Monday, July 28, 2014

RESPA-TILA update; HMDA changes in the wind; New IM system for Banks?

How is it that this is the last week of July already? Lots of lenders seem to have seen decent Julys - but perhaps not as strong as some of their Junes - and certainly for many the upward sloping trend of lending activity and profits seen from March through June has tended to level off - it is a tough job for most to keep that kind of increase going. HR folks' jobs are sometimes pretty tough - and can  be the opposite of boring - and in a note that will make HR folks take notes, are laws & restrictions on running criminal background checks in the near future? "The law prevents criminal background checks in the private sector until after employers and hiring managers pursue the interview process with potential applicants."

Let's take a quick look at the overall market. Who says that the housing market is not doing well? We can't pick up a newspaper or see the news without seeing some study about prices, foreclosures dropping, or recovering markets, or some combination thereof. It seems to have become a national hobby...

Compass Point Research and Trading LLC reports on the banks' mortgage origination and servicing numbers for the second quarter. "Origination volumes are up roughly 25%, in-line with prevailing estimates from Fannie Mae and MBA. Gain on sale margins were up 7% on average, while correspondent lenders saw slightly more pressure than retail-heavy originators. Mortgage servicing rights (MSR) marked down 2% on average. This would indicate the non-bank mortgage originators likely will see slight pressure on margin due to the material amount of originations from the correspondent channel, while fair value marks will hit GAAP earnings. On a positive note, we have seen gain on sale margins move meaningful higher through the first few weeks of the third quarter as stable mortgage rates combined with lower agency MBS have caused spreads to widen. If this continues, the third quarter could be setting up to be a decent quarter. 

Compass Point's excellent piece went into more detail. "The spike in margins through the first weeks of the due to a quick move down in agency MBS yields while mortgage rates have not fallen as the same pace. Typically, this is a temporary phenomenon until we see some stabilization in MBS yields. Mortgage origination volumes are up 25%, while margins are up 7% on average. Mortgage servicing income was a mixed bag. MSR amortization was more elevated than expected and we generally saw 2-5% markdowns for most servicers. We did see some hedging gains support servicing margins, but this likely won't translate for the non-banks that are reporting in the next couple of weeks." 

Lastly is an opinion on affordability. "Over the past several quarters, we have made the argument that the mortgage and housing markets have the capacity to handle higher rates given affordability index has been well above the long-term average. However, with the most recent move higher in prices during the spring selling season, the affordability index is approaching its long-term average. Meanwhile, the price-to-income ratio has pushed above the long-term average, indicating it will be difficult for the housing market to handle a significant move higher in rates without income levels going along with it. We continue to believe housing remains affordable for well-qualified borrowers, but are increasingly concerned the market can handle an increase in rates." 

Compliance is about a year away, but a mention of RESPA-TILA reform bears repeating, since it impacts every loan application. "RESPA-TILA is a huge rule and will impact your business from the time a borrower walks through the door to closing, and your business is going to need to make deep operational changes to comply. To help the mortgage industry get ready, MBA is on the road this summer with top-level legal, compliance and technology experts - including a CFPB representative. So far they have brought together hundreds of industry professionals in two states. There are just two workshops remaining - Atlanta on July 31st and Washington, D.C. on August 7th. The cost for this one-day intensive workshop is low, but space is limited." 

Yup, accurate HMDA reporting is an executive level oversight these days; the downside is too great for it not to be a concern. "With heightened regulatory and media focus on HMDA data, more lenders will find themselves the subject of fair lending exams," according to Mortgage TrueView, a provider of data-driven business intelligence services. With their new independent study, the company concluded that many lenders are leaving themselves vulnerable to fair lending exams and significant penalties by not properly monitoring and managing HMDA reporting. "Mortgage companies and banks are not taking full advantage of the insights offered in HMDA data," said Mortgage TrueView President and CEO David Moffat. Additionally, Moffat said their 2013 HMDA survey showed that many lenders are submitting their data with formatting errors, which could lead to non-compliance issues with regulators.Among the findings, include: 2013 regulatory risk indicators show a 13% year-over-year increase in loan denial rates, denial rates for white applicants increased from 17% to 21%, while denial rates for non-white applicants increased from 23% to 28%, denial rates for Hispanics increased from 25% to 30%, denial rates for non-Hispanics increased from 18% to 21%, and denial rates for female applicants increased from 21% to 26%, as opposed to males where it increased from 17% to 21%. 

And CliftonLarsonAllen's Anna DeSimone reports on the CFPB's latest thoughts on simplifying the HMDA reporting for financial institutions. (Under the proposal, financial institutions that make 25 or more closed-end loans or reverse mortgages in a year would be required to report HMDA data.) Even in this era of computers we still don't have the 2013 numbers yet, but "in 2012, 7,400 financial institutions reported information about approximately 18.7 million mortgage applications and loans. While the HMDA dataset is the leading source of information about the mortgage market, it has not kept pace with the market's evolution. For example, the HMDA data do not provide adequate information about certain loan features that helped contribute to the mortgage crisis, such as adjustable-rate mortgages and non-amortizing loans.  

"The July 24 announcement... is proposing to improve the quality and type of HMDA data as required by the Dodd-Frank Act. The Bureau is also looking at ways to make submission of data easier for lenders and to improve the user experience in accessing the public data. The proposed changes include improving market information. In the Dodd-Frank Act, Congress directed the Bureau to update HMDA regulations by having lenders report specific new information that could help identify potential discriminatory lending practices and other issues in the marketplace. This new information includes, for example: the property value; term of the loan; total points and fees; the duration of any teaser or introductory interest rates; and the applicant's or borrower's age and credit score. The CFPB is proposing that financial institutions provide more information about underwriting and pricing, such as an applicant's debt-to-income ratio, the interest rate of the loan, and the total discount points charged for the loan, which all fall under monitoring access to credit. This information would help regulators determine how the Ability-to-Repay rule is impacting the market, and would also help the Bureau monitor developments in specific markets such as multi-family housing, affordable housing, and manufactured housing. The proposed rule would also require that covered lenders report, with some exceptions, all loans related to dwellings, including reverse mortgages and open-end lines of credit. 

It is quite an undertaking, and to see all the information and form your own opinion in order to comment by October 22, see the CFPB's press release on HMDA.

Freedom Mortgage Corporation, a privately held, full-service mortgage lender licensed in all 50 states, let everyone know that it funded over $2 billion in residential mortgages in the month of June 2014...Two years ago, in July 2012, the company achieved monthly volume of $1 billion in funded loans for the first time. This dramatic increase in volume over the past two years is the result of leadership's vision and strategic growth plans. Roughly half of the $2 billion volume was funded by its Structured Products Group, the company's correspondent lending division."

In Northern California comes news that Mechanics Bank and RPM Mortgage, Inc. have announced an agreement for RPM to originate mortgage loans for Mechanics Bank customers. 

Within the last month Mountain West Financial Wholesale announced that, per the California Housing Finance Agency changes to the term of the CHDAP reservation, MWF will lock the CHDAP reservation for only 30 days. It is recommended that you not request a CHDAP reservation until the loan is ready for underwriting submission. As a reminder, CalHFA' s Bulletin 2014-08 stated that for all new CHDAP reservations subordinate to any first mortgage made on or after June 2, 2014, the first mortgage maximum allowable fees charged by a lender may not exceed the greater of 2% of the first mortgage loan amount, or $3,000.

Darned we have a lot of scheduled economic news this week here in the U.S.! Today is Pending Home Sales, tomorrow is the S&P/Case-Shiller house price numbers with their two-month lag, along with Consumer Confidence. Wednesday we have the MBA application numbers, along with the ADP employment change numbers, GDP, and an FOMC rate decision. On Thursday the 31st we'll have the Employment Cost Index, Initial Jobless Claims, and the Chicago Purchasing Manager's Survey. And then on Friday, drum roll please, we can look forward to all the unemployment data, along with Personal Income and Consumption, the University of Michigan Consumer Confidence survey and Construction Spending. 

Looking at the traditional benchmark 10-yr T-note yield, it has been in the 2.44%-2.80% range since January. We're at the lower end of that now due to unrest overseas and the fact that the U.S. economy is not expanding very rapidly. Friday it closed at 2.47%, and this morning we're sitting at roughly the same level, and agency MBS prices are also unchanged.

Executive Rate Market Report:

Last Friday the MBS prices were +18 bps and the 10 yr note rate declined 4 bps to 2.47%. For the week there was no change in MBS prices and the 10 yr slipped just one basis point, from 2.48% to 2.47%. Early this morning ahead of a big week for markets the 10 at 2.48% +1 bp and MBS prices started down 10 basis points. The only report out today in a very significant week; NAR released June pending home sales at 10:00, expected to have increased 0.3% after increasing 6.1% in May, as reported sales declined 1.1%, more nasty data on the housing sector; yr/yr though the expectation was a decline of 5.0%, as reported -4.5%.

The US stock indexes opened slightly weaker taking the 10 yr and MBS prices off their early morning lows. The DJIA started -11, NASDAQ +1, S&P -1; 10 yr unchanged at 2.47% and 30 yr MBS prices +11 bps from 9:30 Friday morning and generally unchanged from Friday’s close.

This week has a plethora of releases and events; Treasury will auction $93B of notes beginning tomorrow with $29B of 2s, usually our end of the yield curve doesn’t pay a lot of attention to the 2 yr; Wednesday $35B of 5s, a little more interesting, then Thursday $29B of 7 yr notes that will get attention from bond and MBS investors. The 7 yr will take place one day after the FOMC policy statement adding additional focus on the demand. The FOMC meeting begins tomorrow and concludes on Wednesday afternoon with the policy statement (there will be no Yellen press conference after this meeting)

Wednesday the advance Q2 GDP will be reported, the current expectations are for GDP to have increased 3.1% in the quarter after declining 2.9% in Q1. The advance report is usually revised from the advance to the preliminary that will be reported one month from now, some of the third month of the quarter data isn’t complete on the advance report. Also Wednesday the July ADP private jobs report is expected to show an increase of 235K jobs; in June ADP said 281K private jobs were created and its data was the same from the BLS official employment data. Friday the BLS will report that unemployment was unchanged from June at 6.1%; non-farm jobs 233K,  private jobs are also expected at 233K. Also this week two reports on consumer attitudes, the Chicago PM July index, the national ISM manufacturing index, June personal income and spending, construction spending. The calendar is loaded (see below).

Ukraine/Russia and Israel/Hamas; both situations are status quo this morning. Israel and Hamas tried a few hours of cease fire then went back to the rocket lobbing’s back and forth. Ukraine tensions haven’t changed; the US claims Russia is supplying heavy weapons to the separatists, Russia denies it. Overall at the moment the two situations have been pushed back off the table and buying of treasuries as a safety move has waned in the last week. Both still are being monitored closely but with the US not adding sanctions after a lot of strong talk and Europe with little interest in doing much, presently we can say the Ukraine/Russia and Israel/Hamas issues are considered regional with little geopolitical consequences. Stay tuned though.

Richard Fisher, Dallas Fed, saying he is becoming increasingly concerned that the Fed is slipping behind the curve in delaying increasing rates. He said the economy is much better than the Fed is thinking and is concerned that the present lower rates are forcing increasing risk-taking in the stock market. Fisher at one point was a regular banker and has managed hedge funds in the past, maybe a little credibility there in his remarks.

This Week’s Calendar:
             10:00 am June pending home sales (+0.3% from +1.6% in May; as reported
             9:00 am May Case/Shiller 20 city index (+9.9% annual)
            10:00 am July consumer confidence (85.5 from 85.2 in June)
                          FOMC meeting begins
             1:00 pm $29B 2 yr note auction
            7:00 am weekly MBA mortgage applications
            8:15 am July ADP private jobs report (+235K from 281K in June)
            8:30 am Q2 advance GDP (+3.1%, Q1 -2.9%, deflator +2.0%)
            1:00 pm $35B 5 yr note auction
            2:00 pm FOMC policy statement
           8:30 am weekly jobless claims (+21K to 305K)
                        Q2 employment cost index (+0.5%)
          9:45 am July Chicago PM index (63.2 from 62.6 in June)
          1:00 pm $29B 7 yr note auction
         8:30 am July employment data (unemployed 6.1% inch, non-farm jobs +233K, private jobs +233K, hourly earnings +0.2%)
                      June personal income and spending (income +0.4%, spending +0.4%; PCE core +0.1%)
        9:55 am U. of Michigan consumer sentiment index (81.5 from 81.3)
       10:00 am July ISM manufacturing index (56.0 from 55.3 in June)
                     June construction spending (+0.5%, +0.1% in May)\
       2:00 pm July auto and truck sales (16.7 mil from 13.4 mil in June)

AM Tracking Quote:

FNMA 4.0% 105.52 now -5 bps: 09:31 -5  Open 105.57

Should you Lock or Float? Contact me for Lock Advice!

Have a great day!

Thursday, July 24, 2014

Banks & Lenders Buying Each Other & Financial Services Companies-Does it make sense?


The FDIC tells us that of the 6,730 FDIC-insured banks nationwide, the 22 largest hold 62% of the $12.75 trillion of assets controlled by all domestic commercial banks and savings institutions as of 3/31/14.  Each of the 22 banks has at least $100 billion of assets. And the big are becoming bigger: every week there are fewer banks as they seek to increase efficiencies, lower costs, and expand geographically through joining forces with others. Announcements during the last week include (in Texas) First Bank & Trust Co. ($624mm) acquiring Texas Savings Bank ($78mm) and Vantage Bank Texas ($328mm) will acquire D'Hanis State Bank ($47mm). Yesterday Columbia Banking System, Inc. and Intermountain Community Bancorp jointly announced a merger - the combined company will have approximately $8.2 billion in assets with over 150 branches throughout Washington, Oregon and Idaho

In Indiana First Merchants Bank ($5.4 billion) will acquire Community Bank ($272mm) for $46mm in cash and stock. Nearby in Iowa First Security Bank and Trust Co. ($464mm) will acquire Hampton State Bank ($74mm). Michigan's mBank ($579mm) will acquire The Peninsula Bank of Ishpeming ($131mm) for $13.3mm in cash and stock. Up in Massachusetts Cape Ann Savings Bank (468mm) will acquire Granite Savings Bank ($70mm).  

Going to Ohio (home of Akron, rubber capital of the world), the Vinton County National Bank ($766mm) will acquire The Citizens Bank of Ashville ($105mm) for about $12.2mm in cash or 1.4x tangible book. Farmers Bank & Trust Co. ($840mm, AR) will acquire 1st Bank ($309mm, TX). In nearby Louisiana Catahoula - LaSalle Bank ($121mm) will acquire Bank of Jena ($72mm). Last but not least, out in California Bank of the Sierra ($1.5B) will acquire Santa Clara Valley Bank ($127mm) for $15.3mm in cash.  

But First Mountain Bank ($137mm, CA) and First National Bank of Southern California ($177mm, CA) have terminated their previously announced merger after the OCC would not approve the sale under the agreement's legal terms and conditions. First Interstate Bank ($7.6B, MT) will close eight branches following its acquisition of Mountain West Bank ($634mm, MT) due to close proximity to existing branches. And Florida's Landmark Bank ($279mm) will close one branch it recently acquired from its takeover of failed Valley Bank (there are valleys in Florida?). And last Friday Eastside Commercial Bank, Conyers, Georgia, was closed and business transferred to Community & Southern Bank of Atlanta, Georgia. 

As an owner of a midsize independent mortgage banking company, what is the feasibility of negotiating an economically attractive sale of your enterprise under current market conditions?  Jeff Babcock (STRATMOR Group) addressed this topic at the recent Western States Secondary Marketing Conference. (STRATMOR is an active player in the M&A space, specializing in transactions within the midsize market sector.) Citing the current STRATMOR transaction pipeline as the source of his observations, Babcock reported that, "There is very strong investor demand for well-managed retail origination platforms. These buyers are motivated to acquire (rather than to build through recruiting which can be slow, expensive and risky) to achieve their ambitious scale objectives. Today's mortgage company buyers are generally larger independents and regional  bank-owned lenders who offer a qualified seller strategically attractive and impactful acquisition synergies. While there remain some private equity investors exploring for opportunities, STRATMOR has found that existing lenders can justify better values, bring cultural compatibility and offer more synergies." 

Jeff's note continued. "By 'qualified sellers,' we mean retail lenders with a high purchase share for 2014 YTD, sustainable earnings track record in 2012-2014 YTD span and a solid reputation with counterparties and competitors.  Such prospective sellers may find that they have greater enterprise value by merging than continuing to struggle for market share as an independent. Every deal in the STRATMOR transaction pipeline involves a substantial premium value to be paid to the seller. STRATMOR's marketplace experience confirms that it's a misconception that all deals today involve necessitous mortgage company sellers who command no premium value." (For a confidential discussion regarding your specific situation, feel free to reach out to Jeff.)


What have the states been up to lately?


Florida recently enacted provisions regarding consumer collection practices in House Bill 413. Under HB 413, "a person may not engage in business in Florida as a consumer collection agency without first registering in accordance with the law, and thereafter maintaining a valid registration." Further, the Financial Services Commission may adopt rules requiring electronic submission of forms, documents and required fees as well as establish time periods during which a consumer collection agency is barred from registration due to prior criminal convictions of, or guilty or no contest pleas by, an applicant's control persons, regardless of adjudication. 

Hawaii recently amended several provisions of the Secure and Fair Enforcement for Mortgage Licensing Act in Senate Bill No. 2817. The bill clarified definitions such as "elder," "sole proprietorship", and became effective on July 1, 2014. 

What is going on in Utah? Recently FINCEN, that would be the Financial Crimes Enforcement Network by the way, published the first issue of SAR Stats(SAR = Suspicious Activity Report). The release examines only data contained on the more than 1 million unique FinCEN SAR's with filing dates between March 1, 2012 and December 31, 2013. The adoption of the new unified SAR form and the implementation of e-Filing enable the financial industry to report suspicious activity more swiftly and with more specificity. The changes also mean the data presented in this issue are a new baseline for financial sector reporting on suspicious activity. The overall 1.4 million data points retrieved for this report are organized and presented by industry. So what exactly is going on in Utah? Well according to SAR Stats, the state ranks first in 'Filings Ranked by U.S. States for "Other" Financial Institutions' (between May 2012 and December 2013) with 7,256 overall filings, constituting 25.3% overall....California is a distant second with 3,450 filings.

A correction! Yesterday I mentioned an underwriting clause that addressed VA loans, moving, and equity. (I wish I could say that I put that in just to see who was reading the commentary, but I can't.) It turns out that the VA requires no equity to offset the rent payment. In other words, the VA does not require equity in a departing residence to offset the mortgage payment with new rental income.  Many lenders have that overlay, but it is not a VA requirement. And here is a note from a lender: "We are mini-corr lenders and sell most of our VA loans to Flagstar. Here is what Flagstar's VA guides say regarding the departure of a current residence: 'Rental income from the property the borrower is vacating may be used to offset the current mortgage payment, provided there is no evidence the property will be difficult to rent; Document the rental income with a current lease agreement; Under no circumstances, may rental income be included in the borrower's income; If there is no current lease agreement, the underwriter may offset the payment with prospective rental income, provided there is evidence the local rental market is very strong. To demonstrate the amount of the prospective rent and the local rental market is strong, obtain one of the following in writing: appraiser's analysis or analysis from a real estate agent having no interest in the transaction. The analysis may not come from the listing or selling realtor or any realtor who is employed with either realtor.'" Thanks everyone! 

Keeping in line with government loans, the Collingwood Group's Managing Director Karen Garner published a blog titled "FHA Enforcement: The Real Cost of Non-Compliance."  The post outlines the issues lenders and servicers may face if they fail to perform certain tasks required by FHA as well as the potential penalties that could be sanctioned if a violation is found.  Lenders and servicers have recently come under increased scrutiny from the U.S. Department of Housing and Urban Development (HUD) to ensure they are complying adequately with FHA requirements. 

"Is volatility going to pick up in October?" Plenty of smart people think that it will. We've had a long spate of the markets not doing much of anything, regardless of economic news, overseas buyers, religious turmoil, geopolitical conflicts. Volatility has been so low - like rates, it has nowhere to go but up, right? With QE 3 ending, and the gentle hand of the Fed being lifted out of the demand equation, things will go back to pre-QE. And yes, capital markets staffs are dreading dusting off the extension and renegotiation polices. Experts think that banks will absorb most of the excess net supply the Fed doesn't - we'll see. 

But for now, steady as she goes: sure, we have some intra-day buying and selling induced rate movements, but I can't remember the last time I saw a gaggle of investors change prices intra-day. The Fed continues to buy about $2 billion of agency paper a day, and selling by originators is thought to be less than that. Agency MBS prices closed down/worse about .125. The National Association of Realtors (NAR) reported a 2.6 percent month-over-month rise in existing-home sales last month to a seasonally adjusted annual rate of 5.04 million. May sales were revised slightly upward to a rate of 4.91 million. 

For news today we'll have Initial Jobless Claims (expected slightly higher) and New Home Sales (expected down about 5%). At 11AM EST the Treasury announces details of next week's auctions of 2-, 5- and 7-year notes (e: $93 billion). For numbers the 10-yr closed at 2.46% and today is sitting at 2.48% with agency MBS prices worse about .125.

Tuesday, July 22, 2014

Upcoming Events & Training; Risk? What risk? We don't have no stinkin' risk!


The Agencies are "happy" to deal with credit risk. After all, that is what guarantee fees are for, right? But when someone like Fannie is dealing with approximately 1,400 lenders, operational risk is not something they want to assume. The Agencies, and other investors, are carefully watching the migration away from the pristine risk profile that the industry has developed over the last several years. They want viable counterparties with plenty of net worth, and lenders exiting or merging cause some instability. And any investor walks a fine line between offering more and more to their clients versus protecting themselves. Given the recent announcement from the FHFA about the Agencies needing to focus on non-regulated servicers, the premise that the Agencies aren't interested in operational risk oversight may be shifting. 

The interesting thing is that everyone I have asked has told me that not every loan should be done - so logically not every borrower will qualify for a loan. Fred Jackson wrote to me saying, "Regarding the comments on mini-correspondents, after all this time, does it not amaze you that many (still) believe that Fannie and Freddie underwrite the loans they buy. No matter how many times it's explained that it's the responsibility of the seller to qualify and underwrite the loans, with DU or LP or manually, and how obvious it is that, to underwrite every loan bought , F&F would need to have as many underwriters as all their sellers put together, why don't people get it? The same applies to large correspondents who are seller/servicers. Do the math, folks." 

Risk management in mortgage lending is a burgeoning field. How does one measure, track, and reduce loan defects? What will the upcoming RESPA/TILA changes mean to risk? Are you preventing all fraud in your originations? And if not, why not? How are you handling your underwriting, repurchase, indemnification, and rescission risks? The CFPB appears to be focused on counterparty risk - how are you monitoring your vendors? What about cybersecurity, or the risk of the janitor throwing a bunch of loan files in the dumpster (I saw that one happen several years ago)? Is the company monitoring appraisal and review appraisal risks? Collateral valuation is critical to investors. How about for third party originators - how are they watching their broker clients?  

But wait - there's more! Are you hedging your secondary marketing risk correctly? Will your warehouse lender be around next month? Conversely, will the warehouse bank's clients be around next month? Are you adequately training your staff on risk metrics and avoidance? Are you at risk of your LOs running amok in social media, saying they have the best rates in town? And the CFPB wants to make sure that a lender's LOs are not being compensated to steer borrowers in one direction - the risk of a lender not doing that are pretty darned steep. 

And when a lender has their eyes on all of that, is there any time or resources to actually originate a loan profitably? Is it easier doing all of that when you're a big bank than when you're a lender doing $30 million a month? Not only are lenders measuring, tracking, and reducing loan defect rates, but they are also mitigating repurchase, re-default, and rescission risk. And all of this is for QM and non-QM loans, vanilla product or expanded - that should have little bearing on a company monitoring and minimizing risk. Indeed, managing risk is critical, and expensive, for lenders. 

Not coincidentally, the MBA's Risk Management and Quality Assurance Forum is scheduled on September 7th-9th in Miami Florida. "Hear from a distinguished panel of key industry leaders and GSE staff as they discuss updates and challenges to current business processes in two general sessions. Register before August 4th, member price $840 and non-member price $1040. For complete details and registration information: MBA.


 While we're talking about training and happenings, let's play some catch-up with other upcoming events. In no particular order...


I know that this is late notice, but the MBA/MW if offering a Fundamentals of Mortgage Banking course starting today in Herndon, VA. "A comprehensive two-day course that every Loan Officer Assistant, Loan Officer or new Processor should attend. Taught by industry renowned instructor Mary Kay Scully of Genworth Mortgage Insurance.   

The CMLA and AMLG are hosting a complimentary comprehensive 90 Minute Repurchase/Make-Whole Defense Webinar: "The Latest Patterns, Trends and Solutions to Resolving Repurchase/Make Whole Claims in 2014 and Beyond" on Tuesday, July 29, from 11-2:30PM PST. Topics include various trends with the major secondary market investors both in and out of court, insights into the latest case law from around the country and how such may affect forward-moving repurchase/make-whole defense and resolution strategies, updates to legal defenses that lenders can use to push back a repurchase demand; common allegations asserted in support of repurchase/make-whole demands and a number of the strategies that should be considered to rebut such demands, etc.

NAMB National will have its 40th Annual Conference in Vegas baby! The Nation's Largest Conference & Tradeshow for Mortgage Professionals is scheduled for September 13-15 at the Luxor Hotel. Attendee registration price is $295 increasing to $345 after Thursday July 31st. For complete conference details, visit the website: NAMB. As an added bonus, you can fulfill your complete 8 hour continuing education requirements for your NMLS license renewal. "This is a separately-ticketed bonus offering. Make the most of your time in Vegas by getting your federally-required CE in addition to a conference full of networking, education, opportunities and prizes. Continuing Education course is provided by Mortgage Educators & Compliance. Important Note: You must take the entire 8 hour class to qualify for credit.

The Community Home Lenders Association (CHLA) has announced plans for its second annual fall conference to be held September 8-9 at in Washington DC at the Liaison Hotel on Capitol Hill.  The conference will once again feature attendance by key federal policy makers that affect the future of the mortgage banking industry and housing finance reform. The Conference also includes a Lobby Day with key members of Congress. "CHLA has taken the lead on important issues affecting independent non-bank mortgage bankers, including being the first national trade association to call on FHA to reduce annual premiums and calling for bank mortgage originators to have testing and training requirements commensurate with those that apply to non-bank mortgage lenders." 

If you find yourself in the Northwest in early September, you may want to check out the Pacific Northwest Mortgage Lenders Conference, September 7-9. This year's event will be held at The Benson Hotel, a historic landmark in the heart of downtown Portland, Oregon.  The Oregon Mortgage Bankers Association (OMBA) is pleased to host this year's tri-state event for Oregon, Washington and Idaho. "The guest speakers will cover topics that include regional and national economic forecasts, GSE reform, CFPB updates, Private MI changes, and QM updates. The MBA will provide critical and timely updates on legislative issues that affect our business."

The TMBA's 13th Annual Reverse Mortgage Day will be held at the Westin Galleria Dallas in Dallas, Texas on Thursday, September 11 with a Welcome Reception on Wednesday September 10. This event will bring industry professionals from all over the country to the Lone Star State seeking strategic options and information about the business of reverse mortgage lending. Attendees include upper management from the nation's leading reverse mortgage lenders, loan officers, real estate attorneys and title companies. Individual registration fee, before August 8th, $159.00, after August 8th, fee is $209.

What happens in Vegas shouldn't stay in Vegas... The CMBA's 19th Annual Western States Loan Servicing Conference is taking place August 3rd - 5th at the Encore in Las Vegas. This year includes an added a golf tournament to kick off our conference which will happen on Sunday, August 3rd at Spanish Trail Golf Course, just a few minutes from the conference hotel. 

The markets: Ukraine, Gaza Strip, and Malaysian Airline disaster, take your pick. Overall prices and rates ended Monday about where they ended Friday, despite turmoil and lack of U.S. news. Today we'll have the Consumer Price Index numbers for June, seen just below the prior read of +0.4%, the FHFA house price index for May (expected slightly higher) and the June's Existing Home Sales (also expected higher). In the early going the 10-yr is still at 2.48% and agency MBS prices roughly unchanged from Monday's close.

Monday, July 21, 2014

Home Value Forecasts; Non-QM & Non-Performing Loan Price Action

What can you buy on minimum wage? Well, I guess that's a relative question; relative to a number of factors such as where you live, your current monthly expenses, and savings rate; however, I'm going to guess 'not much'. Zillow writes, "In 2013, 3.3 million Americans worked in a job that paid at or below the federal minimum hourly wage of $7.25. For many of these workers, finding affordable housing is a constant challenge. Still, nearly two-thirds of suburban minimum wage earners, and nearly half of urban minimum wage earners, owned their own home. Of course, the ownership rate does not capture important differences in home size, amenities, convenience and quality, but is nonetheless illustrative of the options that minimum wage earners frequently encounter." Minimum Wageand what Zillow has to say about it.

Maybe these folks can pick up some talent from Rushmore Home Loans, rumored to have cut back a large number of its employees. And Bloomberg reports that Standard & Poor's has cut 16 members of its U.S. commercial mortgage-backed securities group and moved other analysts across the country...Peter Eastham is stepping down as the group's head...'Standard & Poor's Ratings Services is realigning its U.S. CMBS team to increase its resources around the country and better leverage its staff...'" 

It sure helps to know what is going on in the industry and in the real estate sector. Richey May, the leading public accounting firm serving the mortgage industry, recently announced a significant price reduction for its Richey May Select benchmarking product, which includes quarterly peer-to-peer financial benchmarking data and operational metrics. Full access to the customized quarterly peer benchmarking reports and industry-wide financial and operational data is now available for only $750 quarterly, down from $1,500. Participation among independent lenders is growing steadily and Richey May is focused on adding a substantial number of companies to the platform in the coming months. To learn more about participating, or to discuss the benefits of the Richey May Select product, contact Trevor Reinhart at Richey May or visit their website at

Arch MI has released its new Housing and Mortgage Market Review. The summer edition features the latest Arch MI MSA-Level and State-Level Risk Index values, which estimate the likelihood of home price declines based on local economic and housing market data, such as affordability, unemployment rates, housing starts, foreclosure rates, etc. According to the latest data, the probabilities of regional home prices being lower in two years remain low to moderate. The highest-risk areas continue to be concentrated in Florida, New York, New Jersey and the area around the California-Arizona border. 

And Merrill Lynch thinks home prices are overvalued and will go nowhere over the next few years. Home prices were undervalued about 6% relative to incomes at the end of 2011, and have now rebounded to levels that are 9.7% overvalued. Of course all real estate is local, and there is always the possibility that incomes begin to rise as the labor market tightens.  

Narrowing our focus a little, the FHFA report on mortgage investors turned a lot of heads Thursday. But on the CFPB side, its Policy Guidance appears to be spurred by the CFPB's concern that mortgage brokers may be transitioning to the mini-correspondent lender model in light of GFE and HUD-1 disclosure requirements and the mortgage loan originator compensation and points and fees rules, both of which govern when mortgage broker compensation must be disclosed and when such compensation must be included in the points and fees calculation. But who has the risk, and who actually uses their money to fund the loan? 

The CFPB states that it will closely monitor these practices to ensure that companies are not evading the requirements that afford consumers certain protections. Accordingly, the Policy Guidance summarizes the scope of Regulations X and Z, and specifically notes that both regulations draw a distinction between table-funded and secondary market transactions (the former are subject to Regulations X and Z; the latter are not). The CFPB highlights that the applicability of these regulations to mini-correspondents and their transactions is not determined by the title of the parties involved but, rather, the nature of the transaction

The Agencies and other impacted groups knew of the FHFA OIG report ahead of time, of course, and had time to comment.  The CMLA responded with, "The FHFA Inspector General released a report on trends in GSE mortgage purchases, which shows a purchase increase from nonbank lenders. The biases and unsupported speculation regarding nonbank lenders is extremely disappointing - one would and should expect higher quality analysis from regulators. Equally disturbing, the report exhibited a bias towards large, too-big-to-fail banks, largely ignoring the failure of a number of large banks during the financial crisis that were major loans sellers to the GSEs. In contrast, numerous non-bank, community-based lenders honored their obligations to the GSEs and repurchased loans where mistakes were made, utilizing their own financial resources. In addition, these community lenders did so without receiving a dime of TARP money. CMLA supports the enhanced risk management controls referenced in the report, which have been put in place by the GSEs. These controls serve to strengthen loan quality at the point of origination by the lender that is dealing directly with the consumer, a far more effective method than relying solely on after-the-fact controls. The CMLA will work with the FHFA and GSEs to ensure their responses to this report will continue to permit well-managed, well-capitalized community-based lenders to fulfill their vital role in meeting the home financing needs of consumers." 

As a reminder, since there continues to be questions about it, When the OCC issues guidance...well, I guess you take it. Collectively "the agencies" have jointly issued supervisory guidance on risk management practices for home equity lines of credit (HELOC) approaching the end-of-draw period. "As HELOCs approach scheduled maturity or repayment phases, borrowers could face substantial payment shock when they are required to start amortizing principal. Borrowers may be unable to meet new payment terms or refinance existing debt as economic conditions and property values may have changed since origination. As HELOC draw periods approach expiration, the agencies expect lenders to manage risks in a disciplined, prudent manner; to work with troubled borrowers to avoid unnecessary defaults; and to engage in appropriate risk recognition." The guidance describes five core operating principles that should govern management's oversight of HELOCs nearing their EOD period, as well as 10 EOD risk management expectations that promote a clear understanding of potential exposures and help guide consistent, effective responses to HELOC borrowers who may be unable to meet contractual obligations. 

The secondary markets (versus the primary markets where originators are working with borrowers) continue to heat up. Investors are clamoring for yields - and happy to buy non-QM pools and other assets, almost regardless of risk. (Here we go again!) BlackRock reportedly will launch another sale of once-toxic residential mortgage-backed bonds tomorrow, seizing on a dramatic shift in demand for such assets and a rebound in prices since the crisis. Last week it sold $3.7 billion in an all-or-nothing sale to Credit Suisse. This week's $4.4 billion sale of the same stuff (backed by UBS collateral) will supposedly be split up. I know several folks who "retired" from the business and are making a market in this product - they must be salivating! Whatever happened to the term "toxic assets"? Loans and pools of loans that sold at 20 cents on the dollar have rebounded to 70 cents on the dollar. IFR reports that TRACE data indicate Credit Suisse has already placed a majority of the bonds it bought in the first auction, and it paid even more than that, as the bonds fetched a second-best bid 73.16 cents from Goldman Sachs. 

The implications of this price action are not lost on originators and buyers of non-QM loans. We've seen a huge growth in certain lenders offering expanded criteria loans (it is important to differentiate between credit risk and operational risk!). Elapsed time between foreclosures and short sales and new lending is collapsing. Are the lenders who are racing to the bottom of credit risk being followed by investors racing to the bottom? Lenders typically don't offer a product unless there is a market. So what is the difference between this go-around and what we were seeing ten years ago? In my chats with lenders, it appears to be that the loans, for now, are fully documented. We will see how long that lasts - there isn't much new under the sun. The markets hope that pre-securitization due diligence is top priority nowadays. Many believe that a large, trusted company will step up to make it an integral part of the securitization/whole loan sale process - probably a global firm that's connected to financial markets but also has risk and legal businesses. 

Turning to rates, without much new information coming out of the U.S. last week we had plenty of room to react to the terrible plane crash and other geopolitical risks. Economic data last week (basically retail sales, the producer price index, inventory growth, and a sad housing starts number) did little to move us out of the range. Lots of economists think that consumer spending was a bit stronger in the second quarter, and that inflation will pick up a little in the second half of the year. (It really doesn't have anywhere to go but up, right?) But that Housing Starts number is a problem: it posted a second monthly decline in June raising some questions about the pace of the housing market recovery. More forward looking building permits data also slowed but remain well above the latest level of starts. But for the week the 10-year note gained about .250 in price and the yield declined nearly four basis points - not much of a move. 

Like sands through an hourglass, so go the weeks of scheduled economic news. As we always seem to learn, it is the unexpected events, usually overseas, that seem to move the markets more than the mundane news coming out of the United States. But you should at least know what's coming out. Today are some Chicago Fed numbers; tomorrow are the Consumer Price Index and another house price index (this time from the FHFA) and Existing Home Sales. Thursday is Initial Jobless Claims and New Home Sales, and then Friday is Durable Goods Orders. This morning the 10-yr, which closed Friday at a yield of 2.48%, is roughly unchanged as are agency MBS prices.

Executive Rate Market Report:

Geopolitical issues are dominant this morning within markets. Over the weekend Pres. Obama accused Russia of providing the missile that shot down the Malaysian passenger plane. Russian separatists have impeded rescue workers and investigators from doing their jobs and reports that the crash scene has been contaminated by the same separatists; so far nothing from the Black Boxes that are thought to be in separatists’ hands. In Israel fighting is increasing with Israeli troops continuing their ground assault. Ion the background, and with little news, the Iraq Sunni/Shiite confrontation is ongoing. Until now the US has led the sanctions against Russia as Europe has been dragging back because of the direct impact additional sanctions will have on the already soft European economies. The sanctions imposed so far have been narrowly targeted and haven't applied to broad swaths of the Russian economy.  Ukraine is ready to hand over the investigation of the Malaysia Airlines Flight 17 disaster to Dutch authorities.

Meanwhile, fighting in eastern Ukraine appeared to be intensifying. Putin attempting to take the high road; asking for more international investigation of the crash site and said that "Russia will do everything possible to shift the current conflict in the east of Ukraine from today's current military stage to the state of discussion at the negotiation table." The Obama administration for the first time publicly charged Mr. Putin's government with supplying the rebels the long-range rockets used in last Thursday's strike and also likely providing the separatists with training. European Union foreign ministers meeting in Brussels tomorrow will consider tougher sanctions on Russian individuals and companies.

There are no economic releases scheduled today; this week has June existing and new home sales and June durable goods orders as headliners. The week also has a huge number of key Q2 earnings reports due. Between the data and the geopolitical events in Israel and Ukraine, markets will likely be jittery; reacting to unfolding news about sanctions by Europe and earnings reports. Looking ahead, the FOMC will meet next week on Tuesday and Wednesday; expect more of the same from the meeting, however one can never underestimate what comes out of it. There is no Yellen press conference after the meeting. Also next week; the July employment report is on the schedule, in the past when the first Friday of the month ell on the 1st of the month the employment report was delayed until the second Friday. Finally next week Treasury will auction 2s, 5s and 7 yr notes.  With all that next week, this week isn’t likely to see much change in rates or the stock market.


US interest rates (10s and 30s) are at the lowest rates since last May and also since June of 2013. The events in the next two weeks will test whether investors will buy treasuries to push rates into new lows, breaking the June 2013 low on the 10 yr. Some history; the lowest the 10 yr yield came in August 2012 at the height of the Fed’s QE at 1.50%. There is very little likelihood based on current conditions that rates will get that low again. 2.44% close last May is a difficult challenge.

The DJIA opened at 9:30 -78, NASDAQ -13, S&P -6; 10 yr 2.47% -1 bp and 30 yr MBS prices 11 bps from Friday’s closes.

This Week’s Calendar:

            8:30 am June CPI (+0.3%, ex food and energy +0.2%)

            9:00 am May FHFA housing price ndex (+0.3%, April 0.0%)

           10:00 am June existing home sales (4.99 mil +2.0%)


           7:00 am weekly MBA mortgage applications


           8:30 weekly jobless claims (+8K to 310K)

           10:00 am June new home sales (475K -5.75%)


           8:30 June durable goods orders (+0.5%, ex transportation orders +0.7%)

The events in Ukraine and Israel are dominant today in financial markets. A lot of Q2 earnings and two data points will also get attention this week. Still depends on how investors and traders treat the geopolitical events that will dictate the interest rate markets. If stocks improve on earnings this week the rate markets will not likely improve much regardless of international events. A stock market improvement  would be a vote that those geo-political circumstances will not impede US economic improvement, thus keeping interest rates from increasing. Keep in mind many Fed officials have been speaking about an earlier increase in rates by the Fed than what is now expected. All of our technical studies remain bullish, but it is a thin line.