Loan Think

FM Watch director Mike House often likes to say that when a former Hill Rat (Capitol Hill, that is) leaves government service for Fannie Mae or Freddie Mac, "they're going to Valhalla." As some of you might recall from history class, Valhalla is where the Nordic warriors go when they die. It's sort of like heaven, but only better. Last week it was revealed that the ultimate Hill Rat, Sen. Phil Gramm, R-Texas, had landed himself one big Valhalla, the vice chairman job at UBS Warbug. The irony of Gramm getting the job can't be understated. The Texan has been a long-time critic of Fannie and Freddie and the FHLB System. UBS Warburg, thank you very much, is the No. 1 player in the MBS market. And where do MBS come from? Not from FM Watch, but from, you got it, Fannie and Freddie. We expect Sen. Gramm to soften his anti-GSE rhetoric, either that or maybe UBS will bolt the MBS market. (Not likely). When told of Sen. Gramm's new job, one former UBS official asked us, "What can he possibly do?" An FM Watch spokeswoman said Mr. House was shedding no tears over Sen. Gramm's new position. "If he cries, I'll give you a call," she said...

Getting sick of the refi boom? You may not be alone. The 10-year Treasury (which most mortgages are pegged to) fell to 3.74% at one point this past week. Some loan brokers who post to National Mortgage News' "GrapeVine" website say they are weary of all the "newbies" who are entering the business (thanks to refis). One poster, who calls herself McC notes: "I cannot wait until this (refi) wave ends. Too many people who do not belong in this business are currently cutting into my income with their bait-and-switch techniques and their typical 'no problem' response to any potential applicant that comes across their desk. I wrote more loans when the rates were 12% than I currently do"...

Subprime production volumes are booming, at least that's what the new Quarterly Data Report says. In the first half, $106 billion in subprime loans were written which means that if extrapolated out, subprime producers will fund a record $200-plus billion this year. Firms like Encore Credit, First Franklin, New Century, Option One and Washington Mutual's subprime division are experiencing double-digit gains. But let's take a look at the B&C volume leaders of five years ago, right before the industry crashed and burned. Among the top 10 of midyear 1997, just three firms still exist: Associates (which is owned by Citigroup now), Green Tree (which is owned by Conseco now and is called Conseco Finance) and Commercial Credit (which is now owned by Citigroup.) Conseco's future is shaky because its parent may file for bankruptcy protection. Commercial Credit and Associates operate as " CitiFinancial," which means there are really only two of the top 10 left from yesteryear...

Specialty servicer Ocwen Financial (NYSE: OCN) hasn't had much good news of late, but some of its top executives are buying stock in the company, a bullish indicator. Art Ringwald, president of Ocwen Technology Exchange (an affiliate) recently bought 1,000 shares of OCN at $3.63 per. Ocwen president Ronald Ferris bought 7,000 shares and chairman Bill Erby (or an affiliated party) registered to buy 10,000 shares at $3.68. Then again, according to trading records available via Yahoo!, director Barry Wish and affiliated parties have been dumping shares like crazy. Ocwen lost $50 million in the second quarter. Late last week, its stock was trading at just over $4 a share...

It was another week of excruciating bad news for subprime giant Household International. Not only is its stock continuing to flounder (short sellers are all over it), but some analysts are starting to rethink their views on the company. In a research note released late on Friday Salomon Smith Barney analyst Matt Vetto notes that "Household shares trade near all-time trough valuations. We expect the overhang of regulatory/litigation matters to weigh on the stock near-term." A (supposedly) confidential Washington State report on Household's alleged predatory lending practices leaked out and is now available by visiting the website of the Bellingham HREF="http://www.bellinghamherald.com/"> Herald at. The report is damning, to say the least, and names names at Household. Regulators also reveal that one of Household's affiliates was apparently producing loans for credit card giant MBNA...

As most mortgage professionals know, the subprime business is enjoying a bit of a renaissance these days. According to the Quarterly Data Report, lenders operating in the sector funded $106 billion in subprime mortgages in the first half and are on track to fund more than $200 billion this year. However, some industry executives say buyers of subprime product are reverting back to the "old days" (pre-fall of 1998) by paying as much as 106 and 107 for loans. But one saving grace is the yield curve (the difference between short- and long-term rates). Whether overpaying by some firms now will result in train wrecks later on is a matter of debate...

More than two years ago National Mortgage News first reported that Fannie Mae had grub-staked Homestore.com, a consumer dot-com that offers real estate info to, well, consumers. When NMN reported the story, all the mortgage world yawned. Fannie's original investment in the firm's preferred stock was about $10 million. This past week the Wall Street Journal reported that in July of last year Fannie gave 1.75 million of its 2 million Homestore.com (now known as Homestore Inc.) shares to its Fannie Mae Foundation, a charity. The foundation smartly sold the shares right away at about $35 a pop, netting about $61 million. Today, Homestore's shares trade for bout 50 cents each and its future looks less than bright. GE Capital Corp. also grub-staked Homestore.com, and like Fannie's foundation, dumped its shares at a nice profit, at least that's what one GE source told us not too long ago. The WSJ article, which was less than charitable to the charity, repeated a common gripe that the foundation's TV and print ads are really a way for Fannie Mae to build brand name recognition with consumers. Why would Fannie want to do this? To pave the way for its eventual foray into the market as a funder. Currently, Fannie's charter prohibits this, but one mortgage banker, based on the West Coast, said he believes that Fannie's first step into the origination business will be as a table funder, a wholesaler. He theorizes that if Fannie decides to go this route that it will have to either change or toss its charter...

Are Fannie Mae and Freddie Mac getting short changed on the guarantee fees (g-fee) they charge their seller servicers? Some mortgage watchers say a handful of the top 20 lenders are doing a brisk business in what is called "assignment of trade" or AOT. Under an AOT deal, a mega-lender pays servicing-released premiums (SRPs) to small and medium-sized correspondents. The SRPs are so good that the correspondents -- instead of selling directly to the GSEs -- sell both the loan and servicing to the mega-lender, which in turn sells the loans to Fannie and Freddie. What's the big deal then? Several mega-lenders have g-fee deals that reward them for volume. For instance, one top five lender supposedly has a g-fee deal of just 12 basis points with Fannie, whose average g-fee arrangement is 19 basis points or so. Fannie, in theory, makes more money if the small correspondent sells to them directly instead of using a mega-lender's "deal" rate. Some Fannie watchers say the company has done a terrible job of marketing to smaller-to-medium sized lenders. "I think they're starting to realize this and are trying to change things," said one observer...

Encore Credit Corp. of Irvine, Calif. funded its first loan back in March. In the second quarter, the firm originated a whopping $243 million in home mortgages, according to the upcoming issue of the Quarterly Data Report. If the firm's second-quarter run-rate keeps up, Encore will be doing $1 billion a year in no time at all...

When banks begin buying, the market must be at a peak. Mortgage professionals know all too well that many commercial banks overpaid for the hundreds of non-depository mortgage banking firms they bought during the past five years. Case in point: First Union's acquisition of The Money Store, and National Bank of Australia's purchase of HomeSide Lending, just to name a few. Both deals were unmitigated disasters -- for the buyers that is, not the sellers. Now, commercial banks are beginning to get hammered on their (relatively) recent purchases of Wall Street firms. FleetBoston Financial is expected to lose $280 million when it finally unloads San Francisco-based investment banker Robertson Stephens. (This past week Robbie laid off half its staff.) Some in the industry are wondering how long it will be before J.P. Morgan Chase chief William Harrison decides that he can't afford to keep the investment banking arm of his empire...