continue to wonder about the Fed’s program in buying and
holding U.S. government securities AND agency mortgage-backed
securities: issuing them from one department and buying
them in another. I received this note: “I have to assume
that the Fed is continuing to buy newly issued Treasury
securities because otherwise the Treasury would now have to
pay substantially higher rates to induce buyers, and such
higher rates don’t seem to be being paid. But it is very
strange that no mention of the continuation of this
bond-buying program can be found anywhere, only articles on
Operation Twist. It seems to me that we are witnessing the
most enormous legalized counterfeiting operation in the
history of mankind, right out in the open and no one will
shout out the obvious. I don’t see how this ends well. Why
doesn’t anyone complain that the government is supporting
itself, and merely printing money? It is almost as if it is
peddling in the air, just because it thinks it can, and when
it stops - boom! One branch of the government issues debt, the
other buys it. One branch of the government sells MBS, the
other buys it. It is all a way of printing money. Where
would rates be if it weren't for this policy? How is the
Treasury going to find sufficient buyers for its bonds without
having to offer higher rates? The answer to this question is
crucial for financial markets to know.” Great question.
Fed officials make speeches. Most are fairly mundane, but just
before his last voting appearance at the Federal Open Market
Committee (FOMC) until 2015, Richmond Fed President Lacker,
who has dissented at every meeting this year, is offering a
harsh critique of Fed policy. Lacker says that he
opposes linking policy to the Unemployment Rate, and the
underlying rationale behind recent policy action. He doubts
the effectiveness of MBS QE purchases and that in this policy
action the Fed may well be abusing its 2009 accord with
Treasury on credit allocation. Lacker suggested that if Fed
doesn't limit its credit policy, the Congress may be forced to
legislate such limitations. Further, Lacker suggests that if
the Fed were to follow its plan to allow inflation to
"temporarily" rise above target to help stimulate the economy,
it would lose credibility "for decades to come.”
gears to the Consumer Finance Protection Bureau, the CFPB
has issued its Financial Report for fiscal year 2012. The
report is divided into two parts: one part contains
management’s discussion and analysis and the second part
contains the CFPB’s financial statements and note disclosures.
The CFPB grew from about 663 employees as of the end of FY
2011 to 970 as of the end of FY 2012 (which ended September
30). As of the end of FY 2012, the CFPB’s Division of
Supervision, Enforcement, and Fair Lending and the Division of
Research, Markets and Regulations represented,
respectively, 46.9% and 9% of total CFPB positions. During FY
2012, the CFPB received $343.3 million in fund transfers from
the Fed (more than double the $161.8 million in funds
transferred in FY 2011). Despite its significant growth
during FY 2012, the report indicates that, as of the end of FY
2012 “the CFPB was still below the full employment levels
and funding it estimates for its steady state in future
Given the size of the CFPB’s Division of Supervision,
Enforcement, and Fair Lending group relative to the CFPB’s
other divisions, it certainly reinforces industry concerns
about the CFPB’s use of its enforcement authority as a
substitute for rulemaking. The report also confirms that
the CFPB is on-site at the largest depository institutions
and that it likewise has exams underway at numerous other
depository institutions, mortgage originators, mortgage
servicers, and payday lenders. The report makes no
mention of the results of the exams. You can take a look for
yourself at http://files.consumerfinance.gov/f/201211_cfpb_financial-report-fy-2012.pdf.
of audits & exams, the Basel Committee on Banking
Supervision released a report on the internal audit
function at banks. Community bankers take note: the
report points out that a strong internal audit function (or
externally hired to perform the function) must have
“sufficient authority, stature, independence, resources and
access to the board of directors.” This is important not only
to ensure the overall functioning of risk management is
robust, but also to help protect the bank, so it is a best
practice. Audit the audit process! Internal audit teams must
be “independent, competent and qualified.” Believe it or not,
this is not always the case, especially since auditors need to
understand the bank’s own unique areas of operation. Every
activity (even if outsourced) and every entity of the bank
falls within the scope of the internal audit function, right?
That means no group, product, or service should be
excluded from the audit process. The audit team should
report to the audit committee and it must not only have high
integrity, but also have a plan broad enough to capture areas
of potential risk. Lastly, it is important for management to
help all employees understand what auditors do and why they
are at the bank. Bank and vendor employees should understand
their true function (ongoing maintenance and assessment of
internal control, risk management and governance systems and
processes), and can open up lines of communication between
departments and audit teams.
auditors have rules too! And they have a defined process, with
“being a buddy to everyone else” probably not on the list. The
audit team’s role is to identify areas of potential risk for
bank management and provide ways to mitigate potential issues,
and employees should be reminded that it is better to have
the internal team do this and not the bank examiners or the
CFPB. Regulators expect internal audit teams (whether
actually internal or hired to do the function) to be fully
prepared before any process begins. In general, the internal
audit team is expected to have “an independent and informed
view of the risks faced by the bank.” Heck, that can take
months alone! Regulators also expect banks to make sure audits
are based on not only files and records; but also a deeper
dive into data, a process of inquiry and a professional
Once audit teams have completed their review, regulators
expect them to discuss their views, findings and conclusions
directly with the audit committee and the board of directors.
I am on the board of a bank, and this is exactly what happens.
Mortgage companies may feel that they are not going to be held
accountable for such things – but my guess is that is an
incorrect assumption. Sooner or later… (More on this Friday!)
to a couple relatively recent agency and investor updates.
First, a clarification: on the 16th the commentary had, "Freddie
Mac has issued temporary guidance on property valuation
documentation, which can't be dated more than 180 days before
the Note date (the previous requirement was 80 days). The
same age requirement applies to underwriting documentation."
To clarify, a representative from Freddie Mac noted,
"Freddie's age of property valuation and underwriting
documentation requirement is no older than 120 days as of the
Note. The 180 day requirement you mentioned applies only to
mortgages secured by properties located in eligible Disaster
Areas impacted by Hurricane Sandy. Eligible disaster areas
are Major Disaster Areas declared by the President where
individual federal assistance is being made available." Thank
Everbank revised its re-lock and extension policies for
re-locks expired by 60 days or fewer. If the current market
is worse, worse case pricing will apply for a one-time relock,
while loans are eligible to re-lock at a 25 bps cost for a
maximum of 30 days if the market is better. In order to
re-lock, loans must have at least “Approved with Conditions”
status, and re-locks of more than 30 days are not permitted.
This option is only available for locks that haven’t already
Pinnacle Capital has updated guidance on minimum trade
line requirements for Cascade Jumbos, LPMI eligibility for
conforming loans with LTVs between 95-97%, LTV/CLTV/HCLTV
requirements for conforming ARMs, Enhanced DU Refi Plus
mortgage insurance, FHA garage conversion, LTV/CLTV/HCLTV
parameters for Pinnacle Plus products, and age of document
requirements for USDA loans.
Flipping over to the markets today is a full day of
fixed-income and stock trading, tomorrow is a holiday, and
Friday is an early close. But in spite of the upcoming
illiquidity, and conservative pricing on Friday, what LO
wants to lock today and basically immediately lose several
days of precious processing time? But in recent days
mortgage prices have done very well relative to Treasury
prices and certainly relative to the worsening at the end of
last week – almost as if investors suddenly remembered that
the Fed is in buying more agency loans (Fannie, Freddie,
Ginnie) than are being produced.
of production, this morning we learned what lock desks knew
last week: mortgage applications dropped 13% from the
prior week. Some of this was attributed to higher rates,
but factoring in the Veteran’s Day holiday resulted in an
adjusted drop of only 2.2%. The share of applications filed to
refinance an existing mortgage was unchanged from the prior
week at 81% of total applications. Adjustable-rate mortgages,
or ARMs, increased to 4% of total activity.
on Tuesday MBS prices were worse about .125-.250 – but we
started off near there, and I didn’t notice any rash of price
changes. We’ve already had weekly Jobless Claims, a day early,
and although it was expected to drop from 439k to 410k, it
came out spot on at 410k (from an upwardly revised 451k from
the previous week). We also have some University of Michigan
survey, but also the more important Leading indicators for
October expected to have increased +0.1 (vs. +0.6). In the
early going the 10-yr., which closed at 1.66%, is sitting at
1.67% - the highest in a few weeks, and MBS prices are
roughly .125 worse.
In this time of year of 2013 predictions, let’s take a look at
previous thoughts on the future. (Part 3 of 3.)
"Stocks have reached what looks like a permanently high
Irving Fisher, Professor of Economics, Yale University, 1929.
"Airplanes are interesting toys but of no military value."
Marechal Ferdinand Foch, Professor of Strategy, Ecole
Superieure de Guerre, France.
"Everything that can be invented has been invented."
Charles H. Duell, Commissioner, US Office of Patents, 1899.
"The super computer is technologically impossible. It would
take all of the water that flows over Niagara Falls to cool
the heat generated by the number of vacuum tubes required."
Professor of Electrical Engineering, New York University.
"I don't know what use any one could find for a machine that
would make copies of documents. It certainly couldn't be a
feasible business by itself."
The head of IBM, refusing to back the idea, forcing the
inventor to found Xerox.
"Louis Pasteur's theory of germs is ridiculous fiction."
Pierre Pachet, Professor of Physiology at Toulouse , 1872
"The abdomen, the chest, and the brain will forever be shut
from the intrusion of the wise and humane surgeon.”
Sir John Eric Ericksen, British surgeon, appointed
Surgeon-Extraordinary to Queen Victoria, 1873.
And last but not least...
"There is no reason anyone would want a computer in their
Ken Olson, president, chairman and founder of Digital
Equipment Corp., 1977
In 1980, McKinsey & Company was commissioned by AT&T
(whose Bell Labs had invented cellular telephony) to forecast
cell phone penetration in the U.S. by 2000. The consultant’s
prediction, 900,000 subscribers, was less than 1% of the
actual figure, 109 Million. Based on this legendary mistake,
AT&T decided there was not much future to these “toys.” A
decade later, to rejoin the cellular market, AT&T had to
acquire McCaw Cellular for $12.6 billion. By 2011, the number
of subscribers worldwide had surpassed 5 billion and cellular
communication had become an unprecedented technological
you're interested, visit my twice-a-month blog at the STRATMOR
Group web site located at www.stratmorgroup.com.
The current blog discusses some of the considerations facing
the FHFA regarding Fannie and Freddie. If you have both the
time and inclination, make a comment on what I have written,
or on other comments so that folks can learn what's going on
out there from the other readers.