Okay, this week is dragging, many folks are off anyway,
locks are bumping
along the bottom, so I am going to switch things up a
little, and put the
joke first. In honor of tomorrow, and of South Carolina, here you go:
FireworksSong
[http://r20.rs6.net/tn.jsp?e=001daGt07fZ7XoR1yti6EX1LHmrlon78CGgBdydNKI6eMHf
oY8NE3JPBWf9o9CUbPVsaF8IzZ_W6cCLOzMFTd-XPVjATbYhMbCCbCyPd_MmKUG_l9bIGx501U8N
-1u0icilNBxM6m2NToYCxQgso7_g2hB08cSiqaCf].
The F&M Bank & Trust Company is looking to hire a
Team of Mortgage
Professionals in
the Central Region (Oklahoma City & Dallas). F&M Bank has
been in business for over 65 years strong and is a
"locally owned" $2 billon
[http://r20.rs6.net/tn.jsp?e=001daGt07fZ7Xo9cg8OxG168m2PZqvLrnbuqghoLlobV9Sn
65TwL2EIqb6EE2d-7nTlCzUTkmfpCJlhr1qrlfZc2Rpg6rkycimJqdAxxXesVgDjZ6e8hpUnzQ==
]).
The bank itself
has been primarily a commercial bank but its' growing
mortgage operations has offices in both Oklahoma and
Texas. F&M offers a
very aggressive Jumbo pricing, conforming loan amounts up
to $500,000, has a
marketing structure
to support referral sources, has access to a banking
platform which generates additional referral leads and
has a very
competitive commission structure which also includes
bonus for targeted
production levels and has local underwriting and
processing.
If you or anyone
you know is looking for a new opportunity, please contact
Yesterday the commentary mentioned the latest lawsuit
settlement story about
Citigroup paying Fannie Mae $968 million to resolve
mortgage claims on 3.7
million loans.
I received this note: "Rob, Sign me up for that Citi
settlement deal. At
$263 per loan, I will take that deal every day of the
week in lieu of
repurchase demands."
It is a little more complicated than that, but it boils
down to Citi wanting
to keep its relationship with Fannie, and deciding to
settle. And yes,
smaller originators wanting to keep their relationship
with an investor will
also settle.
Yesterday the commentary also mentioned borrower-signed
lock agreements.
From a capital markets perspective, maybe that might
improve pull through.
But Connie C.
wisely notes, "I can't say that signed lock-in
agreements are a federal
requirement.
That said, they can be a critical document to validate
other things that are
federal requirements. RESPA requires that a GFE be
provided once the
borrower has locked
in a rate, plus the value of the APOR for HPML testing
is triggered by the lock-date as well as for HMDA
Reporting. If one doesn't
have a copy of a signed & dated lock agreement from
the borrower, its darned
hard to prove any of those things. As anyone who has gone
through a
compliance audit knows, if it isn't documented, it
didn't happen."
Well, the Federal Reserve went and approved the Basel III
regulations. (Here
are a couple links
for you to scan: Memo
[http://r20.rs6.net/tn.jsp?e=001daGt07fZ7XrQBFM1fGjGRMUEEyynCUQg8fR4iQl4EiDH
YU3fW0SOGA8xgUWSFvtX7i32LLgNSkLTKwRXHcooQQualoXrjXq3s5pGRCR5gJvbxJfctcXAlwfp
6tOz1UvV_t-Km2v1BuWMChvL26cmy5w6sqOSimFLYtMzW_nC1kDNp7MLu5RNSOAGZ5mbyS_vWeIG
c70cHFxUnJfwIinnpQ==]
and FinalRule
[http://r20.rs6.net/tn.jsp?e=001daGt07fZ7XqKO34ehWoenpLITLFgPF_q7fx6aI7C4FSt
4BrN2Z5Zu0AT8whtg800KLcgf2RXLV6mXYu-B5ZUUL_aoZWXjvqWHlonsDi7iSB1A8BRQiGh_gYg
J70EqRbhDgDbHKi2tCxgtGnt7QpGjaXcJ9ELspoWFTwDYFnT8UB_YKozdA2ck-Rt441SjrnDaMJh
PCzATz-tFwljTHXSMg==].)
The final rules were released to U.S. banks. Remember
that the Board's
approval was the first step in the approval process, but
the other Basel III
regulators (the FDIC and the OCC) are expected to approve
the rule shortly.
The rules are phased
in over five years starting January 1, 2014, but we
will certainly see changes ahead of that. The Final Rule
did not treat
mortgage banking assets as severely as the proposed rule,
however the Final
Rule will have potentially significant implications going
forward,
especially for banks owning mortgage servicing assets
(MSAs) and for FHA and
VA loans as their risk weighting will increase. The Final
Rule is effective
on January 1, 2014, but many sections have separate
phase-in rules.
The MBA reports that mortgage servicing assets were not
given favorable
treatment in the Final Rule. "The Rule requires that
the following assets
that individually exceed 10 percent of the common equity
component of tier 1
capital be deducted from that component of tier 1
capital: Mortgage
Servicing Assets defined as contractual rights owned by
the bank to service
for a fee mortgage loans owned by others, Deferred Tax
Assets (DTAs) arising
from temporary differences that the bank could not
realize through net
operating loss carrybacks, and significant investments in
the capital of
unconsolidated financial institutions in the form of
common stock. In
addition, the aggregate of all assets in the above
categories that exceed 15
percent of the common equity component of tier 1 capital
must be deducted
from that component of tier 1 capital. In addition, any
MSAs not deducted
from capital would be risk-weighted at 250 percent. The
present risk-weight
of MSA's is 100 percent."
However, the regulators agreed with MBA's comment letters
in three
MSR-related areas.
The first is that the existing 10 percent haircut of
MSA's from capital
under section
475 (b) of FIDICIA will be removed. Under the proposed
rule, any non-cash
gain on sale recorded for securitization interests
(multi-tranche
securities) would have
to be reversed. Under the final rule, the gain on
sale associated with the set-up of an MSA on
securitization would not have
to be reversed. And deferred tax liabilities associated
with the MSA tax
safe harbor can be used to offset MSA's used in the
10 percent and 15 percent limits above.
The final rule rejected the proposed Category 1/Category
2 approach for
residential mortgages and proposed risk-weight which
ranged from 35 percent
to 200 percent based upon LTV. Instead, the rule retains
"the treatment for
residential mortgage exposures that is currently set
forth in the general
risk-based capital rules." Exposures secured by a
first lien on a
single-family home that are prudently underwritten and
performing receive a
50 percent risk-weight; all other loans receive a 100
percent risk-weight.
"Prudently underwritten" is not synched with
QM, though could plausibly be
interpreted more broadly. This is positive for the
industry. But the
risk-weight for FHA and VA loans would increase from zero
percent to 20
percent, which is the same for MBS issued by Fannie Mae
and Freddie Mac.
Residential mortgages are excluded from the definition of
financial
collateral in the Final Rule since they were not thought
to be appropriate
because they exhibit increased variation and credit risk,
and are relatively
more speculative than the recognized forms of financial
collateral under the
proposal. Per the MBA, the present definition of
financial collateral for
banks filing under the advanced approach includes
residential mortgages in
the financial collateral definition, generally allowing warehouse lines of
credit to be risk-weighted at 50 percent (the risk-weight
of the underlying
collateral). Under the new rule, all banks would have to
treat warehouse
lines as commercial loans with a risk-weight of 100
percent.
For the MBA's complete take on it, go here
[http://r20.rs6.net/tn.jsp?e=001daGt07fZ7XqGtgLamOAByqgE8hTzKsz89POMckjHWONZ
DfToh-rsUmG9g910TcqVW80iyW4Fj8vxp1Wbd0J2eGKp5MP1hYXKZjLRZNAD1KLbsI-Pv38vvj9s
toEIKrTkb2UurLSbWlWc2LsnwFS-KzA-0MgKIxVdcFM2IxQF9do9WSWckvGp6ugObb3fYgOR].
What does it all mean? Are servicing values going to
plunge? Hopefully not,
although any bank that values it's servicing at more than
10% of tier 1
capital will be reading the fine print, and perhaps
adjusting its portfolio.
There are certainly non-bank servicers willing to buy
more. Remember that
small and medium-sized US banks not subject to the advanced approaches
rules (those that hold less than $250 billion in
consolidated assets and
less than $10 billion of on-balance-sheet foreign
exposures) are required to
apply either the SSFA methodology or the gross-up
approach to determine risk
weights on their securitization exposures, including
RMBS, CMBS, and ABS.
One can find more details at RiskCapital
[http://r20.rs6.net/tn.jsp?e=001daGt07fZ7XpWQD-2iz01t1FAH189sBAGGXbXZ9xGjI-H
HLWXwAHc1AajbgZC0WO5GlMW8DE8IHNvwfT1BclYOQew5vOmBIL_bVv-jKSGdZRVd1n1BeauzdjA
3caP82owduOBbCaLQ01_WIl5rgsnZMSw-FzItz_fqy1s5NH-kP2ULy9sbRBJQEOKsjfG4pMvsFmu
3jnJJS5EUQJq6TVuE24kkwG6X2ZQb7J-4rf4g5M=].
What is the "SSFA methodology"? The SSFA
approach is a recently introduced
methodology that avoids the usage of credit ratings in
determining capital
requirements for securitizations. Instead, the SSFA
approach relies on the
90+ delinquency percentage and the risk weights of the
underlying exposures
in the securitization, as well as the attachment and
detachment points of
the bond, to calculate capital requirements.
Relative to Basel II rules, the formula generally results
in lower capital
requirements on below-IG-rated, legacy senior
securitizations, and higher
capital requirements on IG-rated mezzanine exposures
(e.g., new-issue AAs or
As). For those out there
who love the nitty gritty, Barclays reports that,
"The final rule did make some clarifications/changes with respect to the
SSFA approach: Re-remics holding only a single
securitization exposure that
has been re-tranched are not considered re-securitizations
and, importantly,
are not penalized with the higher 1.5 value. The
parameter has been
clarified to be floored at zero. This issue was somewhat
unclear in the
original SSFA proposal released for comment in June 2012
but has been
resolved in the final version of the rules. The 'W'
parameter used to define
the 90+ delinquency rate on the securitization explicitly
excludes the
deferral of principal and interest payments on loans where the deferral is
unrelated to the performance of the loan or the borrower.
Specifically,
student loans - with their varying repayment statuses
(i.e., in-school,
deferment, forbearance) during which principal and
interest were not
required to be paid by the borrower - and retail credit
cards - with
promotional offers of no interest/no payments for 12
months - that are in
their deferral periods will not be included in the
calculation of 'W'."
"Banks not subject to the advanced approaches rules
also have the option to
apply the gross-up approach to determine capital
requirements on all of
their securitized assets. For senior securitization
exposures, the gross-up
approach effectively results in the same risk weight as
the risk weight of
the underlying loans; however, the methodology heavily penalizes mezzanine
securities, even if they are IG rated.
If a bank chooses to apply the gross-up approach, it must
apply the gross-up
approach to all of its securitization positions and
cannot selectively apply
the SSFA approach to some assets and the gross-up
approach to others" per a
Barclays report.
On the other hand, banks subject to the advanced
approaches rules are
required to apply the supervisory formula approach (SFA)
to determine
capital requirements on securitizations, if all of the
data needed in the
formula are available. Otherwise, the bank is permitted
to apply the SSFA
methodology.
But there are changes to the risk-weighting methodology
for mortgage whole
loans.
Whereas the proposed rules stipulated that mortgage loans
would be assigned
a risk weight of 35-200%, depending on the LTV of the
loan and its
collateral characteristics, the final rules allow banks
to continue to
utilize their general risk-weighting framework to
determine mortgage loan
risk weights. Specifically, mortgage loans are assigned
either a 50% or a
100% risk weight, depending on their loan
characteristics.
Loans meeting these criteria will be assigned a 50% risk
weight: loans
secured by a 1-4 family residential property and is
either owner occupied or
rented, loan is in a first-lien position, the loan is not
90+ days
delinquent or in non-accrual status, the loan must meet
prudential
underwriting standards, including an LTV requirement that
has been set
internally by the bank (historically 90%), the loan has
not been
restructured or modified, although loans that have been
modified under HAMP
are not considered restructured/modified.
Mortgages that do not meet the above criteria, including
second liens,
seriously
delinquent loans, and loans underwritten with extremely high
LTVs, are assigned
a 100% risk weight.
The effect of the change in the mortgage risk-weighting
methodology is
generally positive
for non-agencies, as many loans originated prior to 2008
would have received a higher risk weight under the
proposed methodology.
Under the existing capital regime, such unrealized losses
and gains are
excluded from the
calculation of Tier 1 capital ratio. Thus, changes in the
value of agency MBS securities due to rate fluctuations
have no effect on
Tier 1 capital under the current regime. However, this
will not be the case
in the future, and including certain numbers into the
capital ratio
calculation will have the effect of increasing the
volatility of capital
ratios. Although banks could potentially reduce this
effect by reclassifying
these securities under their HTM or trading books and
adopting more active
hedging strategies, these come at the cost of lower
liquidity and/or higher
income volatility. As a result, it is likely that banks
will reduce their
duration exposure to decrease the interest rate risk on
their agency MBS
holdings.
This could have an effect on agency MBS as banks shorten
the duration window
of their agency MBS purchases for their portfolio.
Additionally, banks are
likely to refrain from adding significant agency MBS to
their portfolios,
given the risks of a potential selloff of the sort seen
over the past two
months. This could temporarily reduce the demand for
agency MBS from the
banking sector.
Banks not subject to the advanced approaches rules are
required to adopt the
new securitization
risk-weighting methodology starting on January 1, 2015.
As noted above,
however, advanced approaches banks must start to comply
with the revised
advanced approaches rules (i.e., required to apply the SFA
methodology or the SSFA if it is not feasible to apply
the SFA) on January
1, 2014.
Finishing up with the servicing discussion, Fitch has
come out saying that
bonds being
serviced by Nationstar will see some losses: Fitch
[http://r20.rs6.net/tn.jsp?e=001daGt07fZ7XoirW7dooQzH74k6rZi_NZLOo_Xhqpe1b-4
igKewvNF--GHMTiw0E4CsG8IKZ1PDYqcT_Dj5swXwCKjWszu5qVgD3cjKWT3_N3HU4CiKjOaANdw
EUcdEnPjJQBhOYaWI5XgAc4Nqs6sCobrIFxvuUOk5MSIUmlPgU8V_fvRss3BkbAl3YKoEgzIQayR
YGu6EaRn72O9VaIBXZquzJPNS09Tndn_CSu2j0w=].
This morning we learned what lock desks everywhere
already knew: locks fell
steeply last week. The MBA reported that applications
fell 12% from the
prior week, with
refis falling 16% and purchases falling 3%. Applications
to refinance are now down to 64% of the total, the lowest
level since May
2011. And as we'd expect, the ARM percentage increased to
8% of total
applications, the highest level since July 2008.
The market was pretty quiet yesterday, with low volumes
and not much change
to rates.
But we've had the ADP numbers this morning, stronger than
expected.
Companies in the
U.S. boosted employment by 188,000 workers in June,
figures from the Roseland, New Jersey-based ADP Research
Institute showed
today. The median forecast of 38 economists surveyed by
Bloomberg called for
an advance of 160,000. This may bump up expectations for Friday's jobs
numbers. At the start of the day (remember the bond market
closes early
today, so don't look for rate sheets to improve - who
wants to take a bunch
of locks ahead of Friday's jobs data?) the 10-yr is
roughly unchanged at
2.48% as are MBS prices.
(Joke's at the top!)
If you're interested, visit my twice-a-month blog at the
STRATMOR Group web
[http://r20.rs6.net/tn.jsp?e=001daGt07fZ7XqYQitS2t5NdrqBIVXSNlX6Ob4-f4mE-K8V
G0vMT22lpPpHcUKjvbv_4bwpwMXmDBNBwqaCoGM7CYgniyWYuMJObv6ykZpQKT_vMJ52nGi7Xl3m
SVafDtqO].
The current blog is, "Mortgage Backed Securities:
Life after QE3." If you
have both the time and inclination, make a comment on
what I have written,
or on other comments so that folks can learn what's going
on out there from
the other readers.
Rob
(Check out
[http://r20.rs6.net/tn.jsp?e=001daGt07fZ7Xq9ay2MPBlKJpX5FNuiL4aAmaB1ns5w6TXd
r3iLlZqvgJo4R-w_uf-v53-S52nQqs1PfIc6nJFh7FDJItWi0UBEvqkj3diQixPjpu2NHZUcg0kR
vZhBowedFz4-fj9dHM_50ARJBxBBvH8w3knZtnR_mQ3BtrXarmjrV4vCV-QOxQ==]
[http://r20.rs6.net/tn.jsp?e=001daGt07fZ7XriwjYYjlRjxr-iu-Tzi50FMYYuuW2gFWvL
WEUNdHHBS7aHNWsMfohKLxZx-DjyR73F-42JYH0poqcgP6lbBxE880Jk4s9J9WYh1zcY_l4dA4M4
zyfZQok8N9UaVkXVAJhQBqaGIgOYzA_K__siS81Y].
[http://r20.rs6.net/tn.jsp?e=001daGt07fZ7XrLi4C7RAMQg-FZPjIvRDrwx8lWN6tdm6bL
i4tpansNu3HrE2PbUq4Uwa5jT4JJmgwelFie9ND2jVkXz1ZR9JnrMRUkBCy7JajzujWrxjjO4UGP
AiRJy0g3].
Copyright 2013 Chrisman LLC. All rights reserved.
Occasional paid job
listings do appear. This report or any portion hereof may
not be reprinted,
sold or redistributed without the written consent of Rob
Chrisman.)
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