Jun. 11, 2007: Mortgages: are out-of-work originators flocking to reverse mortgages? And some humor

How much did you make last year? (That was a rhetorical question.) The president of Countrywide earned $48 million, the president of Freddie Mac $15 million, WAMU $8 million, Indy Mac $4 million.

According to Goldman Sachs and Wells Fargo, jobless subprime mortgage lenders are looking for employment in the booming market for loans to senior citizens. So far the mortgage industry has lost 15,000 employees, and obviously some will enter the growing market for reverse mortgages. Some bankers worry the market’s rapid growth may make reverse mortgages vulnerable to fraud and increased litigation, which has plagued subprime loans. “As you look at what’s going on in the subprime market, are those the types of folks who are really appropriate for pursuing reverse mortgages?” asked Rolf Edwards, a vice president at Goldman, Sachs & Co. in New York. The number of federally insured reverse mortgages has skyrocketed, climbing to 76,351 in 2006 from 7,781 in 2001. So-called HECM loans, or Home Equity Conversion Mortgages, make up 90% of them, according to the National Reverse Mortgage Lenders Association. In another sign of growth, Bank of America Corp. in April said it agreed to buy the reverse mortgage business of Seattle Mortgage Co., making it the third-largest U.S. provider. IndyMac Bancorp Inc. is the industry leader. At Wells Fargo, for example, about 700 loan officers specialize in reverse mortgages.

Not that it directly impacts 30-yr mortgage prices, but traders now assign a 44% percent chance the Fed will raise rates 25 basis points by December, compared with 0% a month ago. (Mortgage prices are worse by almost .250 today after improving Friday – we are back to where we were Thursday afternoon.) The Federal Reserve has kept its overnight lending rate between banks at 5.25% at its last seven meetings; the 8th is later this month on June 28th. It is a very busy week for news – see below.

There has been much talk regarding the appropriate level for IO fixed rate pools. Interest Only fixed rate products are very new and so prepayment patterns are unknown, and thus the price compared to amortizing loans is difficult to gauge. If IO loans pay off faster, and they are priced worse, then there is significant value because when those loans prepay the investor will receive par – 100.

A circus owner runs an ad for a lion tamer and two people show up. One is a good looking, older retired navy chief in his mid-sixties and the other is a gorgeous blonde in her mid-twenties. The circus owner tells them, “I’m not going to sugar coat it. This is one ferocious lion. He ate my last tamer so you guys better be good or you’re history. Here’s your equipment — chair, whip and a gun. Who wants to try out first?” The girl says, “I’ll go first.” She walks past the chair, the whip and the gun and steps right into the lion’s cage. The lion starts to snarl and pant and begins to charge her. About half way there, she throws open her coat revealing her beautiful naked body. The lion stops dead in his tracks, sheepishly crawls up to her and starts licking her; feet and ankles. He continues to purr and rub her body for several minutes and then rests his head at her feet. The circus owner’s mouth is on the floor. He says, “I’ve never seen a display like that in my life.” He then turns to the retired chief and asks, “Can you top that?” The tough old chief replies, “No problem, just get that lion out of the way!”

Week of June 11 – June 15