Friday, September 25, 2015

The CFPB's fines, Final rules, Defining rural lenders, Updates on exam procedures...


The Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ), after an investigation that begin in early 2014, announced a joint action against Hudson City Savings Bank for discriminatory redlining practices that denied residents in majority-Black-and-Hispanic neighborhoods fair access to mortgage loans. The complaint filed by the CFPB and DOJ alleges that Hudson City illegally provided unequal access to credit to neighborhoods in New York, New Jersey, Connecticut, and Pennsylvania. The bank located branches and loan officers, selected mortgage brokers, and marketed products to avoid and thereby discourage prospective borrowers in predominantly Black and Hispanic communities. If the proposed consent order is approved by the court, Hudson City will pay $25 million in direct loan subsidies to qualified borrowers in the affected communities, $2.25 million in community programs and outreach, and a $5.5 million penalty. This represents the largest redlining settlement in history to provide such direct subsidies.

The Equal Credit Opportunity Act (ECOA) prohibits creditors from discriminating against applicants in credit transactions on the basis of characteristics such as race, color, and national origin. In the complaint, the CFPB and DOJ alleged that from at least 2009 to 2013, Hudson City violated the law when it engaged in illegal redlining by offering unequal access to credit based on the race and ethnicity of prospective borrowers' neighborhoods. Specifically, Hudson City structured its business to avoid and thereby discourage residents in majority-Black-and-Hispanic neighborhoods from accessing mortgages. The DOJ also alleges that Hudson violated the Fair Housing Act, which also prohibits discrimination in residential mortgage lending. 

Remember that last week the CFPB also took legal action against World Law Group. The lawsuit against World Law names individuals responsible for running a debt-relief scheme that charged consumers exorbitant illegal upfront fees. The CFPB alleges the debt-relief scheme falsely promised consumers a team of attorneys to help negotiate debt settlements with creditors, failed to provide legal representation, and rarely settled consumers' debts. 

No, the CFPB has not been sitting on its hands. Using enforcement actions to effectively run an entire industry is not a good way to run residential lending, and everyone is certainly waiting for "another head to be put on a stake on the castle wall" regarding MSAs. That being said, the CFPB issued a final rule amending threshold adjustments for 2016 HOEPA and QM loans, effective January 1st, 2016. The final rule regarding various annual adjustments is required to make under provisions of Regulation Z (TILA) that implement the CARD Act, HOEPA, and the ability to repay/qualified mortgage provisions of Dodd-Frank. The adjustments made by the final rule are effective January 1, 2016. The revised loan amount threshold for HOEPA loans is $20,350 and the adjusted statutory fee trigger is $1,017. 

HOEPA requires the CFPB to annually adjust the total loan amount thresholds that determines whether a transaction is a high cost mortgage when the points and fees are either 5 percent or 8 percent of such amount.  In the final rule, the CFPB decreased the current dollar thresholds from, respectively, $20,391 to $20,350 and $1,020 to $1,017.

And helping every borrower better shop their lender (I didn't say that!), "As part of our Know Before You Owe mortgage initiative there is now a Loan Estimate that makes shopping for a mortgage easier than ever. The Loan Estimate uses clear language and design to help you understand the key features, costs, and risks of a loan offer you've received from a lender. Starting October 3, lenders will give you the Loan Estimate for most mortgages you apply for. The new design also makes it easier to compare Loan Estimates. Shopping for the best deal on your mortgage could save you money over the years. You should get Loan Estimates from at least three lenders and compare them to find the loan that's best for you and your family."

The CFPB also issued a rule that will increase the number of financial institutions that are able to offer certain types of mortgages in rural and underserved areas. "The rule also gives small creditors time to adjust their business practices to comply with the new rules. We will update some of the Title XIV implementation materials on our website to reflect the changes, and will send an email to let you know when we have posted those updates." Yes, it issued a final rule that revises the definitions of "small creditor" and "rural areas" under Regulation Z of the Truth in Lending Act (TILA). The final rule is effective January 1, 2016 and creates special small creditor provisions with regard to certain Regulation Z requirements. Certain provisions apply to small creditors in general, while other provisions apply to small creditors that operate predominantly in rural or undeserved areas.

Additionally, the annual percentage rate ceiling for a first lien loan to be a non-higher priced mortgage loan that is eligible for the qualified mortgage safe harbor under the ATR rule is higher for small creditors than other creditors (i.e., less than 3.5 percentage points above a benchmark rate as opposed to less than 1.5 percentage points above the benchmark rate). To increase the number of financial institutions eligible for these special provisions under Regulation Z, the final rule revises the definition of "small creditor" by increasing the loan origination limit for determining eligibility for small-creditor status from 500 originations of covered transactions secured by a first lien to 2,000 originations. Significantly, originated loans held in portfolio by the creditor and its affiliates are excluded from the 2,000 loan cap. 

In addition it includes the assets of the creditor's affiliates that regularly extended covered transactions in the calculation of the $2 billion asset limit for small-creditor status. The CFPB took this step to prevent larger creditors from attempting to fit within the small creditor provisions through organizational changes. It also expands the definition of "rural area" to include either: (a) a county that meets the current definition of a rural county; or (b) a census block that is not in an urban area as defined by the U.S. Census Bureau. Additionally, the rule allows creditors to rely on a new automated tool provided on the CFPB website to determine whether properties are located in rural or underserved areas, or on the Census Bureau's website to assess whether a particular property is located in an urban area (based on the Census Bureau's definition). For more details definitely click on the link a few paragraphs up! 

The CFPB updated two regulatory examination procedures, the Real Estate Settlement Procedures Act (88 pages) and the Truth in Lending Act (323 pages). Yes, 323 pages of simplification.

Friday, September 4, 2015

The Price of Messing up on TRID

Back to school? The U.S. Census Bureau has come to the rescue with a lot of forgettable numbers - but those actuary and statistics majors have to do something, right? There are about 78 million children and adults enrolled in school throughout the country ranging from nursery school to college and comprised of 26% of the population age 3 and older. A quarter of elementary through high school students had at least one foreign-born parent in October 2013. About 74% of college graduates with a degree in science, technology, engineering or math (STEM) were not employed in STEM occupations. And underwriters could probably tell you that the average earnings for full-time workers with a bachelor's degree were $83k in 2012, compared to $41,248 for full time workers with a high school diploma.

Unlike the free magazine above, mistakes cost money. ComplianceEase recently released an analysis of compliance defects for closed loans and found that the cost of correcting errors is pushing the cost of origination up by $28 per loan. Their research also indicated that 17 percent of the 700,000 loans analyzed failed for TILA reasons and 6 percent failed for being outside of RESPA tolerances. For the 6 percent of loans that failed the RESPA tolerance test, the average cost for reimbursement was $328 and for 2 percent of loans that had an uncured RESPA violation the average reimbursement cost was $740. With the upcoming TRID regulations, lenders will have to be more cautious as penalties will range from $5,000 per day to $1 million per day for "knowing violations." Also one year after the effective date of the QM rule, Compliance Ease's research showed that 4.5 percent of QM loans failed Safe Harbor tests and 11 percent were mis-categorized as to their QM status.

With about 20 business days left until the TRID hammer comes down on the industry, I have received several questions about penalties if something goes wrong. Brennan Holland with Lenders Compliance Group writes, "The penalties for closing even a single loan in violation of the TILA-RESPA Integrated Disclosure (TRID) regulations can far outweigh any costs incurred in ensuring compliance with the new requirements.... For any violation of a law, rule, or final order or condition imposed in writing by the Bureau, a civil penalty may not exceed $5,000 for each day during which such violation or failure to pay continues.... For any person that recklessly engages in a violation of a Federal consumer financial law, a civil penalty may not exceed $25,000 for each day during which such violation continues... For any person that knowingly violates a Federal consumer financial law, a civil penalty may not exceed $1,000,000 for each day during which such violation continues..."

The Mortgage Action Alliance issued a Call to Action, urging its members to contact their members of Congress in support of legislation that would provide a temporary enforcement grace period and legal safe harbor to ensure smooth implementation of the new TILA-RESPA Integrated Disclosures rules for lenders that make a good-faith effort to comply.  

In the House, H.R. 3192, the Homebuyers Assistance Act, introduced by Rep. French Hill, R-Ark., would provide a legal safe harbor for lenders through February 1, 2016. The bill was approved by the House Financial Services Committee in late July.  In the Senate, S. 1711, introduced by Sen. Tim Scott, R-S.C., would provide a similar legal safe harbor through January 1, 2016. The bill was included in the regulatory relief package that was reported from the Senate Banking Committee earlier this year.

In these waning days of summer vacations the number of announced bank mergers have died down. In the last week there was only a handful. Northfield Bank ($3.1B, NY) will acquire Hopewell Valley Community Bank ($485mm, NJ) for $54.9mm in cash (25%) and stock (75%) or about 1.47x tangible book. In Alabama Avadian Credit Union ($607mm) will acquire American Bank of Huntsville ($127mm). And up north in Illinois Union Federal Savings and Loan Assn ($108mm) will acquire First Federal Savings and Loan Assn of Kewanee ($64mm).

Wednesday, June 17, 2015

Discover Financial Closing Mortgage biz; Primer on hedge costs!

 If you don't like numbers skip this paragraph. The U.S. Census Bureau has published highlights of the Annual 2014 Characteristics of New Housing. There were 620,000 single-family homes completed in 2014 and of these, 565,000 had air conditioning, 64,000 had two bedrooms or less whereas 282,000 had four bedrooms or more, 263,000 were one-story homes and 221,000 homes had three or more bathrooms. In 2014, 264,000 multifamily units were completed, with 127,000 in buildings with 50 units or more, 123,000 had two or more bathrooms and 23,000 were age-restricted. Of the 437,000 single family homes sold in 2014, 314,000 were in a homeowner's association, 311,000 were paid using conventional financing whereas 37,000 were paid for in cash, 137,000 had both a patio and porch and 244,000 had two stories. The average sales price of new single-family homes sold was $345,800, the average price per square foot for new single-family homes sold was $97.09 and the median size of a new single-family home sold was 2,506 square feet.

On the flip side, and it isn't the first and won't be the last, after three years of giving it a go Discover Financial Services is shutting down its struggling home-lending business and laying off 460 employees, many of them in Irvine, California. I am sure compliance costs factored into things... let me know when those borrowers become better off! [Readers can post resumes at]

A Primer (from MCT) on Loan Level Hedge Cost


Over the last 18 months we have seen a sharp increase in the number of hedging clients who are requesting the calculation of loan level hedge cost estimates.  While there are some required assumptions and a few limitations to any such analysis, we will briefly outline an intuitive and mathematically sound method for estimating loan level hedge cost.  We will then thoroughly review the necessary assumptions. 

In explaining this methodology, we will use the case of a locked open pipeline hedged with TBAs and accordingly all hedge costs in our example are the result of TBA pair offs. Hedge cost resulting from forward contract pair offs can be stratified using the same method. We define the hedge period as the window of time between the point the lender confirms the interest rate lock commitment to the borrower (pipeline entry) and the loan is funded and immediately committed to the agency or aggregator (pipeline exit). For purposes of this example we use the term hedge cost, although in a rising rate environment hedge gains would be distributed in the same manner. 

The first step in the calculation will be to distribute the hedge costs across all loans in the population, on a loan amount weighted basis. The primary factor in determining the hedge cost associated with a particular loan is the market movement that it has experienced while in the hedge. Thus, the next step will be to calculate the weighted average market movement of all loans in the analysis by taking the difference in market levels between the time at which the loan was initially locked and the time it was committed out of the pipeline. In order to correctly include the loan's duration in the analysis, the price movement of the appropriate security type and coupon must be used. This is needed because when hedge costs are compared across a population of loans, assets with higher durations carry more weight due to the fact that they will move faster given a change in interest rates compared to those with lower durations. 

The next step of the analysis will be to calculate the deviation from mean market movement for each loan and then apply this figure to the corresponding loan amount weighted hedge cost.  This will give us a loan level hedge cost that has been adjusted for the given loan's market experience versus the overall loan population in the analysis. 

The second and final adjustment will be made for time in the hedge. As with the market movement adjustment we first calculate the weighted average time that the population of loans spent in the hedged pipeline. We then calculate the deviation from the mean lock period for each loan. Finally, we multiply this figure by the weighted average TBA roll cost for the securities that were paired off during the analysis period. 

We now have arrived at a loan level hedge cost estimate that accounts for duration weighted market movement and the time decay that occurred on the hedge while the loan was in the hedged pipeline. The results are intuitive in that the sum of these loan level hedge costs will always exactly tie back to the actual hedge costs that were incurred during the given period.

A significant benefit to this calculation is that hedge cost by channel, branch or even originator can be estimated by using an adaptation of the model. If we distribute the hedge cost incurred over the period of analysis across fallout as well as funded production, the hedge cost generated from a specific segment of production can be estimated. With the hedge cost of fallout included, we can get closer to arriving at the actual hedge performance of any segment of production (i.e., Product, Channel, Branch or Originator). 

As discussed in the introduction, this analysis has one limitation that can potentially compromise the accuracy of the result. Timing discrepancies between hedge and asset execution will cause gains or losses to be pent up in the open pipeline and thereby introduce noise into the historical population. As a result, the primary limitation of this analysis is a function of the look back period. Hedge cost values calculated from two different time periods cannot be compared and thus a specific time horizon for the analysis must be chosen. The loan level value calculated above is subject to profitability timing with the analysis period. A hedge cost analysis that examines a one month window of production will be extremely susceptible to timing issues.  A three month period is better and twelve month look back period would be optimal. The problem of course is that a year is long time to wait for an estimate of hedge cost on a loan that funded today. Thus, accuracy is obtained at the expense of the utility of the result. 

The primary assumption in the analysis is relatively intuitive in that all loans are considered to be equally lucky or unlucky in the market as well as with regards to pull through model errors.  In other words, we assume the hedge position was initiated with the same priority for all loans and pull through assumptions were equally as accurate or inaccurate for all loans. The error equivalence can be relieved by adding pull through back testing to the examination; however this substantially complicates the analysis. Additionally, it is important to note that a discrepancy or error between forecasted and actual pull through error does not necessarily equate to a higher hedge cost for a given loan during a certain period (i.e. forecasting too high of a pull through rate during a period in which rates rose). 

While there are various methods that can be employed to control for timing as well as relieving other assumptions, accuracy is inevitably traded for practicality and usefulness of the result.  Bottom line, we at MCT have found this to be the most reliable method for calculating interpretable and intuitive loan level hedge cost figures. As illustrated in the assumptions above there are far too many caveats that accompany the analysis for any decisions to be made solely from the results. Most importantly, we implore any lender not to use the results of this analysis for compensation purposes. With that said, stratifying hedge costs across a given population of production in this manner will give solid directional guidance to hedge performance.

Housing starts dropped 11.1% in May to 1.036 million although April was revised higher from 1.135 to 1.165 million. Building permits rose 12% however to 1.275 million - the highest in 8 years. Housing starts have been very volatile, so it makes more sense to look at the trend, which is generally up.

For interest rates we closed out the 10-year at 2.32% on Tuesday. The scheduled, potentially market-moving news for today consists of the FOMC rate decision at 2PM EDT, 8PM Croatia time. At this point it would be a real shock if the Fed did anything to short-term rates. 


Tuesday, June 16, 2015

Today's Executive Rate Market Report

US treasuries were better early this morning on increased fears of a Greek debt default. The 10 yr note yield at 8:00 at 2.32% down 4 bps from yesterday’s close, MBS price +16 bps from yesterday’s close. At 8:30 May housing starts and permits were released; starts were expected to have declined 4.0% as reported down 11.1%; building permits though were stronger, expected -3.4% were up 11.8%. Starts were thought to be at 1090K units (yr/yr), starts as reported at 1040K; April starts were revised higher, from 1135K to 1170K. The best two month period since Nov and Dec 2007. Permits for future projects climbed to the highest level in almost eight years, indicating activity might pick up. The starts decline isn’t as negative as the number indicates, starts in April were up 22.1% so the decline put in context isn’t much. The initial market reaction didn’t change the prices or rates on the MBS or treasury markets; at 8:45 the 10 yr at 2.32% -4 bp, 30 yr MBS price +16 bps. (see below for 9:30 levels).

Markets continue to fret over the Greek debt crisis. Talks collapsed over the weekend with the IMF pulling out its negotiators late last week and negotiators in Brussels over the weekend became increasingly agitated over Greece’s reluctance to accept what had been defined as a ‘take it or leave it’ proposal from creditors last week. At the present moment there is increasing concerns that Greece will default at the end of the month, unable to pay €130B of debt payments due in two weeks. Another round of negotiations begins today. Greece will eventually default, the country will not or cannot agree to the reforms demanded by creditors. A new fear is brewing in the EU now; what will happen if Greece leaves the EU and eventually may return to prosperity? Will other countries follow? Reading an article by Brett Arends he points out that Southern Europe’s economies did much better before the EU than they do now in terms of growth. Whether there is substance in the new fears or simply using old data to illustrate a point is certainly debatable; what isn’t is that Greece cannot pay its debts unless it gets more free money from creditors---kicking the can, like using on credit card to pay another card.

At 9:30 the DJIA and the other key indexes opened unchanged after trading weaker earlier this morning. The 10 yr note at 9:30 has slipped from its best level at 2.32% back to 2.34% -2 bp from yesterday’s close. 30 yr MBS price +9 bps from yesterday’s close and -7 bps from 9:30 yesterday.

The remainder of the session should be quiet ahead of tomorrow’s FOMC meeting and Yellen’s press conference. There is little doubt the Fed is ready to increase the FF rate; most still hold that it will be increased at the Sept meeting. Our focus is on how the policy statement frames the economy now and the outlook painted by the Fed. Today’s starts and permits were encouraging but recent reports on manufacturing and consumer spending haven’t been encouraging. Spending did increase in May but still consumers are reluctant to spend. The boost from lower gasoline prices has slowed, prices at the pump have increased $0.80/gallon in Indianapolis and more in the west. Markets put a lot of emphasis on lower energy prices that would increase consumer spending. There is no inflation now or not much on the radar. How will the FOMC and Yellen frame it? Data dependent as has been Yellen’s emphasis on a rate increase?

Technically speaking; the 10 yr note where your attention should be, is continuing to fail on rallies at our resistance at 2.33%, a couple of anemic pushes below it that have not been sustained more than a couple of hours. We don’t expect the strong resistance to break today with the FOMC tomorrow and the uncertainty over Greece. Tomorrow the policy statement and Yellen’s press conference, and events in Europe will set the next move in the rate markets. Currently technically bearish, we need to keep that in mind as the next 24 hours unfolds.

PRICES @ 10:00 AM

10 yr note: +4/32 (12 bp) 2.34% -1 bp

5 yr note: +2/32 (6 bp) 1.69% -1 bp

2 Yr note: unch 0.71% unch

30 yr bond: +5/32 (15 bp) 3.08% -1 bp

Libor Rates: 1 mo 0.185%; 3 mo 0.283%; 6 mo 0.449%; 1 yr 0.791%

30 yr FNMA 3.5 July: @9:30 102.91 +9 bp (-7 bp frm 9:30 yesterday)

15 yr FNMA 3.0 July: @9:30 103.31 +2 bp (+10 bp frm 9:30 yesterday)

30 yr GNMA 3.5: @9:30 103.67 +5 bp (-16 bp frm 9:30 yesterday)

Dollar/Yen: 123.40 -0.02 yen

Dollar/Euro: $1.1245 -$0.0038

Gold: $1178.30 -$7.50

Crude Oil: $59.77 +$0.25

DJIA: 17,851.76 +60.59

NASDAQ: 5041.44 +11.47

S&P 500: 2089.45 +5.02  

Monday, April 20, 2015

Quicken vs. the U.S. Government; Agency fee changes - much ado about nothing?

Let's start with something simple, like a bill introduced last week to amend the Real Estate Settlement Procedures Act of 1974 to prohibit certain financial benefits for referrals of business and to improve the judicial relief for certain violations, and for other purposes.


But the big recent news: dogs sleeping with cats, geese flying south for the summer, toast landing on the floor butter-side up... and Quicken Loans, the nation's largest Federal Housing Administration (FHA) mortgage lender, filing suit in Federal District Court against the United States Department of Justice (DOJ) and Department of Housing and Urban Development (HUD). "The company was left with no alternative but to take this action after the DOJ demanded Quicken Loans make public admissions that were blatantly false, as well as pay an inexplicable penalty or face legal action."


The Wall Street Journal noted that, "Because lenders must certify that the FHA-backed loans they make have no errors, the government has sometimes pursued damages under the False Claims Act, a Civil War-era law that lets the government recover triple damages. That's led to what some banks say are onerous settlements for minor penalties. Rather than audit banks' entire loan portfolios, the Justice Department also tends to extrapolate mistakes based on a sample, another practice that has drawn some banks' ire. 'The risks of doing FHA loans for lenders is too high and marks a low point when a Quicken Loans has to fight back,' said David Stevens, president of the MBA, which lobbies on behalf of lenders. 'This has gone too far and will only hurt consumers' access to credit.' A Quicken spokesman in an email said that the company would continue to make FHA loans in the near term and that "like nearly every lender in the country, we will be evaluating the prudence of our continued participation with FHA." Maybe they should talk to Chase...

Libertarian originators and industry analysts were quick to write.....

"God bless Quicken for having the money, determination and principle to become the aggressor in this matter. The DOJ and HUD should not be allowed to blackmail and strong arm those doing it best. I have been brokering loans to Quicken for about 5 years and have found them to be of the highest quality to partner."

"It takes the biggest to even attempt something like this.  Needless to say, I hope it works. Other lenders and I have spoken and believe there should be a remedy for consumers that will be damaged by the new archaic rules being implemented on 8/1/2015.  A purchase cannot be treated like a refi at closing. When the consumer is financially damaged by the poorly thought out, arrogant rules issued by the CFPB, they should be able to recoup their losses from the CFPB."


And for Agency news, to the surprise of no one the Federal Housing Finance Agency (FHFA) released the results of a comprehensive review of the Fannie and Freddie guarantee fees. In short, the review findings were that there is no current compelling reason to change the current g-fee structure... with a couple of notable exceptions. First, seven years after its implementation in 2008, the 25 basis point upfront adverse market charge is to be removed. The FHFA is also setting aside its December 2013 decision to retain the adverse market charge in certain high foreclosure states. And the FHFA is applying targeted and small fee adjustments to a subset of Enterprise (Fannie and Freddie) loans. This includes small fee increases for certain loans in the LTV/credit score grid and certain loans with risk-layering attributes (i.e. cash-out refi, investment properties, secondary financing, and jumbo conforming.) But to repeat, "As a result of FHFA's review of guarantee fee levels, the agency concludes that the current guarantee fee level is appropriate under current circumstances." And before anyone becomes all riled up, the changes to the LLPAs will be implemented for all loans purchased or delivered into MBS pools issued on or after September 1, 2015.


One cynic said, "They took away the adverse market fee but added a bunch of other fees based on purchase date - not commitment date - seems like a lot of fuss about not much." Most will see this as favorable - at least the FHFA removed the onerous adverse market fee and appear open to market input - but this will not generate a large systemic change in pricing/rates, and in that there will be little or no change for most borrowers.

With all this excitement who cares about the bond markets? Someone might - and there isn't much volatility - and for news this week we've had the Chicago Fed National Activity Index (-.42), zip tomorrow, Wednesday are the FHFA House Price Index and Existing Home Sales, Thursday is Initial Jobless Claims & New Home Sales, and Friday is Durable Goods. For numbers we closed the 10-year at 1.85% and this morning we're at 1.87% with agency MBS prices roughly unchanged depending on coupon.

Executive Rate Market Report:

Friday the stock markets around the world took big hits; the DJIA down 279, Nasdaq -76. China made it easier to short their stock market in an effort to slow speculation, Greece back in play on comments frm Christine Lagarde that she isn’t interested in any extensions unless Greece increases its austerity programs. Nothing however has changed for trading US stocks; for months now any day when the key indexes decline in big swings the following day the market rallies. Traders have to love it, wait for a major sell-off then buy on the close, the next trading day will be an up day. This morning the key indexes are stronger at 8:00.

The 10 fell to its resistance level on Friday at 1.86% down 4 bps frm Thursday; we thought this morning the note would continue lower and break out of the three week plus trading range. Not the case, the 10 traded up 1 bp to 1.87%. MBS prices on Friday didn’t improve much closing the day 9 bps better on the day. MBSs also locked in narrow ranges unable to exit.

Over the weekend, talks between the government and the institutions overseeing the Greek bailout took place in Paris. Negotiations have so far yielded little in terms of progress and European officials have cautioned that discussions between the two sides are nowhere near the point where bailout money can be disbursed. Chinese officials over the weekend made an attempt to cool the negativity that exploded last week by lessening the reserve requirements of banks hoping that would spur increased lending. The decision to lessen reserves in a sense counters Friday’s news that the government made it easier to short the Chinese markets, a move to calm global markets. It was the second in less than three months and the largest in magnitude since the 2008 financial crisis.

Today Europe’s equity markets recovering a little from Friday’s selling; Hong Kong suffered their largest one-day tumble this year on Monday and trading volumes in Shanghai jumped to a fresh record, as reassurance from Beijing over the country’s slowing economy failed to persuade investors.

This week’s trading should be focused on global markets; China and Europe. US earnings also will be in play, so far 75% of earnings reported have been better than estimates. Only three economic reports but all of the them have the potential of moving US market outlooks; March existing and new home sales and March durable goods orders.

The DJIA opened +160, NASDAQ +30, S&P +14. The 10 at 9:30 1.87% +1 bp, 30 yr MBS price +2 bp frm Friday’s close and +11 bps frm 9:30 Friday morning.

This Week’s Calendar:
7:00 am MBA mortgage applications
9:00 am Feb FHFA home price index (+0.6%)
10:00 am March existing home sales (+4.5% to 5.045 mil frm 4.88 mil)
8:30 am weekly jobless claims (-8K to 286K)
10:00 am March new home sales (-3.9% to 517K frm 539K)
8:30 am March durable goods orders (+0.5% frm -1.4% in Feb; ex transportation orders +0.3% frm -.06%)

Debate within Europe and the US whether the EU and IMF will let Greece default and eventually leave the EU will be in play. If Greece leaves the EU what are the downside repercussions? Will the debt issues spread to other southern Europe countries and cascade into more defaults then threaten the very existence of the EU? Safety moves should push investors toward US treasuries with our interest rates substantially higher than other safe sovereigns. In the end we expect Greece will not leave, the possibility of other debt ridden countries leaving while remote is too great to bet on the end of Greece.

We floated over the weekend, not much benefit; thought there was a better risk that the US 10 would finally break below 1.86%; so far it hasn’t happened. Expecting two strong down days in the US stock markets continues to be wishful rather than possible. How many times in the last two months have the key indexes had triple digit moves lower (on the DJIA) only to encourage buying on any dips. Both MBS prices and the 10 yr treasury are at critical pivots, the 10 at 1.86% and FNMA 3.0 coupon at 102.63 (at 10:00 102.54). We expect the 10 will break lower but the longer it holds it lessens our enthusiasm . Friday afternoon we said if the 10 yield does break it will drop to 1.70% and MBS prices would decline 200 basis points, a freshman brain fade, MBS price would increase 200 bps.

PRICES @ 10:00 AM

10 yr note: +1/32 (3 bp) 1.86% unch

5 yr note: +1/32 (3 bp) 1.30% unch

2 Yr note: +1/32 (3 bp) 0.50% -1 bp

30 yr bond: -10/32 (31 bp) 2.53% +2 bp

Libor Rates: 1 mo 0.180%; 3 mo 0.275%; 6 mo 0.402%; 1 yr 0.691%

30 yr FNMA 3.0 May: @9:30 102.55 +2 bp (+11 bp frm 9:30 Friday)

15 yr FNMA 3.0 May: @9:30 104.92 +5 bp (+13 bp frm 9:30 Friday)

30 yr GNMA 3.0: @9:30 103.61 +8 bp (+12 bp frm 9:30 Friday)

Dollar/Yen: 119.05 +0.15 yen

Dollar/Euro: $1.0745 -$0.0061

Gold: $1195.60 -$7.50

Crude Oil: $55.54 -$0.20

DJIA: 18,039.10 +212.80

NASDAQ: 4970.79 +38.97

S&P 500: 2098.30 +17.12

Monday, April 6, 2015

HUD, VA, FHA, and Recent Government Lender Updates of Note


Late last week someone asked about HUD's Equal Access Rule. A month or so ago Bankers Advisory released a notice regarding HUD's update to equal access rules for marital status, gender identity and sexual orientation. HUD published the notice on February 2nd in order to raise awareness of the HUD Equal Access Rule requirements for actual or perceived discrimination. The final rule was published on February 3rd, 2012 and changes to HUD's general rule include expanding the definition of "family" to include "a single person, who may be an elderly person, displaced person, disabled person, near-elderly person or any other single person; or a group of persons residing together, including family with or without children, elderly family, near-elderly family, disabled family, displaced family and remaining members of a tenant family." The term "gender identity" includes actual or perceived gender-related characteristics and "sexual orientation" means homosexuality, heterosexuality or bisexuality. The rule also revises HUD's general program requirements by adding that ant recipient of HUD funds may not "inquire about the sexual orientation or gender identity of an applicant for, or occupant of, HUD assisted or HUD-insured housing for purposes of determining eligibility. It is permissible to inquire into sex for temporary, emergency shelter with shared sleeping areas or bathrooms, or to determine the number of bedrooms to which a household may be entitled." The Office of Single Family Housing has included the updates into its Single Family Housing Policy Handbook, 4.0001, effective June 15, 2015. 

The February edition of the HUD Housing & FHA Monthly Review has been published, which provides an overview of January mortgagee letters and recent activity. Highlights from the report include mortgagee letter 15-01 implements the 50 bps reduction in FHA's MIP rates for most FHA Title II mortgages and allows for cancellation of existing case numbers in order to utilize the MIP rates found within the mortgagee letter. Mortgagee letter 15-02 provides policy guidance applicable to "ineligible" non-borrowing HECM spouses that will not be eligible for the due and payable deferral period, previously announced in mortgagee letter 2014-07. The requirements in ML 15-02 may be implemented for all HECM case numbers assigned on or after January 5, 2015. In addition, on January 29th, the Multifamily Housing published a memo providing guidance for Multifamily Property Assessed Clean Energy (PACE) in California. The memo discusses prospective benefits of PACE and clarifies information regarding the processes by which HUD insured and assisted properties in California can receive assistance for energy and water efficiency improvements within the program. 

The U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau announced new residential construction statistics for February 2015. Privately owned housing units authorized by building permits in February were at a seasonally adjusted annual rate of 1,092,000. This is 3 percent above the revised January rate of 1,060,000. Privately owned housing starts in February were at a seasonally adjusted annual rate of 897,000. This is 17 percent below the revised January estimate of 1,081,000. Privately owned housing completions in February were at a seasonally adjusted annual rate of 850,000. This is 13.8 percent below the revised January estimate of 986,000. 

And as a reminder the Federal Housing Administration (FHA) published additional sections of its Single Family Housing Policy Handbook (SF Handbook; HUD Handbook 4000.1): including Doing Business with FHA-Lenders and Mortgagees; Doing Business with FHA-Other Participants in FHA Transactions - Appraisers, Quality Control, Oversight, and Compliance-Lenders and Mortgagees; Quality Control, Oversight, and Compliance-Other Participants in FHA Transactions - Appraisers, and Origination through Post-Closing/Endorsement for Title II Forward Mortgages (Origination through Endorsement) Appraiser, 203(k) and 203(k) Consultant Sections. The March 18, 2015 SF Handbookis now available on HUD's Client Information Policy Systems (HUDCLIPS) web page.  

Staying on this vein, the FHA announced a web-based platform for mortgagee submissions of FHA appraisal data and reports: Mortgagee Letter 2015-08Electronic Appraisal Delivery (EAD) Portal for FHA-Insured Single Family Mortgages. This Mortgagee Letter announces FHA's implementation of its EAD portal, and provides information about the portal and its mandatory use with FHA case numbers assigned on and after June 27, 2016. The EAD portal will allow transmissions to FHA of only those appraisals that comply with FHA's Single Family Housing Appraisal Report and Data Delivery Guide. When submitting an appraisal, the portal provides confirmation of a successful submission, or information regarding required corrections that may need to be made before resubmitting and transmitting to FHA.  When an individual appraisal is submitted-whether through the EAD portal or through the existing process until the mandatory effective date-the appraisal submitted becomes the appraisal of record. FHA does plan to incorporate the EAD portal into the Single Family Housing Policy Handbook (SF Handbook; HUD Handbook 4000.1). 

FHA Announced Electronic Appraisal Delivery (EAD) Portal Implementation in its Mortgagee Letter 2015-08. This information outlines details of the portal and its mandatory use with FHA case numbers assigned on and after June 27, 2016. "The EAD portal will make it easier to do business with FHA by offering process and technology efficiencies that streamline appraisal data transmission, promote quality up-front appraisal data, and reduce post-endorsement appraisal data corrections." 

SunWest announced it will be removing the Automated Valuation Model (AVM) requirement on VA IRRRLs with qualifying credit score equal to or greater than 580 for locks / commitments made on or after September 16, 2014. For loans with the qualifying credit score less than 580, a conventional appraisal (must be ordered through Sun West's vendor order website) or an AVM, with specific requirements is required to determine the LTV ratio. 

A while back we learned that new and Reduced Documentation Requirements for M&T-to-M&T FHA Streamline Refinances and enhancements to its FHA Streamline Refinance Program for existing M&T-serviced loans sold back to M&T are in affect starting last month. Some key product highlights include: No Credit Report Required - a Risk-Based Pricing Disclosure from the Lender's standard credit reporting vendor is required. Verification of Employment Not Required. Verification of Income Not Required. IRS Form 4506 Required at Closing Only. Another option to be added is an FHA Streamline Refinance with an Appraisal for M&T-to-M&T transactions only. 

A VA "Joint" loan is defined as a VA loan having any co-borrower other than the veteran-borrower's married spouse.  This could include (but is not limited to) a veteran and girlfriend (not wife), a veteran and another relative (i.e. two brothers), etc. The M&T Bank VA product page(s) has been updated. Regarding flood insurance for FHA transactions, flood IS required to cover any Non-Residential Detached Structure that has any part located in a Special Flood Hazard Area (SFHA). This is required for FHA transactions even though it is not a FEMA requirement and is required whether or not the detached structure was given value by the appraiser.

 Today analysts continue to cogitate on Friday's employment number. The weaker-than-expected March jobs data adds to uncertainty about the timing of fed funds interest rate lift-off. Some analysts have already concluded that the weaker-than-expected March jobs data eliminates the possibility of June lift-off but that fails to account for normal monthly fluctuations in jobs data and ignores the fact that expectations were simply too high. The March jobs report is the last one that the Fed will see before the April 28/29 FOMC meeting but they will see three more weekly Initial Jobless Claims reports. Many expect those reports to be strong so don't eliminate the possibility of a June more in short term rates quite yet. The probability of September lift-off has increased has increased. Janet Yellen has repeatedly said that the timing of lift-off is data dependent - as if we need to be reminded.


In a week like this where this is no substantive scheduled economic news here in the U.S., the markets tend to focus on a) overseas events, and b) minor news which ordinarily are of little consequence. We do have a smattering of news, including the Fed's release of its Minutes from the March 17-18 FOMC meeting, Initial Jobless Claims Thursday. But that's about it. Rate sheets are roughly unchanged: we closed the 10-yr at 1.84% and this morning we're at 1.84% with agency MBS prices about the same.