When I moved away from home, I quickly learned that the best way to clean a floor was to get a dog and then occasionally sprinkle meat juice around the kitchen. The dog, of course, would lick the floor, regardless of anything “good” being on that spot, and voila! Sometimes the bond market seems to be doing something similar. Many investors seem hesitant to buy anything related to mortgages, good or bad. And if investors are hesitant, the price drops to attract them, and rates rise. Last week we were all reminded that a cut in the overnight rate by the Fed has little correlation to immediate lower mortgage rates. Rates on 30-year mortgages shot up last week to about .375% higher than the week prior. Even ARM rates increased. We have auctions on the 10-yr note and the 30-yr bond to deal with – after all, the US Government must raise more money to pay for the rescue. On the flip side, many analysts believe that rates should slide back down – at least LIBOR rates are improving.

Mortgage rates are certainly above last year’s levels, when the 30-year fixed-rate mortgage was at an average around 6.25%, and the highest that they’ve been in three months. The spread between current-coupon 30-year fixed-rate mortgage securities and interpolated 5 and 10-year U.S. Treasuries had soared to 277 points early last week, versus a historical average of 180 basis points, and near the previous all-time high in mortgage credit spreads of 284 points in March of this year. But as any agent will tell you, mortgage rates aren’t high by historical standards, and for most borrowers the underwriting obstacles are more of a concern.

Last Friday we saw the Employment Cost Index shoot up +.7% in the third quarter, meaning that wages and salaries grew 0.7%. Over the year, employment costs are up 2.9%, which is the slowest annual rate since the first quarter of 2006. We also had the Institute for Supply Management-Chicago Business Index, which decreased to 37.8 from 56.7, the largest drop on record and the lowest level since the 2001 recession. Lastly, the University of Michigan final index of consumer sentiment dropped to 57.6 from 70.3 in September, the biggest decline on record since monthly data began in 1978. Is the stock market’s decline any surprise with numbers like these? It was relatively quiet over the weekend, and this morning we find the 10-yr yielding 3.93% and mortgage prices (so far) not much different than Friday afternoon.

JPMorgan Chase (the largest U.S. bank by market value) announced plans to modify terms on $110 billion of mortgages and forgo foreclosure proceedings on all real-estate loans while the changes are implemented in the next 90 days. This offer includes the servicing from WaMu, and the modifications will probably focus on either interest-rate or principal reductions. The bank said it will establish 24 regional counseling centers to provide face-to- face help in areas with high delinquency rates. JPMorgan has about $250 billion of prime mortgages and home equity loans, $27 billion in subprime mortgages and about $51 billion of "option" adjustable-rate mortgages. Other lenders have also had loan modification programs in place, namely Washington Mutual (owned by JPM) and Countrywide (owned by the Bank of America). Earlier this month, Bank of America agreed with 11 state attorneys general to offer relief to nearly 400,000 Countrywide customers with troubled mortgages, resulting in an expected $8.4 billion of interest rate and principal reductions.

In a related, yet unrelated, story, supposedly a large number of Merrill Lynch employees may leave the company since they are unhappy Bank of America’s retention bonuses. According to the NY Post, perhaps a third of Merrill's brokerage force may decide to leave the company. And do what?

U.S. Bank Home Mortgage Correspondent Lending Division recently made significant changes to their Jumbo fixed rate and Treasury ARM programs. Due to the greater effect “declining markets” have had on housing that is significantly above “area median”, they found it necessary to trim their maximum TLTV’s at or near the highest total financing amounts allowed.

PMI clarified their stance on DU-decisioned loans, and developed guidelines for High Balance loans, formerly known as Conforming Jumbo, and made changes to other policies. For example, PMI defines High Balance Loans (formerly known as Conforming Jumbo) as having a maximum loan amount of $625,500 ($938,250 for Alaska & Hawaii).

An 80-year-old Scotsman goes to the doctor for a check-up. The doctor is amazed at what good shape the guy is in and asks, “How do you stay in such great physical condition?”

“I’m Scottish and I’m a golfer,” says the old guy, “and that's why I'm in such good shape.  I'm up well before daylight and out golfing up and down the fairways.  I have a wee glass of whisky, and all is well.”

“Well,” says the doctor, “I'm sure that helps, but there's got to be more to it. How old was your Dad when he died?”

“Who said my Da's died?”

The doctor is amazed. “You mean you're 80 years old and your Dad's still alive. How old is he?”

“He's 100 years old,” says the Old Scottish golfer. “In fact he golfed wi' me this morning, and then we went to the topless beach for a walk and had anither wee dram and that's why he's still alive. He's Scottish and he's a golfer, too.”

“Well,” the doctor says, “that's great, but I'm sure there's more to it than that. How about your Dad's Dad? How old was he when he died?”
“Who said my grandad's dead?”

Stunned, the doctor asks, “You mean you're 80 years old and your grandfather's still living!  Incredible, how old is he?”

“He's 118 years old,” says the old Scottish golfer. 

The doctor is getting frustrated at this point: “So, I guess he went golfing with you this morning too?”

“No. Granddad couldnae go this mornin' because he's getting married today.”

At this point the doctor is close to losing it. “Getting married!!  Why would a 118 year- old guy want to get married?”
“Who said he wanted to?”