Wednesday, June 17, 2015

Discover Financial Closing Mortgage biz; Primer on hedge costs!

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

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

A Primer (from MCT) on Loan Level Hedge Cost


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

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

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

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

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

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

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

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

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

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

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

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


Tuesday, June 16, 2015

Today's Executive Rate Market Report

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

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

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

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

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

PRICES @ 10:00 AM

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

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

2 Yr note: unch 0.71% unch

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

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

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

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

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

Dollar/Yen: 123.40 -0.02 yen

Dollar/Euro: $1.1245 -$0.0038

Gold: $1178.30 -$7.50

Crude Oil: $59.77 +$0.25

DJIA: 17,851.76 +60.59

NASDAQ: 5041.44 +11.47

S&P 500: 2089.45 +5.02  

Monday, April 20, 2015

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

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


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


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

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

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

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


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


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

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

Executive Rate Market Report:

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

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

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

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

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

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

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

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

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

PRICES @ 10:00 AM

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

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

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

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

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

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

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

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

Dollar/Yen: 119.05 +0.15 yen

Dollar/Euro: $1.0745 -$0.0061

Gold: $1195.60 -$7.50

Crude Oil: $55.54 -$0.20

DJIA: 18,039.10 +212.80

NASDAQ: 4970.79 +38.97

S&P 500: 2098.30 +17.12

Monday, April 6, 2015

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


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

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

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

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

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

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

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

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

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

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


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

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