Bank Failure Stats Improving and Banks Easing Credit?

By rchrisman@robchrisman.com

 

Here are the answers to yesterday's quiz.

1. Johnny 's mother had three children. The first child was named April The second child was named May. What was the third child 's name?

Answer: Johnny of course

2. There is a clerk at the butcher shop, he is five feet ten inches tall, and he wears size 13 sneakers. What does he weigh?

Answer: Meat.

3. Before Mt. Everest was discovered, what was the highest mountain in the world?

Answer: Mt. Everest; it just wasn't discovered yet.

4. How much dirt is there in a hole that measures two feet by three feet by four feet?

Answer: There is no dirt in a hole.

5. What word in the English language is always spelled incorrectly?

Answer: Incorrectly

6. Billy was born on December 28th, yet his birthday is always in the summer. How is this possible?

Answer: Billy lives in the Southern Hemisphere.

7. In California, you cannot take a picture of a man with a wooden leg. Why not?

Answer: You can 't take pictures with a wooden leg. You need a camera to take pictures.

8. What was the President 's name in 1975?

Answer: Same as is it now - Barack Obama

9. If you were running a race, and you passed the person in 2nd place, what place would you be in now?

Answer: You would be in 2nd. Well, you passed the person in second place, not first.

10. Which is correct to say, "The yolk of the egg are white" or "The yolk of the egg is white"?

Answer: Neither, the yolk of the egg is yellow.

11. If a farmer has 5 haystacks in one field and 4 haystacks in the other field, how many haystacks would he have if he combined them all in another field?

Answer: One. If he combines all of his haystacks, they all become one big one.

 

"If you work hard and go the extra mile to provide for your family...I will take that extra income and give it to those who refuse to do the same!" Was that heard on the campaign trail? I don't know. But it is making the rounds. And don't forget that tomorrow is April's Fools Day - be careful what you believe in daily commentaries.

The Financial Times reported that client-reporting failure has cost big banks $43B since 2009. "The world's largest investment banks have been fined $43 billion during the past seven years for customer-reporting failure, according to Corlytics." That is a lot of money. Something else that has cost a lot of money is bank failures. Fortunately, the number of failed banks peaked in 2010 and has been coming down ever since: 2008 25, 2009 140, 2010 157, 2011 92, 2012 51, 2013 24, 2014 18, 2015 8.

 FDIC lawsuits regarding those failures, with a two-year lag being typical, peaked a few years later: 2010 2, 2011 16, 2012 26, 2013 40, 2014 21, 2015 3. Many of those suits have been settled, but the cost has been steep. Not including legal fees, the amount as totaled over $675 million.

 Small banks often try to become big banks, and many opt to acquire or merge rather than grow their assets organically - if there is a cultural fit! But things may be quieting down: S&P Global Market Intelligence reports as of March 15 there were 47 bank and thrift transactions vs. 85 in Q4 of 2015 and 67 in Q1, or about 45% and 30% lower, respectively.

 Just in the last week, however, it was announced that in Michigan The State Bank ($444) will acquire Community State Bank ($196mm) for about $21.6mm in cash (100%). In Illinois Morton Community Bank ($3.1B) will acquire the parent company of Illini Bank ($285mm) and Farmers State Bank of Camp Point ($49mm). In nearby Ohio First State Bank ($370mm) will acquire First Safety Bank ($49mm). The holding company of CBI Bank & Trust ($491mm, IA) and Farmers & Mechanics Bank ($297mm, IL) will acquire Brimfield Bank ($47mm, IL). Northwest Bank ($9.0B, PA) will acquire employee benefits and property casualty insurance firm Best Insurance Agency (PA). In West Virginia, Mountain Mama, First Sentry Bank ($508mm) will acquire Rock Branch Community Bank ($75mm) for about $7.4mm in cash and stock. And First State Bank ($366mm, NE) will acquire Farmers State Bank ($50mm, NE).

 Wells Fargo Economics Group: It Happens Every Cycle. What's that Wells Fargo? You say underwriting standards have eased over the last three years? "....there has been a steady rise in the percentage of banks that have eased underwriting standards, while there has been a continued decline in the percentage of banks that have tightened credit."

 Regulators are not big fans of entities that they can't regulate. Peer-to-peer lending is on the rise. This much talked-about cottage industry has been moving into traditional lending space over the last few years and has created its own arbitrage opportunities. This P2P platform has become so popular abroad, even China's marketplace is booming....so, China being China, is cracking down on it. The last week of 2015 saw China's banking regulator laying out plans to restrict thousands of online peer-to-peer lenders, pledging to "cleanse the market" as failed platforms and suspected frauds highlight risks. Bloomberg writes, "The thrust of the CBRC's approach is that the platforms are intermediaries -- matchmakers between borrowers and lenders -- that shouldn't themselves raise or lend money. It rules out P2P sites distributing wealth-management products, a tactic that some hoped would diversify their revenue sources, and limits their use for crowd funding."

 And while we're on banks, credit quality has been mixed. According to the American Bankers Association's Consumer Credit Delinquency Bulletin, delinquency in closed-end loans increased in the third quarter of 2015. Delinquencies slightly rose in six of the eleven individual categories.  The composite ratio, which tracks delinquencies in eight closed-end categories, grew 5 basis points to 1.41 percent in Q3 2015. The rise in closed-end loan delinquency can be attributed to slow job and income growth. Home equity line delinquencies dropped 3 basis points to 1.3 percent and property improvement delinquencies fell 4 basis points to 0.87 percent. Bank card delinquencies increased two basis points to 2.54 percent, while personal loan delinquencies rose to 1.52 percent from 1.41 percent.

 The Federal Reserve's FedCommunities.org web site has been updated with easy access to the growing number of Fed resources related to community development across the country. Updates include new video, research, data, publications and webinars pertinent to the topics of housing and the Community Reinvestment Act (CRA). Available information topics such as the upcoming 2016 National Interagency Community Reinvestment Conference, which will be held Feb. 7-10, 2016, in Los Angeles.

 Additional resources covering housing and CRA include: The Community Development Data Inventory, compiled by the Philadelphia Fed, The Kansas City Fed's "CRA OneSource" site that which includes CRA tools, templates, guides and webinars. The St. Louis Fed's Housing Market Conditions report, which provides a quarterly snapshot of conditions in the U.S. and in the Eighth District states. These are just a few of the hundreds of online community development resources that are updated frequently by the Federal Reserve Board of Governors and its 12 regional Reserve banks, and made easily accessible via the FedCommunities.org centralized website.

 By now most of the smart money is betting that the Fed is not going to do anything regarding short-term rates for quite some time in spite of the U.S. economy doing pretty well. (Of course plenty of folks think our economy is dragging.) The U.S. yield curve steepened very sharply Wednesday as the ADP employment change was roughly in line with estimates and the $28 billion 7-year Treasury auction went well.

 This morning we've had all the scheduled news we're going to have ahead of tomorrow's unemployment data. The March Challenger Job Cuts showed a 31% increase year over year. And Initial Jobless Claims for the week ending 3/26 showed +11k to 276k, topping forecasts. We closed Wednesday with the 10-year sitting at 1.83% and this morning it is hovering around 1.84% with agency MBS prices worse a smidge.

The Cost of TRID From STRATMOR and its Impact on Appraisers

By rchrisman@robchrisman.com

 

Something for seniors to do to keep those "aging" grey cells active! (Answers tomorrow.)

1. Johnny's mother had three children. The first child was named April. The second child was named May.

...What was the third child's name?

2. There is a clerk at the butcher shop, he is five feet ten inches tall and he wears size 13 sneakers.

...What does he weigh?

3. Before Mt. Everest was discovered,

...what was the highest mountain in the world?

4. How much dirt is there in a hole

...that measures two feet by three feet by four feet?

5. What word in the English language

....is always spelled incorrectly?

6. Billy was born on December 28th, yet his birthday is always in the summer.

....How is this possible?

7. In California, you cannot take a picture of a man with a wooden leg.

...Why not?

8. What was the President's name

...in 1975?

9. If you were running a race,

...and you passed the person in 2nd place, what place would you be in now?

10. Which is correct to say,

..."The yolk of the egg are white" or "The yolk of the egg is white"?

11. If a farmer has 5 haystacks in one field and 4 haystacks in the other field,

...how many haystacks would he have if he combined them all in another field?

(Answers tomorrow.)

 

Lenders across the nation are switching to potlucks at the end of the month instead of catered lunches. Why? A new survey of mortgage lenders by the MBA finds loan production expenses have climbed 9.4% to $7,747 per loan vs. $7,080 before the TRID requirement went into effect. I just made up the tidbit about the lunches, and everyone knows that these costs are passed on to borrowers, but still... It certainly helps explain why there is less refinancing in a similar rate environment. But STRATMOR has a different take on the increase in cost - see below.

Regarding TRDI Jim Hennessy writes, "Do you suppose when coming up with TILA/RESPA Integrated Disclosure that the acronym squad ever considered "Truly Understanding Residential Disclosures"?  (I think the industry might have agreed with that one.)"

 STRATMOR released select findings from its TRID - Impact and Experience Spotlight Survey. It has impacted not only the mortgage lender but also the borrowers it was created to assist. Dr. Matt Lind writes, "Based on the results of STRATMOR's Spotlight Survey, TRID implementation seems to be largely complete, with the vast majority (87 percent) of survey respondents reporting implementation either fully or mostly accomplished; only 1 percent said their efforts were 'way behind.' Independent lenders were generally ahead of banks, with TRID implementation fully accomplished at 72 percent of small and 80 percent of mid-sized independents, as compared to just 33 and 44 percent respectively for small and mid-sized banks. In fact, banks seemed to have a harder time with implementation all around, with 31 percent characterizing their experience under TRID as either 'difficult' or 'terrible' versus only 16 percent of independents reporting similar results.

 "Implementing TRID has obviously not been easy for lenders. It's been costly as well. On average, since October 2015, TRID has increased lender back office fulfillment and post-closing costs by an average of $209 per loan, and lenders are estimating that only about 17 percent of those costs can be recovered through additional charges," said Dr. Matt. "However, TRID seems to be associated with a significant pickup in borrower satisfaction, despite somewhat slower application-to-closing times. At the end of the day, improving the borrower's experience is a main objective of TRID, and in an increasingly competitive origination market, it is also a primary goal of lenders as well."

 "The increase in satisfaction is borne out by STRATMOR's MortgageSAT Borrower Satisfaction Program survey data, which pulls in thousands of data points every month. The MortgageSAT data shows that the time to process a mortgage from application to closing, after initially increasing, is moving back towards pre-TRID levels. There has also been a steady and substantial increase - from 85 to 91 percent - in the proportion of borrowers being contacted by their lender prior to closing. Increasing such contact was a key goal of TRID and has previously been shown by MortgageSAT to be an important factor affecting overall borrower satisfaction. As a result, overall borrower satisfaction with the origination process now stands at 91 percent, a record high since MortgageSAT was launched in 2013. (Full results of the TRID - Impact and Experience Survey are available for purchase from STRATMOR online at http://www.cvent.com/d/pfqxkh.)"

 Regarding the recent MBA figures on the cost per loan heading higher, it seems that, "Over $425 per loan in the MBA's roughly $650 per loan increase can be attributable to a 12.5% decline in volume from the 3^rd to 4^th quarter. Assuming that $3,000 of the roughly $7,000 origination expense per loan cited by the MBA for the 3^rd quarter are fixed costs, a 12.5% decline in volume results in a 14.2% increase the cost per loan or an increase of about $426. Add our estimate of $209 in TRID costs and you get $635 per loan, just about what the MBA estimated for the total increase from the 3^rd to the 4^th quarter."

 Speaking of TRID I received this note. "Appraisers always will have many questions as they continue traveling down the road to compliance. Am I doing what is right? Am I going about my business that meets with regulation guidelines? Some of those rules have changed since October, when the TILA-RESPA Integrated Disclosure (TRID) rule took effect. "Mistakes made by the appraiser regarding the report will result in hyper-diligence, meaning the remedy time to fix those mistakes will be hours and not the usual 24- to 48-hour time frames," Jan Buchele, SVP of The William Fall Group & Valuation Partners said.

 "In my opinion, there will be more pressure on the appraiser to be accurate. Consumers losing earnest money deposits due to falling outside contractual closing dates may come back and claim the appraiser caused these problems in the first place costing them real money. Lenders will not deal with appraisers who make mistakes that can delay closings." Of course, everything starts with a quality report, where accuracy should be reflected to achieve compliance. Buchele said a quality report convinces the reader that the appraiser believes in its conclusion. "I believe that reconciled data is what gets lost in reports," she said. "It is the responsibility of the appraiser to provide results and explain the data used to arrive at that determination of value. There's no such thing as too much or too little information within a report. Each report has to contain the sufficient data for that individual assignment and has to be detailed and explained to the reader as to why this is the appropriate and necessary data."

 There are some definite thoughts on the appraisal side of the biz. From the Sierra Nevada Foothills in California Sharon Nixon penned, "Here's a good article addressing the shortage of appraisers. Where the use of trainees is concerned, the few lenders who will accept trainee signatures most require the Supervisory Appraiser to sign also. The Supervisory Appraiser takes full responsibility for the appraisal just as he/she would if the signing appraiser. Most appraisers carry E & O Insurance. There really is no shortage of appraisers. The lenders and AMCs want to go cheap then they complain about lousy appraisals and long turn times. They do not want to pay a reasonable and customary fee and many appraisers are refusing to do lender or AMC work. Seasoned appraisers are changing their client focus on non-lender work, retiring or changing their profession."

 As a reminder there is a relatively extensive process to first become a Trainee/Apprentice Appraiser, and then a Licensed Appraiser. To become a Trainee one must complete and pass 75 hours of basic appraisal education, which includes three courses (Basic Appraisal Principles   30 hours, Basic Appraisal Procedures 30 hours, and 15-hour Universal Standards of Professional Appraisal Practice (USPAP) 15 hours). Each Trainee Appraiser must be supervised to get the required hours of experience before applying for the Licensed Residential Appraiser level. Locating a certified appraiser is a very important step to becoming an appraiser. The trainee and supervisory appraiser must keep a log of work completed that will be reviewed when the trainee applies for any license to the state regulatory body. All new Trainee (Beginning) Appraisers and Supervisory Appraisers are required to complete an approved Supervisor/Trainee course before they will be able to log experience hours.

 Licensed Appraisers can appraise non-complex, one- to four-unit residential properties less than $1,000,000 and complex one- to four-unit residential properties less than $250,000 in market value. They must complete a total of 150 hours of education. The 150 hours includes the 75 hours required for the trainee level and four additional courses: Residential Market Analysis and Highest and Best Use (15 hours), Residential Appraiser Site Valuation and Cost Approach (15 hours), Residential Sales Comparison and Income Approaches (30 hours), and Residential Report Writing and Case Studies (15 hours).

 But wait - there's more! New appraisers are required to complete 2,000 hours of experience in no less than 12 months. These hours must be directly supervised by an acceptable supervisory appraiser. Appraisers are required to maintain a log jointly with the supervisory appraiser. And then an Appraisal Qualifications Board (AQB)-approved Licensed Residential Real Property Appraiser examination must be successfully completed. All education, degree, and experience hours must be completed prior to taking the national exam.

 And appraisers must complete 30 semester hours of college-level education from an accredited college, junior college, community college, or university. An associate degree or higher satisfies this requirement. Wow!

 For anyone relying on a bond market rally to spur business, we had a nice rally in the bond market yesterday after Fed Chair Yellen allayed investor concerns that April's FOMC meeting might harbor the second rate hike in this tightening cycle. She played up the downside risks to the U.S. economy more than investors had expected although she did say that the fallout from 2016's market turmoil is likely to be limited.

 Today we've already had the MBA's weekly mortgage indices. Apps dropped 1% with refis down 3%. We've also had the March ADP report. Expected to come in around 190-200k, and down from February's 214k, it was indeed at 200k. Later we have the $28 billion 7-year note auction. We closed the 10-year Tuesday at 1.81% and this morning we're at 1.83% with agency MBS prices worse slightly.

Ohio's Take on Minimum Wage for Sales Personnel

By rchrisman@robchrisman.com

An old geezer became very bored in retirement and decided to open a medical clinic.

He put a sign up outside that said: "Dr. Geezer's clinic. Get your treatment for $500, if not cured, get back $1,000."

Doctor "Young," who was positive that this old geezer didn't know beans about medicine, thought this would be a great opportunity to get $1,000.

So he went to Dr. Geezer's clinic.

Dr. Young: "Dr. Geezer, I have lost all taste in my mouth. Can you please help me ??"

Dr. Geezer: "Nurse, please bring medicine from box 22 and put 3 drops in Dr. Young's mouth."

Dr. Young: Aaagh!!!! -- "This is gasoline!"

Dr. Geezer: "Congratulations! You've got your taste back. That will be $500."

Dr. Young gets annoyed and goes back after a couple of days figuring to recover his money.

Dr. Young: "I have lost my memory. I cannot remember anything."

Dr. Geezer: "Nurse, please bring medicine from box 22 and put 3 drops in the patient's mouth."

Dr. Young: "Oh, no you don't - that is gasoline!"

Dr. Geezer: "Congratulations! You've got your memory back. That will be $500."

Dr. Young (after having lost $1000) leaves angrily and comes back after several more days.

Dr. Young: "My eyesight has become weak - I can hardly see anything!!!!

Dr. Geezer: "Well, I don't have any medicine for that so, here's your $1000 back" and gives him a $10 bill.

Dr. Young: "But this is only $10!"

Dr. Geezer: "Congratulations! You got your vision back! That will be $500."

Moral of the story -- Just because you're "Young" doesn't mean that you can outsmart an "old Geezer"

 

Sweden, with its population of about 9.6 million about the same as Michigan, just adopted a law limiting mortgage loans to 105 years. Our 30-year fixed-rate mortgage has plenty of critics, but Sweden's unlimited amortization developed as a strategy to cope with high property prices as a longer term means monthly payments are lower. But inheritors are left with repaying the balance of the mortgage, often by selling the home. The recent average mortgage term was around 140 years, and nearly one-third of mortgages issued in 2014 allowed borrowers to repay only interest. New mortgages will have a 105-year repayment limit as borrowers will be required to reimburse a minimum amount of the loan capital each year, after a five-year grace period on loans for new homes.

In January Redwood Trust announced that it was exiting the conforming conventional business. That, combined with the impact of the FHFA's ruling on captive insurance company membership, and lack of jumbo securitization due to large banks being happy to sit on their jumbo and non-QM loans, has led to plenty of rumors about the role of the company in the industry going forward. Hopefully they are unfounded as several capital markets folks told me that, "Redwood has always been a good #2 outlet for our jumbo product after #1 Chase." (And it sounds like Chase may be attempting to work on its operational quagmire which has existed for quite some time in actually purchasing loans.)

 In state-specific news, aside from a $15 per hour minimum wage in California (bound to jack up the price of hamburgers and any other product touched by minimum wage workers, which unfortunately may impact certain demographics more than others), lenders with Ohio-based "outside" loan originators scored a victory. The Ohio Supreme Court ruled that outside sales people are still exempt from minimum wage requirements. Bricker & Eckler's David Stein wrote in saying, "This case was closely watched because Ohio enacted a constitutional amendment in 2006 that provided protections to certain workers that go above and beyond the federal employment standards of the FLSA. The constitutional amendment was poorly worded and left doubt as to whether outside sales employees were or were not exempt from minimum wage standards. Enabling legislation incorporated the amendment but stated that the term 'employee' - and exclusions and exemptions from that term -  shall have the same meaning as that under the FLSA.

 "In Haight v. Minchak¸ the Ohio Supreme Court held that to be entitled to a statutory minimum wage, the person must be an 'employee' as that term is defined by the FLSA. Accordingly, the exclusions and exemptions under the FLSA must also apply. Outside loan officers, who meet certain criteria, are generally exempt from the FLSA. Now, this fact is also clear under Ohio law. Because the plaintiffs sought to have outside sales people categorized as employees under the new state protection, their logic would have caused significant liability to banks, lenders and others, who have continued to treat outside originators as exempt." Thank you David!

 To determine home affordability across the nation, Zillow analyzed the median income and cost of living in different parts of the country. Zillow found that the median income for law enforcement workers, including bailiffs, correctional officers, detectives, parking enforcement workers and police officers in Jackson, Mississippi is $27,000 per year. In Santa Rosa, California, the average income for law enforcement workers is $96,000. Apart from the difference in income, mortgage affordability varies depending on the metro area. For example, households in San Francisco, Honolulu, San Jose and Los Angeles dedicate 35 percent of their income on a mortgage payment, whereas in Saginaw, Michigan, Amarillo, Texas and Augusta, Georgia, households tend to spend 14 percent of their income on a mortgage. Funeral workers in New York City can also afford a home up to $913,000, whereas those in the same line of work in Philadelphia can afford a home up to $158,000. To read more about Zillow's article, click here.

 We also had the Ohio House recently pass HB 134, a bill that would allow a quicker foreclosure process for vacant and abandoned properties. OMBA had been lobbying for the passage of the legislation as part of the "Inform the Capitol", the annual lobby day for the association.

 April begins Friday already, and here are a couple events of note to start the month:

 Join the TPO division of Banc Home Loans and Arch MI as they host the second installment in a series of Tax Return Analysis Seminars. Taking place on April 7 in Irvine, CA, this free hands-on session will provide loan officers, underwriters, and processors with the opportunity to take their self-employed income analysis skill set to the next level. Topics for this intermediate level training session will include deductions & allowable add-backs, partnership & corporate returns, and agency guidelines relating to proper income analysis. Class size is limited, so RSVP. Don't miss out on this great opportunity to expand your knowledge and become a more well-rounded professional."

 My cat Myrtle doesn't quite grasp the ramifications of TRDI, but this may help. The CFPB staff will present an informational webinar on Tuesday, April 12 to address issues with the TILA/RESPA Integrated Disclosure (TRID) rule in connection with questions that have been raised since the rule took effect last October. The webinar is titled Know Before You Owe Mortgage Disclosure Rule - Post-Effective Date Questions and Guidance. Because few details have been released in connection with the presentation, topics could vary from general guidance to specific guidance on fact specific situations. The most recent informational webinar, held on March 1 and the first since the rule took effect, focused on construction to permanent loans. Bureau staff did note at the end of the last presentation that they have received many questions that were not addressed during the webinar, and those questions would impact future presentations.

 If you're near Colorado on April 13^th you can check out the 25^th Annual Rocky Mountain Mortgage Lenders Expo. It will be held at the Marriott Denver Tech Center.

 The Great River Mortgage Bankers Conference (formerly Tri-State MBA) is a couple weeks away.  Missouri mortgage folks were added to this conference - hence the name change. Now the States of Tennessee, Mississippi, Arkansas and Missouri are included in the conference! The event will be April 13-15 in Memphis - if you go please say hello!

 Join Fannie Mae to review updated requirements for Fannie Mae's Servicer Expense Reimbursement processing as incorporated into the Servicer Expense Reimbursement job aid posted on FannieMae.com. The webinar will highlight the consolidation of available expense reimbursement claim line item categories and subcategories in the Black Knight Financial Services LoanSphere Invoicing Application, and will also answer many of the most frequently asked questions. Please register here to take advantage of this opportunity.

 Plaza Home Mortgage has posted its April training calendar. View the calendar and click a webinar topic for details.

 Turning to the capital markets, since they reflect the demand for certain products and therefore the rates in the primary markets, Prosper Marketplace had some trouble last week selling its security which was backed by personal loans. Investors who bought into the offering did so only once yields were five percentage points higher than a comparable offering a year ago! The higher the yield, the lower the price that is settled upon, and higher yields also denote more perceived risk from a firm. Interestingly even junk bonds (defined by relatively much higher yields) have seem some calm, which would imply that investors see company-specific risk.

 Prosper floated a $278 million offering and at least part of the loans grabbed buyers at only a 12.5 percent yield. The loans had been bought from Prosper and in turn sold by Citigroup. Middleman sellers such as Citi may see skittish investor demand as credit funds (traditionally, buyers) have been losing some of their appetite for this type of security backed by those loans. Bond investors seem to be saying that they do not think the personal loan business model is attractive as it might once have been.

 In the markets there were a few things that came out yesterday that MBS traders noticed. First, the Personal Income and Spending report for February came in right around expectations. The Federal Reserve is looking for 2.0% year-over-year inflation as expressed by the core PCE Index. Following yesterday's report, the index remains unchanged at 1.7% year-over-year. (The personal savings rate edged up to 5.4% from 5.3%.) But the $26 billion 2-year Treasury auction saw the lowest bid-to-cover ratio since October 2008. I guess no one wants to tie up their money for two years and only earn about .9%.

 Today we'll have the January Case-Shiller 20-city Index at 7AM Mountain Time and March Consumer Confidence at 8AM Mountain Time. We can also look forward to a $34 billion 5-yr note auction later today but most importantly a speech by Fed Chair Janet Yellen at 9:30 Mountain Time. We closed Monday with the 10-year yielding 1.87% and this morning it seems happy at 1.86% with agency MBS prices better slightly - perhaps a quiet day in the markets unless Yellen's speech spooks the herd.

Primer on Negative Interest Rates

By rchrisman@robchrisman.com

Lawyers should never ask a Georgia grandma a question if they aren't prepared for the answer.

In a trial, a Southern small-town prosecuting attorney called his first witness, a grandmotherly, elderly woman to the stand.

He approached her and asked, "Mrs. Jones, do you know me?"

She responded, "Why, yes, I do know you, Mr. Williams. I've known you since you were a boy, and frankly, you've been a big disappointment to me. You lie, you cheat on your wife, and you manipulate people and talk about them behind their backs. You think you're a big shot when you haven't the brains to realize you'll never amount to anything more than a two-bit paper pusher. Yes, I know you."

The lawyer was stunned.

Not knowing what else to do, he pointed across the room and asked, "Mrs. Jones, do you know the defense attorney?"

She again replied, "Why yes, I do. I've known Mr. Bradley since he was a youngster, too. He's lazy, bigoted, and he has a drinking problem. He can't build a normal relationship with anyone, and his law practice is one of the worst in the entire state. Not to mention he cheated on his wife with three different women. One of them was your wife. Yes, I know him."

The defense attorney nearly died.

The judge asked both counselors to approach the bench and, in a very quiet voice, said, "If either of you idiots asks her if she knows me, I'll send you both to the electric chair."

 

The legal morass that residential lending finds itself in continues. The latest comes from the ghost of Lehman Brothers continuing to haunt small institutions around the United States - like this small bank in Wisconsin - thanks to Scott F. for passing this along. In other news, Credit Suisse has agreed to pay more than $29 million to settle a lawsuit with the National Credit Union Administration. Supposedly CS sold toxic mortgage-backed securities to credit unions that later failed. NCUA has recovered more than $2.5 billion from banks through lawsuits it began filing in 2011. And out in California jury has awarded Mount Olympus Mortgage Co $23 million in damages from Guaranteed Rate and a former loan officer for conspiring to steal hundreds of loan files and confidential customer information.

Like mortgage companies, banks continue to merge, acquire other companies, and change branch structure. In the last week we've learned that First Savings Bank of Hegewisch ($610mm, IL) will acquire Lake Federal Bank, FSB ($66mm, IN). In Massachusetts Rockland Trust Co ($7.2B) will acquire Bank of Cape Cod ($261mm) for about $30.7mm in stock. Umpqua Bank ($23B, OR) will consolidate 26 branches/stores as the bank adjusts to changing customer behavior around increased usage of online and mobile banking services. Reliance Bank ($168mm, AL) will acquire 4 AL branches and 1 NC loan production office from SouthBank ($65mm, AL).

 Adjustable rate mortgages aren't against the law - yet - but volumes certainly haven't done much, percentage-wise or volume-wise, in recent years.

 A while back Andrew Kalotay proposed a "ratchet mortgage," which is essentially an ARM with a rate that can only reset downward. Ed Pinto outlined a "wealth building home loan" that features shorter amortization-fifteen or twenty years-than most U.S. mortgages. Howell Jackson discussed embedding call options in mortgage contracts that would allow an interested party (such as the government) to buy a mortgage from the holder under specific circumstances (for instance, during a financial crisis) at a predetermined price. Andrew Caplin focused on shared-equity finance, in which a third party (such as a private equity firm) provides some of the equity for a home purchase, and in turn shares the risk (or gain) when house prices change.

 Franklin American Mortgage Company announced the release of its Non-Conforming Jumbo ARM program. The product offers 5/1 and 7/1 LIBOR ARMs.

 TRID-specific news and changes continues to come through - nearly six months after it was instituted.

 On Tuesday, March 1 at 2 p.m. EDT, the Federal Reserve hosted a webinar on the Know Before You Owe mortgage disclosure rule.  A link to this webinar is now available on the Bureau's website. The session, presented by the Bureau, addressed specific questions from industry pertaining to construction lending.

 Flagstar's recentTRID system enhancements include users' ability to choose a closing date two days earlier provided that all borrowers required to receive the CD have electronically consented.  This is available for all new requests and is not available on loans where the request has previously been submitted. Once all applicable borrowers have electronically consented the Earliest Closing Date available in the Disclosure Management module will reflect the new Earliest Closing Date.  In addition, The Disclosure Management module has now been updated for originators to input the non-obligated borrower(s) information including their email address. This will allow for the non-obligated borrower(s) to electronically consent earlier in the process.  Please note a social security number is required for any non-obligated borrower requesting to receive documents electronically.

 DocMagic announced the development of an extensive set of new reps and warrants for its calculations, documents and data, which provides peace of mind to lenders when it comes to compliance with the TRID rule. With DocMagic's TRID-ready systems and now the Premium Compliance Guarantee, it has implemented a solution that mitigates lender risk of non-compliance.  With the Premium Compliance Guarantee, the Loan Estimate and Closing Disclosure are guaranteed to be accurate and complete. The offering is backed by a $5 million dollar guarantee (up to $50,000 per loan) with a 36-month claim filing period.  Beginning February 15, 2016, all new customers will automatically receive the new premium rep and warrant offering. Existing customers will be given the opportunity to protect their future loan files for an additional nominal fee.

 Powered by NYCB's proprietary eSign technology, the Signing Room vision now expands beyond our industry-leading eSign Closings to the convenient electronic acknowledgement of the LE and CD with more e-documents to come. For Clients: Signing Room Client Roadmap [WSL: 1266]A great summary of key Signing Room details you need to know. For Borrowers/Other Signers: Welcome to the Signing Room [WSL: 1265]Provide this flyer to Borrowers/Other Signers to prepare them for the Signing Room experience. Online Consumer Tutorial - Easily demonstrate the Signing Room procedures to your Borrowers/Signers. This tutorial is also available from esignmortgage.com.

 I remember the days following 9/11 when originators had loans in their pipelines which were technically on hold for funding due to certain characteristics contained in the credit package. This made for interesting conversations around secondary marketing desks on how to hedge and commit such files. But what about when foreign money wants to purchase real estate with cash? Or, foreign originated money aside, what about individuals who wish to purchase through LLC's? In a recent Bloomberg article they discuss such an area of concern for the current administration, they write, "President Barack Obama's administration, citing concern about the origin of funds used for all-cash purchases of luxury real estate, said it is stepping up scrutiny of transactions in New York City and Miami. The Financial Crimes Enforcement Network said on Wednesday that it will temporarily require title insurance companies to identify individuals behind companies that pay cash for high-end residential real estate in Manhattan and Miami-Dade County." FinCen, a unit of the U.S. Treasury Department, is concerned that real estate purchases without bank financing "may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures." Maybe someone should tell these people intentionally hiding taxable assets from the United States is frowned upon.

 I recently wrote about European negative interest rates, and received an email asking why anyone would pay a bank to hold their money in deposit? The quick answer: you probably wouldn't....but institutions might under the right circumstances. If the average American has $4,400 in their checking account they would probably withdraw it and store it under their mattress, or burry it in their backyard ala Tony Soprano; however, large banks and money managers who control billions of dollars don't have that option. Why? For one there would be a cost associated with storing that much money (maybe even more than the implied 20bps in negative interest banks would charge you), and secondly, banks and money managers aren't necessarily in the business of holding cash, but rather are in the business of moving cash.That's a good thing too, if you believe the classic economic concept of the circular flow of money. Economies are normally unproductive when cash sits on the side lines (see: current U.S. economy as example). Negative interest rates are an attempt to spur investments.

 Central bankers are stress testing mortgages again and not liking what they find. Before you start trying to find your resume on your computer, I should mention the central banker in question is the PBOC (the People's Bank of China) which called officials from the nation's biggest commercial lenders to a meeting in the southern city of Shenzhen to stress a close adherence to rules on mortgage lending. Bloomberg writes, "The People's Bank of China told lenders not to compete excessively on mortgages, said the people, who asked not to be identified as they aren't authorized to speak publicly. Banks were also requested to step up their scrutiny on the source of borrowers' down payments, the people said." This sounds uniquely familiar, but I can't place it's context...."Chinese authorities are mulling plans to impose rules ending the practice of home buyers taking out loans to cover down-payments, people familiar with the matter said last week." Where did I hear that before? "Central bank Deputy Governor Pan Gongsheng said on Saturday loans from developers, real estate agents and peer-to-peer lenders have raised home buyers' leverage, undermined the effectiveness of macro policies and increased risks to the financial system and property markets." Again, that seems oddly familiar.

 Down Tuesday, up Wednesday, down Thursday... the bond market and rates have seen some minor fluctuations right up to the early close yesterday. Declining global equities and oil prices were not enough to keep U.S. Treasuries in positive territory yesterday. The economic data for the U.S. was bad too as the durable goods orders data for February caused downward revisions to Q1 GDP growth estimates. Durable goods orders fell 2.8% in February, slightly less than estimates, but January's change was revised down to +4.2% from the initial reading of +4.9% and excluding transportation orders were down 1.0% in February and were said to have increased 1.2% in January versus 1.8% before. New orders for nondefense capital goods excluding aircraft -- a proxy for business investment -- declined 1.8%.

 The bond markets are closed today for the Good Friday holiday, so any rate sheets produced will have the usual conservative approach.