The recent drop in rates has created some interesting situations in the market, especially for lenders.   First of all, I'm not aware of any consensus on how to calculate a "current coupon" rate in this environment.  The current coupon is calculated by interpolating between coupons that are above and below par, adjusting for the delay days associated with the securities in question.

Let's take an example from the old days when coupons traded below par.  Let's assume the following, assuming (for simplicity's sake) that we're calculating the current coupon for February settlement, with FN 3.0s at 99.00 and FN 3.5 at 101.25.  First, you have to adjust for the delay days.  Fannie Mae pools pay on the 25th of the month following the record date, which results in a 24-day delay.  (The delay results from all the accounting and financing complications involved with managing the vast numbers of loans in the MBS universe.)  The prices can be adjusted for the delay by adding 24 days of coupon payments.  For a 3% pool, the price is adjusted higher by 0.20 (i.e., 3.0 x 24/360), resulting in a 99.20 adjusted price; the 3.5% pool has an adjusted price of 101.2333.  You would then interpolate between the two prices to get the rate that equates to par.  In this case, it is 3.1967%.  The last adjustment is to convert it from monthly yield (since MBS pay monthly to a semi-annual bond equivalent yield, which result in a current coupon rate of 3.218%.

However, we are in a world where the lowest tradable coupon (30-year 3.0s) is both highly illiquid and well above par.  In past periods of low rates, the practice would be to extrapolate (rather than interpolate) to par.  This looks like what some people are doing; however, it gives you some very bizarre numbers if you try to track this number (or look at the current coupon spread over Treasuries or swaps).  A major provider shows the current coupon rate rising on Thursday from 2.52% to 2.70%, even though MBS prices were higher on the day.  This in turn means that the spread of the current coupon over the 10-year Treasury yield, a closely-watched benchmark, has fluctuated this week between +65 bps and +88 bps with minimal change in MBS relative value.  As they say...go figure.

The huge run-up in MBS prices has impacted the market in other ways.  Matt Graham wrote about the liquidity (or lack of liquidity) in 30-year 3.0s.  As he noted, some lenders are originating loans that would be securitized as 30-year 3.0s (as well as 15-year loans that would go into Dwarf 2.5s), although it's unclear what's being done with the loans.  (They could be sold to the GSEs' cash window.)  With rates pushing down, a 3.75% loan can still be pooled into a 3.5% security (with a proviso-see below); however, the poor execution on 3.0s, and lenders' unwillingness to short the coupon, has been an impediment to rates moving even lower.  For example, the spread between the Freddie Mac survey rate and the 10-year Treasury yield is at +204 basis points, versus an average (over the last two years) of +162. 

The "stickiness" of rates at current levels is, in my mind, largely a function of having limited outlets for loans with note rates of 3.625% and lower.  The biggest problem is that there is no natural buyer for 30-year MBS with 3% coupons.  I've recently written that the Fed should buy all outstanding 3% pools, which would do more good than just "buying the market."  In any case, markets for these very low coupons need to develop for rates to move decisively lower.

Another complicating factor is the impact of the recent tax on mortgages, paid as a 10 basis point addition to a loan's guaranty fee.  Consider the above example on pooling 3.75% loans into 3.5% pools.  It's almost certain that the new g-fee can be bought down entirely (although there has not yet been a definitive statement to that effect from Freddie or Fannie), leaving 25 basis points of servicing to be held by someone.  A question that the GSEs are grappling with, however, is the cap on agency buy-ups.  Most contracts are written such that the total amount that can acquired by the GSEs on any loan (including both the g-fee and servicing) is capped at 37.5 basis points.  This means that the 10 basis point tax limits the amount of servicing that the GSEs can buy as part of the pooling transaction.  While buy-ups have not been a big factor in the past (since most big lenders just held excess servicing, rather than sell it to the GSEs at puny multiples) this could be a factor in the future, especially in light of the shrinking number of players willing to take down servicing.   Supposedly, the GSEs are looking at increasing the caps, but it's unclear whether the contracts will (or can) be revised.

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Three major banks and Virginia-based MERSCORP, Inc. and its subsidiary Mortgage Electronic Registrations Systems (MERS) were sued Friday by the state of New York.  The suit, filed by the state's Attorney General Eric T. Schneiderman, charges that the creation and use of a privately national electronic registration system, MERS, "has resulted in a wide range of deceptive and fraudulent foreclosure filings in New York state and federal courts, harming homeowners and undermining the integrity of the judicial foreclosure process."  Further, the lawsuit charges that the employees and agents of the three banks, Bank of America, J.P. Morgan Chase, and Wells Fargo, acting as "MERS certifying officers," have repeatedly submitted court documents containing false and misleading information that made it appear that the foreclosing party had the authority to bring a case when in fact it may not have.  The suit also names additional defendants for some of the charges including loan servicing subsidiaries of the three banks.

The lawsuit, filed in the Supreme Court of the State of New York, Kings County levies the following charges:   

MERS was created to allow financial institutions to evade country recording fees, avoid the need to publicly record mortgage transfers and facilitate the rapid sale and securitization of mortgages. MERS members log all of their transfers in a private electronic registry rather than in the local county clerk's office.
MERS is a shell company with no economic interest in any mortgage loan. It is the nominal "mortgagee" of the loan in the public records and remains as such regardless of how often the loan is sold or transferred among its members.
MERS has few or no employees but serves as the mortgagee for tens of millions of mortgages. It has indiscriminately designated over 20,000 MERS member employees as MERS "certifying officers" expressly authorizing them to assign MERS mortgages and execute paperwork to foreclose on properties and submit claims in bankruptcy proceedings while failing to adequately screen, train, or monitor their activities. Assignments were often automatically generated and "robo-signed" by individuals who did not review the underlying property ownership records, confirm the documents' accuracy, or even read the documents. MERS certifying officers have regularly executed and submitted in court mortgage assignments and other legal documents on behalf of MERS without disclosing that they are not MERS employees, but instead are employed by other entities, such as the mortgage servicer filing the case or its counsel.
Use of the private database to record property transfers has eliminated homeowners' and the public's ability to track them through the traditional public records system. This data base is plagued with inaccuracies and errors which make it difficult to verify the chain of title or the current note-holder. In addition, as a result of these inaccuracies, MERS has filed mortgage satisfactions against the wrong property.
This "bizarre and complex end-around of the traditional recording system" has saved banks more than $2 billion in recording fees and allowed the banks to securitize and sell millions of loans, "often misrepresenting the quality and nature of the mortgages being transferred."
The creation and use of the MERS System by the Defendant Servicers and other financial institutions has resulted in a wide range of deceptive and illegal practices, particularly with respect to the filing of New York foreclosure proceedings in state courts and federal bankruptcy proceedings.

The lawsuit estimates that MERS members have brought over 13,000 foreclosures against New York homeowners naming MERS as the foreclosing property when in many cases MERS lacks the standing to foreclosure.  Even when foreclosures were not initiated in MERS name, proceedings related to their registered loans often included deceptive information.

The lawsuit seeks a declaration that the alleged practices violate the law, as well as injunctive relief, damages for harmed homeowners, and civil penalties. The lawsuit also seeks a court order requiring defendants to take all actions necessary to cure any title defects and clear any improper liens resulting from their fraudulent and deceptive acts and practices.

On January 24 the U.S. Court of Appeals for the 11th Judicial Court upheld an appeal from MERS that contended a lower court had erred in finding that a homeowner had been improperly foreclosed on by MERS on the grounds that:

1).   The assignment of the security deed was invalid because MERS, as nominee of a defunct lender could not assign the documents of its own volition.

2.     The "splitting" of the mortgage and the note rendered the mortgage null and void and therefore notices of foreclosure were invalid as not coming from a secured creditor.

The New York suit differs slightly from the facts in Smith V. Saxon Mortgage, but if Schneiderman wins his case, it could be that the legitimacy of MERS will ultimately have to be decided by the U.S. Supreme Court.

MERSCORP Responds:

Mortgage Electronic Registration Systems, Inc. (MERS) takes its role as a mortgagee very seriously. The MERS® System is an important part of the mortgage industry and the MERS business model has been consistently validated in all 50 states. All of the activities of MERSCORP and MERS are in compliance with state and federal laws. We are confident that as people understand more about MERS and the role we play, they will see that MERS adds great value to our nation’s system of housing finance in ways that benefit not just financial institutions, the broader economy and the government, but—most of all—homeowners.

AG Schneiderman Claim #1:
Defendants have improperly brought New York foreclosure proceedings in MERS’ Name

FACT: The right to bring a foreclosure action is determined by the plaintiff’s relationship to the mortgage loan, which is whether the entity bringing the action is the holder of the note or authorized by the holder of the note to bring a foreclosure action. MERS was authorized by the note holder to bring foreclosure actions in its name, and the borrower agreed that MERS may be the entity who may foreclose on the property in the event of a default. That being said, since July 2011 MERS no longer acts as foreclosing entity. In addition, MERSCORP never received a fee or made any money on foreclosures initiated in MERS’ name.

AG Schneiderman Claim #2:
MERS Certifying Officers, including defendant servicers’ employees and agents, have submitted false, deceptive and often legally invalid documents in New York foreclosure proceedings

FACT: When MERS is the mortgagee and is not the entity foreclosing, MERS executes an assignment of a mortgage that transfers all of the interests in the mortgage to the entity that is foreclosing prior to the commencement of the foreclosure. The courts have held that MERS may assign its interests, as a mortgagee, and that such assignments are valid.

AG Schneiderman Claim #3:
The use of MERS certifying officers by defendants has confused and deceived homeowners and the courts.

FACT: It is perfectly proper for MERS, as the mortgagee, in order to fulfill certain acts required of the mortgagee, to appoint signing officers (or agents) to act on MERS’ behalf. To act as a principal for its signing officers is not a deceptive trade practice. There is no requirement under New York law that a principal must disclose whether its agents are employed by another entity. These agents authorized to act on behalf of MERS are not employees of MERS, but employees of the loan servicers or sub-servicing companies. Signing officers are duly authorized to perform their responsibilities on behalf of MERS who is the mortgagee – in compliance with applicable laws – and to sign their own names and to use the titles “vice president” and “assistant secretary” of MERS.

AG Schneiderman Claim #4:
MERS and defendant servicers through their use of MERS have concealed important information from homeowners about their property and the role that MERS plays with respect to their mortgage.

FACT: MERS does not hide ownership or undermine the integrity of land records. Any mortgage holder registered in the MERS® System can easily access information related to their mortgage on our website or through a toll-free number. Federal law provides that consumers are notified for changes in investors or servicing status. In addition, county land records were not intended to identify the servicer of a mortgage or the current note holder; they are intended to provide notice to purchasers of property that there is a lien on the property and when that lien was perfected.

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Gain access to the most accurate real-time back month TBA indications from Thomson Reuters and Tradeweb. LEARN MORE MBS MID-DAY: Mostly Sideways After NFP-Inspired LossesA recap of MBS Market Updates provided by MND Analysts and streamed live to the MBS Live Dashboard.10:20AM  :  ALERT: MBS Struggle to Hold Lows Following 2nd Round of Econ Data Admittedly, ISM Non-Manufacturing and Factory Orders are not the most critical market-moving economic reports. Case in point, see the 58k 10yr contracts traded in the 10 minutes following these two, versus the 268k contracts in the 10 minutes following NFP earlier this morning.

That said, they're enough to give already teetering bond markets a slight nudge, resulting in MBS revisiting their lows of the day at 103-18+ and 10yr yields pushing higher past support. The breakout in 10yr yields is only slight at this point, but if it goes any further, MBS could soon be looking at their own break of support.

10:10AM  :  ECON: Service Sector Growing Faster Than Expected - ISM The NMI registered 56.8 percent in January, 3.8 percentage points higher than the seasonally adjusted 53 percent registered in December, and indicating continued growth at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 59.5 percent, which is 3.6 percentage points higher than the seasonally adjusted 55.9 percent reported in December, reflecting growth for the 30th consecutive month.

The New Orders Index increased by 4.8 percentage points to 59.4 percent, and the Employment Index increased by 7.6 percentage points to 57.4 percent, indicating substantial growth in employment after one month of contraction. The Prices Index increased 1.5 percentage points to 63.5 percent, indicating prices increased at a slightly faster rate in January when compared to December. According to the NMI, 12 non-manufacturing industries reported growth in January. Respondents' comments are mostly positive about business conditions. There is concern about cost pressures and the sustainability of the recent spike in activity.

RTRS - ISM NON-MANUFACTURING PMI INDEX AND BUSINESS ACTICITY INDEX AT HIGHEST SINCE FEBRUARY 2011

RTRS- ISM NON-MANUFACTURING EMPLOYMENT INDEX AT HIGHEST SINCE FEB 2006

RTRS - ISM NON-MANUFACTURING NEW ORDERS INDEX AT HIGHEST SINCE MARCH 2011

10:06AM  :  ECON: Factory Orders Rise, but Pace Slower Than Expected New orders for manufactured goods in December, up two consecutive months, increased $5.3 billion or 1.1 percent to $466.2 billion, the U.S. Census Bureau reported today. This followed a 2.2 percent November increase. Excluding transportation, new orders increased 0.6 percent.

Shipments, up seven consecutive months, increased $3.4 billion or 0.7 percent to $459.4 billion. This followed a 0.2 percent November increase.

Unfilled orders, up twenty of the last twenty one months, increased $12.7 billion or 1.4 percent to $911.5 billion. This followed a 1.3 percent November increase. The unfilled orders-to-shipments ratio was 6.00, down from 6.13 in November.

Inventories, up twenty six of the last twenty seven months, increased $0.4 billion or 0.1 percent to $610.1 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.4 percent November increase. The inventories-to- shipments ratio was 1.33, down from 1.34 in November.

RTRS- U.S. DEC FACTORY ORDERS +1.1 PCT (CONSENSUS +1.5) VS NOV +2.2 PCT (PREV +1.8 PCT)

RTRS - "Orders for non-defense capital goods excluding aircraft - a closely watched category because it is taken as a sign of businesses' future spending plans - climbed a solid 3.1 percent in December. That followed declines of 1.5 percent in November and 0.9 percent in October. "

8:54AM  :  ALERT: First Signs That Bond Markets Have Stopped the Bleeding So far, it looks like we've witnessed a support event around 1.925 in 10yrs and 103-22 in Fannie 3.5 MBS. The latter has been ticking sideways at 103-26 for nearly 10 minutes now, and 10yrs are testing to break their lowest yields since NFP, around 1.896. 8:33AM  :  ECON: Non-Farm Payrolls Crush Expectations. Positive Revisions RTRS - U.S. JAN NONFARM PAYROLLS +243,000 (CONSENSUS +150,000) VS DEC +203,000 (PREV +200,000), NOV +157,000 (PREV +100,000) RTRS - US JAN PRIVATE SECTOR JOBS +257,000 (CONS +170,000), DEC +220,000 (PREV +212,000) RTRS - U.S. JAN GOVERNMENT JOBS -14,000 VS DEC -17,000 (PREV -12,000) RTRS - U.S. JAN JOBLESS RATE 8.3 PCT, LOWEST SINCE FEB 2009, (CONSENSUS 8.5 PCT) VS DEC 8.5 PCT (PREV 8.5 PCT) RTRS - U.S. LABOR FORCE PARTICIPATION RATE 63.7 PCT IN JAN VS 64.0 PCT IN DEC RTRS - U.S. JAN AVERAGE HOURLY EARNINGS ALL PRIVATE WORKERS +0.2 PCT (CONS +0.2 PCT) VS DEC +0.1 PCT (PREV +0.2 PCT), TO $23.29 VS DEC $23.25; JAN YEAR-ON-YEAR EARNINGS +1.9 PCT RTRS - U.S. JAN AVERAGE WORKWK ALL PRIVATE WORKERS 34.5 HRS (CONS 34.4 PCT) VS DEC 34.5 HRS (PREV 34.4), FACTORY 40.9 VS 40.6, OVERTIME 3.4 VS 3.3 RTRS - U.S. JAN FACTORY JOBS +50,000, BIGGEST INCREASE IN ONE YEAR, (CONS. +15,000) VS DEC +32,000 (PREV +23,000) RTRS - ANNUAL REVISION ADDS 162,000 JOBS FROM MARCH 2011 NON-SEASONALLY ADJUSTED LEVEL VS. EARLY OCT ESTIMATE OF +192,000 RTRS - ANNUAL REVISION ADDS 165,000 JOBS FROM MARCH 2011 LEVEL ON A SEASONALLY ADJUSTED BASIS RTRS - U.S. JAN GOODS-PRODUCING JOBS +81,000, CONSTRUCTION +21,000, PRIVATE SERVICE-PROVIDING JOBS +176,000, RETAIL +10,500 RTRS - U.S. JAN AGGREGATE WEEKLY HOURS INDEX FOR ALL PRIVATE WORKERS +0.2 PCT VS DEC +0.5 PCT RTRS - U.S. JAN NONFARM PAYROLLS INCREASE LARGEST SINCE APRIL 2011, GOODS-PRODUCING JOBS INCREASE LARGEST SINCE JAN 2006 8:30AM  :  ALERT: Major Upside Surprise for NFP. Bonds On The Retreat more to follow. pretty ugly so far. 10's up almost 10bps, MBS down 24 ticks to 103-10. Could be that we're seeing the ugliest part of the whipsaw reaction, but we'll update you either way. 8:21AM  :  ALERT: Overnight Trading Suggests Markets Waiting on NFP On Monday, 10yr yields began the week at just over 1.84, and they've traded about a 6bp range ever since. From lunch-time on Wednesday through right now, there are no hour-over-hour moves greater than 2bps. This is a very calm market that has arguably been waiting for SOMETHING, perhaps resolution to Greek bond-swap/PIL, perhaps NFP, or perhaps a combination of the two.

Overnight trading seems to give the nod to NFP as Reuters reported EU governments might have to give Greece another 145 bln Euros in a 2nd assistance package. If we stretch our imaginations, we can maybe see some volume come in around that news, bringing yields down slightly, but a) it wasn't much and b) we're smack dab in the middle of the week's range.

MBS opened 1 tick up and Treasuries just under 1bp lower than yesterday. The whole of the overnight session took place in a 2 bp range in 10yrs and in moderately light volume. Stock futures are dead even with yesterday's 4pm levels. So we'll say that which the market seems to have already said: bring on NFP!

Matthew Graham  :  "http://screencast.com/t/dcWqwxIqP" Matthew Graham  :  "hard to see on the 2 day chart, but several ceiling bounces at 103-23 just now, which had earlier seen the majority of support bouncesbefore about 9:18" Matthew Graham  :  "103-23 Jude. 4 days ago, all time higher were 103-29" Michael Stark  :  "we - WF retail start harp 2.0 Monday : )" Jude Bridwell  :  "GM all. Double digit red = not cool" Adam Quinones  :  "lots of red on the board....yet FNCL 3.5s still near 104 handle. HAHAHA...wow." Aaron Buyside Meyer  :  "I heard Wells retail is starting HARP 2.0 on Monday" Andy Pada  :  "Update: on the cash window, I can buy a 10 day commitment and extend for 20 days at 20bps or I can buy a 30 day commitment pricing is still worse by 30 bps than 10 day with 20 day extension...ridiculous" Matthew Graham  :  "Ralph (with respect to "30yr taking a header"), for what it's worth, note the yield changes in TSYs as opposed to the price changes (which tell you much less b/c the coupons change periodically). With that in mind, the yield curve looks to be steepening in a fairly linear fashion, i.e. 2's through 30's all with 2-3 bps higher yields from one maturity to the next" Adam Quinones  :  "drop in participation rate does some "cooking"" Adam Quinones  :  "warm weather certainly helps construction" Ralph Migliozzi  :  "Wait you think they are cooking the numbers? No....shocking" Justin Bayle  :  "What are the chances the labor market is improving more and more in an election year!!" Andy Pada  :  "Cash window just implemented at least a 50 bps difference between 10 day and 30 day locks" Andy Pada  :  "Relatively speaking, aren't we at last Friday's levels?" Matthew Graham  :  "I tried to push fence-sitters last night. " without any bias toward what might happen tomorrow, few if any savvy market watchers would find fault in locking an interest rate the day before an influential piece of economic data, when MBS have just traded to their all-time highs. Some folks might prefer a riskier stance in the hopes of a rate-friendly jobs report tomorrow or some other future chance at a lower rate, but if you're inclined to lock and/or have been on a fence, it's about as good a" Jeff Anderson  :  "Was just thinking the same thing, Jason." jason lewis  :  "maybe we can push some people of the fence now" Matthew Graham  :  "There's "a" bounce Oliver. I'd be shocked if it held" Oliver S. Orlicki  :  "theres our bounce:)" Ira Selwin  :  "did someone say reward/risk instead of risk/reward? Need to wait until initial reaction calsm, but is a good example of how quick things can move." John M Roberts - TN Consumer  :  "That's gonna leave a mark. " Victor Burek  :  "plus revisions higher" Jeff Anderson  :  "Holy smokes." Victor Burek  :  "135k to 150k..depending on who you ask" Tony Cardinal  :  "Anticipated nfp is what today?" Discuss the MBS and Mortgage Markets on Our Streaming Dashboard

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First Friday of the month and time, once again, for The Employment Situation Report, or more specifically, the Non-Farm Payrolls headline.  Both Manufacturing and Private payrolls are expected to have fallen somewhat from last month's report with the 200k headline falling to 150k.  With both stocks and bonds near their best levels in about half a year, there aren't the usual foregone conclusions about a positive report hurting interest rates or a negative report hurting stocks.  Without being overly optimistic about the team for which we cheer, it seems like Treasuries and MBS would have an easier time keeping a bid in the face of threatening data. 

To clean up that hypothesis a bit, let's say NFP comes in between 150-200k, beating the 150k consensus.  Historically, such a result would tend to lead rates higher, but in the current environment where we've seen more of a leveling off in the broad swath of other domestic economic data,  where last month's report printed 50k higher than this month's consensus, and where an unprecedented level of demand for US Treasuries continues unabated until Europe is "fixed," it doesn't seem like a beat that falls in that 150-200k range is the end of the low-interest rate world.  Granted, even a bigger beat would be hard pressed to cause the end of low interest rates, but the moral of this story is the "underlying default positivity," (or whatever you want to call it... we give up) that pervades US Treasuries and even MBS. 

But what would happen to stocks if NFP misses the consensus.  The recent rally in stocks is impressively stable, almost indicative of it's own version of the "underlying default positivity" (Buy American?).  But we can't help but think that the print needs to hit at least 150k (or have some favorable "yeah buts" in the internal components) for stocks to come out ahead tomorrow.  Then again, we're probably setting ourselves up for disappointment by trying to apply logic to equities.  Maybe we should stick with bond markets. 

With that in mind, logic dictates, well... we're not sure.  All we really know is that Treasuries are at the more aggressive end of a flat range or a bullish trend channel.  Either way, left to their own devices with no NFP tomorrow and no Europe, yields would probably bounce higher and MBS prices would probably fall.  So whatever the suggestion from NFP, it will need to speak loudly enough in favor of economic uncertainty if we're to maintain recently achieved all-time highs in MBS tomorrow.  It COULD do this even with a 150k print, but the higher it is from there, the more and more challenging our day becomes, probably. 

There's other data after the 8:30 AM Jobs report (Factory Orders and ISM Non-Manufacturing), but we're not planning on paying much attention to it unless NFP leaves us woefully desirous of additional economic clarification.  On the other hand, for the first time in a few months, it feels like we're heading into Jobs data with the distinct risk of going sideways or weaker, and with less developed speculation/hopes of bond markets strengthening on a lackluster report.

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HOPE NOW, the voluntary private sector alliance of mortgage industry stakeholders, recently concluded a two day conference in Washington which focused on assistance to military homeowners and foreclosure mediation. 

One group of servicers, investors, and housing counselors met with regulators, investors, and members of the military to discuss ways of reaching military families facing foreclosure because of their unique situation which includes Permanent Change of Station and other issues. A second group of HOPE NOW stakeholders met with judges, attorneys, and several state housing agencies to discuss best standards related to foreclosure mediation.

John Dalton, President of the Housing Policy Council, former Secretary of the Navy, and a panelist at the conference said "The current housing crisis has created a separate set of challenges for homeowners in the military. In order to assist these families, the Housing Policy Council,... developed several documents, including one that outlines a single point of contact for personal finance managers, housing relocation managers and JAGs (military attorneys) as they work together to save homes for families serving our country."  The documents, he said, will be implemented across the armed forces.

Faith Schwartz, Executive Director, HOPE NOW said that her organization, in cooperation with the military, has identified at least four military bases for face to face outreach events during the first half of the year and additional bases may be added during 2012.  "We look forward to the opportunity to assist military families and we hope to help solve gaps in the process that will be addressed through specialized outreach activities and streamlined processes," she said. 

Schwartz added, "We are also encouraged by the efforts of our members to improve the foreclosure mediation process and create standards that allow for quicker resolutions and better communication between servicers and homeowners."

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The e-mail wires here in Miami have been burning up with...e-mails.

PHH clients received a note from Norm Fitzgerald, explaining the recent restructuring. "I am writing to let you know we recently decided to reallocate resources from our Correspondent Lending channel to our Private Label Solutions and Real Estate Field Sales distribution channels. Although this action will reduce our Correspondent Lending volume, I want to be clear that we are committed to Correspondent Lending and will continue to participate in the business with a renewed focus on our high quality and long term customers. We made this decision in response to ongoing challenges posed by the volatility in the global economy, the capital markets and the housing markets. We believe these market uncertainties require an increased emphasis on liquidity and cash-generation. While our company focus may shift and adapt with the current market environment, our priorities remain the same, including an unwavering commitment to customer service."

Lenders One clients also received a note about PHH, recently downgraded by S&P (join the club!), under investigation by the CFPB, and which carried out significant layoffs earlier this week. "Given the potentially serious nature of the situation, we have endeavored to find out as much as possible so that we could share tangible information with the Members.  However, we also want to avoid spreading rumors or providing misinformation. To that end, we can think of no better way to ensure the most accurate distribution of information than to invite each of you to participate in the upcoming PHH earnings call which, fortuitously, is scheduled for next week...'PHH announced plans to release its fourth quarter 2011 results on Monday, February 6, 2012, after the market closes. The Company will host a conference call at 10AM EST on Tuesday, February 7, to discuss its fourth quarter 2011 results. You can access the conference call by dialing (888) 510-1762 or (719) 457-2634 and using the conference ID 4120134 approximately 10 minutes prior to the call. The conference call will also be webcast, which can be accessed at www.phh.com/invest under webcasts and presentations.'"

Not to be outdone in sending notes, Wells Fargo's wholesale management (Kevin Sexton, Bill Trees, and Jim Wyble) sent out a note to brokers. "As the competitive landscape for third party lending continues to evolve, we wanted to take this opportunity to confirm our commitment to Wholesale lending and our broker community. As other lenders exit the Wholesale business, we believe 2012 promises to be a great year with ample opportunity as we continue to work together and remain focused on quality. Wells Fargo Wholesale Lending is committed to serving you and your customers. For more than 15 years, Wells Fargo has been an industry leader in the Wholesale channel. As we've demonstrated time and again, Wells Fargo is invested in the long-term success of you, your borrowers and the wholesale business. You can count on our dedicated team to partner with you to provide valuable products and programs to American homebuyers in a fair and responsible way."

Back in September the FHFA, the overseer of Fannie & Freddie, released a "white paper" suggesting a change to the way servicers are compensated. FHFA's goal was to propose a new servicing compensation structure to (i) improve service for borrowers; (ii) reduce financial risk to servicers; and (iii) provide flexibility for guarantors to better manager non-performing loans while promoting continued liquidity in the TBA market. It asked for comments on reducing the Minimum Servicing Fee (MSF) from 25bp to 12.5bp to 20bp. (The proposal established a separate account within the trust structure of the MBS which is funded by reallocating around 5bp from the borrowers payments, and would be available to pay for non-performing loan servicing.) Under this proposal, servicers were to move from receiving 25bp of servicing to receiving a fixed dollar amount based of compensation if the loan is current ($10/loan). And in order to protect investors from churning, the enterprises were to do the following: implement a net tangible benefit test for streamline refi programs, enhance monitoring and tracking of prepayment speeds for each servicer, and restrict the amount of excess IO in a pool. But lacking was a plan for guidance on what a servicer might earn should a loan go delinquent.

We've come to learn that the FHFA is preparing to back away from this plan to overhaul the minimum servicing fees paid on Fannie Mae and Freddie Mac loans, after intense, across-the-board industry opposition to the idea. "Sources" say it's pretty much over and done with, and in a non-descript message FHFA spokeswoman Corinne Russell e-mailed, "Considering changes to the structure of mortgage servicing compensation is an important component of improving the operations of the future mortgage market. We received useful input on the discussion paper, and will provide an update on next steps in the near future." Most servicing advisory firms came out against any radical changes to compensation, as did the MBA. (Editor's note: haven't we had enough change and uncertainty from outside the industry - why do we need more from within it?)

Live and learn. There are a lot of learning opportunities from our MBA for mortgage folks out there. (Probably even a few where this might happen). For example from Feb 13-15, "Collections and Early Intervention: Regulatory Requirements and Implementation Strategies is for all the collections and customer service managers, leads, and supervisors out there to help design compliant strategies and processes for handling collections" - Link.
Continuing on, for asset managers, relationship managers, servicing managers, and commercial real estate primary services who service CMBS loans, "CMBS Restructures: How to Work with Customers on Non-Performing Loans" outlines the specific details of the responsibilities, standards, and circumstances associated with CMBS loans. More information for the Feb 16 course. And anyone who works in REO and is interested in asset management protection should look into "REO and Property Preservation," which will help participants with strategy, managing remediation costs and timetables, and calculating return on the repair dollar and its influence on the markets.  This one will take place from March 12-13.

The FDIC will host a national conference on "The Future of Community Banking" on February 16 in Arlington, Virginia. The conference will provide a forum for community bank stakeholders to explore the unique role community banks play in the country's economy and the challenges and opportunities this segment of the banking industry faces. Ben Bernanke and FDIC Director Tom Curry are scheduled to deliver the keynote addresses at the conference. FDIC Acting Chairman Martin J. Gruenberg will also make remarks -  additional information. Before you book your flight, attendance at the conference is by invitation and will be open to credentialed members of the media - so the conference will be broadcast live and archived through a publicly available webcast on the FDIC's Web site here.

In keeping with regulation trends, the US Sentencing Commission has proposed harsher sentencing guidelines for securities and mortgage fraud violations. (Who knew our government had a sentencing commission - but these days who is surprised?) It is seeking comment on whether or not the current guidelines under Dodd-Frank account for potential and actual harm to the public and financial markets from securities, mortgage and financial institution fraud.  Regarding securities, the Commission is focusing on insider trading, while for mortgage fraud, they're looking to amend the way loan fraud loss is calculated. The latter would be assessed by taking into account the amount recovered from the foreclosure sale where the collateral is disposed as well as reasonably predicted administrative costs incurred by the lending institution associated with the foreclosure of the mortgaged property. The Commission also wishes to amend the sentencing for specific financial harms such as "jeopardizing the financial institution."  To view the proposal in full, see http://www.ussc.gov/Legal/Federal_Register_Notices/20120119_FR_Proposed_Amendments.pdf.  Note as well that they are accepting public comments until March 19th!

The California Department of Real Estate (DRE) is constantly asked, regarding short sale transactions, whether a buy can be charged to compensate either the sale negotiator or the broker.  As of July 2011, California state law prohibits the charging of additional fees in exchange for the written consent of the sale.  Under the Real Estate Law, short sale fees may still be charged, but, to maintain a certain level of transparency, the negotiator must be properly licensed under California law, and there must be full written disclosure to all parties involved, including the short sale and originating lenders.  The compensation fees must be disclosed in the purchase agreements, escrow instructions, and HUD 1 statement.  Any "special fees" charged must be authorized by the DRE via an advance fee contract; Additionally, the Real Estate Settlement Procedures Act (RESPA) requires these fees to correspond to an actual service performed-in other words, the buyer must be getting work done for any money paid.  Any "junk" or "special" fees and they'll be on you like a ton of bricks.

Yup, rates are good, and should be for quite some time. Like Ground Hog Day, yesterday was more of the same: good supply/selling from mortgage bankers (maybe locks are picking up with these record low rates?) met by more demand by the Fed, hedge funds, banks, and money managers. Investors are piling into agency MBS in anticipation of a QE3 round from the Fed - officials have been hinting lately about plans to potentially launch another round of QE (w/this one focused on mortgages instead of Treasuries). The Fed's appetite continues to be a constant $1-1.2 billion a day, so any selling above or below that by originators tends to tilt the scale. (Bernanke, who testified yesterday in Washington, said nothing new to move the markets.) Yesterday, by the close, MBS prices were better by almost .250 and the 10-yr T-note closed at 1.83%.

We've had the 1st-Friday-of-every-month jobs numbers this morning. January's Nonfarm Payrolls, expected +150k, down from +203k in December, came out at +243k. The Unemployment Rate dropped from 8.5% to 8.3% (the lowest in almost 3 years). With no substantive news from Europe, this will probably determine trading for today, and soon after the strong jobs number the 10-yr worsened from 1.82% to 1.92%, and MBS prices appear worse by .375-.50.

For more weekly insight into MBS / secondary markets, make sure to read and subscribe to: Calculating Current Coupon in a Record Low Rate Environment by Bill Berliner.

A guy took his blonde girlfriend to her first football game.
They had great seats right behind their team's bench.
After the game, he asked her how she liked it.
"Oh, I really liked it," she replied, "especially the tight pants and all the big muscles, but I just couldn't understand why they were killing each other over 25 cents."
Dumbfounded, her boyfriend asked, "What do you mean?"
"Well, they flipped a coin, one team got it and then for the rest of the game, all they kept screaming was, 'Get the quarterback! Get the quarterback!' I'm like...Helloooooo? It's only 25 cents!!!!"

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.

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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The monthly Employment Situation Report was released at 8:30am this morning, with much better-than-expected results.  Stocks rallied sharply and most every interest rate in fixed-income markets moved higher.  The economic optimism created by this sort of data tends to increase demand for riskier investments like stocks and lower demand for things like fixed-income notes and bonds.  MBS (the "mortgage backed securities" that most directly govern mortgage rates) fall into this fixed-income sector, and definitely weakened following the jobs data.  As a result, Mortgages Rates moved higher at their fastest pace in some time, traversing most of this week's territory, but leaving Best-Execution rates mostly at 3.875%.  (learn more about how we calculate Best-Execution in THIS POST). 

We'd said yesterday that MBS were looking like a runner in baseball taking a "lead-off," waiting to find out whether or not the jobs data would be "a hit."  We went on to say a stronger than expected report would result in MBS simply moving back to the safety of the base to wait for the next pitch.  That's essentially what's transpired today.  Our heroic little base-runner was clearly spooked by the data, and clearly backtracked to previous ground.  But in the process, we see "the base" metaphor emerging as a real possibility, in that markets weakened, but were able to dig in and hold firm after a certain point.  Bottom line, the runner is back on the base, but was not "tagged out," at least not today.

The next pitches will be thrown next week in the form of US Treasury auctions.  While it's true that mortgage rates are based on MBS and NOT on Treasuries, the Treasury Auctions are still a significant event for MBS, especially the longer maturity issues on Wednesday and Thursday.  Things are less certain on Monday and Tuesday, and it's possible rates could be weaker if markets extend today's movements against the backdrop of limited economic data on those first two days of the week.  We'll know a lot more about how longer-term trends are evolving with the passing of at least the first important auction, Wednesday's 10yr Notes.  Between now and then, 3.875% Best-Execution is STILL on the table, albeit at a higher cost than yesterday.  The point is that if you didn't lock yesterday, today is not so much worse that you should just hold off indefinitely.  For those who are taking the risk floating into next week, things could get bumpy, but we'll know a lot more about that on Wednesday. 

On a final note, we have to put out the constant caveat that European headlines do not adhere to a schedule and certainly have the potential to move markets in unexpected ways, by unexpected amounts, at unexpected times.

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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