I noticed in the newspaper that this week marks the 54th anniversary of the invention of the credit card. I told my kids that before that, people practiced something called "living within their means" - a foolish, outmoded way of life. We’ve come a long way since then!

The problem with an investment bank balance sheet is that on the left side nothing's right and on the right side nothing's left.

Let’s hope that Toll Brothers, who announced poor earnings yesterday, do not find themselves with that problem. As one industry expert opined, “Their results were not surprising. For years they traded at a premium to other home builders. That they would under-perform and lose that premium is unsurprising because jumbo financing has to be a larger problem for them than it is for others, their footprint is national but concentrated in the northeast so is somewhat more vulnerable to the financial sector slow down, and they have many years worth of land supply.”

Many mortgage bankers are re-evaluating the decision “To hedge or not to hedge”. The reasons to move to a mandatory delivery, and hedge your production while it is in the pipeline, are numerous, starting with the pricing. Everyone, including your production staff, knows that mandatory pricing with investors is better than best efforts pricing, since the lender is taking on the risk of fall out. The average gain over best efforts is almost .375 in price, and this year it is has been much higher. The key, of course, is in managing the production staff with regard to fall out. Certainly managing a best efforts pipeline is more time constraining and labor intensive, since any changes must be relayed to investors, and renegotiations and extensions can be handled without contacting investors. Substituting loans is much easier under a mandatory/hedged policy, since the individual loans are not locked with investors until they are funded and “in the can”. Lastly, selling loans, whether individually or in bulk transactions, is typically more streamlined, and sellers usually have more options in delivery which is critical in dealing with warehouse constraints.

Franklin American Mortgage Company will be implementing new price adjustments to their FHA and VA loan programs.  Effective today the following price adjusters are “ FICO’s 620 – 659 (0.250), FICO’s 720 - 759          0.125, and for FICO’s > 760 a 0.250 bump to the seller.” (Obviously there is no change for FICO’s between 660 and 719.)

Although it has been pretty quiet in the news, analysts are wondering if the Fed, who has been in buying securities, is enough to keep yields and interest rates low. The release of the Fed minutes yesterday brought that question up, especially in light of economic conditions perhaps improving, or at least not becoming worse. The yield on the 10-yr Treasury has been above the magic 3% level for quite some time, and the sun still comes up in the morning. Mortgage securities are relatively stable, with the Fed buying about $5 billion a day and origination running in the $2-3 billion per day range. This week we’ve seen the stock market’s rally slow down a little, which has helped the bond markets (remember, though, that there is not a direct “if one goes up, the other goes down” correlation).

Today we have already had the weekly Jobless Claims data, which showed new claims dropping 12,000 last week to 631,000. (New claims have declined in 3 out of 4 of the last weeks.) This was about as expected. At 10AM EST we’ll have Leading Economic Indicators and the Philly Fed survey, and then later today the Treasury will announce next weeks’ auction amounts for the 2, 5, and 7-yr notes. In addition to the mid-day price improvements that we saw yesterday in the bond market, this morning rates are continuing lower. The 10-yr yield is back down to 3.15%, and the 5-yr Treasury and mortgage prices are better by another .125.

An Irishman had been drinking at a pub all night. The bartender finally said that the bar was closing so the Irishman stood up to leave - but fell flat on his face. He tried to stand one more time; same result. He figured he'd crawl outside and get some fresh air and maybe that would sober him up. 

Once outside, he stood up and fell on his face again. So he decided to crawl the four blocks home. Again, he fell flat on his face. He crawled through the door and into his bedroom. When he reached his bed he tried one more time to stand up. This time he managed to pull himself upright, but he quickly fell right into the bed and was sound asleep as soon as his head hit the pillow.

He was awakened the next morning to his wife standing over him, shouting, "SO YOU'VE BEEN DRINKING AGAIN!"

Putting on an innocent look, and intent on bluffing it out he said, "What makes you say that?"

"The pub just called; you left your wheelchair there again."

Rob

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