San Diego, California Mortgage Market Update

Market Happenings:

Initial claims for unemployment benefits jumped 19K to 373K : in the holiday week of February 23. While the holiday serves as a rough rationale for the lift the upward trend speaks for itself. Trade has been boosted further, albeit briefly, as data shows nothing good. The jobless claims were higher than expected along with upward revisions on the back months while GDP was also worse. The buck remains a problem, actually spurring further interest in the "safety" bid in bonds and Agency MBS. With the stock market down 66, Fed speak making no bones about it’s intention to cut in March and the feeble economic data to back it up, Mortgage traders and investors are in buy mode expecting interest rates to slip further. Currently FNMA 5.0% coupons are up 26 ticks (+28/32) while 5.50% are up 19 (+21/32). Expect improved lender pricing again today as the roller coaster ride continues. Lower notes rates will improve as much as 80 bps, dropping to roughly 50 bp better is you hit the high end of the note rate spectrum.

Industry News:

Fannie Takes $3.6B 4Q Loss

Fannie Mae has reported a $3.6 billion loss for the fourth quarter and a $2.1 billion loss for 2007, recognizing for the first time a loss on its subprime and alternative-A private-label securities totaling $1.35 billion. The unrealized losses on the $41.4 billion in subprime private-label securities and $32.5 billion in alt-A private-label securities totaled $3.3 billion, the government-sponsored enterprise said in its 2007 annual financial report. Fannie increased its loan loss reserves by $2 billion, and the GSE became more pessimistic in its housing market outlook. The company said it expects house prices to decline 5%-7% this year and projected that its credit loss ratio will be 11-15 basis points. Fannie reported that its single-family guarantee fee income rose 19% in 2007 to $5.1 billion, up from $4.3 billion the previous year, which reflected higher demand for loan guarantees and higher fees. "While we are pleased that demand for our mortgage guaranty businesses has surged as we respond to the market's urgent need for liquidity and stability, this positive trend has been far outweighed by the negative financial impacts of rising defaults, falling house prices, and extraordinary disruptions in the credit markets," Fannie president and chief executive Daniel Mudd said.

Expert: 40% of Subprime Loans Could Default

An estimated 40% of outstanding subprime mortgage loans could go into default over the next three years based on current economic assumptions, according to Michael Bykhovsky, president of Applied Analytics, San Francisco. With an estimated loss severity in the range of 50%, that could lead to $200 billion in additional losses related to defaults on subprime home loans. During a press briefing sponsored by Fidelity National Information Services (the parent of Applied Analytics) at the Mortgage Bankers Association's National Mortgage Servicing Conference, Mr. Bykhovsky said there are an estimated $1 trillion of subprime home loans outstanding. He said he is skeptical of the prospects for term modifications that are being proposed as part of an effort to support subprime borrowers. "It will help, but not hugely," Mr. Bykhovsky said. "A lot of subprime loans will default anyway." Based on assumptions that include two more years of housing price declines, Applied Analytics projects that default rates may not start to trend downward until 2011. That dire outlook reflects the impact of declining home values on outstanding subprime mortgage loans, Mr. Bykhovsky said.

OFHEO Lifting GSE Portfolio Caps

The Office of Federal Housing Enterprise Oversight is lifting the portfolio caps on Fannie Mae and Freddie Mac, which will allow the two government-sponsored enterprises to provide more liquidity to the mortgage market and invest in jumbo mortgages. "OFHEO will remove the portfolio growth caps for both companies on March 1, 2008," OFHEO Director James Lockhart said. The unexpected action gives the GSEs more room to use their new authority to purchase jumbo mortgages and hold them in portfolio until they can securitize the higher-balance mortgages. Mr. Lockhart noted that Fannie and Freddie are filing their 2007 annual financial reports on time, which shows they have made "substantial progress" in fixing their accounting systems and internal controls as specified in separate consent orders. The consent orders also require the GSEs to maintain a 30% capital surplus. The OFHEO director signaled that he will begin discussions with Fannie and Freddie to gradually lower the capital surplus.

Misc:

-- On Today’s date in 1993, a gun battle erupted at a compound near Waco, Texas, when Bureau of Alcohol, Tobacco and Firearms agents tried to serve warrants on the Branch Davidians; four agents and six Davidians were killed as a 51-day standoff began.

-- On Today’s date in 1997, in North Hollywood, Calif., two heavily armed masked robbers bungled a bank heist and came out firing, unleashing their arsenal on police, bystanders, cars and TV choppers before they were killed.

-- Today Auto racer Mario Andretti is 68.

Today's market update brought to you by:

Todd Albrigo

Account Executive

CMG Mortgage, Inc.