Something doesn’t quite fit. Can the economy really support higher rates when retailers like The Sharper Image and Lillian Vernon have declared bankruptcy? Or a city here in the San Francisco Bay Area (Vallejo) makes the headlines for being near bankruptcy? Thus the belief that although there will be blips up, the general trend in rates is lower – at least US Government-backed rates. As housing prices continue to decline, food and energy prices continue to rise, and as consumer confidence continues to wane, look for more retailers’ profits to decline after a mediocre Christmas season. The University of Michigan Consumer Sentiment Index fell to a 16-year low last week. And the ability of borrowers to qualify, use their HELOC’s, or borrow in general has declined, while at the same time investors are demanding more and more for their risk pushing long-term yields up. Calgon, take me away!

The joke used to be, “Do you know what FHA really stands for? Five Hundred’s Alright”, of course referring to a borrower’s FICO score. But those days may be ebbing away, as the loan limits increase, and investors try to minimize their risk in spite of the government guarantee. Will borrowers really be able to get a $729,000 FHA loan for less than 5% down? Perhaps, but many industry analysts feel that the price for such mortgages may put it out of reach for the “typical” FHA borrower.

Speaking of pricing changes, yesterday FHLMC announced wide-sweeping changes to their pricing and product line structure, effective June 1. (These are in addition to changes announced previously, and already in place with most lenders.) Although FNMA has not followed yet, one can expect them to, if for no other reason than to avoid adverse selection and buying the loans that Freddie no longer wants. And certainly the larger investors will as well: Chase, Citi, Wells, Countrywide, etc. Freddie expanded their use of risk-based pricing, increasing post-settlement delivery fee rates for high risk loans, and added delivery fee rate credits for mortgages with lower risks. They are revising their requirements for mortgages with high LTV ratios, and discontinuing purchases of most mortgages with LTV/TLTV/HTLTV ratios greater than 97%. Freddie will implement delivery fee increases (50 or 75 basis points) based on credit score and LTV, bucketing loans from 680-700, 701-719, and equal to or greater than 720 and then in LTV groups of less than or equal to 60%, and greater than 60% to less than or equal to 70%. There will be a 25 basis point delivery fee credit for mortgages with LTV ratios less than or equal to 60% and scores equal to or greater than 700.

If that isn’t enough, in addition to the above, Freddie is going to add a 30 basis point delivery fee for loans with LTV/CLTV ratios greater than or equal to 80% and credit scores of  less than 740, including those sold with recourse or indemnification. They are increasing CS/LTV (A-minus) LP Mortgage fee rates for A-minus Mortgages and Caution Mortgages with Level 1 feedback to 125 basis points and for Level 3 feedback to 275 basis points. Making proportional changes to certain CS/LTV (A-minus) Non-LP Mortgage fee rates.

And speaking of Freddie Mac, they announced that in the fourth quarter of 2007, 92% of prime borrowers who originally had a 1-year conforming ARM chose a new conforming fixed-rate mortgage when they refinanced and 89% of prime borrowers who initially had a conforming hybrid ARM refinanced into a conforming fixed-rate loan as well. Given that practically every lender tightened their underwriting standards and thus some ARM products were either no longer available or came with more restrictions.

How is 15-yr production? The difference between 15-year and 30-year fixed mortgage rates is .5% right now, and when these rates are within a half of a percentage point of one another borrowers will usually opt for the longer amortizing loan because of the payment difference. Therefore 15-yr production is relatively light.

US Treasuries are steady this morning, with the 10-yr hovering in the high 3.70’s. There is no scheduled economic news, aside from stock markets in Europe and Asia falling overnight. Mortgages, on the other hand, are slightly worse in price after a week of volatility. Prices were helped yesterday by a weak Philly Fed Index result, but lagged Treasury rates. Investor appetite for risk, which includes mortgages, remains low.

A Mafia Godfather finds out that his bookkeeper has cheated him out of ten million bucks. His bookkeeper is deaf.  That was the reason he got the job in the first place - it was assumed that a deaf bookkeeper would not hear anything that he might have to testify about in court.

When the Godfather goes to confront the bookkeeper about his missing $10 million, he brings along his attorney, who knows sign language. The Godfather tells the lawyer, “Ask him where the $10 million bucks he embezzled from me is.”

The attorney, using sign language, asks the bookkeeper where the money is.

The bookkeeper signs back: “I don't know what you are talking about.”

The attorney tells the Godfather: “He says he doesn't know what you're talking about.”

The Godfather pulls out a pistol, puts it to the bookkeeper's temple and says, “Ask him again!”

The attorney signs to the bookkeeper: “He'll kill you if you don't tell him!”

The bookkeeper signs back: “OK, OK! You win! I will tell you, just don't hurt me. The money is in a brown briefcase, buried behind the shed in my cousin Anthony's backyard in Queens!”

The Godfather asks the attorney: “Well, what'd he say?”

The attorney replies: “He says you don't have the courage to pull the trigger.”

Rob