Just when you thought it was safe to go back in the water, Taylor Bean & Whitaker abruptly ceased operations.  It is never good news when the fellows in the windbreakers show up, and this time was no exception.  In the words of TBW’s chairman, Lee Farkas, “It’s the saddest day of my life.”

TBW, ranked 12th in national origination volume, left at least 600 banks and many independent mortgage companies wondering what to do with their loan locks, and many very qualified mortgage bankers wondering what happened to their jobs.  TBW was leading an effort to raise $300 million of private equity to shore up Colonial Bank.  That deal fell apart too.  Rumors are swirling about the viability of Colonial, a bank that provides 20% of the mortgage industry’s warehouse lines.

The TBW news is a blow to a mortgage industry already struggling with higher interest rates.  Friday’s could-have-been-worse jobs report sent Treasury yields to their highs of the year.  Futures are pricing in a Fed rate increase by the end of the year.  Though the economy could still stumble – where is the real growth going to come from – rates could push higher this week.  The market is coming to grips with an economy that is no longer on the ropes.  In the months ahead, it is likely that mortgage rates will be range-bound, pushing towards 6.00% when the economic news is good, and falling back to 5.00% when the news is bad.

There are some green shoots in the housing business.  Home prices posted their first month-to-month rise in three years.  Origination profits are pushing towards 1.00% in yield, after hitting a post-refi low of 0.75%.  Mortgage rates are near 5.50% – not a great level, but pretty good nonetheless.  Rates owe much of their recent decline to further compression in the mortgage-Treasury yield spread.  At 1.90%, the spread is near the year’s lows, and down considerably from 2.25% some weeks ago.

The economy shrank just 1% last quarter.  The recession, now in its 19th month, has been the most severe since quarterly numbers were first published in 1947.  But it is probably over.  Recent reports suggest that GDP will expand an annualized 3% this quarter.

News that the economy’s decline is decelerating helped send stocks higher for a fourth straight week.  Stocks had their best July in 12 years, with the S&P 500 up 7.4%.  Stocks just had their best five-month run since 1938 – up nearly 50%; the S&P 500 is 19% below levels set before Lehman Brothers’ collapse last September.  Barron’s, however, warns of a 760x P/E ratio (based on reported earnings), and of a huge rally while two million jobs evaporated.  The paper exclaims “that the marginal buyer of equities today may well be the same person who was loading up on real estate during the summer of ‘06.”

You know it’s a bad day when people like the IRS more than you.  Such is the case for Ben Bernanke.  Americans currently rate the Federal Reserve lowest of any government agency, even below the IRS.  In a recent Gallup poll, only 30% said the nation’s central bank was doing an excellent or good job, trailing the IRS at 40%. Top marks went to the Centers for Disease Control with 61%, followed by a tie between NASA and the FBI at 58%.

Members of the Senate are considering a tax on cosmetic surgery. When they brought it up, you should have seen the look that Nancy Pelosi’s face tried to make.  – Conan O’Brien

Thanks for your business and have a good week.            — Tom Millon

Market	Close	Wk Chg
30-Yr Agency Note Rate	5.57%	+0.24%
30-Yr Mortgage Yield	4.67%	+0.29%
Note Rate vs. MBS Yield	0.90%	-0.05%
Mortgage-Treasury	1.90%	-0.05%
10-Yr Treasury	3.86%	+0.38%
2-Yr Treasury	1.32%	+0.20%
10yr- to-2yr Spread	2.54%	+0.17%
Fed Funds	0.19%	0.00%
Fed (Aug ‘09)	0.24%	+0.03%
Fed (Feb ’10)	0.81%	+0.20%
Dow Industrials	9,370	+198