Loan Think

At the recent SourceMedia Mortgage Technology Conference I chaired in Orlando, my opening remarks stressed theimportance of vendor efficiency in keeping lenders afloat during a time of decreased origination fees. Here's whatI said in my opening remarks:

Stan O'Neal's $1.3 billion mistake came home to roost this past week with the news that Merrill Lynch is closing its subprime wholesale division First Franklin. Its failure was not unexpected. In past columns we published exclusive comments from former account executives at First Franklin who said, among other things, "Merrill is starving us out." One told us that origination volumes were non-existent at the company, noting that the eight remaining co-workers at his office spent most of their days in the conference room "playing scrabble and Play Station on the conference projector screen to pass the time." It was a year ago that then Merrill CEO O'Neal signed a $1.3 billion check to buy First Franklin and two affiliates. Mr. O'Neal was forced out this past fall and walked away with severance and retirement benefits north of $130 million. Merrill had plans to originate Fannie Mae loans and promised its remaining AEs that they would be trained in GSE products but one AE told us "that training never happened." He also said many lenders refused to deal with Merrill "because of all the buyback requests forced upon them." Back in December this source predicted, "I think they're going to shut us down in January or by late February." He was right...

THIS JUST IN: The Federal Deposit Insurance Corp. may want to start staffing up on workout attorneys and loan liquidation experts. (We know the agency is concerned.) According to a new report by JPMorgan Chase, depositories and investment bankers could be on the hook for $341 billion in mortgage-related writedowns in the years ahead -- both residential and commercial. The report, which has not been issued publicly, notes that 75% of these writedowns will be borne by federally insured banks. For the full story see Monday's National Mortgage News. Don't subscribe? Call: (800) 221-1809...

The speeds of 30-year mortgage loans in Fannie Mae and Freddie Mac MBS rose "modestly" in January, accordingto the Bear Stearns Prepayment Commentary.

THIS JUST IN: JPMorgan Chase has agreed to buy certain "intellectual property" assets belonging to the residential warehouse division of Washington Mutual. Job offers are being extended to certain WaMu warehouse executives in Texas where the unit is based. For the full story see Monday's edition of National Mortgage News. Don't subscribe? Call: (800) 221-1809. The story only appears in the print version...

THIS JUST IN: It appears that H&R Block has a buyer for the $62 billion subprime servicing portfolio of Option One Mortgage. For the full story see the Monday edition of National Mortgage News. Don't subscribe? Call: (800) 221-1809...

Industry officials my colleague Brad Finkelstein and I spoke to at the Mortgage Bankers Association's annualconvention in Boston were pretty sanguine about the dangerous time that lies ahead for the mortgage market thisyear. Yet, they also saw a couple of areas that won't be as bad that industry firms can use as countercyclicalplays.

The speeds of 30-year Fannie and Freddie MBS increased 13% in December, as aggregate speeds stood at 9.0 CPR forFannie Maes and 8.4 CPR for comparable Freddie Macs.That was up from 7.7 CPR and 7.6 CPR, respectively, in November, according to the Bear Stearns Prepayment Commentary.Bear Stearns senior managing director V.S. Srinivasan said the company believes the December prepayment report"reflects some of the early response" to the rally in mortgage rates that began in late November."Given the low level of mortgage origination activity, the lag between changes in rates and the ensuing prepaymentresponse has likely decreased," he said.Prepayments on 15-year Fannie Mae and Freddie Mac collateral rose by 9% in December, with Fannie speeds climbingfrom 8.3 CPR to 9.2 CPR and Freddie speeds increasing from 8.1 CPR to 8.7 CPR.Ginnie Mae speeds rose 9%, with the biggest percentage increase coming in the 6.0% coupons of 2007, Bear Stearnsreported. The speeds jumped from 5.5 CPR in November to 11.7 CPR in December and are running nearly 2 CPR fasterthan comparable Fannies and Freddies."While some of this increase can be attributed to the recent rally in rates, we believe that servicer buyoutactivity probably contributed significantly as well," Mr. Srinivasan said.The Bear Stearns analyst predicted that the January prepayment report would show a 10% rise in speeds in responseto several factors: the full effect of the rally in rates, a one-day increase in the business calendar, and a likelyrush in refinancings as originators try to complete as many as possible before a change in the delivery fee structurefor the government-sponsored enterprises takes effect in March."However, given today's extraordinary housing conditions and structural changes to the underwriting process,the refinance response to a rally in rates is likely to be significantly less than suggested by recent history,"Mr. Srinivasan said. "We continue to believe that the refinancing curve in 2008 will be flatter than any timesince the mid-1990s."

Now that the default rate on subprime mortgages has hit 20% -- is there any reason to believe it won't go higher,possibly to 30%, with the slowdown in the economy and a recession on the horizon?

Here's something to think about: In the fourth quarter of 2007 Fannie Mae bought $203.3 billion in mortgages from its seller/servicers. Countrywide Financial Corp. originated $59.9 billion in conventional mortgages in Q4, selling a majority of them (so we're told, to Fannie) which means (if my math is correct) that Fannie depends on CFC for 30% of its business. Interesting. If you think that Fannie Mae CEO Daniel Mudd is not closely watching CFC's sale to Bank of America, then think again...