Daily Commentary by Larry Baer 9.30.2011

Commentary: The Commerce Department released their August Personal Income and Spending report earlier this morning. The data showed incomes fell for the first time in nearly two years requiring consumers to dig into their savings to keep spending. Income slipped 0.1% last month, posting its first decline since October 2009. Spending rose 0.2%. The Fed's preferred measure of inflation pressure at the consumer level, the so-called "core personal consumption expenditure index", rose a very modest 0.1% in August - the smallest increase for this measure since March.

The "so what" factor behind all this statistical mumbo-jumbo is simple and straightforward. Mortgage investors are keenly aware consumer spending accounts for more than 70% of all U.S. economic activity - and as long as economic activity remains sluggish - the upward pressure on mortgage interest rates will remain weak - especially in an environment where inflation threats remain benign.

Looking ahead to the coming week -- Monday's Institute of Supply Management's measure of activity in the manufacturing sector followed on Wednesday by the Institute's measure of activity in the service sector will be little more than a warm-up as mortgage investors await next Friday's September Nonfarm Payroll report. Investors have already priced in expectations for a weak employment story. If those expectations are met - the impact of the jobs report on the trend trajectory of mortgage interest rates will be minimal to non-existent. In the extremely off-chance that the September headline nonfarm payroll number exceeds 75,000 and/or the national jobless rate falls below 9.1% -- it would be reasonable to expect mortgage investors to shove mortgage interest rates noticeably higher. While such an outcome is possible - it is certainly not very probable.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.29.2011

Commentary: According to the Labor Department the number of Americans filing claims for first-time unemployment benefits fell to a five-month low last week, while the economy grew slightly more than previously reported in the second-quarter.

Initial claims for state unemployment benefits fell 37,000 to a seasonally adjusted 391,000, well below economists' consensus forecast for 420,000.

Separately, Gross Domestic Product (a statistical guesstimate of the market value of all the goods and services produced in a country in a given period) grew at an annual rate of 1.3% in the second quarter.

Mortgage investors blew off the much better-than-expected decline in the weekly jobless claims figure as a statistically anomaly -- while the upward revision to Q2 GDP had been priced into the mortgage market for some time.

Uncle Sam will wrap up this week's $99 billion borrowing spree with the sale of $29 billion of 7-year Treasury notes at 1:00 p.m. ET. The offering is expected to draw solid demand from domestic as well as foreign investors. If so, this event will likely prove supportive of steady to perhaps fractionally lower mortgage interest rates. I'll post the auction results on my website as soon as possible after the final gavel falls.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

UAD could cause appraisal turn times to increase affecting closing dates

UAD (Uniform Appraisal Dataset) went into affect September 1^st, 2011. UAD standardizes certain data points to support consistent appraisal reporting regardless of geographic location of the property or any localized reporting conventions.

What does this mean to you? Expect appraisal turn times to increase to two weeks until the appraisers become familiar with the new software and procedures.

Here is a quick history on the changes that have taken place in the industry in the last few years.

HVCC (Home Valuation Code of Conduct) was implemented by the Federal Housing Finance Agency in May of 2009 in an attempt to improve the independence of appraisers. The FHFA felt that some lenders and builders were influencing their appraisers in regard to appraisal values which caused inflated property valuations. AMCs (Appraisal Management Companies) were formed to meet the new regulations. AMCs provide a layer of insulation between the lender and the appraiser. They also add a middle man and therefore increased appraisal costs.

In October of 2010 Fannie Mae and Freddie Mac issued new Appraiser Independence Requirements (AIR) to replace HVCC. AIR made no significant changes to the core principles of the HVCC. In other words the acronym changed but the rules and affect to the consumer did not.

And that brings us back to UAD. UAD will be used by Fannie Mae and Freddie Mac (The GSE’s), as a common way to deliver appraisals with uniform data requirements, like similar codes, to support improved quality and accuracy of data while preserving each GSE’s ability to determine what the data means to loan performance and loan quality, or how people pay the loans back.

It consists of the Uniform Mortgage Data Program (UMDP), the Uniform Loan Delivery Dataset (ULDD), the Uniform Collateral Data Portal (UCDP), and the Uniform Appraisal Dataset (UAD). The ULDD and UCDP will be behind the scenes type changes, some already in effect, other changes to come. But, the big change is (UAD).

The UAD standardizes certain data points to support consistent appraisal reporting. Similar definitions, codes, common verbiage, etc. will be expected on appraisals so that the GSE’s have a uniform way of determining the quality of valuation, and influences on loan performance. This information will be uploaded to a common portal, or website, monitored by a common entity.

So, appraisers, via the AMC’s formed by HVCC, will upload their information and two pages of codes, to the UMDP’s UCDP, so the GSE’s can uniformly assess a client’s Uniform Residential Appraisal.

In the same way that FHA, USDA, and VA eventually adopted HVCC, I would expect them to adopt UAD or something similar very soon as well.

I think you will find UAD appraisals easier to understand once you get used to them. With all of these changes we can expect appraisal turn times to increase at least until the appraisers become familiar with the new software and procedures.

Daily Commentary by Larry Baer 9.28.2011

Commentary: Different day - same story.

Credit market participants are mesmerized by the European debt crisis, with its dozens of moving pieces, and its potential to topple governments, banks and to deliver a massive financial shock to the global economy. The systemic threats produced by this continental dilemma have actually reinforced the safe-haven appeal of U.S. dollar denominated assets like Treasury debt obligations and mortgage-backed securities - a condition exceptionally supportive of steady to perhaps fractionally lower mortgage interest rates. That is the good news.

Market rumors and speculation insinuating the countries composing the European Union may be on the verge of taking meaningful action to substantially reduce the likelihood of a broad based financial meltdown in the region is largely behind the upward pressure that has developed on mortgage interest rates since last week Friday. The likelihood that Greece will ultimately default on its sovereign debt is essentially already "baked-into-the cake" as far as most investors are concerned. If the disaster can be limited to Greece - as many analysts believe is possible - the European economy will likely recover at a decent pace. Against such a backdrop - one of the primary anchors holding U.S. mortgage interest rates at multiple decade lows will begin to slip. Such an event is not likely to occur in the next day or so - but if the probabilities begin to favor such an event occurring within the next three to six months - the upward pressure on mortgage interest rates will intensify. As I have mentioned in this space many times - mortgage investors live in the future, not the present. Heads up.

The Commerce Department announced earlier this morning that new orders for long-lasting manufactured goods slipped 0.1% in August after a 4.1% gain in July. The component of the report excluding transportation orders fell 0.1% as well. The bright spot of the report was the fact that non-defense spending capital goods excluding aircraft, a fancy name for a closely watched proxy for business spending, increased 1.1% last month after a 0.2% fall in July. All of this statistical mumbo-jumbo is strongly suggesting the manufacturing sector has not weakened nearly as much as some analysts had feared. The "take-away" from this report for many mortgage investors is that economic growth is slow - but has not yet turned recessionary -- and therefore the incentives to push mortgage interest rates notably lower remains minimal.

As they do every Wednesday, the Mortgage Bankers of America have released their Mortgage Application Survey for the week ended September 23^rd. According to the MBA, overall mortgage application traffic jumped 9.3% higher during the week - lead by a solid 11.2% increase in refinance loan requests. The demand for home purchase loans edged 2.6% higher.

The contract rate for 30-year fixed rate conforming mortgages finished the week at 4.24%, down 5 basis-points from the prior week, down 12 basis-points from four-weeks ago, and down 34 basis-points from the year ago mark. Eight-out-of-every-ten loan applications taken last week represented a refinance request.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.27.2011

Commentary: Credit market participants are mesmerized by the European debt crisis, with its dozens of moving pieces, and its potential to topple governments, banks and to deliver a massive financial shock to the global economy. The systemic threats produced by this continental dilemma have actually reinforced the safe haven appeal of U.S. dollar denominated assets like Treasury debt obligations and mortgage-backed securities - a condition exceptionally supportive of steady to perhaps fractionally lower mortgage interest rates. That is the good news.

Market rumors and speculation insinuating the countries composing the European Union may be on the verge of taking meaningful action to substantially reduce the likelihood of a broad based financial meltdown in the region is largely behind the upward pressure that has developed on mortgage interest rates since last week Friday. The likelihood that Greece will ultimately default on its sovereign debt is essentially already "baked-into-the cake" as far as most investors are concerned. If the disaster can be limited to Greece - as many analysts believe is possible - the European economy will likely recover at a decent pace. Against such a backdrop - one of the primary anchors holding U.S. mortgage interest rates at multiple decade lows will begin to slip. Such an event is not likely to occur in the next day or so - but if the probabilities begin to favor such an event occurring within the next three to six months - the upward pressure on mortgage interest rates will intensify. As I have mentioned in this space many times - mortgage investors live in the future, not the present. Heads up.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.26.2011

Commentary: The mortgage market is under a little bit of selling pressure this morning. I suspect investors are merely adjusting their positions in front of the three-part, $99 billion Treasury auction scheduled to run from tomorrow through Thursday.

Policymakers from around the world met this weekend to discuss the possibility of beefing up the bailout fund for Greece and other countries currently skating along the edge of sovereign debt default. There was no agreement reached on exactly what course of action to take -- so suggestions by some media sources that the European crisis has begun to abate is very premature.

The European debt crisis will be a day-to-day story, with chatter surrounding a possible resolution likely to nudge mortgage rates fractionally higher. Headlines indicating European financial leaders have yet to cobble out a bailout package containing enough "shock and awe" value to avert a major meltdown of both government and bank debt will tend to be supportive of steady to fractionally lower mortgage interest rates here in the States.

This morning's news from the Commerce Department indicating the pace of new single-family home sales fell 2.3% in August was viewed as little more than a macro-economic footnote by most mortgage investors. A notable drop for new home sales was already well priced into the mortgage market. Sharp declines in the Mortgage Bankers of America's weekly mortgage application survey during the month of August strongly suggested the pace of new home sales would be anemic.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.23.2011

Commentary: The economic calendar offers nothing for investors to chew-on today leaving traders to do little else than take profits and let the dust settle after a massive two-day rally in the mortgage market.

Looking ahead to next week -- Uncle Sam will be in the credit markets from Tuesday through Thursday expecting to borrow $99 billion in the form of 2-, 5- and 7-year notes. Tuesday's 2-year note auction may be a mortgage interest rate unfriendly event - but the remaining two note sales should draw sufficient demand to ultimately be supportive of steady mortgage interest rates.

In terms of economic news -- investors will get a look at the August New Home sales figures, the final guesstimate for second-quarter Gross Domestic Product and the Personal Income and Spending data for August. All three reports are expected to be mortgage interest rate neutral.

I think it is extremely important not to loose sight of the fact fixed income investors live in the future, not in the present. These investors are keenly aware that every move the Fed, Congress and all the other financial powers in the world make from this point forward will be designed to fuel economic growth - even at the expense of sharply higher inflation. Since inflation eats away at investors' profits on long-term fixed-income investments - any increase in inflation pressures begins to diminish the total returns investors were expecting to generate when they initially committed capital to the asset class. It is possible for inflation pressures to swell to a point where it becomes financially compelling for fixed-income investors to redeploy their capital into riskier but potentially higher yielding alternative investment opportunities.

The moral of this story is simple and straightforward - stimulus programs - especially effective stimulus programs - almost always mark the beginning-of-the-end of a move to lower mortgage interest rates. At this juncture, there is nothing currently available to suggest things will be different this time around. Heads up.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.22.2011

Commentary: Fed Chairman Bernanke and his fellow central bankers gave additional support to the near-term prospects for steady to lower mortgage interest rates by not only coming through with "Operation Twist" - but by announcing that they would use principal paydowns from their existing mortgage portfolio to reinvest in new agency eligible mortgage-backed securities. The Fed's move back into the mortgage securities market was not expected. Paydowns from the Fed's existing mortgage portfolio are estimated at approximately $20 billion per month at current interest rate levels. To put the Fed's new mortgage-backed security buying power into perspective -- the mortgage industry is creating new agency eligible securities at a pace of roughly $65 billion per month.

I personally can't help but wonder how long it will take before government "powers-that-be" notice that dramatically lower mortgage interest rates in an environment of super-tight underwriting guidelines, onerous government mandated compliance requirements, and an anemic job market is currently exerting about as much positive impact on housing sector growth as one would expect from an attempt to empty a swimming pool one teaspoon at a time. Lower mortgage interest rates are at least a positive start - but to be most effective -- much more meaningful and significant structural changes will be required.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Operation Twist

The Fed announced the $400 billion "Operation Twist" today. It will reinvest proceeds from the maturing mortgage portfolio into new mortgage backed securities. This caused mortgage backed securities to move to their highest level ever! What does this mean to you. Just the lowest interest rates ever!

Daily Commentary by Larry Baer 9.21.2011

Commentary: Different day - same story.

As you are probably well aware by now -- most traders are anticipating the Fed will announce a new bond-buying program nicknamed "Operation Twist" following the conclusion of the Open Market Committee meeting this afternoon at 2:15 p.m. ET.

If the Fed does choose to launch such a program the central bank will soon begin conducting a number of special auctions where they buy longer-dated Treasury securities with proceeds derived by selling shorter-dated notes and bills. The buying and selling process would occur over the course of the same day and is intended to push long-term rates - including mortgage rates -- lower. The sources I talk to tell me the initial novelty of this fancy financial footwork may prove supportive of fractionally lower mortgage rates - but the effect will not likely last long. The moral of this story is simple and straightforward - stimulus programs - especially effective stimulus programs - almost always mark the beginning-of-the-end of a move to lower mortgage interest rates. At this juncture, there is nothing currently available to suggest things will be different this time around.

I'll provide a summary of the Fed's post-meeting statement on my website as quickly as possible following its release later today.

The mortgage market continues to find support from a growing fear Greece may default on their sovereign debt - possibly within the next couple of weeks. A significant amount of international capital has elected to flee European and other global markets for the relative safe-haven of dollar-denominated assets like Treasury debt obligations and mortgage-backed securities. This so-called "flight-to-quality" flow of capital into our domestic credit markets is a condition that tends to temporarily support steady to perhaps fractionally lower mortgage interest rates.

The National Association of Realtors announced earlier today that the pace of Existing Home Sales posted a solid 7.7% gain last month. Home prices across the country are down 5.5% on a year-over-year basis - a condition which drove bargain hunters into the market. Sales to investors accounted for 22% of the overall gain in the pace of August existing home sales, compared with 18% in July. Until job growth shows notable and sustained improvement -- the housing sector activity will likely continue to wallow near multi-decade lows.

As they do every Wednesday, the Mortgage Bankers of America have released their Mortgage Application Survey figures for the week ended 9/16/11. Overall mortgage application activity rose a very modest 0.6% last week. Refinance requests accounted for all of the gain with a 2.2% increase as homeowners continue to take advantage of record low mortgage rates. The number of applications taken for the purchase of a home fell 4.7%.

The contract rate for 30-year fixed-rate conforming mortgages finished the week at 4.29%, unchanged from a week ago, down 7 basis-points from four weeks ago, and down 31 basis-points from the year-ago mark. Refinance requests accounted for 8 out of every 10 loan applications taken last week.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.20.2011

Commentary: Trading action in the mortgage market is exceptionally thin this morning as investors wait on the side-lines to hear what, if anything, Fed Chairman Bernanke and his fellow central bankers have up their sleeve in the way of additional economic stimulus.

As you are probably well aware by now -- most traders are anticipating the Fed will announce a new bond-buying program nicknamed "Operation Twist." If the Fed does choose to launch such a program the central bank will soon begin conducting a number of special auctions where they buy longer-dated Treasury securities with proceeds derived by selling shorter-dated notes and bills. The buying and selling process would occur over the course of the same day and is intended to push long-term rates - including mortgage rates -- lower. The sources I talk to tell me the initial novelty of this fancy financial footwork may prove supportive of fractionally lower mortgage rates - but the effect will not likely last long. The moral of this story is simple and straightforward - stimulus programs - especially effective stimulus programs - almost always mark the beginning-of-the-end of a move to lower mortgage interest rates. At this juncture, there is nothing currently available to suggest things will be different this time around.

The mortgage market continues to find support from a growing fear Greece may default on their sovereign debt - possibly within the next couple of weeks. A significant amount of international capital has elected to flee European and other global markets for the relative safe-haven of dollar-denominated assets like Treasury debt obligations and mortgage-backed securities. This so-called "flight-to-quality" flow of capital into our domestic credit markets is a condition that tends to temporarily support steady to perhaps fractionally lower mortgage interest rates.

The only macro-economic report on the calendar today showed that housing remains weak - certainly no big surprise to anyone. The Commerce Department reported housing starts for August fell a sharper than expected 5.0% from month earlier levels. Most investors shrugged-off the outsized decline - assuming the number was probably exaggerated by the impact of hurricanes and tropical storms during the reporting period. Building permits filed for future construction increased a better-than-expected 3.2%. Until the rest of the economy improves and the national jobless rate declines notably - traders expected the housing sector to remain distressed.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.19.2011

Commentary: According to data compiled by Daniel Kruger and John Detrixhe, columnist for Bloomberg.com, Wall Street's biggest bond traders are stockpiling longer-dated Treasury debt obligations at the fastest pace since 2007 on speculation the Federal Reserve will announce a plan to buy longer-dated government debt issues in an effort to spur the faltering economy. There traders are anticipating the Fed will announce a new bond-buying program nicknamed "Operation Twist."

If the Fed does choose to launch such a program to stimulate the economy the central bank will soon begin conducting a number of special auctions where they buy longer-dated Treasury securities with proceeds derived by selling shorter-dated securities. The buying and selling process would occur over the course of the same day and is intended to push long-term rates - including mortgage rates -- lower. The sources I talk to tell me the initial novelty of this fancy financial footwork may prove supportive of fractionally lower mortgage rates - but the effect will not likely last long.

As I mentioned in this space on Friday -- fixed income investors live in the future, not in the present. These investors are keenly aware that every move the Fed, Congress and all the other financial powers in the world make from this point forward will be designed to fuel economic growth - even at the expense of sharply higher inflation. Since inflation eats away at investors' profits on long-term fixed-income investments - any increase in inflation pressures begins to diminish the total returns investors were expecting to generate when they initially committed capital to the asset class. It is possible for inflation pressures to swell to a point where it becomes financially compelling for fixed-income investors to redeploy their capital into riskier but potentially higher yielding alternative investment opportunities.

The moral of this story is simple and straightforward - stimulus programs - especially effective stimulus programs - almost always mark the beginning-of-the-end of a move to lower mortgage interest rates. At this juncture, there is nothing currently available to suggest things will be different this time around.

The mortgage market is also finding support this morning from a growing fear Greece may default on their sovereign debt - possibly within the next couple of weeks. A significant amount of international capital has elected to flee European and other global markets for the relative safe-haven of dollar-denominated assets like Treasury debt obligations and mortgage-backed securities. This so-called "flight-to-quality" flow of capital into our domestic credit markets is a condition that tends to temporarily support steady to perhaps fractionally lower mortgage interest rates.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.16.2011

Commentary: Trading action is very thin in the mortgage market this morning. Most mortgage investors are quietly squaring-up their risk management positions in front of next week's much anticipated two-day Federal Open Market Committee meeting.

Fed Chairman Ben Bernanke and his fellow central bankers will huddle for two-days of monetary policy deliberations on Tuesday and Wednesday. There is still some hope among some market participants the Fed will announce a new bond-buying program nicknamed "Operation Twist" -- but few traders are betting money on it.

If the Fed does choose to launch such a program to stimulate the economy the central bank will soon begin conducting a number of special auctions where they buy longer-dated Treasury securities with proceeds derived by selling shorter-dated securities. The buying and selling process would occur over the course of the same day and is intended to push long-term rates - including mortgage rates -- lower. The sources I talk to tell me the initial novelty effect of this fancy financial footwork may be supportive of fractionally lower mortgage rates - but the effect will not likely last long.

Fixed income investors live in the future, not in the present. They are keenly aware that every move the Fed, Congress and all the other financial powers in the world make from this point forward will be designed to simulate economic growth - even at the expense of sharply higher inflation. Since inflation eats away at investors' profits on long-term fixed-income investments like a high-school football team at an "all-you-can-eat" pizzeria - as inflation pressures increase - investors returns diminish to a point where investors will find it necessary to redeploy capital into riskier but higher yielding alternative investment opportunities.

The moral of this story is simple and straightforward - stimulus programs - especially effective stimulus programs - almost always mark the beginning-of-the-end of a move to lower mortgage interest rates. At this juncture, I see nothing to suggest anything will be different this time around.

Looking ahead to next week's economic calendar - the post-meeting statement the members of the Federal Open Market Committee will issue at 2:15 p.m. ET on Wednesday will likely exert the strongest single influence on the near-term trend trajectory of mortgage interest rates. The expected interest rate neutral August Housing Starts and Building Permits numbers on Tuesday together with the August Existing Home Sales data on Wednesday will probably draw nothing more than a passing glance from mortgage investors.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.15.2011

Commentary: New claims for government unemployment benefits rose by 11,000 last week to their highest level since June. It was the second straight week in which jobless claims posted an unexpected advance. At the same time, consumer prices rose a surprisingly steep 0.4% in August, with food prices posting their biggest gain since March.

The jobs data ramps up the pressure on Federal Reserve Chairman Ben Bernanke and his Federal Open Market Committee together with members of Congress to develop a strategy for injecting additional job-creating stimulus into the flagging economy.

The August consumer price index figures serve as a reminder to everybody involved that the pace of consumer inflation will almost certainly accelerate in proportion to the amount of monetary and/or fiscal stimulus applied.

This relationship is certainly not lost on mortgage investors. Expect mortgage interest rates to creep progressively higher the more detailed the government becomes as they flesh-out the next economic rescue strategy. I'm not suggesting mortgage rates are poised for a rocket shot to higher levels this afternoon - I'm just saying that it would be wise to bear-in-mind that significant job growth created by massive amounts of government designed fiscal and monetary stimulus programs is not typically the "stuff" that notably lower mortgage interest rates are made of.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.14.2011

Commentary: Today's economic news clearly shows a majority of consumers have hunkered down and are refraining from spending on anything other than necessities. Consumer spending accounts for more than two-thirds of all U.S. economic activity. According to Commerce Department figures the overall pace of August retail sales was unchanged on a month-over-month basis. For many analysts this data raises fresh questions about the country's ability to steer clear of a double-dip recession.

A separate report from the Labor Department showed prices at the factory gate were unchanged in August, held down by a drop in energy costs. It was the second time headline prices failed to rise in 2011. The core rate of the August Producer Price Index, a value that strips out the more volatile food and energy components, rose a very modest 0.1%. Today's Producer Price Index report sends the Fed a pretty clear message that inflation pressures in the manufacturing sector of the economy remain benign.

The collective story told by these two macro-economic reports will probably be interpreted by most mortgage investors as interest rate neutral.

Speaking of mortgage investors, the Mortgage Bankers of America released their Mortgage Application Survey for the week ended September 9^th, 2011 earlier this morning. Overall loan application activity increased 6.3% last week. Purchase requests increased by 7.0% while the refinance demand posted a 6.0% gain. Refinance requests accounted for 8 out of every 10 loans applications taken last week.

The contract rate for a 30-year fixed rate mortgage finished the week at 4.17%, its lowest level ever recorded. The rate was down 6 basis-points from a week ago, down 15 basis-points from four-weeks ago, and down by 30 basis-points from the year-ago mark.

Europe's deepening debt crisis and expectations the Federal Reserve may soon increase its purchase of long-dated Treasury debt obligations should combine to create decent demand at today's government debt sale. Uncle Sam will be in the credit market looking to borrow $13 billion through the sale of 30-year bonds. Given the current headline risk, investors will likely overlook the miniscule return being offered on these bonds in favor of their relative safety. If my assessment proves accurate, look for this event to be supportive of steady mortgage interest rates. In the unlikely event this auction goes poorly -- expect mortgage interest rates to creep fractionally higher.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.13.2011

Commentary: Trading action in the mortgage market is light this morning. There is reluctance among investors to push note rates lower as they await the results of the Treasury Department's $21 billion 10-year note auction scheduled to conclude at 1:00 p.m. ET today.

Europe's deepening debt crisis and expectations the Federal Reserve may soon increase its purchase of long-dated Treasury debt obligations should combine to create decent demand at today's government debt sale. Given the current headline risk, investors will likely overlook the miniscule return being offered on these 10-year notes in favor of their relative safety. If my assessment proves accurate, look for this event to be supportive of steady mortgage interest rates. In the unlikely event this auction goes poorly -- expect mortgage interest rates to creep fractionally higher.

The economic calendar will feature twin measures of inflation pressure in the form of tomorrow's August Producer Price Index and Thursday's August Consumer Price Index. Wednesday's August Retail Sales figures will also draw considerable investor attention. All three major economic reports are expected to be mortgage market neutral.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Obama's Housing Scorecard

Les Christie, On Friday September 9, 2011, 12:24 pm EDT

CNNMoney.com

During his speech before Congress Thursday night, President Obama briefly referenced an initiative to help rescue the troubled housing market.

"To help responsible homeowners we're going to work with Federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4% - a step that can put more than $2,000 a year in a family's pocket, and give a lift to an economy still burdened by the drop in housing prices," he said.

While details were scant, the new program sounds very similar to the existing Home Affordable Refinance Program (HARP) and isn't the broad new program aimed at facilitating millions of refinancings that some were expecting, said Jaret Seiberg, an analyst for MF Global Inc.'s Washington Research Group, which analyzes public policy for institutional investors.

However, Seiberg noted that even if Obama wanted to trot out a bigger plan to rescue the housing market, getting the legislation passed by Congress would be extremely difficult.

"Regulators can tweak the HARP to make it more effective without the need for legislation or financing," said Seiberg. "But a new initiative would require Congressional action, which we believe would be impossible to get."

Whether the administration could make an initiative like this work is another question entirely. The Obama administration has unveiled several programs designed to help struggling homeowners and ease the foreclosure crisis -- and many of them have fallen well short of their goals.

Here are some of the government's previous efforts, and how they've fared:

Home Affordable Modification Program (HAMP)

Trial launch: March 2009

Borrowers affected: As of July 2011, there have been 1.89 million trial modification offers extended to borrowers since the program launched in March, 2009.

HAMP was a big early disappointment -- not only because it fell well short of initial promises to lower mortgage payments for 3 to 4 million borrowers but because so many of the borrowers who were issued modifications early on quickly re-defaulted on their loans.

Track record: The program's record has improved and re-default rates have dropped, but they're still troubling. As of March, more than 19% of all borrowers with HAMP modifications are at least two payments behind twelve months after their loans have been modified.

How to rescue housing

Only 675,000 borrowers have received permanent modifications and are still in those refinanced mortgages. That's compared to 764,000 trial modifications that have been cancelled, usually as a result of missed payments.

Still, there have been improvements, with borrowers earning permanent modifications more quickly and in higher percentages than before. The modifications have lowered borrowers' payments by an aggregate of $7.8 billion, according to the Treasury Department.

Housing and Urban Development Secretary Shaun Donovan said that HAMP and other government foreclosure prevention programs have helped to create an infrastructure in which non-government mortgage modifications are processed.

In fact, the number of non-HAMP modifications during the first six months of 2011 came to 375,000, according to Hope Now, about twice as many as completed under HAMP over that period.

Second Lien Modification Program (2MP)

Launch date: April 2009

Participation: 37,466 borrowers

The Second Lien Modification Program (or 2MP) provides assistance to homeowners who have a second mortgage or a home equity line of credit in addition to their primary mortgage.

Many potential mortgage modifications have run into roadblocks because lenders of home equity loans and lines of credit refuse to cooperate. After all, the first mortgage holder typically gets paid first when an underwater mortgage gets modified and there's often nothing left for the second lien holder.

Yet, second lien holders have to agree to a mortgage modification -- and to take a loss -- before a loan can be refinanced. Under 2MP, the government pays cash incentives to the lenders of the second loans so they will allow the refinancing to proceed.

Track record: So far, only 3,516 borrowers have had their second mortgages fully extinguished by their second loan lenders, with an additional 33,528 receiving a paartial reduction in their principal or other steps to reduce payments. That's a far cry from the estimated one million or more that the program was created to help.

The average amount involved is more than $67,000 for a full elimination of a loan balance and nearly $6,400 for a partial elimination.

Hardest Hit States Fund

Launch date: February, 2010

The Obama administration set aside $7.6 billion in funding for states that were hit hardest by the economic downturn to be used toward foreclosure prevention.

Eighteen states and the District of Columbia currently participate in the program and each state can spend the money on programs they determine best meet the needs of their residents.

Since the funding was allocated, all of the states have now implemented their programs, according to a spokeswoman for the Treasury Department.

They have directed about 70% of their funds toward programs that help homeowners who've lost their jobs, she said. Another 20% is being used to reduce mortgage principal for borrowers deep underwater. Much of the rest will go toward outreach and foreclosure counseling and prevention programs.

Track record: Too soon to tell. The Treasury does not aggregate data and the states have not produced full reports yet. There's been a big uptick in the number of servicers volunteering to participate in the program.

Home Affordable Foreclosure Alternatives (HAFA)

Launch date: April, 2010

All HAFA agreements started: 25,716

Aimed at borrowers who are underwater on their mortgages and who've been denied a modification via HAMP, HAFA was supposed to be a last-ditch effort to help homeowners avoid foreclosure. They still, however, lose their homes.

The program pays cash to both the borrower and lender to encourage a short sale, a deal in which the bank accepts the proceeds of the home sale as full repayment of the mortgage debt, forgiving any loss.

The program includes deeds-in-lieu, which are agreements in which the bank takes back the home directly from the borrower as full repayment.

Track record: HAFA was also a disappointment, with few borrowers taking advantage of the program. Others who would have participated, were ineligible because they did not meet a 31% debt-to-income requirement for approval. Earlier this year, that requirement was lifted.

Principal Reduction Alternative (PRA)

Launch date: June 2010

Trial modifications started: 29,406

This program is for borrowers with loans that are not backed by Fannie Mae or Freddie Mac or insured by the FHA. It requires servicers to evaluate the benefit of reducing mortgage principal for loans in which the balance has exceeded the value of the home by 15% or more.

Loan servicers are not required to reduce the principal, just to consider doing so. The mortgages may be ones in the HAMP program.

Track record: With less than 30,000 participants, this program has yet to gain much traction. But for those who are eligible for the program, PRA can result in substantial savings. The average reduction in principal is nearly $70,000.

Home Affordable Unemployment Program (HAUP)

Launch: July 2010

Participation: Only about 13,521 borrowers were participating in the program as of the end of June.

This program originally reduced or suspended mortgage payments for unemployed borrowers for up to three months, but on Wednesday, the Treasury Department announced it would extend that for up to 12 months.

Track record: Participation has been limited. The GSEs, Fannie Mae, Freddie Mac and the FHA, have their own forbearance programs and they represent a huge share of the market.

FHA Short Refinance

Launch date: September, 2010

This is one of the few programs designed to help borrowers who have remained current on their mortgage payments. If their servicers agree to write off at least 10% of the principal, underwater borrowers can refinance into a new FHA-insured loan.

The refinance will put them back in the black, at least on their first mortgage: The debt-to-value ratio has to exceed 97.75%. With any second mortgage factored in, it can't exceed 115%.

Track record: This got off to a very slow start, with only about 15 refinances done by early 2011. The program seemed to gain some traction this spring -- 23 servicers had signed up to participate -- when the House Financial Service Committee voted to kill it in March. It's future is in doubt.

As of late August, there were 870 cases in the pipeline, according to HUD.

Emergency Homeowner's Loan Program (EHLP)

Launch date: June, 2011

Loans affected: No data yet

This $1 billion program offers interest-free loans to homeowners who have been hit with a job or income loss and reside in one of the 32 states not covered by the Hardest Hit States program.

Loans are restricted to those who have a household income of $75,000 or less, or earn less than 120% of the median household income for a community. They must have missed at least three payments, be on the verge of losing their home and demonstrate the ability to resume payments once their period of unemployment ends.

Track record: The money is being loaned on a first-come first-served basis until it runs out. Originally, the deadline was July 27 but HUD later announced it would take applications up until September 15.

The program's target is to help 30,000 borrowers.

Extended forbearance for FHA loans

Launch date: July, 2011

Loans affected: No data yet

This program extended to 12 months the period of time unemployed homeowners with Federal Housing Administration-backed mortgages could skip or make smaller mortgage payments, up from a minimum of four.

A HUD spokesman noted that the program became effective August 1 and that servicers had 60 days to implement it. He said it was too early to produce any data that showed the program's effectiveness.

Daily Commentary by Larry Baer 9.12.2011

Commentary: The central feature of the coming week will be a three-part Treasury debt auction scheduled to run from Monday through Wednesday. Uncle Sam will look to borrow a total of $66 billion in the form of 3- and 10-year notes and 30-year bonds. I'll provide auction results on my website once the final gavel falls at 1:00 p.m. ET on each of the three respective days.

The economic calendar will feature twin measures of inflation pressure in the form of Wednesday's August Producer Price Index and Thursday's August Consumer Price Index. Wednesday's August Retail Sales figures will also draw considerable investor attention. All three major economic reports are expected to be mortgage market neutral.

The Treasury auctions results together with trading action in the stock markets will probably exert the most influence on the trend trajectory of mortgage interest rates this week.

According to my models, the Dow Jones Industrial Average (a price-weighted average of 30 actively traded, primarily blue chip industrial stocks, considered to be an indicator of overall stock market conditions) is in the process of establishing a intermediate-term (multi-week) bottom somewhere in the neighborhood of 10,800 and 10,600. This bottom, according to my models, will likely be made this week. If this assessment proves anywhere close to accurate, it will be difficult, if not impossible for mortgage note rates to move significantly lower from current levels. Heads up.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.9.2011

Commentary: All the chatter surrounding the Administration's proposed $447 billion package of tax cuts and spending plans is little more than background noise for financial markets this morning. Capital market investors of every description will not commit capital in significant amounts unless they see creditable policy movement from Washington. Until then, all the speeches and posturing in the world will likely have only temporary influence on the direction of equity markets and mortgage interest rates.

One of the few things investors seem to be completely sure of at the moment is that this economic downturn has been deeper and lasted longer than anything history has recorded since 1930. The vast majority of market participants are also sure all of the Fed's monetary policy strategies together with the fiscal stimulus programs that have been provided by Washington up to this point have not been enough to rekindle the economic growth engines. Keep your fingers crossed that the coming round of "financial starter fluid" is enough to produce something more than just a sputter and cloud of smoke from the economy. My personally opinion is there is a growing list of reasons for optimism in this regard - guarded optimism certainly - but optimism nonetheless.

The central feature of the coming week will be a three-part Treasury debt auction scheduled to run from Tuesday through Thursday. Uncle Sam will look to borrow a total of $66 billion in the form of 3- and 10-year notes and 30-year bonds. The economic calendar will feature twin measures of inflation pressure in the form of Wednesday's August Producer Price Index and Thursday's August Consumer Price Index. Wednesday's August Retail Sales figures will also draw considerable investor attention. All three major economic reports are expected to be mortgage market neutral. The Treasury auction results together with trading action in the stock markets will probably exert the most influence on the trend trajectory of mortgage interest rates next week.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.8.2011

Commentary: Trading activity in the mortgage market is thin and sporadic this morning as investors await Fed Chairman Bernanke's 1:30 p.m. ET speech and President Obama's address to a joint session of congress at 7:00 p.m. ET. Most market participants realize there is no such thing as magic pixie dust that will enable either the Fed or the White House to suddenly and permanently relieve the nation's employment woes.

Media sources have been talking up the likelihood that Obama will unveil some $300 billion in tax cuts together with another round of government spending on infrastructure and job training programs. For his part Fed Chairman Bernanke will speak on the economic outlook and market participants will be listening intently to see if Mr. Bernanke floats a hint that central bankers are fleshing out the details of "Operation Twist," a strategy aimed at lowering longer-term borrowing costs for businesses and borrowers alike.

The mortgage market has already priced in the expectations I have outlined above - so unless Mr. Bernanke or Mr. Obama deliver a surprise of a major magnitude (a low probability outcome) - it is unlikely either event will influence the current trend trajectory of mortgage interest rates much one way or the other. If this assessment proves accurate, the mortgage market will continue to take directional cues from trading action in the stock markets. Higher stock prices will tend to push mortgage note rates fractionally higher while lower stock prices will likely prove supportive of steady to perhaps slightly lower rates.

I expect a price pull-back for the Dow Jones Industrial Average toward the 11,000 level to occur within the next day or two. If buyers aggressively show up as the DJIA trades at, or near the 11,000 mark -- the probabilities will favor a rally in the stock market lasting through mid-October. If the rally develops as expected it will likely have the potential to carry the price of the Dow all the way back to the neighborhood of 12,800 or so. I'll be watching closely. Should this scenario actually develop - the lowest mortgage interest rates of the year will likely have been set during the week ended August 19^th.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.7.2011

Commentary: Different day - same story.

For the time being mortgage investors appear content to tread water as they await Fed Chairman Bernanke's 1:00 p.m. ET speech on Thursday and President Obama's address to a joint session of congress at 7:00 p.m. ET the same day. Until then, the mortgage market will probably take directional cues from trading action in the stock markets. Higher stock prices will tend to push mortgage note rates fractionally higher while lower stock prices will likely prove supportive of steady to perhaps slightly lower rates.

Yesterday I wrote, "For what it is worth, my models are indicating the Dow Jones Industrial Average (a price-weighted average of 30 actively traded, primarily blue chip industrial stocks, considered to be an indicator of overall stock market conditions) will attempt to put in a short-term bottom somewhere in a price range between 11,040 to 10,950. This bottom, according to my models, will likely be made sometime between today and the close of business on Friday. If this assessment proves anywhere close to accurate, it will be difficult, if not impossible for mortgage note rates to move significantly lower from current levels."

The intraday low for the Dow Jones Industrial Average was 10,932 yesterday morning -- and the index has since rallied 400+ points. I expect a price pull-back toward the 11,000 level to occur within the next day or two. If buyers aggressively show up as the DJIA trades at, or near the 11,000 mark -- the probabilities will favor a rally in the stock market lasting through mid-October that has the potential to carry the price of the Dow all the way back to the neighborhood of 12,800 or so. I'll be watching closely. Should this scenario actually develop - the lowest mortgage interest rates of the year will likely have been set during the week ended August 19^th.

Speaking of mortgage interest rates - the Mortgage Bankers of America have released their Mortgage Application Survey for the week of September 2^nd. The total number of mortgage applications taken during the period fell 4.9%. Despite lower mortgage rates, the refinance component of the index dropped 6.3% while the pace of purchase applications increased a very modest 0.2%.

The contract rate of 30-year fixed-rate mortgages finished the week at 4.23%, down 9 basis-points from a week ago, down 14 basis-points from four weeks ago, and down by 27 basis-points from the year-ago mark. Refinance applications accounted for 8 out of every 10 loan applications taken last week.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.6.2011

Commentary: Much to most economists' surprise the pace of expansion in the service sector of the economy accelerated in August, snapping a three month losing streak.

The Institute of Supply Management said its services index rose to 53.3% in August from 52.7% in July. This index represents about 90% of all domestic economic activity. Today's uptick suggests the recovery is continuing to limp along even in the face of anemic job growth. Mortgage investors took note of the better-than-expected performance for the ISM's Service Sector Index - and then shrugged the whole thing off.

For the time being mortgage investors appear content to tread water as they await Fed Chairman Bernanke's 1:00 p.m. ET speech on Thursday and President Obama's address to a joint session of congress at 7:00 p.m. ET the same day. Until then the mortgage market will probably take directional cues from trading action in the stock markets. Higher stock prices will tend to push mortgage notes fractionally higher while lower stock prices will likely prove supportive of steady to perhaps slightly lower rates.

For what it is worth, my models are indicating the Dow Jones Industrial Average (a price-weighted average of 30 actively traded, primarily blue chip industrial stocks, considered to be an indicator of overall stock market conditions) will attempt to put in a short-term bottom somewhere in a price range between 11,040 to 10,950. This bottom, according to my models, will likely be made sometime between today and the close of business on Friday. If this assessment proves anywhere close to accurate, it will be difficult, if not impossible for mortgage note rates to move significantly lower from current levels. Heads up.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 9.2.2011

Commentary: Employment ground to a halt in August as sagging confidence caused already skittish businesses to refrain from posting their "Now Hiring" signs.

For the first-time since 1947 the headline nonfarm payroll number posted a goose-egg. According to the Labor Department, nonfarm payrolls were unchanged last month - with new job creation matched exactly by job losses. The national jobless rate remained at 9.1%. The statistical anomaly for the headline jobs number is sure to be revised away next month -- but any adjustment will not change the single truth that labor market conditions are dismal. As it stands now, the economy needs to generate 150,000 jobs or so each month just to keep pace with the number of new job seekers entering the labor market.

Based on today's ugly nonfarm payroll report there are many calling for the Fed to immediately launch another stimulus plan. Others question whether another round of intervention by the Fed would really do much in the way of inducing businesses to hire additional workers.

With liquidity in the banking system and on corporate balance sheets at the best levels in decades it seems to me that injecting additional liquidity won't likely do much to induce job creation. The current crisis is no longer a function of liquidity - but rather it is largely a crisis of confidence - and that is a condition that is much more difficult to resolve since it requires strong leadership at a number of different levels of government, business, and society-at-large. America has a solid history of leaders appearing at just the right moment to guide the country through its most troubling times. If history is going to repeat itself - I believe now would certainly be an opportune time for those leaders to make their presence known.

Looking ahead to next week's holiday shortened scheduled the economic calendar is sparse -- with nothing more than Tuesday's Institute of Supply Management Service Sector Index to capture mortgage investors' attention. This report is expected to do little more than confirm other previously released data indicating economic growth almost ground to a halt last month - a condition that is already well priced into most of your investors' rate sheets.

At some point - from the investors' perspective - accepting lower yields on their mortgage portfolio becomes pointless - or dangerous - or both. Against this background it will not take much in the way of an inflation spike or signs of even slightly improving economic conditions to prompt a dramatic upward surge in note rates. A word to the wise.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

More short sales bring new scam: flopping

In 'flopping,' a home is purchased by insiders at a steep discount, then immediately sold for a big profit.

By Melinda Fulmer of MSN Real Estate

Real-estate agent Lynne Wright thought she had found the perfect home for her clients. The quiet house on a cul-de-sac in one of the most prestigious gated communities in Bakersfield, Calif., was offered in a short sale for $40,000 less than similar homes on the market.

Wright and the couple moved quickly and made an offer higher than the asking price, but were outmaneuvered by a husband-and-wife real-estate team in Wright's brokerage office who wanted to buy it for their own use. She didn't think much of it, until she saw that the property sold for $40,000 less than the $342,000 her clients had offered.

When she asked the listing agent why, she was told to "leave it alone."

Wright says she is still not sure if the servicer or owner of the property ever saw her clients' much higher offer. All she knows is that two agents picked up a luxury property for $80,000 less than market value, the banks took a big loss and the listing agent got both sides of the commission, representing his colleagues.

"It's just robbery," she says. "And I don't know how to stop the robbery."

• MSN Money: Should you sue your lender?

Apparently the nation's mortgage servicers don't, either. Suspicious real-estate transactions have surged in the past two years, analysts say, along with the number of short sales, in which a house is sold for less than the amount of its remaining mortgage.

Short sales are supposed to be "arms length" transactions without any relationship or collusion among the parties, all of whom must sign affidavits to that effect. But the parties often are connected.

Many times, this fraud is committed through limited-liability companies to make it hard for servicers to see who is buying the property, says Robert Hagberg, associate director of mortgage-fraud investigations for Freddie Mac.

• 'Listed': Money woes come a-rapping at Edgar Allan Poe home

In some cases, this type of mortgage fraud involves buyers scooping up distressed properties for a portion of their value, either for themselves or to give back to a friend or relative.

The rest involve "flopping," where an investor – with the help of an agent or middleman – persuades the bank to agree to a much steeper discount than it should, and immediately resells the property to another buyer for a significant profit without having made any improvements. The FBI says it has found numerous instances in which organized-crime groups were involved in short-sale fraud.

According to a recent study by CoreLogic, short sales that were resold the same day averaged a 34% gain (or $54,947) between sale prices.

One in every 52 short-sale transactions in the first half of last year appeared to be one of these "suspicious" resales, CoreLogic said. This year, it expects lenders, servicers and investors to incur more than $375 million in unnecessary losses from these shady deals, as the number of short sales surges an additional 25%.

"Short-sale fraud and other servicing-related fraud is definitely the fraud du jour and our greatest area of focus at the moment," Hagberg says. In 2011, more than 50% of Freddie Mac's investigations were related to short sales.

Who are the perpetrators?
For the most part, these deals involve insiders, from the underwater borrowers themselves to investors, listing agents, brokers providing valuations and so-called "facilitators," or middlemen negotiating with the banks and buyers trying to flip the properties.

Banks, with a huge backlog of distressed properties, are under pressure to do a lot of transactions and to do them as quickly as possible, says Ann Fulmer (no relation to the reporter), vice president of industry relations for Interthinx, a company that helps lenders reduce their fraud risk.

Knowing this, these insiders are able to work the system and push through bogus valuations to set the price of the sale or fend off higher offers.

Fulmer has seen listing agents involved in these scams post properties in multiple-listing services in the wrong city to avoid competition. Some post pictures of a completely different, junk-filled property. Or they stipulate that only people from the real-estate office will take offers on the property, so they can control the transaction.

In Wright's case, which was reported to the state but has not been prosecuted, real-estate agents controlled every aspect of the deal. An agent in her office was the distressed borrower; the listing agent who represented the property and buyer sat just desks away, as did the real-estate team who eventually wound up with their own luxury property for a song.

"The thing that really bothered me was the lack of ethics," Wright says. "Sure I can find my clients another house; what I couldn't explain to them very well was how (something like this) can happen."

Gary Crabtree, an appraiser in the area, said he got calls from several agents whose offers were rebuffed for the rock-bottom inside bid.

"It set an all-time low for that neighborhood," he says.

Price manipulation
To realize a big profit from this type of fraud, an investor, agent or middleman must first push down a home's price. That means driving down the broker price opinion (BPO), the estimate of value that servicers get agents to provide for short sales.

While the vast majority of these estimates are probably free of influence, many aren't. Short-sale facilitators or other middlemen often contact these agents with lowball comparable sales that they would like to see used in the valuation, such as mobile homes or major fixer-uppers. In one case, Hagberg says, he was told of a negotiator leaving two envelopes for the agent coming up with the BPO: One contained the comparables to be used in the valuation; a second contained two $100 bills.

Another way to drive down the price of a short sale and pack more profit into the flip is by making the house look as though it is in worse shape than it is. Borrowers or negotiators brought in by the borrower will submit false repair bills for shoddy pipes, wiring or lead paint.

"A lot of times these repairs are for things Realtors are not qualified to assess," Hagberg says.

Hagberg has even seen cases of "anti-staging" or "reverse staging" in which a house is sabotaged to look weather-beaten, vandalized or smelly.

How can someone gain access to do this? Many times, an underwater borrower will give his negotiating rights – and access to his home – to a short-sale negotiator who will conduct all communications with the lender and allow other investors to manipulate the sale for a kickback.

"Many times, borrowers don't know about the flip" that's coming, Hagberg says. "And frankly I don't know if there's a whole lot of concern on their part. They are seeing the same loss anyway."

There haven't been very many indictments for this type of short-sale fraud. But such fraud can be punishable by up to 30 years in prison.

To catch a thief
Servicers are slowly trying to improve their systems and give paperwork more scrutiny to prevent short-sale fraud, Fulmer says. Prevention is more practical than prosecution, given the limited resources of law enforcement.

And, in the past, it has been hard for investigators to get servicers to cooperate in efforts to crack down on this fraud.

Glenn Gulley, a real-estate fraud investigator with the district attorney's office in California's Stanislaus County – one of the nation's hot spots for mortgage fraud – recalls calling servicers repeatedly about fraudulent deals and never getting a call back.

"In 4½ years, I've never had a bank call me and say we've been defrauded," he says, though he adds that they're slowly starting to respond as they put more staff in charge of mitigating these losses.

Instead, most of the calls he gets about this type of fraud are from thwarted homebuyers who read published sales transactions in the newspaper.

"I'm getting people calling and saying, 'I offered $300,000 for a house that sold for $200,000.'"

And those are the ones who actually make an offer. Many more people are discouraged from bidding when the listing agent for a short sale puts it up on the MLS at 9 a.m., only to list it as "sale pending" at 9:01.

"Then you know the same agent double-ended it" and is bringing in his own buyer, Gulley says.

Indeed, Hagberg says, some resales from the short-sale buyer to a third party actually close before the deal is negotiated with the bank, giving them the money to satisfy the lender on the short sale. In some cases, the buyer used a proof-of-funds letter generator found on the Internet to vouch for his ability to close the deal, Hagberg says, without actually having the money at the time.

Of course, some lower-priced short sales are legitimate, pitting cash deals against homeowners with financing or repair demands.

The whole problem could be solved if lenders had a better idea what properties were worth, Gulley says. Fulmer and others say they aren't sure that BPOs should take the place of full-fledged appraisals.

"There are no real standards for how to pick the comps to establish the value that you receive," Fulmer says. "You can pick the lowest of the low balls and skew the results."

Whom does it hurt?
After the recent mortgage meltdown, few are shedding tears for lenders over these short-sale losses. Fulmer says that when she talks about this type of fraud, a common reaction is, "So what?"

But people should care, she says, because we're all ultimately paying the tab for it.

"A lot of these loans are insured by the Federal Housing Administration or bought by Fannie (Mae) and Freddie," Fulmer says. "These excess losses are translating into losses that taxpayers are going to have to make up for."

Moreover, this type of fraud pushes down neighborhood values, potentially putting more people underwater on their loans. In other cases, the fraud is part of a larger network of schemes that leaves the house sitting empty and open to theft and vandalism.

"Once a neighborhood gets caught up in fraud, it can get recycled in fraud indefinitely," Fulmer says. "I saw one house that was flipped and foreclosed, flipped and foreclosed for 10 years."

Daily Commentary by Larry Baer 9.1.2011

Commentary: Mortgage investors have completely shrugged-off this morning's stronger-than-expected decline in the weekly jobless claims number and the better-than-anticipated Institute of Supply Management Manufacturing Index. The near-term trend trajectory of mortgage interest rates is now leaning entirely on tomorrow morning's 8:30 a.m. ET release of the August Nonfarm Payroll figures.

The majority of economist are projecting the headline nonfarm payroll number will fall within shouting distance of 80,000 and the national jobless rate will remain at its current 9.1% level. These expectations are already well priced into the mortgage market. Numbers that match or exceed the current consensus estimate will probably exert upward pressure on mortgage interest rates -- while a headline number less than 75,000 and/or a jobless rate of 9.2% or higher will almost certainly prove supportive of fractionally lower rates before the day is over.

While lower rates are certainly welcome by borrowers and mortgage originators alike - they don't do much for the end investors. Yields to investors are approaching the point where they don't offer a return much greater than what the investor could get by simply stuffing their money under the mattress. The "so what" factor here is worth noting. At some point - from the investors' perspective - accepting lower yields on their mortgage portfolio becomes pointless - or dangerous - or both. Against this background it will not take much in the way of an inflation spike or signs of an accelerating economic recovery to prompt a dramatic upward surge in note rates.

FYI: The mortgage market will operate on a normal schedule on Friday, September 2^nd and will be closed on Monday, September 5^th for the Labor Day Holiday.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME