Capital One – “What’s in your wallet?” Obviously not mortgage companies, given its history with lenders such as Hibernia, GreenPoint/Northfork, Chevy Chase, and now ING. Yes, the industry lost a jumbo wholesale buyer yesterday when clients were notified: “ING Mortgage will cease the origination of home loans through mortgage brokers. This email serves as official notification of the termination of the existing Broker Origination Agreement between your company and ING Mortgage. This termination is effective at 6:00 PM Pacific Time on April 3. As part of the shut-down of the mortgage broker channel and the termination of our Agreement, you have until 5:00 pm Pacific Time on May 3 to submit loan applications currently in your possession that were taken on or before April 3. Any approved home loan applications submitted on or before 5:00 pm Pacific Time on May 3 must be closed and funded by 5:00 pm Pacific Time on July 2, 2012.”

ING has been on a move to reduce risks to its balance sheet, and in the highly regulated and lawsuit-filled mortgage industry, mortgage production is apparently viewed as a risk it can do without. ING has other issues, and is viewed to be in trouble since 2008 – especially with its holdings of debt from Southern Europe. Its CEO said the company's banking arm plans to return to a more traditional approach, relying more on funding from retail depositors and less on financial markets, and investing more in business loans rather than in financial products developed by other banks. "Given the ongoing crisis in the Eurozone and increasing regulatory capital requirements, we need to take a cautious approach and pay special attention to liquidity, funding and capital."

Although the markets bounced back somewhat overnight, yesterday afternoon we were all reminded that supply and demand determine, to a large part, mortgage rates. So when demand shrinks (the Fed's future reduction in buying agency mortgages, or at least its expected appetite in the future for them), prices drop, and rates go up. Stocks also took a tumble (they don’t always move in lock-step with bonds), and commodities (like metals and oil) sold off as the dollar strengthened. The mid-March FOMC meeting minutes signaled lower expectations for QE3 or other near term Fed stimulus actions – one can read all about it here: http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20120313.pdf.

We are reminded that the Federal Reserve has been propping up the entire U.S. economy by buying about 60% of the government debt issued by the Treasury Department. Many viewing it as moving money from one pocket to the other, and creates the false appearance of limitless demand for U.S. debt. And we still have our budget problems, right?

Treasury debt, and securities backed by mortgages, isn’t the only debt being issued. Remember “junk” bonds? First of all, they never went away – someone, or some company, always needs to borrow money at a higher rate since the lender wants to be compensated for the higher risk. Secondly, just like garbage men became sanitation engineers, junk bonds become part of the “high yield” market. I bring this up because investors in debt are always looking at different instruments with different yields, and these various bonds all compete with each other for a limited amount of investor dollars.

During the 1st quarter the US high-yield market had its largest quarter ever with nearly $92 billion being issued, while investment-grade volume of $294 billion was the largest first quarter on record and the fifth largest quarter ever. On the supply side, record low rates have encouraged issuers to continue to refinance debt, setting their sights on their 2014, 2015, 2016 or even longer maturities, per Thomson Reuters Data. On the demand side, meanwhile, record low yields on US Treasuries have left high-yield bonds as the only sector where many investors believe they can find an adequate return on risk. So not only are residential borrowers refinancing to take advantage of lower rates, but companies are as well.

Wells Fargo’s mortgage operation, now apparently with a market share at or above 30%, has been subject to rumors for years. It seems that every time a player exits, people wonder, “Is Wells next?” I have no insider knowledge, other than to observe that the company has repeatedly denied withdrawing from any origination channel, views mortgage originations as a way to feed the bank new customers (and then cross-selling them on other services), and seems to have been successful in “erring” on the conservative side of things for the last decade. This also may include, in the future, tightening restrictions and/or minimum requirements for doing business with Wells, such as net worth, volume, quality, or product mix.

Wells knows a thing or two about applications, but the MBA knows more, and it released its figures for last week that includes 75% of retail originations. Applications were up almost 5%, the first rise since early February, and led by purchase apps (up over 7%). "Applications to buy a home picked up last week, and are running more than two percent above the level reported at this time last year," per Michael Fratantoni, MBA's vice president of research and economics, and "Home purchase applications for conventional loans are now about 10 percent above last year's level."  Refi’s are down to 71.2% of applications – they couldn’t last forever, right?

Is the U.S. economy really picking up steam? Plenty of smart folks think it is, and it is hard to argue with them. An expanding economy can put upward pressure on interest rates. And as we saw yesterday, the belief that the Fed may think things are picking up, and therefore not feel the need to support the economy as much as it has been, can move markets. But time has begun to take its toll on the federal budget. After years of kicking the can down the road and ignoring the long-run warnings from numerous Social Security commissions (as well as others), we are running out of road. At this point in prior recoveries, the federal deficit had clearly been lower and improving more rapidly than the current recovery. Now, the aging of the baby boom generation and the weak pace of the recovery have produced current deficits in cash flow for Social Security.

On top of that, our continued dependence on foreign capital inflows and the assistance of the Federal Reserve produce the problem of “interest rate sensitivity in the budget.” A return to “normal” interest rates would produce a rapid rise in federal debt service that would increase the burden of the debt. The burden of 40 plus years of overpromising by political policymakers will not be solved by the current modest pace of the recovery. And economists point to job gains during the current recovery being dramatically inferior to the jobless recoveries of the past. (This brings up a discussion of the globalization of production and the growth of emerging market economies, competitiveness, productivity, capital, labor, and skills beyond the scope of this simple mortgage commentary.) Suffice it to say, the economy might be doing better, but there are plenty of reasons it might falter.

A few weeks back, in the Wall Street Journal Lawrence Goodman wrote that, “The conventional wisdom that nearly infinite demand exists for U.S. Treasury debt is flawed and especially dangerous at a time of record U.S. sovereign debt issuance…in recent testimony before the Senate Budget Committee, former Federal Reserve Board Vice Chairman Alan Blinder said, ‘If you look at the markets, they're practically falling over themselves to lend money to the federal government.’ Sadly, that's no longer accurate. It is true that the U.S. government has never been more dependent on financial markets to pay its bills. The net issuance of Treasury securities is now a whopping 8.6% of GDP on average per annum—more than double its pre-crisis historical peak. The Fed is in effect subsidizing U.S. government spending and borrowing via expansion of its balance sheet and massive purchases of Treasury bonds. This keeps Treasury interest rates abnormally low, camouflaging the true size of the budget deficit.” Goodman notes what every family budgeter knows: “the Fed must stabilize and purposefully reduce the size of its balance sheet, weaning Treasury from subsidized spending and borrowing. Second, the government should be prepared to lure natural buyers of Treasury debt back into the market with realistic interest rates. If this happens, the resulting higher deficit may at last force the government to make deficit and entitlement reduction a priority.”

As noted above, the mid-March FOMC (Federal Open Market Committee) meeting minutes were released yesterday. As for the statement itself, clearly the market took it as a surprise: 10-yr T-notes sold off over 1 point and mortgage lenders issued numerous rate changes. It appears that there is a clear shift in stance where in status-quo no longer requires easing. The minutes have now exposed that the markets are going to need more than just talk in order to believe that the Fed is willing to do more easing.

But if anyone is looking for rates to go back down, they’ll have to hope for greater European budget woes, an extremely weak jobs report, or continued housing problems. Be careful what you wish for! But rates bounced a little overnight on weak European data and poor Spanish auctions. Here in the States the ADP number showed job growth of 209k, which really didn’t move the markets, but the 10-yr is down to 2.24% and MBS prices are a shade better than Tuesday’s closing levels.

SOUTHERN KNOWLEDGE (Part 2 of 2)
“Backwards and forwards” means I know everything about you.
You don't have to wear a watch, because it doesn't matter what time it is, you work until you're done or it's too dark to see.
You don't PUSH buttons, you MASH 'em.
You measure distance in minutes.
You switch from heat to A/C in the same day.
All the festivals across the state are named after a fruit, vegetable, grain, insect, or animal.
You only own five spices: salt, pepper, mustard, Tabasco and ketchup.
The local papers cover national and international news on one page, but require 6 pages for local high school sports and motor sports, and gossip.
You think that the first day of deer season is a national holiday.
You find 100 degrees Fahrenheit a bit warm.
You know what a “hissy fit” is.
Fried catfish is the other white meat.
We don't need no dang Driver's Ed. If our mama says we can drive, we can drive!!!