terror watch list and is never allowed to fly again.
Scenario 8:
Johnny falls while running during recess and scrapes his knee. He is found crying by his teacher, Mary. Mary hugs him to comfort him.
1957 - In a short time, Johnny feels better and goes on playing.
2010 - Mary is accused of being a sexual predator and loses her job. She faces 3 years in State Prison. Johnny undergoes 5 years of therapy.

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog discusses residential lending and mortgage programs around the world, part 2. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.

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There are all sorts of ways to divide market moving information into different categories.  One of our favorites is also one of the most broad: scheduled vs unscheduled.  At first glance, it might seem a bit odd to classify something scheduled as "market moving information" before it has been released.  After all, we don't yet know what it's specific impact will be, or if it will even have one.  But the important part here is not so much about the market impact and more about the fact that IF the data in question proves to be a market mover, AT LEAST WE KNOW what time of day it is released. 

The same courtesy is rarely extended to markets by the more significant market movers that concern European woes.  The timely example would be Greece's current petulant defiance of it's three most important bond-holders: the ECB, EU (via European Commission), and the IMF--collectively known as the Troika.  Although we can hazard guesses as to the approximate timing of pertinent information based, for example, on the time of a certain deadline, we've seen time and time again that Greece either doesn't care about running over such deadlines or is otherwise incapable of reaching sufficient consensus to meet them.

This was the case on Monday where the pinnacle of progress on the Troika talks was Greece agreeing to 1 of the 7 conditions by yesterday'seadline.  The fact that bond markets traded relatively flat and in a relatively narrow range should tell you one of two things: either markets have given up caring about these sorts of surprises, or they're simply waiting for something bigger to happen before going out of their way to react to it.  Whatever the case may be, this is our best candidate to produce the unscheduled market movement discussed above. 

If it seems like "stuff that hasn't even happened yet and might not happen at all" is getting a somewhat inordinate amount of attention, that's because the other side of the equation--scheduled market movers--were in extremely short supply on Monday and are in similarly short supply again Today.  That said, today is marginally better, primarily due to a 10:00 AM Bernanke appearance in front of the Senate Budget Committee as well as a few pieces of economic data.  One of the reports is even important enough for us to mention, but only just!  December Consumer Credit is released at 3pm Eastern and is expected to have grown by 7.2 bln dollars after a 20.37 bln increase in the previous month. 

Beyond that, the only other item that makes the cut on our economic calendar is the 1pm Auction of 3yr Treasury Notes.  Although these used to be significant enough to warrant a close look, 2 and 3yr note auctions have been increasingly uneventful since the August FOMC announcement introduced the 2013 verbiage (now the "2014 verbiage"), which effectively pinned down the short end of the yield curve.  Today's auction could send ripples, but any wave-making is reserved primarily for Wednesday's 10yr auction and to a slightly lesser extent, Thursday's 30yr Bond.

Bond markets were quiet overnight, trading in narrow ranges and light volume.  10's are 1bp higher at 1.912 and MBS are starting the day a tick lower at 103-26.  Slightly bigger movement is seen in stocks where the S&P is off 5 pts from 4pm prices.

No Significant Scheduled Economic Data

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Gain access to the most accurate real-time back month TBA indications from Thomson Reuters and Tradeweb. LEARN MORE A recap of MBS Market Updates provided by MND Analysts and streamed live to the MBS Live Dashboard.10:18AM  :  NAHB: List of Improving Housing Markets Expands to Nearly 100 The list of housing markets showing measurable improvement expanded by 29 metros in February to include a total of 98 entries on the National Association of Home Builders/First American Improving Markets Index (IMI), released today. Thirty-six states are now represented by at least one market on the list...9:37AM  :  MBA: 2011 Q4 Commercial/Multifamily Mortgage Originations Up 13 Percent from 2010 Q4 ommercial/multifamily originations during the fourth quarter of 2011 were up 13 percent over the fourth quarter of 2010, but fell 7 percent from the third quarter of 2011, according to the Mortgage Bankers Association's (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations.

"MBA's Commercial/Multifamily Mortgage Bankers Origination Index hit record levels for life insurance companies in the second and third quarters of 2011," said Jamie Woodwell, MBA's Vice President of Commercial Real Estate Research. "In the fourth quarter, multifamily originations for Fannie Mae and Freddie Mac hit a new all-time high. While the CMBS market continued to be held back by broader capital markets uncertainty during the past year, others - like the GSEs, life companies and many bank portfolios - increased their appetite for commercial and multifamily loans."

9:25AM  :  ALERT: MBS, Treasuries Flat All Morning in Absence of Data. Waiting on Greece Volume and volatility have been in short supply so far this morning as markets continue to wait for clarity on whether or not Greece will accept the terms of its latest bailout. With no domestic economic data or other market moving events, MBS and Treasuries have been almost entirely flat this morning.

10yr yields are right at unchanged levels versus 5pm on Friday, but slightly improved versus 3pm marks. Fannie 3.5 MBS are up a tick at 103-24, but have been trading between 103-22 and 103-25 all morning. Fannie 3.0s, which are showing enough quote activity with reasonable bid/ask spreads for us to mention, are unchanged at 101-19.

8:51AM  :  Merkel Presses Greece as Another Bailout Deadline Slips (Reuters) - Greece let yet another deadline slip on Monday for responding to painful terms for a new EU/IMF bailout, as German Chancellor Angela Merkel made clear Europe's patience is wearing thin over drawn-out negotiations among its feuding political leaders.

Failure to strike a deal to secure the 130 billion euro ($170 billion) rescue risks pushing Athens into a chaotic debt default which could threaten its future in the euro zone.

Merkel turned up the heat, saying Athens had to come to terms with the "troika" of lenders - the European Commission, European Central Bank and IMF - to get the funds it needs to meet big debt repayments in March.

Greek political leaders, positioning themselves for a likely general election in April, have baulked at accepting another package of deeply unpopular wage and pension reductions, job cuts and tougher tax enforcement measures.

Speaking in Paris alongside French President Nicolas Sarkozy, Merkel said she wanted quick action from Athens.

"We want Greece to stay in the euro," she told a news conference. But she added: "I want to make clear once again that there can be no deal if the troika proposals are not implemented. They are on the table, time is of the essence. Something needs to happen quickly."

Matthew Graham  :  "RTRS- BULLARD-IF FED NEEDS TO BUY MORE ASSETS, IT SHOULD BUY TREASURIES, NOT MBS " Mike Drews  :  "I have a 674k purchase that i'm working on..first appraisal came in at 525....so I ordered a second one...it came in at 675" Gus Floropoulos  :  "in addition to valuation issues I also see an inconsistency within appraisers approach to values as well." Andrew Horowitz  :  "gm all, I think it is difficult to say that this year or this month will be the end of the decline in property values until we have a resolution on Europe and the resulting aftershocks to the global economies" Aaron Buyside Meyer  :  "I do think 2012 will be the year values stablize, in the greater Madison market Appraisers tell me it stablized in 2011 (minus condos)" Matthew Graham  :  "yeah, exactly... not to mention little details like Case Shiller 20-city down 0.7% reporting just last week, and a revised -0.7pct in October" Aaron Buyside Meyer  :  "Yes very much so, especially since the bottom has been called how many times?" Matthew Graham  :  "I didn't watch the Q&A of Bullard's speech this morning, so maybe he was speaking in generalities, but does this strike anyone else as questionable? Especially considering ongoing efforts to turn REO into rentals (implicit competition for housing demand)" Matthew Graham  :  "RTRS- BULLARD-HOUSING PRICES HAVE BOTTOMED, BUT WON'T GO BACK TO BUBBLE LEVELS OF 2006 " Matthew Graham  :  "RTRS- GREEK PM'S OFFICE SAYS PM TO HOLD TALKS WITH EU/IMF LENDERS ON MONDAY" Matthew Graham  :  "collective shouts of "Gah!" were subsequently heard around the world" Matthew Graham  :  "RTRS - - GREEK PM'S OFFICE SAYS POLITICAL LEADERS' MEETING POSTPONED TO TUESDAY " Tony Cardinal  :  "Good insight on the roll" Victor Burek  :  "we will hit 104..but later this week we have roll, so after roll back under 104" Tony Cardinal  :  "Vic. O/u on ending at or above 104 by weeks end? " Discuss the MBS and Mortgage Markets on Our Streaming Dashboard

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The list of Improving Housing Markets (IHM) maintained by the National Association of Home Builders (NAHB) took another big jump in February, rising from 76 in January and more than doubling the 41 reported in December.  There are now 98 metropolitan areas representing 36 states included on the list.

The IHM identifies metropolitan areas that have shown improvement from their respective troughs on each of three metrics - employment, housing permits, and home prices - for at least six consecutive months.  NAHB uses data from the Bureau of Labor Statistics, the U.S. Census Bureau, and Freddie Mac to measure improved performance.

The additions to the February Index include some metropolitan areas that had been particularly weak including Miami, Detroit, Memphis, Kansas City, Missouri; Portland, Oregon, and Salt Lake City.  NAHB points out that inclusion in the Index does not indicate strong recovery, merely that some of these troubled areas are coming off of extreme lows.

Seven metro areas dropped off of the Index in February due to softening housing prices.  One of these was Washington, DC, one of the few areas that had continued to show strong prices and sales through 2011. 

"While many of the markets on the February IMI are far from fully recovered, the index points out where employment, home prices and housing production are no longer retreating and have held above their lowest recession troughs for six months or more," said NAHB Chief Economist David Crowe. "This is a sign that a large cross section of the country is starting to turn the corner as local economic conditions stabilize."

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Some will call this a useful tool and a time saver - others will say it is another sign of our privacy going away and "Big Brother" seeing everything. Enter an address, and it displays a map of the area showing all residences/businesses, including their phone numbers: http://neighbors.whitepages.com.

In Northern California, WBC Lending is looking for experienced wholesale AE's to call on brokers. WBC Lending has "an aggressive product offering, including a super jumbo portfolio product with start rate 1.625% and life cap of 6.25%, up to $2 million dollars with a 50% DTI, and a 40-year term." With over 65 years of combined wholesale mortgage banking experience, the executive management team at WBC Lending believes they have put together a wholesale platform that is second to none, and would prefer that candidates have a minimum of 2 years' experience. WBC has local underwriting, docs and funding all out of the San Jose based corporate offices.   If interested, please inquire today by contacting John Giagiari at jg@westernbancorp.com, and for more information on the company visit http://www.westernbancorp.com/.

Perhaps Bank of America home loans president Barbara Desoer could apply - she will retire this month after being at the bank since 1977! Her most recent assignment was the "integration of the Home Loans business into Consumer Banking" after the 2008 purchase of Countrywide.

HUD, and the FHA, is definitely a big part of the home mortgage environment. In the name of further learning, HUD is offering a variety of training programs, including an online course on the new HOPE LoanPort (HLP) enhancements.  You can register for classes, which are take place every Tuesday and Thursday.  Also available is a series webinars on Loss Mitigation, offered in conjunction with the FHA.  Some of the upcoming courses cover HUD's Neighborhood Watch System, loss mitigation, default reporting and FHA claims.  See the HUD website to register.

Early pay-offs (prepayments) of Ginnie Mae securities, made up primarily of FHA and VA loans, is causing some concern among investors. Besides the initiatives announced by President Obama in his Plan to Help Responsible Homeowners and Heal the Housing Market, more changes, such as tweaks to the FHA mortgage insurance premiums (MIP), could be unveiled in the next few weeks. President Obama's plan describes "Streamlined Refinancing for FHA Borrowers" by excluding streamline-refinanced loans from comparison ratio calculations. Most believe that this plan will be implemented and has the potential to raise GNMA prepayment speeds. (There has been a recent increase in early pay-offs; most attribute this to the "GNMA universe" becoming a lot more refinanceable after the improvement in FHA rates this year.)

(As a quick refresher, the compare ratio is the serious delinquency rate of all loans originated by a lender during a one or two-year period relative to the average of all lenders operating in the same region. If this ratio rises above 150%, the lender may lose the ability to make new FHA loans out of that region or branch - 200% is almost a sure thing. As higher coupon and seasoned loans have a weaker credit and greater default risks, lenders worry that streamline-refinancing them could push up the compare ratio.)

If Streamlines are excluded from the compare ratio calculation, this should remove a disincentive for streamline-refinancing higher-risk borrowers. This argues for an increase in GNMA prepayments, particularly on higher coupons and pre-2009 originations since these have the worst credit quality. But data from HUD suggest that the compare ratios of most national lenders are now significantly below the 150% threshold (see below), implying that this is not the only binding condition for refinancing riskier loans. In addition, FHA's indemnification rules essentially grant put-back amnesty for loans originated before 2009 - refinancing these loans would reset the clock and put the lender on the hook for fresh rep & warranties. Unless FHA grants put-back amnesty for all streamline refinances, lenders are likely to remain skittish. And let us not forget the various overlays that most investors have in place on FHA Streamlines.

So where are the compare ratios of "the big boys"? The current national compare ratios for the big lenders, from research piece I read from a large broker-dealer, are all below 130% - well below 200% recommended by FHA. Only 6% of lenders have a compare ratio of above 200% and these lenders comprise of only 2% of the total loans outstanding (that are considered for calculating compare ratios). BofA has 126, Chase 39, Wells 79, Quicken 78, US Bank 69, Fifth Third 59, PHH 66. Bank of America 90+ delinquencies have been steadily rising and there are concerns that they will be forced to do a one-time buyout as their 90+ delinquencies hit 5%, and/or, similar to GMAC, BofA starts buying out just enough delinquent loans to maintain delinquencies at that level.

Critics of the compare ratio ask, "Isn't it more of a long term snapshot of performance than short term?  If a lender tightens up their guidelines would you see an immediate impact to the compare ratio?" Some liken it to turning a cruise ship, and only looking in the rear view mirror. And further complicating things is the theory that most delinquencies are caused by unforeseen job losses, rather than other reasons that might have been caught during the underwriting process - unless one's underwriters were very poor and the company was seeing a first payment default problem.

Speaking of which, the serious delinquency rate for FHA mortgages reached 9.6% in December, and the highest level in more than two years, HUD recently announced. More than 711,000 FHA-insured loans were seriously delinquent, up almost 19% from one year earlier, according to the HUD report, and up 3% from November. At the same time, mostly for pricing reasons, originations are down. In December, the FHA insured 93,700 mortgages, a nearly 30% decline from the 133,000 insured in December 2010. Analysts are most concerned with the FHA's insurance fund: in its fiscal year 2011, the FHA Mutual Mortgage Insurance Fund slipped to a 0.24% capital ratio from 0.5% the year prior. By law, the fund must remain above 2%. Lenders should not be surprised if the FHA insurance premiums go up again this year.

Here in Miami, and everywhere else condos exist, condo buyers are having a hard time obtaining FHA mortgages, and often it's down to the building's financial status, not the borrower's.  Since February 2010, the FHA have required that the whole building be deemed financially viable rather than just the single units, which has resulted in a proliferation of rejected buildings, a headache for condo sellers who rely on the FHA stamp of approval as a marketing mechanism, impeding the housing market's recovery. FHA regulations now dictate that buildings must be 50% owner-occupied, that no more than 10% of the units are owned by one entity, that no more than 15% of the units are 30 days past due on their monthly assessments, and that at least 10% of the association budget be set aside for capital expenditures and deferred maintenance.  The general consensus in the housing industry is that, given consumer demand for FHA-backed mortgages, the regulation is short-sighted.

FHA mortgagees participating in the Lender Insurance ("LI") program will be required to indemnify HUD for self-endorsed loans that HUD deems ineligible for FHA insurance based on a final regulation published by HUD on January 25. The regulation finalizes changes to the LI regulations and will take effect on February 24. In addition to the significant changes to HUD's indemnification authority for self-endorsed loans through the LI program, the final regulation also amends mortgagee eligibility criteria to participate in the LI program, including acceptable default/claim rates, amends HUD's authority to monitor lenders participating in the LI program, and implements a process for FHA lenders terminated from the LI program to request reinstatement of their LI authority.

HUD made clear that these amendments are designed to improve and expand the risk management activities of the FHA and to strengthen the FHA Insurance Fund by limiting "unnecessary and inappropriate risks" to the Fund associated with loans that the Department determines should not have been endorsed through the LI program. As HUD notes, this is the latest in a series of steps the Department has taken to strengthen the financial soundness of the FHA program and mitigate the risk of possible insolvency of the FHA Insurance Fund as HUD continues its efforts to increase FHA's capital reserve ratio to meet the congressionally mandated threshold of two percent.

Last week was not kind to fixed-income U.S. securities, especially after that strong jobs number Friday. But the U.S. economy is not setting the world on fire, and Europe still poses a threat - and could for years. So we can all expect rates to drift and drift down. Rates are holding record lows as mortgage bonds (MBS) rally ever higher. Any modest improvement in our economy would nudge investors into equities and out of bonds - but the overhang of the Eurozone debt crisis proves to be too much. Our 10-yr T-note closed Friday at about 1.94%

The economic calendar will be very light this week - so watch for Europe to perhaps regain center stage. We do, however, have some Bernanke testimony and Treasury auctions tomorrow, Wednesday, and Thursday; the Trade Balance and Consumer Sentiment will be released on Friday. Ahead of that rates and prices are nearly unchanged from Friday.

HIGH SCHOOL -- 1957 vs. 2010 (Part 1 of 2)
Scenario 1:
Jack goes quail hunting before school and then pulls into the school parking lot with his shotgun in his truck's gun rack..
1957 - Vice Principal comes over, looks at Jack's shotgun, goes to his car and gets his shotgun to show Jack.
2010 - School goes into lock down, FBI called, Jack hauled off to jail and never sees his truck or gun again. Counselors called in for traumatized students and teachers.
Scenario 2:
Johnny and Mark get into a fist fight after school.
1957 - Crowd gathers. Mark wins. Johnny and Mark shake hands and end up buddies.
2010 - Police called and SWAT team arrives -- they arrest both Johnny and Mark. They are both charged with assault and both expelled even though Johnny started it.
Scenario 3:
Jeffrey will not be still in class, he disrupts other students.
1957 - Jeffrey sent to the Principal's office and given a good paddling by the Principal. He then returns to class, sits still and does not disrupt class again.
2010 - Jeffrey is given huge doses of Ritalin. He becomes a zombie. He is then tested for ADD. The family gets extra money (SSI) from the government because Jeffrey has a disability.
Scenario 4:
Billy breaks a window in his neighbor's car and his Dad gives him a whipping with his belt.
1957 - Billy is more careful next time, grows up normal, goes to college and becomes a successful businessman.
2010 - Billy's dad is arrested for child abuse; Billy is removed to foster care and joins a gang. The state psychologist is told by Billy's sister that she remembers being abused herself and their dad goes to prison. Billy's mom has an affair with the psychologist.
(Part 2 tomorrow.)

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The Departments of Housing and Urban Development (HUD) and Treasury issued the administration's January Housing Scorecard on Monday.  The report is essentially a summary of data on housing and housing finance released by public and private sources over the previous month and/or quarter.  Most of the data such as new and existing home sales, permits and starts, mortgage originations, and various house price evaluations have been previously covered by MND. 

The scorecard incorporates by reference the monthly report of the Making Home Affordable Program (MHA) through the end of December.  This includes information on the universe of MHA programs including the Home Affordable Modification Program (HAMP), HOPE Now, and Second Lien Modifications and other initiatives. 

Since the HAMP program began in April 2009 1,774,595 homeowners have entered into trial loan modifications, 20,074 since the November HAMP report.  About half of these homeowners, 933,327, have completed the trials and converted to permanent modifications; 23,374 conversions took place during the current report period.  Just over three-quarters of a million of the permanent modifications are still active.

While the HAMP program dates to April 2009, it underwent substantial revisions to its policies and procedures in June 2010, and many of the measures of its performance are benchmarked at that time.  Eight-four percent of homeowners who entered a trial modification after that date have received a permanent modification with an average trial period of 3.5 months compared to 43 percent who entered a trial prior to the changes.  As of December, 21,002 of the active trials had been underway for six months or more; in May 2010, the month before the changes took place, 190,000 trials were six months old or more.  In December every servicer except Ocwen was above an 80 percent conversion rate.

HAMP modifications with the largest reduction in mortgage payments continue to demonstrate the lowest redefault rates.  At 18 months after modification all loans have a 90+ day default rate of 23 percent.  However, loans with a 20 percent or smaller reduction in loan payment are defaulting at the rate of 36.4 percent while loans with a 50 percent payment decrease or greater have a default rate of 13.3 percent. 

The Home Affordable Foreclosure Alternatives program offers incentives to homeowners who wish to exit home ownership through a short sale or deed-in-lieu of foreclosure.  Thus far 43,368 homeowners have been accepted into the program and 27,665 transactions have been completed, the vast majority through a short sale.  More than half of the completed transactions (18,350) were on loans owned by private investors; 7,711 were portfolio loans and 1,604 were GSE loans.

There has been an emphasis in some quarters on reducing the principal balance of distressed loans since the last HAMP report.  Some members of Congress have asked for justification from the GSEs as to why they were not participating in principal reductions and the Treasury Department recently urged them to do so as well while tripling the incentives it is paying to other investors to reduce principal.  The HAMP Principal Reduction Alternative (PRA) has started trial modifications for 63,203 home owners and permanent modifications for 42,753 of which 40,374 are still active.  The median principal amount reduced in these modifications is $67,196, a median of 31.1 percent of the principal balance.

Each month HAMP reports on selected servicer performance metrics.   Servicers are expected to make Right Party Contact (RPC) with eligible homeowners and then evaluate their eligibility for HAMP.  HAMP evaluated servicer outreach to 60 days delinquent homeowners over the previous 12 months (November 2010-December 2011) and found most services have made RPC at least 85 percent of the time; however there is a wide range of performance results in terms of completed the evaluations.  

Servicers are also expected to identify and solicit homeowners in early stages of delinquency and, effective October 1, 2011, a higher compensation structure was put into effect to reward servicers who complete evaluations and place homeowners in a trial modification within 120 days of first delinquency.  The table below shows the status of major servicers relative to their eligibility for maximum incentives.

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Following Friday's employment data, Mortgages Rates moved quickly higher.  In most cases, the changes were seen not in the quoted interest rates themselves, but rather in the closing costs required to obtain those rates.  A small number of lenders' Best-Execution rates rose to 4.0%, but a majority stayed at 3.875%.  (learn more about how we calculate Best-Execution in THIS POST). 

For a given interest rate, there are a range of costs at which it could still be a best-execution candidate.  Whereas Friday basically took these costs from the low side (about as low as they'd even been) to the high side, today's improvements serve to moderate that movement back toward somewhat of a middle ground.  In another way of looking at things, you could think of the past three days as 3.875% best-ex rates being in question on Friday afternoon, but are "safe" once again, at least for today. 

Indeed, "safety" is a relative term.  All we can ever truly know is what rates are available on the day we're looking at them.  Even then, rates can change several times a day.  They don't usually do this more than once a day, but it does happen.  While we don't necessarily expect any violent movements in the near future, we can't ever rule out potential volatility.  In that regard, we can at least identify the events and possibilities that could stand as the culprits for such volatility, in the same way we prepared for Friday's jobs report as a high-risk event. 

Of the high risk events this week, some are scheduled while others are not.  The key scheduled events are the US Treasury auctions this week, particularly the 10yr auction on Wednesday and the 30yr auction on Thursday (these two are more pertinent to the MBS--or "Mortgage Backed Securities"--market which most closely governs mortgage rates).  The other "potential event," is a lingering LACK of resolution to an ongoing debate between Greece and it's bond-holders to determine whether or not Greece will receive it's next lump of bailout funds or face default.  It's actually this uncertainty (Greece defaulting would be bad, economically speaking) that's helping rates bounce back from Friday's jobs data.

Today's BEST-EXECUTION Rates

30YR FIXED -  3.875% mostly, less 3.75 today, 4.0's getting closer
FHA/VA -3.75%
15 YEAR FIXED -  3.25%
5 YEAR ARMS -  2.625-3.25% depending on the lender

Ongoing Lock/Float Considerations

Rates and costs continue to operate near all time best levelsCurrent levels have experienced increasing resistance in improving much from hereThere are technical reasons for that as well as fundamental reasons
Lenders tend to get busier when rates are in this "high 3's" level and can throttle their inbound volume by raising rates or costs.While we don't necessarily think rates are destined to go higher, given the above facts, there seems to be more risk than reward regarding floatingBut that will always be the case when rates operating near historic lows(As always, please keep in mind that our talk of Best-Execution always pertains to a completely ideal scenario.  There can be all sorts of reasons that your quoted rate would not be the same as our average rates, and in those cases, assuming you're following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).You can see a list of all comments on MND by clicking the 'Read the Latest Comments' option under the 'Community' menu.

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(MBS Live) - Against today's data-free backdrop, the only real market mover has been the earlier scheduled Fed buying (30yr sector of Treasuries) that left the long end of the yield curve in slightly better shape. 2s v 10s moved down to 167 from 170.8 just before the Fed buying. In the process, 10yr yields have held support nicely under 1.95, and it seems that MBS appreciate the stable environment. Fannie 3.5's have marched calmly to better and better prices all morning, now up 4 ticks at 103-27. 

Volume has been quite light and volatility quite low for MBS. The swings in Treasuries have been a bit choppier by comparison, but this is the expectation surrounding these Fed market ops, and as long as the next pivot point on either side of the prevailing range remains unbroken, the volatility isn't much of a concern. This is exactly what happened this morning as yields rose at their quickest pace in the lead up to the Fed buying from 9-10am, then got choppy for the next hour, finally resolving a bit lower than this morning's previous lows. 10yr are currently at 1.9083. 

Is all this good enough for a potential positive reprice? Maybe... In terms of outright price gains, we'd normally like to see a bit more before considering reprices, but there's something to be said for slow and steady improvement, even if it's minimal in terms of outright gains. A few of the early crowd might show up with reprices, but the majority of lenders would likely need either more time or further gains.

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Here are three different ways to view Friday afternoon's bounce back in 10yr yields combined with the moderate gains so far today.  It's not uncommon for opposing trends to exist on the same chart.  Depending on the peaks and valleys to which you wish to pay attention, a case could be made for up, down, and sideways trends in intermediate-term 10yr yields.  The triptych below breaks the three trends out on three separate frames, each of the same underlying 10yr yield chart.  Which one is your favorite?

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The Mortgage Bankers Association (MBA) reports that commercial and multifamily loan originations were down 7 percent in the fourth quarter of 2011 compared to the third quarter but were 13 percent higher than originations in the fourth quarter a year earlier.  The year-over year change was driven by originations for both industrial and multifamily properties which increased 43 percent and 31 percent respectively from Q4 2010.  On the negative side, retail loans were down 8 percent, loans for healthcare properties fell 24 percent, office properties were down 29 percent and hotel originations decreased 44 percent.

Quarter over quarter results were mixed.  There was a 153 percent jump in originations for health care properties; industrial loans were up 51 percent and multifamily properties increased 29 percent.  Originations for healthcare properties fell 52 percent, office properties were down 39 percent, and retail property loans decreased 24 percent.

Looking at lending by investor groups, commercial bank portfolios were up by 122 percent compared to the fourth quarter of 2010 and Freddie Mac and Fannie Mae (the GSEs) increased lending 17 percent.  Life insurance companies and conduits for commercial mortgage backed securities (CMBS) decreased lending by 23 percent and 50 percent respectively.

 On a quarter-over-quarter basis only the GSEs increased their loans, which rose 34 percent to an all time high.  Conduits for CMBS were down 26 percent, life insurance companies decreased lending by 23 percent, and commercial bank portfolios declined by 16 percent.  

"MBA's Commercial/Multifamily Mortgage Bankers Origination Index hit record levels for life insurance companies in the second and third quarters of 2011," said Jamie Woodwell, MBA's Vice President of Commercial Real Estate Research. "In the fourth quarter, multifamily originations for Fannie Mae and Freddie Mac hit a new all-time high. While the CMBS market continued to be held back by broader capital markets uncertainty during the past year, others - like the GSEs, life companies and many bank portfolios - increased their appetite for commercial and multifamily loans."

Commercial/Multi-family Originations by Investor Types

*2001 Ave. Quarter = 100

Commercial/Multi-family Originations by Property Types

*2001 Ave. Quarter = 100

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Gain access to the most accurate real-time back month TBA indications from Thomson Reuters and Tradeweb. LEARN MORE A recap of MBS Market Updates provided by MND Analysts and streamed live to the MBS Live Dashboard.2:36PM  :  ALERT: MBS Gains Hold. Additional Positive Reprices Reported About 2 hours ago, we started to entertain the possibility of positive reprices despite the lack of outright gains, and suggested that additional lenders would either need more time or further improvement in prices. They ended up getting both, and we're ending up seeing more reprices as a result. Things still aren't widespread in terms of participating lenders, but the possibility remains into the afternoon as MBS have basically been on a slow, steady run higher in price since Friday afternoon.

Fannie 3.5's are up 5 ticks on the day to 103-28 and 10yr yields are down 2.6bps to 1.898.

12:40PM  :  ALERT: MBS Slowly and Steadily Winning The Race Against today's data-free backdrop, the only real market mover has been the earlier scheduled Fed buying (30yr sector of Treasuries) that left the long end of the yield curve in slightly better shape. 2s v 10s moved down to 167 from 170.8 just before the Fed buying. In the process, 10yr yields have held support nicely under 1.95, and it seems that MBS appreciate the stable environment. Fannie 3.5's have marched calmly to better and better prices all morning, now up 4 ticks at 103-27.

Volume has been quite light and volatility quite low for MBS. The swings in Treasuries have been a bit choppier by comparison, but this is the expectation surrounding these Fed market ops, and as long as the next pivot point on either side of the prevailing range remains unbroken, the volatility isn't much of a concern. This is exactly what happened this morning as yields rose at their quickest pace in the lead up to the Fed buying from 9-10am, then got choppy for the next hour, finally resolving a bit lower than this morning's previous lows. 10yr are currently at 1.9083.

Is all this good enough for a potential positive reprice? Maybe... In terms of outright price gains, we'd normally like to see a bit more before considering reprices, but there's something to be said for slow and steady improvement, even if it's minimal in terms of outright gains. A few of the early crowd might show up with reprices, but the majority of lenders would likely need either more time or further gains.

Curt Sandfort  :  "thank you!" Kent Mikkola #353976  :  "yep" Curt Sandfort  :  "cool, so 15 is automatic at 78%?" Kent Mikkola #353976  :  "if it is a term greater than 15 yrs" Victor Burek  :  "yes..restarts it" Curt Sandfort  :  "will a FHA s/l "restart" the 5 year period one must carry MI on their mortgage? Assuming they will be below 78% in less than 5 years from date of new loan" Tom Schwab  :  "REPRICE: 3:48 PM - Franklin American Better" Victor Burek  :  "REPRICE: 3:27 PM - Nexbank Better" Victor Burek  :  "REPRICE: 2:36 PM - Plaza Better" Jim Cheeley  :  "REPRICE: 2:35 PM - Flagstar Better" Michael Tadros  :  "REPRICE: 2:30 PM - Interbank Better" Tim Collins  :  "REPRICE: 2:16 PM - 360 Mortgage Better" Tom Schwab  :  "REPRICE: 2:02 PM - AMC Better" Michael Tadros  :  "REPRICE: 12:39 PM - Provident Funding Better" Discuss the MBS and Mortgage Markets on Our Streaming Dashboard

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The Employment Situation Report is normally preceded by "sideways uncertainty" and followed by noticeable directionality.  But this time around, the opposite is true.  Although there were some fast and moderately large losses on Friday following the report, it could be argued that the "noticeable directionality" took place in the days leading up to the report, and the passing of the report--by the time this week's upcoming Treasury Auctions and European events are considered--will usher in the "sideways uncertainty." 

Case in point with respect to European events, Reuters reports that Greece basically cannot bring itself to accept the terms of their most recent bailout, thus effectively dooming themselves to default and/or EU exit.  Well...  They apparently do have until today:

( Reuters) - Greece's coalition parties must tell the European Union on Monday whether they accept the painful terms of a new bailout deal as EU patience wears thin with political dithering in Athens over implementing reforms.  Technocrat Prime Minister Lucas Papademos put on a brave face on Sunday as he tried to get leaders of the three parties in his government to sign off on terms of a 130 billion euro rescue, which Greece needs soon to avoid a chaotic debt default.  Papademos said in a statement the party chiefs - who may face angry voters in parliamentary polls as soon as April - had agreed measures including wage cuts and other reforms as part of spending cuts worth 1.5 percent of gross domestic product.  But a spokesman for the PASOK socialist party said a number of major issues demanded by the "Troika", representing Greece's EU, European Central Bank and IMF lenders, remained unresolved late on Sunday. 

Bond markets chopped around in a fairly narrow range overnight, in fairly low volume.   The Greece-related uncertainty helped 10yr yields walk in the door this morning abotu half a bp lower than Friday afternoon, just under 1.92.  MBS are opening right in line with those Friday afternoon levels as well.  Fannie 3.5's are currently unchanged at 103-23.  With no other significant scheduled data on tap, a Greek resolution, or lack thereof, is our best candidate for moving markets today.  The economic calendar stays light all week actually, with the only report drawing much attention away from 10 and 30yr auctions being International Trade on Friday. 

No Significant Scheduled Economic Data

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There is plenty of play-by-play on the post-NFP sell-off in the MBS Recap.  If you haven't seen those updates already, that's a good place to start, and in terms of where MBS are and what they're doing, there's not much more to say.  So we'll focus instead on the longer term implications, look at charts, and consider the week ahead. 

First off, here's some pictorial accompaniment for today's movement.  MBS turn out to have been relatively drama-free since the initial sell-off, returning to bounce fairly convincingly for a second time at 103-18.

Even if MBS were now to break below that pivot, volume has basically dried up for the week, leaving the big bounces seen in the earlier heavy volume as the more significant from a technical perspective.  To quantify the relative change in volume on the day and since the FOMC statement (last major volume spike), here's a chart of 10yr Futures Contracts volumes, both on the day, and you guessed it, since the FOMC statement:

The biggest pop of activity from 8:30 to 8:40 took 10yr yields precisely to the lower white trendline in the chart below, as if to suggest that 10's should try their luck in this uptrend (the white parallel lines are an upwardly sloped trend channel).  This is the first time I've charted this uptrend, but certainly, it's seen quite a few bounces, not only on the trendlines pictured below, but also on other lines of the same slope (not pictured below because frankly, the chart is crowded enough as it is, but feel free to use your mind's eye to see the other potential locations for the similarly sloped white lines).

Despite the losses, 10's clearly rejected the notion of testing a breakout of the red line.  There's also a horizontal support/resistance pivot point at 1.95, meaning that all three trends are contenders heading into next week's auction cycle.  Bond markets were clearly bullish headline into today's report, and clearly had been doing more to confirm the bullish trend (red lines).  So rather than the usual "sideways uncertainty" being resolved by a big piece of data, we're instead left with a strong rally resolving into sideways uncertainty.  If the upper red line breaks and 1.95 isn't offering any support, 2.04 and perhaps even 2.09+ might not be that far behind, although we'd generally expect dealers to reload longs up into that territory.  Auctions, however, will be more informative than our general expectations in that regard.  3's, 10's, and 30's next week, and very limited economic data to distract from that.

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Treasury Secretary Timothy Geithner told the Financial Stability Oversight Council that the financial system is getting stronger and safer and that much of the excess risk-taking and careless financial practices that caused so much damage has been forced out.  However, he said, "These gains will erode over time if we are not able to put our full reforms into place."

He outlined the basic framework has been laid, with new global agreements to limit leverage, rules for managing the failure of a large firm and the new Consumer Financial Protection Bureau (CFPB) up and running, and the majority of the new safeguards for derivatives markets proposed.  Geithner ticked off the major accomplishments of reform.

First, banks now face much tougher limits on risk which are critical to reducing the risk of large financial failures and limiting the damage such failures can cause.  The focus in 2012 will be "on defining the new liquidity standards and on making sure that capital risk-weights are applied consistently."

 The new rules are tougher on the largest banks that pose the greatest risk and are being complemented by other limits on risk-taking such as the Volcker Rules and limits on the size of firms and concentration of the financial systems.  These will not apply only to banks but to other large financial institutions that could pose a threat to financial system stability and this year the Risk Council will make the first of these designations.

Second, the derivatives market will, for the first time, be required to meet a comprehensive set of transparency requirements, margin rules and other safeguards.  These reforms are designed to move standardized contracts to clearing houses and trading platforms and will be complemented with more conservative safeguards for the more complex and specialized products less amenable to central clearing and electronic trading.  These reforms, the balance of which will be outlined this year, will lower costs for those who use the products, allow parties to hedge against risk, but limit the potential for abuse, the Secretary said. 

Third, is a carefully designed set of safeguards against risk outside the banking system and enhanced protections for the basic infrastructure of the financial markets: 

Money market funds will have new requirements designed to limit "runs."Important funding markets like the tri-party repo market are now more conservatively structured.International trade repositories are being developed for derivatives, including credit default swaps. Designated financial market utilities will have oversight and requirements for stronger financial reserves;

Fourth; there will be a stronger set of protections in place against "too big to fail" institutions.  The key elements are:

Capital and liquidity rules with tough limits on leverage to both reduce the probability of failure and prevent a domino effect; New protections for derivatives, funding markets, and for the market infrastructure to limit contagion across the financial system;Tougher limits on institutional size; A bankruptcy-type framework to manage the failure of large financial firms. This "resolution authority" will prohibit bailouts for private investors, protect taxpayers, and force the financial system to bear the costs of future crisis.

Fifth, significantly stronger protections for investors and consumers are being put in place including the CFPB which is working to improve disclosures for mortgages and credit cards and developing new standards for qualified mortgages.  New authorities are being used to strengthen protections for investors and to give shareholders greater voice on issues like executive compensation.

Geithner pointed to the failure of account segregation rules to protect customers in the MF Global disaster as proof of the need for more protections and said that the Council will work with the SEC and the Commodity Futures Trading Council on this problem.   

Moving forward, reforms must be structured to endure as the market evolves and to work not just in isolation but to interact appropriately with each other and the broader economy.  "We want to be careful to get the balance right-building a more stable financial system, with better protections for consumers and investors, that allows for financial innovation in support of economic growth." 

First, he said, we have to make sure we have a level playing field at home; that financial firms engaged in similar activity and financial instruments that have similar characteristics are treated roughly the same because small differences can have powerful effects in shifting risk to where the rules are softer.  A level field globally is also important, particularly with reforms that toughen rules on capital, margin, liquidity, and leverage, as well as in the global derivatives markets.  "In these areas we are working to discourage other nations from applying softer rules to their institutions and to try to attract financial activity away from the U.S. market and U.S. institutions." 

It is necessary to align the developing derivatives regimes around the world; preventing attempts to soften application of capital rules, limiting the discretion available to supervisors in enforcing rules on risk-weights for capital and designing rules for resolution of large global institutions.  Also, because some U.S. reforms are different or tougher from rules in other markets, there needs to be a sensible way to apply those rules to the foreign operations of U.S. firms and the U.S. operation of foreign firms.

 The U.S. also needs to move forward with reforms to the mortgage market including a path to winding down the government sponsored enterprises (GSEs.)  The Administration has already outlined a broad strategy, Geithner said, and expects to lay out more detail in the spring.  The immediate concern is to repair the damage to homeowners, the housing market, and neighborhoods.  The President spoke this week about the range of tools he plans to use.  Our ultimate goals are to wind down the GSEs, bring private capital back into the market, reduce the government's direct role, and better target support toward first-time homebuyers and low- and moderate-income Americans.

Geithner said the new system must foster affordable rentals options, have stronger, clearer consumer protections, and create a level playing field for all institutions participating in the system.  For this to happen without hurting the broader economy and adding further damage to those areas that have been hardest hit, banks and private investors must come back into the market on a larger scale and they want more clarity on the rules that will apply. 

Credit availability is still a problem and there is a broad array of programs in place to improve access to credit and capital for small businesses.  As conditions improve, it is important that we remain focused on making sure that small businesses, a crucial engine of job growth, have continued access to equity capital and credit.

Many Americans trying to buy a home or refinance their mortgage are also finding it hard to access credit, even for FHA- or GSE-backed mortgages.  The Administration has been working closely with the FHA and FHFA to encourage them to take additional measures to remove unnecessary barriers and they are making progress.  They will probably outline additional reforms in the coming weeks.

Bank supervisors, in the normal conduct of bank exams and supervision, as well as in the design of new rules to limit risk taking and abuse, must be careful not to overdo it with actions that cause undue damage to the availability of credit or liquidity to markets.

Geithner said the U.S. financial system is getting stronger, and is now significantly stronger than it was before the crisis.  Among the achievements:

Banks have increased common equity by more than $350 billion since 2009.Banks and other financial institutions with more than $5 trillion in assets at the end of 2007 have been shut down, acquired, or restructured. The asset-backed commercial paper market has shrunk by 70 percent since its peak in 2007, and the tri-party repo market and prime money market funds have shrunk by 40 percent and 33 percent respectively since their 2008 peaks.The financial assistance we provided to banks through TARP, for example, will result in taxpayer gains of approximately $20 billion.

The Secretary said the strength of the banks is helping to support broader economic growth, including the more than 3 million private sector jobs created over 22 straight months, and the 30 percent increase in private investment in equipment and software.   Broadly, the cost of credit has fallen significantly since late 2008 and early 2009.  Banks are lending more, with commercial and industrial loans to businesses up by an annual rate of more than 10 percent over the past six months.  

He concluded by saying that no financial system is invulnerable to crisis, and there is a lot of unfinished business on the path of reform.  The reforms are tough where they need to be tough.  "But they will leave our financial system safer, better able to help businesses raise capital, and better able to help families finance safely the purchase of a house or a car, to borrow to invest in a college education, or to save for retirement.  And they will protect the taxpayer from having to pay the price of future crisis."

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