Countrywide & Guam’s Settlement; PMI Files for Bankrupcty; Primer on Fannie & Freddie’s Impact on Fed Funds


If you say
“raise up lights” really fast, it sounds like “razor
blades” in an Australian accent.

If you say “VA Funding Fee” really fast, nothing cool happens. But it
is good to know the details of what it will be for the next few years:

I hope
that the folks in Guam are sleeping better at night given the settlement of “Government
of Guam Retirement Fund v. Countrywide, 11-6239, U.S. District Court, Central
District of California (Los Angeles).” Bank of America settled securities fraud
claims by a group of Countrywide Financial investors including the California
Public Employees’ Retirement System that opted out of a $624 million
class-action settlement last year. For more details at Bloomberg visit:

“In the
old days,” and in Monopoly, declaring bankruptcy meant throwing in the towel
and the filer would disappear. I don’t know exactly what it means anymore, but PMI Group Inc. filed for bankruptcy
after it lost a court bid to undo the takeover by Arizona
regulators of PMI Mortgage Insurance Co. (MIC), its main unit. After posting 16
straight quarterly losses, and with assets of $225 million and debt of $736
million (as of Aug. 4), I’d probably file Chapter 11 too. The company is headquartered in California, the petition was filed in Delaware,
and the regulators are in Arizona – attorneys in three states are salivating.

News Daily reports that, “Spurred by a strong demand for rental housing and low
property prices, investors are buying more houses according to the latest Campbell/Inside
Mortgage Finance HousingPulse Tracking Survey.  The report says that investor purchases represented about 22% of
closed transactions for the month of October
, the third straight month that
investors have held a share greater than 20 percent…The gap between the supply
of distressed properties and their absorption by first-time homebuyers has now
widened to 13.7 points in October compared to 8.8 points in September,
indicating that first-time homebuyers have become less active in the distressed
property housing market. The retreat of first-time buyers, the prime market for
the kind of starter-level house favored by investors, coupled with low prices
are starting to make buying, repairing, and renting more attractive to
investors than flipping properties.” Does
that mean that the flippers can’t find credit-worthy buyers for their
properties, and are “stuck” renting them out?

When I visit with folks in the biz around the country, I am sometimes asked,
“Hey, you with the corny jokes, if
Fed Funds are 0%, why are 30-yr mortgage rates 4% or higher?
” Aside
from how it is often phrased, it is a good question, and an answer starts with
knowing how the Fed Funds determined, if government-sponsored enterprises are
involved, and what is “effective Fed Funds?” FF effective is the
weighted average rate on overnight brokered fed funds transactions over the course
of a business day. Currently these transactions fall into two types: a smaller
volume of trades involving banks that occur at higher interest rates, and a
larger volume of trades between the GSEs and banks with strong balance sheets
that tend to occur at lower rates since the GSEs are presented with few viable
options for investing their cash given their daylight overdraft restrictions.
It is this second type of trade that dominates averages given the sheer volume
of GSE cash. Domestic banks that borrow in Fed Funds pay FDIC-insurance
assessments for doing this trade because it grosses up the balance sheet, which
is a key reason why the effective is so far below IOER (the Fed’s interest on
excess reserves).

But before you ask, if you’ve read this far, “How might lowering the rates
paid on excess reserves impact ‘FF effective’?” you should know that the GSEs are significant sellers of funds
on a daily basis and yet are not legally eligible to earn interest on balances
held with Reserve Banks
. Those banks willing and able to borrow funds from
GSEs have been able to pay them rates under the IOER that they earn. For
example, banks receive 25bps IOER and pay GSEs something like 10bps. A small
reduction in IOER might leave this arbitrage intact (and economically
attractive to banks), although we would still expect banks to pass through this
cost to the GSEs, which would push FF effective rates lower. At some point,
though, these rates could get so low that the GSEs would prefer to just leave
their funds at the Fed and earn nothing on them rather than be
under-compensated for assuming the counterparty risk. Historically, the GSEs
have been lenders of funds. The Home Loans have typically used this market as a
liquid warehouse for cash to be drawn upon to meet unexpected borrowing demands
from member banks. Freddie and Fannie have also been net sellers, using the Fed
Fund market for short-term investments for cash earmarked for later principal
and interest payments.

Right now, GSE transactions dominate Fed Fund transactions and while lower IOER
forces lower the rates that banks are willing to pay GSEs for funds, there is
little reason why the GSEs would pay banks for the opportunity to lend them
cash – so don’t look for a negative interest rate. Fed funds have never traded
at negative rates, even on quarter-end dates when repo and bills have traded
negative. And probably the same with LIBOR, which, basically, represents the
rate at which banks borrow unsecured funds from one another, there isn’t much
reason why any bank would pay to assume counterparty risk and make an
uncollateralized loan.

MSI sent out a release addressing USDA funding and the changes to the VA Funding Fees. The company
reports, “USDA Funding GRH FY 2012 funding has been allocated and will be in
place in the next couple of weeks on USDA purchases. We expect that allocation
for refinances will follow shortly. The agency is still issuing commitments on
refinances with ‘subject to’ verbiage at this time.” MSI reinstated locks for
USDA refinance transactions and “will continue to close and fund USDA loans: purchases
– the Conditional Commitment (RD Form 1980-18) must be in the loan file with no
“subject to …” language. For refinances, the Conditional Commitment (RD Form
1980-18) will be accepted with “subject to availability of commitment
authority” language until the refinance funds are available. Both are subject
to restrictions. And regarding the VA Funding Fee update, I noted the website
at the top of the commentary.

Bank of America clients are reminded that loans with
application dates of December 1, 2011 or later will not be eligible for
purchase by Correspondent Lending.

GMAC, SunTrust, and other investors stated that federal legislation
setting VA Funding Fees for VA Home loans until September 30, 2016 has been
signed by the President and will become effective immediately for all VA loans
closed on and after November 22, 2011.

Chase eliminated its Rate Cap

Over in the MI space, Genworth Financial
is implementing changes within its mortgage insurance segment to make it easier
for lenders to participate in HARP 2.0. For example, one of the incentives of
HARP 2.0 is to waive reps and warranties on mortgages to mitigate the risk of
lenders having to repurchase certain loans. Genworth said it will make a
description of the changes available within its mortgage insurance underwriting
guidelines by Dec. 1.

United Guaranty sent word out to
clients that it “fully supports helping borrowers through participation in
HARP… Upon careful analysis of the GSEs’ announcements, United Guaranty has
opted to responsibly expand our participation in HARP, introducing streamlined
processes and waiving our reps and warrants rights for certain HARP loans.” UG
will agree to waive its reps and warrants rights with respect to the original
loan file “for the following ‘Same Servicer’ and “New Servicer” HARP loans
only: all full-file loans originally underwritten by United Guaranty, or all
loans that were closed on or before December 31, 2003. The new HARP loans must
meet United Guaranty and GSE HARP requirements in effect at the time of

Turning to
the markets, and remembering back past the mashed potatoes to Wednesday, we had
a surprisingly solid 7-yr note auction. But although Treasury prices
rates did ok, MBS prices were worse a shade. Most originators are closed today,
although the bond markets are open for a shortened day. Today the economic
calendar draws a blank, so, aside from chatter about last night’s shopping
volumes, news from Europe takes the center stage.  For Friday’s session as there are no major
economic releases on tap. The 10-yr note closed Wednesday at 1.88% and in the early going this morning we find it
at 1.93%, with both stocks and MBS prices slightly worse.

For the
older folks out there:

a) A
grandmother was telling her little granddaughter what her own childhood was
like. “We used to skate outside on a pond. I had a swing made from a tire;
it hung from a tree in our front yard. We rode our pony. We picked wild
raspberries in the woods.”
The little girl was wide-eyed, taking this all in. At last she said, “I sure
wish I’d gotten to know you sooner!”

b) I
didn’t know if my granddaughter had learned her colors yet, so I decided to
test her. I would point out something and ask what color it was. She would tell
me and was always correct. It was fun for me, so I continued. At last, she
headed for the door, saying, “Grandma, I think you should try to figure
out some of these colors yourself!”
c) When my grandson Billy and I entered our vacation cabin, we kept the lights
off until we were inside to keep from attracting pesky insects. Still, a few
fireflies followed us in. Noticing them before I did, Billy whispered,
“It’s no use Grandpa. Now the mosquitoes are coming after us with
d) When my grandson asked me how old I was, I teasingly replied, “I’m not
sure.” “Look in your underwear, Grandpa,” he advised, “Mine
says I’m 4 to 6.”

If you’re
interested, visit my twice-a-month blog at the STRATMOR Group web site located
at The current blog reminds everyone
about how government intervention in the housing market is nothing new. If we
forget history, we are doomed to repeat it, and it is important to know the
last 15 years of the history of the agencies. 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.

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