San Diego, California Mortgage Market Update

Market Happenings:

Trimming Gains : The market has sunk some as the long end has fallen out of bed, but the underlying drivers remain the same. Expectations for further, bigger, rate cuts at next week's FOMC remain high, while talk of cuts elsewhere has also heated up. The session is likely to see some steep corrective drop-offs, but, with little else to go on the buy side bias should hold. Traders say they are keeping a closer eye on the Davos Economic Summit in Switzerland than has been the case in the past, with the heated markets adding some weight to some of the comments from the more influential in attendance. With the market expecting further cuts by the Fed ahead for their Jan 29 – 30 meeting, a stock market selloff fueled by fears of a recession (are we already their?) and a general flight to quality have Treasuries and Agency Mortgage Backeds continuing their rally although these spreads have widened some with Treasuries outperforming Agency MBS. Since the opening bell FNMA 5.0% coupons are up 10 ticks (+10/32) with 5.5% coupons up 5 (+5/32). Expect investor ratesheet pricing to again be improved, by roughly 10 – 20 bps.

Industry News:

BoA CEO: Countrywide Deal Still On

Bank of America chief executive Kenneth Lewis said Tuesday morning that he expects the company's purchase of the troubled Countrywide Financial Corp. to close some time in the second half of this year. There has been speculation that BoA might back out of the deal, which sent Countrywide's share price reeling on Jan. 18. Meanwhile, on Tuesday the treasurer of the Service Employees International Union sent a letter to Federal Reserve Chairman Ben S. Bernanke and elected officials that oversee the mortgage industry, asking them to carefully review the transaction. "While the short-term appeal of this acquisition may be tempting, the long-term implications of bank industry consolidation on this scale raise serious policy and regulatory questions that need to be answered now," wrote SEIU treasurer Anna Burger. The union has 1.9 million members.

CS: GSEs Looking at $16B in 4Q Charges

Fannie Mae and Freddie Mac could write down the value of their subprime and alternative-A securities by as much as $16 billion, according to a new report issued by Credit Suisse. CS analyst Moshe Orenbuch estimates that Freddie's charge could be as high as $11 billion, Fannie's $5 billion. Mr. Orenbuch said the government-sponsored enterprises, through September, have recognized "minimal impairments" on their roughly $230 billion in subprime and alt-A holdings. Both GSEs declined to comment on the CS report. Fannie and Freddie are scheduled to release fourth-quarter earnings at the end of February, but have not yet specified an exact date.

Wachovia Takes Big Option ARM Loss

Wachovia Corp. is taking a 25% loss on the sale of California homes financed by payment-option ARMs, and the banking company has seen the performance of those negatively amortizing loans deteriorate over the past few quarters. The Charlotte, N.C.-based bank reported a $1 billion increase in nonperforming option adjustable-rate mortgages as the percentage of loans 90 days or more past due in its $120 billion portfolio rose from 1.47% in the third quarter to 2.31% in the fourth quarter. Wachovia took a $93 million chargeoff against the portfolio. But company executives say they expect the option ARM business to remain profitable, despite rising chargeoffs and real-estate-owned sales. The banking company reported a 98% drop in earnings to $51 million in the fourth quarter compared with the level of a year earlier, mainly due to chargeoffs and provisioning relating to its residential and commercial mortgage portfolios. "Lower earnings largely reflect the effect of continued disruption in the capital markets, which resulted in net valuation losses of $1.7 billion as well as a provision for credit losses of $1.5 billion, which exceeded net chargeoffs by $1.0 billion," the bank said.

NatCity Reports $333M 4Q Loss

National City Corp., Cleveland, has reported a fourth-quarter loss of $333 million ($0.53 per share), compared with net income of $842 million ($1.36 per share) a year earlier. NatCity reported a loss of $149 million for the quarter in its loans-held-for-sale portfolio due to problems in the secondary market, which resulted in additional fair-value writedowns on those loans. It has now stopped origination of all products other than agency-eligible products and shifted certain non-agency-eligible mortgage loans and home equity loans from its held-for-sale portfolio to its balance sheet portfolio. NatCity also took a charge of $181 million ($0.26 per share) for goodwill impairment related to the mortgage business. For the year, NatCity earned $314 million ($0.51 per share), down from income of $2.3 billion ($3.77 per share) in 2006.

Misc:

-- On Today’s date in 1845, Congress decided all national elections would be held on the first Tuesday after the first Monday in November. Why the following Wednesday after the completion of the lunar cycle in April didn’t work is beyond me.

-- On Today’s date in 1964, the 24th amendment to the Constitution, eliminating the poll tax in federal elections, was ratified.

-- On Today’s date in 1973, President Richard Nixon announced an accord had been reached to end the Vietnam War.

-- Today Actor Richard Dean Anderson is 58. For the uninitiated: http://www.wright.edu/~bevington.5/MacGyver.jpg

Today's market update brought to you by:

Todd Albrigo

Account Executive

CMG Mortgage, Inc.