Speaking of California acquisitions, Union Bank, a wholly owned subsidiary of The Bank of Tokyo-Mitsubishi UFJ, which is a subsidiary of Mitsubishi UFJ Financial Group, and California’s fourth biggest bank by deposits, is buying the parent of the state’s 20th biggest deposit holder, Pacific Capital Bancorp. Pacific Capital owns Santa Barbara B&T, giving it some representation on California’s Central Coast. (Got that straight?) Pacific Capital has $5.9 billion in assets and 47 branches, compared with UnionBanCal’s $90 billion in assets and 414 branches. (For deposits in California, BofA is #1 with 26%, Wells is #2 with 19%, Chase has about 7%, and Union Bank has 6%.)

I don’t know if this acquisition will result in layoffs, especially on the mortgage side of things, but that seems to be the trend. A close examination of Friday's jobs numbers from the Bureau of Labor Statistics showed that mortgage companies cut 3,200 full-time employees from their payrolls in January. The total went from 265,300 in December to 262,100 positions in January. Overall, the number of jobs in the mortgage banking and broker sector fell nearly 4% from a year ago, with some big chunks coming from MetLife and Bank of America.

GMAC's Northeast Correspondent Team told everyone far and wide that GMAC is back lending in Massachusetts. That is good news for the state's borrowers, who all know that Fig Newtons were named after one of their towns, and for GMAC, rumored to be very carefully examining whether or not it wants to be in the warehouse business. And if Massachusetts' Barney Frank has his way, the FHFA's Edward DeMarco would be replaced since he has been "too rigid" in his approach to foreclosure prevention and should be replaced:
http://thehill.com/homenews/house/215369-barney-frank-joins-calls-for-top-fannie-freddie-regulator-to-be-replaced.

KB Home has announced that it has entered into an agreement with Nationstar Mortgage, with Nationstar becoming KB’s “preferred mortgage lender.” Under the agreement, Nationstar, headquartered in Texas and owned by Fortress, will offer a wide array of financing options and mortgage loan products to the KB’s homebuyers. Nationstar has attracted some notice lately since it is one of the largest non-bank mortgage servicers in the country with a portfolio of approximately $107 billion: http://online.wsj.com/article/BT-CO-20120312-706726.html.

Yesterday the commentary mentioned the RESPA-related case of Freeman vs. Quicken Loans, now under consideration by the Supreme Court. Although I do not have a statement from Freeman, I do have one from Quicken Loans: "Quicken Loans has never charged unearned fees and never will.  The company won this case on summary judgment in Federal Court on undisputed evidence that the fees Quicken Loans collected were, in fact, earned. The ruling in favor of Quicken Loans was upheld on appeal by the U.S. Court of Appeals for the Fifth Circuit. Quicken Loans, like all lenders, has and continues to offer clients the option of ‘buying down’ their interest rate by paying loan discount points.  This practice is a universal standard across the lending industry and is in accordance with state and federal laws.  It was proven the loan discount points collected were earned and resulted in a lower interest rate for the borrowers."

Mortgage banking is mired in legal issues everywhere. Barclays Capital notes that with the Countrywide settlement case now back in New York state court and with some clarity on its progress, “we look at potential non-agency rep and warranty related recoveries for other sponsors/originators. We estimate that the overall non-agency market could see $44 billion of rep and warranty related payouts. Of that amount, $10 billion is already included in proposed or completed settlements. We continue to think that larger originators/sponsors provide the greatest opportunity for rep and warranty related payouts or repurchases, even through collectively negotiated settlements.  On the other hand, many smaller originators are already defunct or do not have the resources to make significant settlement payments to investors… Bank of America and JPMorgan have by far, the largest exposure to loan-level rep and warranty related liabilities. While settlement recoveries or court awards are likely to be lumpy, they can represent a considerable source of cash flow for non-agency investors. In particular, deals that have historically exhibited weak collateral performance are likely to benefit the most from rep and warranty settlements that are similar to the Countrywide deal. Second-lien securitizations, where many of the losses have already been realized, could be significant beneficiaries as well.”

The Union Bank news points to the fact that banks, and central banks around the world, have more cash and liquidity than they’ve ever had before. Focusing on country’s central banks, because of collective quantitative easing, the balance sheets of the Fed, ECB, BOE, BOJ, Bundesbank, and others are all at record levels. The total size of the 8 largest balance sheets have almost tripled in the last 6 years from $5.4 trillion to more than $15 trillion (and still growing). The result of this build up in central bank reserves is that it artificially lowers rates and makes asset classes like fixed income securities, relatively overvalued. One would hope that the low rate environment also provides incentives for banks to take on riskier assets in the form of loans. And to some degree this is taking place, although not as much as many would like, but if one looks at the recent performance of different bank asset classes (commercial and industrial loans, credit cards, mortgages, and so on – even stocks) they’re all doing pretty well return-wise – even though they’re not necessarily related! Economists believe that this unprecedented correlation in returns is due to the availability of cheap money, and it is overriding most microeconomic aspects of various industries.

For bankers, this presents a huge future risk: “Will this unwind?” At some point central banks have to pull trillions of dollars out of the economy, both in terms of physical money and in terms of leverage. Smaller banks’ management needs to understand that until a global exit strategy is articulated, volatility will remain high because of leverage, which also means that risk management becomes more important than ever. To sum things up, some smart folks out there think that credit is being artificially supported (look at the Fed buying agency MBS’s every day, helping to keep prices high and mortgage rates low) thus if given the choice between quality assets at low spreads and riskier assets at wider spreads, the former is preferred but the latter is often chased to support margin. Many asset classes and geographies are performing at above zero return levels only because of this liquidity support. In addition, excess liquidity will keep commodities and equities well supported - asset classes that will also act as bellwethers when this reverses.

Yesterday was “much ado about nothing” as there was no real economic news in the U.S., the 3-yr T-note auction went off, Europe and Asia were pretty quiet, and the Fed and the usual suspects were in buying agency mortgage-backed securities. On the supply side, however, things seemed pretty quiet – perhaps locks are slowing as the thrill of lower rates wears off and all the easy refi’s are done?

Today we’ve had some news with Retail Sales +1.1%, with a January revision higher – perhaps slightly better than expected (but a good chunk of the number was due to sales at gasoline stations). This +1.1% was the highest jump since September, which is of mild interest. Later we’ll have a $21 billion 10-yr T-note auction at 1PM EST and the FOMC’s statement release at 2:15PM EST – don’t look for anything from the Fed. In the early going the 10-yr is now up to 2.06% and MBS prices are worse about .125.