Wednesday, March 18, 2015

Changes in Fannie & Freddie Pricing & Programs;How Much Does 3.75 million sq. ft of office Cost?

What is the Willis Tower? I don't know, but the $1.3 billion Sears Tower, complete with a $775 million loan, was sold to Blackstone. The WSJ reports that the property backs a $775 million loan of which several pieces were securitized in commercial mortgage-backed securities. The building has more than 3.75 million square feet of office space and is the second tallest office building in the United States, after One World Trade Center in downtown Manhattan. The property faced large tenant leasing and capital costs in the first quarter of 2014. Subsequently, the loan was transferred into special servicing after the borrower expressed concern about the capital required to keep the property fully funded. The loan could be defeased and a special servicing workout fee likely when the loan pays off. Currently with two years to maturity (20 months till open) and a 6.27% coupon, it is unclear whether Blackstone will assume the loan or defease it.

Hey, who is more likely to go into foreclosure, a conforming conventional borrower or a jumbo borrower?

While we're talking about big money, Ginnie Mae has added HMBS Enhanced Monthly Pool and Loan Level Disclosure Layout revisions. To view its disclosure, click here.

And not to be outdone, Fannie updated its LLPA matrices. "This Notice announces that Fannie Mae has updated the pricing guidelines in the Loan-Level Price Adjustment (LLPA) Matrix and Adverse Market Delivery Charge (AMDC) Information and the Refi Plus™ Mortgages Only Loan-Level Price Adjustment (LLPA) Matrix and Adverse Market Delivery Charge (AMDC) Information matrices to reflect the policy change that pertains to how loan-level price adjustments are applied to mortgage loans with more than one borrower, specifically when one borrower has a credit score and one or more borrowers do not have credit scores." 

Also not to be outdone, Freddie Mac released Bulletin 2015-3 which announced changes that "enhance our modification options and expand borrower eligibility using our loss mitigation toolkit. All changes are effective for new evaluations conducted on or after July 1, 2015, but you're encouraged to implement them immediately." Freddie's Bulletin addressed Step-Rate Mortgages ("Offering borrowers with Step-Rate Mortgages the opportunity for an earlier modification with our Freddie Mac Streamlined Modification - Streamlined Modification; adding a new eligible hardship to our Freddie Mac Standard Modification - Standard Modification.)  Imminent Default Hardship test. There are plenty of other thrilling details - please read Guide Bulletin 2015-3 for more details on these changes and for additional updates. 

So Freddie is asking its servicers to change certain loans "to reduce the risk of re-defaults as scheduled interest rate adjustments under the HAMP program begin." As a reminder, under HAMP rates on modified mortgages fixed for 5 years, then increase in steps by as much as 1% a year until matching the market rate when HAMP modification took effect. The bulletin above directs servicers to start evaluating HAMP borrowers on July 1 for streamlined modification if they become 60 days delinquent within 12 months after rate increase, and borrowers facing imminent default as a result of increases should also be considered for modifications.  

And let's not forget that a couple weeks ago the Rural Housing Service proposed a Rule amending the Single Family Housing Guaranteed Loan Program. The Rural Housing Service (RHS) has proposed a rule, amending the current regulation for the Single Family Housing Guaranteed Loan Program. The RHS seeks to expand its lender indemnification authority, allow lenders to reduce principal balances (in some cases), revise its interest rate refinance requirements, and to amend its regulation to indicate that a loan guaranteed by the RHS is a Qualified Mortgage if it meets certain requirements set out by the CFPB. Comments on the rule must be received by May 4, 2015.

Speaking of agency news, the FHFA (overseer of Freddie & Fannie) released its Progress Report on the initiatives outlined in its 2014 Strategic Plan and 2014 Conservatorship Scorecard for Fannie Mae and Freddie Mac (the GSEs). The Progress Report is a summary of the work undertaken in furtherance of FHFA's key goals for the GSEs, including issues MBA has championed, such as clarifying lenders' liability under the GSE representation & warranty framework, reducing the number and severity of the GSEs' assessments of compensatory fees, increasing the amount of credit-risk that is transferred to the private market, and pursuing "front-end" risk-sharing transactions, and develop a single security that can be fungible for TBA delivery to increase overall liquidity.

Let's keep going with some random program and lender changes that have been announced over the last several weeks.

First, a correction on some New Penn Financial program notes. Its Home Key product is for borrowers who've experienced a credit event; it is not a credit repair product.

JPMorgan announced that it is buying $45 billion in servicing from Ocwen. Chase's production is down and wants those 277,000 loans, and it would bring its servicing portfolio to roughly $1 trillion (still behind Wells' $1.75 trillion). And, let's face it, Ocwen is shrinking and wants the ducats.

A while back Angel Oak Wholesale began offering a mini- correspondent program for eligible parties. Angel Oak Mortgage Solutions, specializes in non-agency lending, with a focus on non-prime loans, announced that its non-agency mortgage products are now available to third party lenders through a mini-correspondent channel. The platform provides affiliated lenders with the opportunity to offer Angel Oak Mortgage Solutions' non-agency products in their respective lenders' name.

Flagstar posted information regarding the new rural area eligibility maps that become effective on February 2 for purchase transactions under the GRHDoc. #5830 program. As a reminder, refinance transactions do not require the property to be in an area currently defined as rural by Rural Development. Therefore only purchase transactions are affected by the new maps. Also, updates have been made to its Early Loan Payoff policy which will now feature a graduated calculation based on duration and product. This new policy will be applied to all loans which payoff on or after February 1, 2015.

Rates: up a little, down a little. Yesterday they continued downward after a very weak housing start number for the month of February. The press is talking about how traders and investors were hesitant to position ahead of today's Fed statement and press conference. The focus is on whether or not the word "patient" appears in the FOMC statement. Really? With countries struggling around the world, people engaged in violent conflicts, huge currency fluctuations... watching for the word "patient" is what it's all about? 

The war of words between Greece's government and Euro group & German officials continued. Greece feels that it has sacrificed given the austerity plan, and highlights the gains to the European core. Germany and others have benefited from exchange and interest rates that are lower than they would have faced had they still had their own currencies.  

But since this is mortgage and economic commentary, returning to yesterday Housing Starts fell 17.0% in February although the January number was revised higher. That was a surprise but analysts quickly attributed it to record snowfall in the Northeast and extreme cold in the Midwest. But the West didn't do its part: high-than-average temperatures should have compensated for some of the decline in other regions, but housing starts fell 18.2% in the West. February Building Permits, however, beat estimates. And let's not forget that West Texas Intermediate Crude (WTI) made a new 6-year low Tuesday - don't forget the impact falling oil prices have on certain states and oil-related businesses! 

This morning we've had the MBA's application numbers from last week: apps dropped 4%, refis fell 5%, and purchases fell 2%. Not great news for April and May...

Executive Rate Market Report:

A solid open this morning in the bond and mortgage markets; US stock indexes started weaker; ahead of this afternoon’s long awaited FOMC meeting that has ground the word patience into dust. Most investors and traders as well as the media (including ourselves) have been mesmerized with ‘patience’, it’s time to remove it so it isn’t the word of the month. Get rid of ‘patience’, please. Removing that word is supposed to signal a rate increase in June, we don’t agree; removing it likely will be replaced with another phrase or word that is likely to keep markets guessing. One trader this morning with tongue in cheek ventured the FOMC would remove patience and re-enter ‘considerable period of time’ that was the previous buzz phrase.

Yellen won’t ignore the soft economy, jobs are welcome but this year so far the economy is slowing based on the high majority of reports that confirm the economy has slowed. Dec, Jan, and Feb retail sales declined; was it weather, or the lack of internet sales in the monthly reports, or the collapse of oil prices; or the sum of all of those? Industrial production and factory use has slipped recently, there is absolutely no wage pressures the Fed can point to. Inflation is not increasing but declining. From my advantage point there is little reason for the Fed to move now. Why now? Because in the past the Fed has been behind the curve in terms of moving more rapidly in changing monetary direction, so the thinking is that Yellen won’t make that mistake. Look for extreme market volatility this afternoon beginning at 2:00 pm.

The only data this morning, the weekly MBA mortgage applications. Overall apps dropped again, -3.9%; purchases down 2.0%, re-financing -5.0%. Rates moved lower in the week with the average 30-year mortgage for conforming loans ($417,000 or less) down 2 basis points to 3.99%. Most believe that the housing market will gain momentum now that weather is improving. An anticipated increase in the FF rates will also increase mortgage rates, if the recent fractional increase in rates has slowed sales and re-fis has dampened the sector, a 25 bp increase in mortgage rates certainly has to be a worry point.

Crude oil is declining once more, this morning a new six year low. Commodity prices are going to follow crude lower as they did a few months ago when oil prices were falling daily. If Obama’s negotiations with Iran lead to relaxed sanctions Iran’s first move would be increasing oil exports; the country needs any monies it can get.

At 9:30 the DJIA opened -77, NASDAQ -13, S&P -7. 10 yr at 9:30 at 2.02% -4 bps, 30 yr MBS price +11 bp frm yesterday’s close and +11 bps frm 9:30 yesterday.

The drop in the rate on the 10 this morning has broken the bearish technical pattern; now trading below its 100, 40, and 20 day averages and the momentum oscillators have turned slightly positive. Any other day we would take it seriously but with the FOMC and Yellen this afternoon we will withhold our enthusiasm for now. Not only the FOMC and Yellen this afternoon, the Fed will also release its quarterly economic outlook; a lot to absorb in a few minutes so expect increased volatility frm 2:00 to 3:30 this afternoon.

PRICES @ 10:00 AM

10 yr note: +7/32 (22 bp) 2.03% -3 bp

5 yr note: +2/32 (6 bp) 1.54% -1 bp

2 Yr note: unch 0.67% unch

30 yr bond: +17/32 (53 bp) 2.58% -3 bp

Libor Rates: 1 mo; 0.177%; 3 mo; 0.270%; 6 mo; 0.401%; 1 yr 0.713%

30 yr FNMA 3.0 Apr: @9:30 101.50 +11 bp (+11 bp frm 9:30 yesterday)

15 yr FNMA 3.0 Apr: @9:30 104.22 +1 bp (+10 bp frm 9:30 yesterday)

30 yr GNMA 3.0 Apr: @9:30 102.55 +9 bp (+10 bp frm 9:30 yesterday)

Dollar/Yen: 121.18 -0.19 yen

Dollar/Euro: $1.0599 +$0.0002

Gold: $1147.40 -$0.80

Crude Oil: $42.35 -$1.11

DJIA: 17,770.46 -78.62

NASDAQ: 4926.46 -10.97

S&P 500: 2068.23 -6.05 

Friday, March 13, 2015

Millennial Job & Housing Stats & Trends;Executive Rate Market Report


Well, all those Millennials are a few weeks older than when the commentary last discussed them. I don't have any trophies to hand them, but Realtors and lenders sure hope they pair up, form households, and "bear fruit." And I even have a joke about them down below. They are certainly the most talked about group in quite some time, and in fact I regularly receive e-mails suggesting they don't need more attention. But I collected some recent news about them, with some of the information even conflicting....

While some data indicates that Millennials are starting to engage in home-buying activities, the Collingwood Group reports that the Millennial housing problem is not going away. As young adults begin to move out of their parents' homes, they are initially looking to rent rather than buy. According to the Collingwood's Mortgage Industry Outlook Report, 61 percent of respondents claimed to have not seen any evidence of new volume from the millennial generation. The usual suspects, high debt burden and low wage growth, are the primary reasons for delaying homeownership. Millennials are also delaying household formation, pushing the need to buy to later in life. Most of the respondents agreed that this generation will become homeowners in the near future. To read the report, click here.

Homeownership among young adults has dropped to 36.8%, from its peak of 43.1% in 2004. As such, more Millennials are living at home and renting with friends to offset the cost of living expenses. In a 2013 survey by Fannie Mae, 19% of adults aged 18 to 38 years old said one of the main reasons for renting was due to its flexibility and 23% of the same cohort said the number one reason for renting was affordability, with 26% stating that they were not ready to financially own a home and 8% noted that they could not obtain a mortgage. As most analysts have pointed out, student debt has bogged down young adults, delaying their ability to partake in homeownership activities. According to a Wells Fargo survey, the second biggest financial priority among Millennials is to purchase a home, only behind paying off debt. Apart from debt hindering some young adults form purchasing a home, Millennials are also delaying marriage, but homeownership rates often converge by the age of 35 to 39 years old. About 90 percent of young adults currently renting do want to buy a home at some point, but more often than not, Millennials will engage in homeownership later in their lives. To read more about Wells Fargo article, click here.

In line with most predictions, a millennial housing boom is coming. Tim Rood, chairman of the Collingwood Group has reaffirmed this expectation, suggesting that the size of the job market is supposed to peak in number of employees by 2016, and then drop off, as more people begin to retire and leave the job market. This will allow for a higher earning potential and greater employment opportunities among Millennials. Baby boomers are also beginning to retire in cities at higher rates, where Millennials currently reside. As more and more Millennials begin to settle down and raise a family (an amount that should increase by the end of the decade), they will move away from the city, ultimately swapping living environments with baby boomers. The rise in earning power for Millennials and their desire to settle down within the next few years will make Millennials the largest share of homebuyers in the near future.

Not all Millennials are struggling, as the mean net worth among Millennials is much higher than the median, indicating that a portion of young adults have a fairly robust balance sheet, according to Wells Fargo. Despite this, the decline in employment opportunities and earning potential among Millennials after the recession has led to an overall drop in assets among this generation. The median value of assets dropped from $38,200 in 2010 to $29,600 in 2013 and nonfinancial assets are more prevalent among young adults than financial assets. Among nonfinancial assets, Millennials are less likely to invest in real estate and business equity than any older cohort, as 35.6% of Millennials (a 2013 all-time low) owned a home and 6.5% of young adults had equity in businesses compared to 11.7% for all households. Millennials are also less likely to own a car and obtain a driver's license - perhaps Millennials are in fact, more granola than their older counterparts. Compared to all households, young adults are only marginally less likely to hold financial assets, but the median asset value is $5,800 for Millennials, compared to $21,200 for all families.  A 2013 Wells Fargo survey suggested that 60% of young people uphold the notion that the stock market is the best place to invest, but the inability to save money is preventing Millennials from doing so. Once the job market picks up for this generation, more Millennials will begin to invest in home buying, boosting the overall housing market.

The entire Millennial generation is now of employable age, and comprises about 35% of the U.S. working age population. Wells Fargo Securities, LLC Economics Group defines the Millennial generation as those between 16-34 years old. Currently, 85 million people make up the Millennial cohort and it is the largest generation in U.S. history, attributing to 30% of the U.S. population. Many Millennials graduated from school during the economic crisis, resulting in decreased employment opportunities and low wages. According to Wells Fargo survey, the recession taught 80% of Millennials to save money in order to mitigate future economic hardships, yet many Millennials are not saving for retirement. This may be attributed to the fact those most Millennials are tied down with debt obligations, as the survey suggested that student debt was the main financial concern among Millennials. More Millennials (between the ages of 25-34 years old) hold at least a Bachelor's degree than the general population aged 25 and older. The educational achievements of the Millennial generation will ultimately lead to greater pay increases and employment opportunities, improving their financial situation. This will have a positive impact on the economy, as Millennials begin to engage in homeownership and investment opportunities. To read more about Wells Fargo's article, click here.

Despite the fact that a greater share of Millennial workers is employed in low-paying industries, recent data indicates that Millennials should start experiencing a rise in income growth, according to Wells Fargo Securities, LLC Economics Group. Since 2008, median weekly earnings for full-time workers have increased about 1.9% per year, whereas the median weekly earnings for older Millennials (ages 25-34) have risen 1.6% per year compared to 1.5% for younger Millennials (ages 16-24). Throughout the past year, the median weekly earnings for younger Millennials have increased ahead of their older counterparts as younger Millennials are working more hours. The slow wage growth for Millennials compared to older workers can be attributed to graduating in a recession and entering careers in a weak labor market, resulting in long-lasting negative effects on wages. Starting salaries are often lower than the pre-recession environment, raises are modest and there are more underemployed workers. This wage loss can continue for around a decade. Between 2007 and 2013, younger households' income (35 and younger), declined 14.6%, although Millennials are only slightly behind in median income compared to all households since the recession. For example, in 2013 the median income household income for those aged 35 and younger was 76.1% of the median income for all households, which has remained the same since 2004. There has been a recent surge in weekly earnings among Millennials, but an income gap still remains between Millennials and older workers, and is wider than prior generations. To read more about Wells Fargo's article, click here

According to an article posted on LinkedIn, Millennials are not job hopping and are more loyal now than they have ever been. A chart published by The Washington Post indicates that Millennials have stayed at their jobs longer than any time since 1982 and since the recession, the average length of employment occupancy has been on the rise, with an overall average of job tenure equaling 3.2 years. Similarly, the Bureau of Labor Statistics also indicated that job tenure has increased, with the median years of tenure in January of 2004 at 4 years, compared to 4.6 years in January 2014. The lack of job hopping can be attributed to the economy, as there are fewer new jobs being created that entail higher payer and room for advancement since more people would take those jobs leaving their current position. Since job hopping is at a low, the ratio between wages and corporate profits has never been higher since companies don't have to pay their employees more. As the economy begins to improve, job hopping will increase again. 

Switching gears to the markets, in yesterday's economic news, advanced retail sales for February was the highlight along with weekly Initial Jobless Claims and February import prices. Feb retail prices were expected to be moderately strong at +0.3% after falling -0.8% in January but actually fell 0.6% in February amid rough weather. That was a huge miss by forecasters. Unemployment insurance claims were expected to have decreased in the first week of March, and sure enough they decreased by 36,000 to 289,000 in the week ended March 7.  The four-week moving average for claims, which evens out weekly volatility, fell by 3,750 to 302,250 last week. Lastly import prices rose .4%, rising for the first time in eight months. Compared with one year earlier, prices were down 9.4%. That marked the largest year-over-year decrease since September 2009.

Executive Rate Market Report:

Treasuries and MBSs were slightly weaker (price) prior to 8:30. Feb PPI released at 8:30, the consensus was for overall PPI to increase 0.3% and the core (ex food and energy) +0.1%; as reported PPI dropped 0.5% and the core also down 0.5%. The initial reaction in the bond and mortgage markets provided support, at 9:00 the 10 yr at 2.10% down 1 bp from yesterday’s close and MBS price +15 bp from yesterday’s close. PPI has been negative now for 4 months; Jan PPI down 0.8%, yr/yr Feb down 0.6%, yr/yr Feb core +1.0%. The initial improvements didn’t last, by 9:15 FNMA 3.0 coupon traded down 6 bps.

Wholesale prices this morning confirm low inflation outlooks. Much of the decline in overall prices was due to a 1.5% drop in a volatile category called trade services, which measures changes in margins received by wholesalers and retailers. Excluding food, energy and trade services, the index was unchanged in February from January. Much of the last 4 month decline in PPI is due to lower energy prices that declined and a drop in food prices, down 1.6% from January. The FOMC meeting next week will debate whether inflation is stabilizing or will continue to decline. Yellen made specific reference to the decline in oil prices, that oil price declines would diminish over time. Defining ‘over time’ is another Fedspeak leaving the definition to investors and traders to speculate. Crude is declining once again in the last few sessions, early this morning down $1.00 to $46.08 breaking its near term support.

Crude has regained its influence on inflation after trading in a tight pattern since January. Even cutting production the supply of oil is now stressing storage tanks that are almost filled to their tops. This morning the International Energy Agency issued a report that they are raising estimates for U.S. oil production for this year, since the large reduction in drilling has failed to slow output. If crude prices make a new low look for another run lower that will have some impact on what markets expect from the Fed. Europe is failing to push up inflation, the US also unable to engineer the inflation rate to 2.0% the Fed has been looking for since 2012.

At 9:30 the DJIA opened -50 after +260 yesterday, NASDAQ -5 after +43 yesterday, and S&P -6 after +26. The 10 yr note at 9:30 2.12% +1 bps; 30 yr FNMA price -5 bps from yesterday’s close and -38 bps from 9:30 yesterday.

The final data point this week at 10:00, the U. of Michigan mid-month consumer sentiment index; expected at 96 from 95.4 at the end of Feb, as reported the index declined to 91.2.

There is an increasing belief within markets that with employment gains recently wages are about to increase. Investors, economists and some traders are on board with that idea. Of course increasing wages will increase the inflation outlook and would be a reason for interest rates to move higher. I don’t have an opinion, however we worry that since the financial collapse in 2008 making assumptions based on historical data hasn’t worked very well. If wage pressures were to increase as is the current thought, businesses will immediately begin cutting back on hiring. The absolutely most important thing for businesses that trade publically is keeping profits up and expenses down, that may derail the bullish employment outlook. The FOMC has to think about it when deciding whether or not to start increasing interest rates. Not sure why, but markets believe that when the Fed increases the FF rate it will mean a constant increase at future FOMC meetings. If the Fed raises the FF rate one time by 0.25% (which we believe is the max we will see) then sits tight for months the initial increase won’t have any significant impact on markets.

Next week’s FOMC meeting and Yellen’s press conference after the meeting should keep financial markets in narrow ranges today and early next week. The dollar is increasing, not good for US economic outlooks. Crude is about to re-gain selling after a few weeks of consolidation, good for the rate markets. All that said, the bond and mortgage markets haven’t changed; both markets remain bearish. Not quite as technically bearish as was the case last week; testing key technical levels.

PRICES @ 10:10 AM

10 yr note: -1/32 (3 bp) 2.12% unch

5 yr note: +1/32 (3 bp) 1.59% unch

2 Yr note: +1/32 (3 bp) 0.65% -1 bp

30 yr bond: -4/32 (12 bp) 2.71% +0.5 bp

Libor Rates: 1 mo 0.176%; 3 mo 0.269%; 6 mo 0.401%; 1 yr 0.715%

30 yr FNMA 3.0 Apr: @9:30 101.06 -5 bp (-38 bp frm 9:30 yesterday)

15 yr FNMA 3.0 Apr: @9:30 104.44 -13 bp (-14 bp frm 9:30 yesterday)

30 yr GNMA 3.0 Apr: @9:30 102.27 -3 bp (-25 bp frm 9:30 yesterday)

Dollar/Yen: 121.43 +0.14 yen

Dollar/Euro: $1.0518 -$0.0117

Gold: $1156.80 +$4.90

Crude Oil: $46.11 -$0.94

DJIA: 17,758.17 -137.05

NASDAQ: 4878.25 -15.04

S&P 500: 2054.07 -11.88


Monday, March 9, 2015

Agency updates in primary & secondary markets; uh-oh: oil impacting commercial real estate

Occasionally I am asked about how the agencies handle certain types of debt. As a reminder, Fannie Mae requires that all deferred installment debt, including student loans not yet in repayment, be included in the calculation of the borrower's debt-to-income ratio. In determining the payment for deferred student loans, Fannie Mae currently requires that the lender obtain a copy of the borrower's payment letter or forbearance agreement or calculate the monthly payment at 2% of the balance of the student loan. Research has shown that actual monthly payments are typically lower than 2%. In addition, many student loan repayment structures now use an income-based approach in calculating changes in the payment due over time. 

As a result, Fannie Mae modified the monthly payment calculation from 2% to 1% of the outstanding balance. In addition, for all student loans, regardless of their payment status, the lender must use the greater of the 1% calculation or the actual documented payment. An exception will be allowed to use the actual documented payment if it will fully amortize the loan over its term with no payment adjustments. Therefore even if the payment is deferred they still have to factor in either the actual future payment or use the 1% calculation.  

Bloomberg reported that the Federal Housing Finance Agency (FHFA) is considering extending the Home Affordable Refinance Program (HARP) beyond the current deadline of year-end 2015. Uh, and why would it do that? Isn't the housing market doing pretty well, and HARP borrowers already took advantage of the government-sponsored program? And doesn't the government want to make us less reliant on it for home loans? But some companies like Walter and NationStar are sure hoping it is extended and broadened: supposedly the FHFA is also considering whether the program should be broadened to include borrowers with loans originated after May 31, 2009. Given strong home price appreciation since 2009 many think the remaining pool of borrowers with negative equity is not large, unless the change allows borrowers who have already done a HARP refinance to do another one.


The American Bankers Association has renewed endorsements of Fannie Mae's secondary market options to help community banks maintain their competiveness in local markets. The partnership with Fannie Mae began in 2002 and allows ABA member banks to meet the needs of their customers and take advantage of the secondary market. The endorsement will allow for reduced transaction fees on Desktop Underwriters, customized training; updates to help lenders remain current on critical issues; and customizable marketing materials. The press release can be found here.


With the addition of Fannie Mae's Collateral Underwriter (CU), Fannie Mae has updated appraisal underwriting rules. In December 2014, Fannie Mae removed the requirement that if comparable sales exceeded 15 percent net and 25 percent growth, appraiser shad to provide an explanation as to why it was included in the appraisal report. Further review indicates that most appraisal reports never exceeded the 15 percent of 25 percent guideline as many appraisers focused on keeping the amount of modifications within the guidelines instead of reflecting market reaction for specific characteristics. Fannie Mae also reminds lenders that photographs in the appraisal report must be clear and descriptive. In order to promote use of comparables sales that have closed within the past 12 months and are most relevant, specific comments from an appraiser if a comparable sale is older than 6 months is no longer required, but a comment is still mandated when a comparable sale is older than 12 months.  

The implementation of Fannie Mae's Collateral Underwriter (CU) has many in the industry up in arms about how to adapt to the new software and what it means for the housing industry. Fortunately, Fannie Mae has published a fact sheet, highlighting sections of the Collateral Underwriter Lender Letter that was published on February 4th, 2015. Lenders are reminded that CU is free and is not a requirement. The purpose of CU is to identify risks and potential discrepancies in the appraisal report, and be utilized as supplementary advisory information when lenders analyze an appraisal.  CU rates appraisal's based on a numeral risk score from 1 to 5, with 1 indicating low risk. CU takes into consideration the relevance of each potential comparable sale based on physical similarity, time and distance. Lenders are prohibited from providing the CU report to appraisal management companies or appraisers. Fannie Mae also does not suggest that lenders ask appraisers to address all or any of the 20 comparables provided by CU but expects CU to further instill confidence in lenders regarding the appraisals they receive. Additionally, Fannie Mae's Appraiser Quality Monitoring (AQM) process will identify appraisers who repeatedly show a pattern of inconsistencies and inaccuracies in their appraisal reports, which can later be used as training purposes and guidance. The AQM process involves data and technology similar to CU to identify patterns or potential issues with appraisal reports, triggering a red flag and human due diligence to determine relevancy and accuracy of the results from the automated system. There is also no correlation between CU risk score and AQM. 

Recently I answered a question (and wrote about it; see Feb 20th commentary) about risk sharing between Fannie and Freddie in the capital markets. Issuance is robust from last years $10.8 Billion mark; in January Freddie Mac completed an $880 million offering, and as Jody Shenn of Bloomberg writes, it is "the first in which some of the bonds exposed investors to principal losses before homeowner defaults exceed certain levels."This is an important deal perimeter moving forward. Ms. Shenn continues, "Bond buyers are flocking back to the market for securities used by mortgage giants Fannie Mae and Freddie Mac to share their risks with investors. Fannie Mae sold $1.5 billion of the debt Thursday, through which it can potentially transfer some of its losses from guaranteeing $50.2 billion of loans, the Washington-based company said in a statement. One portion of the offering carries a yield that floats 4.55 percentage points above a benchmark rate, down from the 5 percentage point spread that investors demanded on similar notes in a November sale."


Fannie Mae updates to its seller guide include clarification regarding project standards policies, reorganization of co-op topics, and postponement of policy relating to delivery of loans with more than two borrowers that was previously released in Announcement SEL-2014-13. Also, clarification to the effective date for the pricing policy previously released in Announcement SEL-2014-13 and updates to the Lender Breach of Contract topic in the Selling Guide to align with the 2014 revision of the Servicing Guide. Details for its announcement SEL-2015-02: are available inThis Announcement.


Lower gasoline prices have certainly changed my consumption behavior; I'm now able to afford I Can't Believe It's Not Butter, instead of relying on the kindness of KFC employees to add an extra handful of butter packets when I make a biscuit Tom Petty says: It's good to be king. But what are Americans (who don't value synthetic butter) doing with their windfall? Not much, according to Wells Fargo, mainly because the "savings" are much like stock options in the '90s tech industry, mostly on paper; the economic group writes, "January's disappointing retail sales figures have many people scratching their heads as to what has happened to the savings from lower gasoline prices. Prices at the pump in January were down 46.5 percent from their year ago level and the typical household is expected to save between $500 and $800 on gasoline purchases this year. So far, however, little of this gain has showed up in retail sales." My bet is to capture any arbitrage you may have at the moment, here in California prices have already started to tick upwards as summer approaches. Unleaded is over $3 a gallon already in Northern California after being near $2 a gallon a month or two ago. 

Continuing on, Bloomberg points out that the price of oil is changing things. Sarah Mulholland observes that, "The oil glut is threatening to expose cracks in the commercial-mortgage bond market. Nomura Holdings Inc. estimates that $16 billion in property debt that has been sold to investors as securities is vulnerable to default after crude prices plunged, posing risks for the economies of U.S. cities and towns built around the boom. Wall Street analysts are poring over commercial-mortgage backed securities for signs of distress as the oil crash weighs on demand for real estate in energy hubs. Properties that house workers -- such as apartment complexes, mobile-home parks and hotels -- are likely to be the first to see vacancy rates rise as oil rigs idle and jobs vanish, according to Nomura debt analysts Lea Overby and Steven Romasko. 'If this oil story persists, oil workers are going to go someplace else -- they're transient,' Overby, a New York-based analyst at the bank, said in a phone interview. 'Demand is going to go from very high to zero overnight, and that's a problem.'"


That is what we need - more problems. So are we sitting here hoping for oil to go back to $100 a barrel? Geez... we can't even make up our minds!


Let's talk about something simple, like the economic calendar for this week. I will cut to the chase - there isn't a whole lot of important scheduled news here in the U.S. on the platter until Thursday. At that point we'll see Retail Sales, Initial Jobless Claims, and Import Prices. Friday is the Producer Price Index (does anyone care about inflation anymore?) and a series of forgettable University of Michigan numbers. (Hope I am not sounding too cynical here...) Rates have crept up because the economy here in the U.S. is not doing badly - housing & jobs are doing just fine, thank you - and we ended last week with the 10-yr at 2.24% and this morning we're at 2.21% with agency MBS prices better by .125 - mostly based on a flight to quality on more chatter about Greece and nervousness in global stock markets.

Wednesday, March 4, 2015

ALTA offers advice to CFPB & points out major problem with disclosure forms


Nothing ruins your Friday like realizing it is only Wednesday! I lose track of what we're celebrating this month: I was all geared up for the Irish, but the Census Bureau reminds us that it is Women's History Month. A good thing, too, as there are 161 million women living in the U.S. (compared to 156 million men) and by age 85 women outnumber men 2 to 1 (4 million to 2 million). The median annual earning for women 15 or older who worked full-time in 2013 was $39,157 compared to $50,033 for men and female workers earned 78 cents for every dollar their male counterparts earned. More women are graduating from college than men, with women accounting for 56% of all college students. In 2014, there were 5.2 million stay-at-home mothers compared to 211,000 stay-at-home fathers.

What is going on around the nation? You can't go to a conference without someone discussing urban price appreciation, rents skyrocketing, and every Realtor licking their chops waiting for a bunch of 24 year olds to buy a house.

The U.S. Census Bureau published 2014 fourth quarter residential vacancy and homeownership rates, with the national vacancy rate at 7 percent for rental housing and 1.9 percent for homeowner housing. The national homeownership rate of 64 percent was 1.2 percentage points lower than a year before. The rental vacancy rate was highest in the South at 9%, then the Midwest at 7.5%, followed by the Northeast at 5.8% and the West at 4.8%. The homeowner vacancy rate in the South was 2.2%, the Northeast was 2%, the Midwest was 1.7% and the West was 1.4%. Approximately 87% of housing units were occupied in the Q4 of 2014, with owner-occupied housing units making up 56% of total housing units and renter-occupied units making up 32% of the inventory in the fourth quarter of 2014. Homeownership rates were highest in the Midwest at 68.3 percent and lowest in the West at 58.5 percent. In regards to homeownership demographics, homeownership rates were highest among householders 65 years old and older (79.5 percent) and lowest for those under 35 years old (35.3 percent). Homeownership rates among non-Hispanic White householders was 73.2 percent, All Other Races householders was 55.4 percent and African American householders was 42.1 percent. For a more in depth look at the U.S. Census Bureau's report, click here.


For those who have given up on the dating life, a recent article published by the Collingwood Group suggests that half of U.S. adults are single. The share of singles have also impacted the homeownership rate, which declined in Q4 of 2014 to 63.9%, the lowest level over the past two decades and is expected to drop even further this year. The percentage of renters who want to become homeowners has also declined to 75%, which is lower than the 80% confidence rate seen five years ago. In order to attract this sector of potential homeowners, it's necessary to market to single adults, explaining how owning a home is more beneficial and often more affordable than renting.


Respondents say it is important to have sufficient reserve capital and/or private mortgage insurance in place to protect taxpayers from the next business cycle downturn. Some suggested combining Fannie Mae and Freddie Mac into a single entity or moving to a single security. The vast majority (85%) of survey respondents agree that Fannie Mae and Freddie Mac should be doing more risk sharing transactions. These transactions allow private market participants to invest in the credit performance of Fannie Mae and Freddie Mac's single-family book of business. Most survey respondents indicated that they support these transactions because they help fuel the private securitization market and limit taxpayer risk while the GSEs are in conservatorship.

I often remind folks that while the huge majority of banks in this country are exempt from direct examination by the CFPB, they are subject to the rules and regulations of the CFPB. And regarding decisions and enforcement actions, attorneys have always looked to agency decisions (to the extent they are available) to discern what possible enforcement posture would be taken by regulators. Attorney J. Steven Lovejoy reminded me that, for example, HUD used to publish Consent Orders on its RESPA page. Those were very helpful in interpreting a rather opaque statute and regulations. It's the same as looking up cases with precedential value. But there is less predictability with a new agency like CFPB and its approach to enforcement is a bit different.  Acknowledging that they are both prosecutor and judge, for purposes of settlement, there is precious little negotiation. Instead they ask "tell us what you want us to know about the violation and the violator and we will determine an appropriate penalty.


Last month many in the industry began to believe that reverse mortgages will be the next target on the CFPB's list, as the bureau has recently released a report that is a snapshot of reverse mortgage complaints from December 2011 to December 2014, which encompasses 1200 reverse mortgage complaints that the agency received during that time period. The top reverse mortgage complaints include problems when unable to pay (38%), making payments (32%), applying for the loan (18%), signing the agreement (10%) and receiving a credit offer (3%). The CFPB cited that many consumers were frustrated over the requirements of reverse mortgages and did not fully comprehend the loan product or how the amount of available equity will decrease due to accrued interest on the loan. Other complaints include challenges paying off the loan once it became due, difficulty obtaining information from servicers and unresponsiveness from servicers when trying to avoid a foreclosure. These findings will more than likely lead the CFPB to enact new requirements for reverse mortgages and the bureau has already posted a consumer advisory on their website to address concerns that arose from the complaints.


I know I am playing some catch up, but the American Bankers Association (ABA) released a response to the CFPB's proposal regarding mortgage relief for some community banks. Bob Davis, the executive vice president of mortgage markets for the ABA, praises the CFPB for listening to community bankers and taking the ABA's recommendations into consideration to expand the definitions of 'rural area'. The proposed changes would ensure certain bankers meet the mortgage credit needs within their communities and the changes could allow many communities to enjoy more choice and expanded competition for mortgage credit. To read the ABA statement regarding the CFPB proposal, click here.


And the American Land Title Association (ALTA), the national trade association of the land title insurance industry, released the following statement in response to CFPB Director Richard Cordray's testimony before the House of Representatives Financial Services Committee. "'In 150 days, new disclosure forms for real estate transactions will completely change the home buying process as it's known today,' said Michelle Korsmo, ALTA's chief executive officer. 'As our member companies work to implement these new forms on Aug. 1, we strongly urge Director Cordray to announce a five-month restrained enforcement period so that new business processes can be adjusted to comply with these regulations. As with previous regulatory reform, only when the new forms are in practice will many issues and defects be discovered. A restrained enforcement period helps our members, and the broader real estate industry, make the changes needed to their business processes and collaborate with industry and regulators to ensure the consumer has a positive experience at the closing table.'


"'Unfortunately, we're already aware of one major problem with the new CFPB forms,' Korsmo stated. 'The Bureau's Closing Disclosure, which replaces the current HUD-1 Settlement Statement, inaccurately discloses the fees associated with title insurance premiums for consumers. State law and regulation in half of the United States dictates that consumers must pay title insurance rates that are different than how the CFPB requires industry to inaccurately disclose these fees to the consumer. Every homebuyer should be well-informed about the accurate costs of homeownership-including what they pay for each service during the real estate closing process. For many consumers, buying a home is the single largest investment they will make in their lifetime. It's critical that Director Cordray and the CFPB staff adjust the disclosure forms prior to Aug. 1 to ensure consumers receive accurate information about their mortgage costs. ALTA and our member companies stand ready to help the Bureau ensure consumers are neither confused nor misled at the closing table.'"


Turning briefly to the markets, since "brief" is all they deserve, as the commentary noted yesterday, if there is peace and quiet overseas then, everything else being equal, rates may be inclined to go up because our economy is doing pretty well. ThomsonReuters noted that, "Supply appeared to have been a bit elevated again, and based on earlier indications was on track to reach $2 billion; the same as Monday and up from an average of $1.7 billion last week. Overall, however, supply is generally trending lower at current mortgage rate levels that are over 3.90%."


This morning, care of the MBA, we've seen what 75% of the retail lenders did last week for application numbers: apps +.1%, refis +.5% and were 62% of apps, and purchases were -.2%. We've also had the February ADP Employment Report. Expected +225k it was +212 - close enough.


Later we will have some non-market moving figures like the Markit Services PMI and February ISM Non-Manufacturing PMI, but also the Fed's Beige Book at 2PM EST. Tuesday we had a 2.12% close on the good ol' 10-yr with agency MBS prices finishing worse by nearly .250 versus Monday afternoon) and in the early going we're at 2.12% and agency MBS prices are roughly unchanged from Tuesday's close.