Origination

The benchmark 10-year Treasury yield had fallen to record lows and was at 2.83% as of late Monday morning. "The Treasury market continues to move to record low yields as preservation of capital and expectation of deep global recession dominates psychology," according to a Monday morning report by Jefferies & Co.'s fixed income division. Historically, a drop in the 10-year Treasury yield has been indicative of low mortgage rates and a refinancing boom but expectations for these have been muted in the recent environment by generally wider spreads to mortgage product, tight underwriting and illiquidity. The latest Mortgage Bankers Association's application index registered a slight decrease in refinancing but it is a lagging indicator that may not yet have reflected a recent drop in mortgage rates. During the week ended Nov. 21, the index showed refis slightly lower compared to the previous week as well as on a seasonally-adjusted four-week moving average basis. But refis still represented close to half of all applications. Purchases also were down slightly.

With the pace of bank failures quickening, the Federal Deposit Insurance Corp. is going outside the banking community to line up investors to bid on the assets and deposits of failed banks and thrifts. "FDIC recognizes that investors not organized as an FDIC-insured depository institution or holding company may potentially be interested in bidding on a failing institution," according to the agency. The FDIC has designed an expedited application process to get conditional approval for deposit insurance and to get on the FDIC's bidders list. However, investors still have to get preliminary regulatory approval for a bank charter. Applicants should have a business plan that is compliant with the Community Reinvestment Act, readily available capital and an identified management team, the FDIC said. There are 171 institutions on the FDIC's problem bank list with $115.6 billion in assets.

Fannie Mae's use of HomeSaver advances to cure delinquent loans in securitized pools peaked in June and July and two-thirds of the personal loans went to nonprime borrowers, according to a report by the Federal Housing Finance Agency. Fannie launched the HomeSaver program in February and it had made more than 45,000 advances totaling $301 million as of Sept. 30, according to the company's latest financial report. The average size of these unsecured loans is $6,700 and it has helped the mortgage giant fix the loans without purchasing them out of pools and recognizing a loss. From February through August, Fannie made 36,415 HomeSaver advances and 23,177 went to alt-A and subprime borrowers. Fannie made 11,725 advances in June and 10,599 advances in July. Advance activity dropped to 7,914 in August, according to the government-sponsored enterprise regulator.

The Treasury Department has provided Freddie Mac with a $13.8 billion infusion to wipe out a capital deficit and keep the government sponsored enterprise afloat. In exchange for this infusion, the mortgage giant issued $13.8 billion in senior preferred stock to Treasury. Freddie reported a $25.3 billion loss for the third quarter and a $13.8 billion capital deficit, which triggered Treasury's response. Treasury officials pledged to prevent Freddie and Fannie Mae from operating with negative net worth when the GSEs where placed in conservatorships on Sept. 7. Under separate senior preferred stock purchase agreements, Treasury agreed to provide Freddie and Fannie each with up to $100 billion in net worth assistance. Fannie reported a $29 billion loss in the third quarter and revealed its net worth had dropped to $9.4 billion as of Sept. 30. The Fannie executives warned in their quarterly securities filing that the GSE may have negative net worth by the end of the fourth quarter if "housing and financial market trends continue to worsen and we have a significant loss in the fourth quarter of 2008."

Sales of new homes fell 5.3% in October to the lowest level since 1991 and homebuilders don't expect a turnaround unless Congress provides more incentives to stimulate home sales. The U.S. Census Bureau saw sales of new single-family homes fall from a seasonally adjusted annual rate of 457,000 in September to 433,000 in October. The National Association of Home Builders is forecasting that new home sales will turn up in the first or second quarter of 2009 if Congress makes the homebuyer tax credit more attractive and enacts an interest rate buy-down program. Even with all the moves by the Treasury Department and Federal Reserve, "I don't think that is quite enough to help turn this market around," said NAHB director of forecasting Bernard Markstein. He noted the inventory of newly constructed homes has declined by 190,000 units since the peak in 2006 to 385,000 in October. "We are making progress," he said, but the current inventory still represents an 11-month supply at the current sales pace. Single-family housing starts won't turn up until the inventory gets down to 300,000, Mr. Markstein said.

Canada's RBC Mortgage Co. has agreed to pay the United States more than $10.7 million to resolve allegations arising under the False Claims Act concerning 219 Federal Housing Administration loans, according to the U.S. Department of Justice. The government had alleged that, between 2001 and 2005, the subsidiary of the Royal Bank of Canada falsified documentation in support of loan applications, violated due diligence underwriting requirements and improperly submitted loans for endorsement by the Department of Housing and Urban Development that were not eligible for FHA insurance. "The settlement reached between RBC and the United States resolves these allegations," the DoJ said. In addition to the settlement, RBC also has agreed to pay $264,000 to resolve administrative claims with respect to 39 federally insured loans, according to the Justice Department.

Fannie Mae issuance of mortgage-backed securities fell to $28.6 billion in October, the lowest level since February 2001, and Ginnie Mae edged out the mortgage giant by issuing $29.2 billion in single-family MBS in the same month. Fannie's monthly activity report shows it purchased $13 billion of its own guaranteed MBS and its mortgage portfolio grew by $15.7 billion to $777.1 billion as of Oct. 31. The government-sponsored enterprise has been hampered by high funding costs in providing more support for the mortgage market. But the Federal Reserve Board's new initiative to purchase GSE debt and MBS should give Fannie a boost in the months ahead and hopefully lower mortgage rates. Meanwhile, the delinquency rate (90 days or more past due) on Fannie guaranteed mortgages rose to 1.72%, up from 1.52% in September and 0.78% in October 2007.

The government-insured share of new mortgage applications continues to grow relative to conventional home loan applications, according to the weekly application survey of the Mortgage Bankers Association. During the month of October, 33% of home loan applications were for government-insured loans, the MBA said. That compares to 10% in October of 2007. The October high water mark for Federal Housing Administration and Veterans Affairs loans is the highest government-loan share of the market seen since 1991. The government share hit a low of 6% in August of 2005.

A new effort by the Treasury Department to revive the market for asset-backed securities could include "non-agency" mortgages, the government said today. Treasury secretary Henry Paulson cautioned that any effort in regard to non-prime would involve "highly rated residential MBS." Treasury said the Federal Reserve Bank of New York will spend up to $200 billion to revive the ABS market. (Treasury is pitching in $20 billion to kick start the program.) The money will be used to finance buyers of ABS through non-recourse loans. Initially, the effort will focus on ABS backed by automobile loans, credit cards, student loans and small business loans. At a press conference Tuesday Mr. Paulson said the effort could be expanded to also include ABS backed by commercial mortgages. Only AAA-rated paper will be considered. The ABS market, according to Treasury, ground to a halt in 3Q with very few deals coming to market.

Seniors will be able to use Federal Housing Administration reverse mortgages in conjunction with the purchase of a new home under new guidelines issued by the Department of Housing and Urban Development. Starting Jan. 1, seniors that want to downsize or move to a new location can use the proceeds from the sale of their home and an FHA Home Equity Conversion Mortgage to purchase a new residence. "Proceeds from sale of their former home can be combined with funds from a reverse mortgage on the new home, allowing the home purchase to be made without any future responsibility of monthly mortgage payments," said Peter Bell, president of the National Reverse Mortgage Lenders Association. This new feature of the FHA HECM program also avoids the expense of taking out a regular mortgage on the new residence and then getting a HECM.