Thoughts and Developements

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Whereas the National Association of Realtors has managed to have everyone capitalize the job of their members (Realtor), the MBA (which years ago was the MBAA) took one of their capitalized letters away, and is now the MBa. (I am sure we've all seen the lesson about how important capitals are, a horse, and Uncle Jack - I just can't repeat it here.)

"You can tell a lot about a woman's mood just by looking at her hands. For example, if they are holding a gun, she's probably angry." At this point the QM/non-QM question is not causing anger, but is indeed causing concern. I received this note from a senior manager at a large aggregator. "Here is one issue upon which the industry has had little direction. Let's assume a loan is originated as a QM eligible loan and sold to the agencies.  Later through a GSE audit or internal QA, we discover there is a defect that leads to a repurchase. How will the industry deal with this, particularly without a fluid secondary market to redeliver these loans? As we both know, the GSE's and large aggregators have stated that non-QM loans are not eligible for delivery. Additionally, there are non-QM requirements under Appendix Q of the rules that may not have been considered when the loan was originated.  Current GSE guidelines do not require all of the Appendix Q overlays." Many lenders could become overly cautious: who wants to sell a QM loan, that turns out to be non-QM but still a solid loan, for 80 cents on the dollar?

The pervading thought is that the agencies' automated underwriting engines will slot the loans into QM or non-QM buckets. And given that the industry is full of smart, entrepreneurial people, my guess is that there will be an outlet for the product - just not at QM, A-paper prices. Lots of people can make lots of money in the "gray areas." (Fenway Summer is already the most public name being bandied about.) This is not because non-QM loans are not good, credit-worthy loans, but because of liquidity issues, potential liability issues, and the possible speed bumps noted above. We're already seeing a shift in the origination make up. For example, Ellie Mae reported that the average FICO score for closed loans run through its system dropped to 734 in August, the lowest level since Ellie Mae began tracking them and both LTV and DTI ratios rose slightly.  Jonathan Corr, president and chief operating officer of Ellie Mae said this indicates a continuation of the credit easing trend. (Ellie Mae also reported that, for loans run through its systems, the refinancing share of loans has dropped 15 percentage points since rates first began to escalate in May, and is now 43% versus earlier this year when it was 62%.)

Law firm K&L Gates writes, "...it is anyone's guess as to what non-QM/non-QRM lending will look like as lenders will need to consider the impact of ability-to-repay and risk retention in lieu of taking advantage of safe harbors and exemptions. In the ATR Rule, the CFPB has provided guidance as to what a lender should consider in determining the borrower's ability to repay.  But without the safe harbor, the lender bears the burden of proving that the borrower had the ability to repay the loan, potentially for the life of the loan.  For higher-priced QM loans, for which only a rebuttable presumption of ability to repay is available, lenders will bear the same risk of having to prove the borrower's ability to repay at some point in the future.  This risk alone may quiet the secondary market for non-QM loans and higher-priced QM loans."

The write-up goes on, "Risk retention requirements may also remove motivation to securitize non-QRM loans as the capital required to be held against a retained piece may be greater in many cases than the capital that would be required to be held against those loans if held in portfolio.  It remains to be seen whether a vibrant private securitization market in non-QM/non-QRM loans will develop in the midst of these challenges as well as uncertainty surrounding government sponsored entity reform. One distinct possibility is that the market will coalesce around QM and QRM loans, with a very limited volume of loans falling outside the QM criteria.  This will make it increasingly difficult for banks to be able to lend to borrowers who cannot meet the criteria, creating yet new challenges for fair lending compliance." Just what we need - yet another unintended consequence!

With the LO comp and QM changes, Tim K. observed, "Here is an interesting byproduct. Several owners that I have talked to recently who service relatively small communities are looking to joint larger entities. The reasoning is interesting: they are actually looking at shifting their originating focus from their local areas, even looking in other states. The unintended consequence that the CFPB has created is that loan originators are being forced to ignore their local smaller markets (lower mortgage amounts) and turning to larger markets (higher loan amounts) in reaction to the income limitations that have been enacted and enforced."

Meanwhile, of course, any concrete changes to the government-sponsored enterprises (GSE - namely Freddie and Fannie) continue to come, not from governmental reform but from regulatory and price action. Two bills on GSE reform, the Corker-Warner Bill and the PATH Act, were introduced but no one expects anything to happen with either given the focus on Syria, the debt ceiling, and other issues. The Corker-Warner Bill has been wallowing around since June, but odds makers in Vegas think that the bill could provide the template for eventual GSE reform. It calls for 10% first loss credit risk to be shifted to the private sector. The government would continue to support the secondary mortgage market. This was followed in July by the PATH Act (Protecting American Taxpayers and Homeowners - who can argue with that title?) The PATH Act calls for a complete wind-down of the GSEs through receivership and the transition to a secondary mortgage market based entirely on private capital.

We all know that the FHFA has raised guarantee fees and is now expected to announce a reduction in conforming loan limits soon. But...they're making some coin! GSE earnings continue to be strong as they are being run as "for profit" companies. Fannie Mae generated a $10.1 billion gain before the payment of preferred dividends and Freddie Mac generated a $5.0 billion gain - both better than expected. The government's senior preferred stock investment in the GSEs stands at $189 billion. Including 3Q13 expected distributions, the GSEs have now paid $146 billion of dividends back to the Treasury. While it appears likely that the Treasury will recoup its investment (in nominal terms) by the end of 2013 or early 2014, these payments do not reduce the principal amount of the preferred investment. The income has come from fewer losses, but also guarantee fees which have increased by an average of over 25 basis points since 2011. (Remember that jumbo loans don't have gfees, so this has been part of the driver of the convergence between conforming and jumbo mortgage rates.) The smart, informed guys out there believe that the FHFA's most likely next move will be to reduce conforming loan limits from the current $625,000.

While we're talking about securities, PennyMac is coming out with a non-agency deal, and Kroll Bond Rating Agency (KBRA) was there to rate it. Kroll assigned preliminary ratings to sixteen classes of mortgage pass-through certificates from PMT Loan Trust 2013-J1 (PMT2013-J1), a jumbo prime RMBS transaction. "The mortgage pool backing PMT 2013-J1 is comprised of 691 first-lien mortgage loans with an aggregate principal balance of $550,462,190.54 as of the cut-off date. The loans in the pool are all 30-year fully amortizing fixed-rate mortgages (FRMs). There are no interest-only loans in the pool. The pool is characterized by substantial borrower equity in each mortgaged property, as evidenced by a weighted average (WA) loan-to-value (LTV) ratio of 70% and a combined LTV of 71%. The WA credit score of the mortgage pool is 770. The public sees that the deal is a result of ex-Countrywide employees: NewDeal.

Let's play some catch up on industry events, news, Wells' layoffs, and other tasty tidbits!

George Bush has never spoken at the same event as I have, but that will change at the end of next month. Hopefully ex-President Bush is not too nervous! Seriously, the MBA, uh, I mean MBa, has assembled quite a group of speakers for its next conference, fortunately most of them are non-political. (I am moderating a panel of people with real substance, including Brad Blackwell, head of Wells Fargo's retail division.) Here's the event - I hope to see plenty of people doing the snake dance through the hotel lobby at 1AM.

While we're on the MBa gala, Freedom Mortgage and Thomson Reuters are sponsoring a charity concert featuring Grammy award winning band America. It is a USO Charity Concert at the Warner Theatre on Monday night, October 28^th during the MBa 100^th in Washington, DC. General Admission wristbands needed and will be available Monday at the conference at the Freedom Mortgage booth in the Walter E. Washington Convention Center as well at the Freedom Mortgage reception desk on the lower level of the Grand Hyatt --- while supplies last.  If you are interested in attending, please register via this link. "Let's celebrate America and our Freedom by supporting the men and women who protect and serve our country with a donation to the USO." Click here to make a donation to the USO and select "General Team Donation."

Out in California, the Silicon Valley CAMP group is offering the 8 hour CE classes like most other chapters. Although the one on 9/25 is sold out, it opened another one scheduled for 10/24. And the group is offering a 1 hour live prep course on 9/25 for the Stand Alone UST (Uniform State Test) being offered by NMLS. Unbeknownst to most LOs, the NMLS is encouraging loan officers to take this Stand Alone Test. The link for the class is on its website.

For anyone wanting to know more about FHA-HUD mortgage insurance programs, there will be a webinar on September 25^th that covers the 203(b), 203(h) Home Mortgage Insurance for Disaster Victims, Home Equity Conversion Mortgage, Energy Efficient Mortgage, and Rehabilitation Mortgage Insurance Programs in detail.  See HUD to register.

The Mortgage Bankers Association of New Jersey will be hosting the annual Northeast Conference of Mortgage Brokers in Atlantic City, NJ from October 15-17^th, with the program focusing specifically on building purchase business. Here you go: Joisey.

The Texas Mortgage Bankers Association's Mortgage Servicing Forum (formerly known as the Southern States Servicing Conference) will be taking place in Dallas, TX on November 13^th and 14^th.  This year the program will focus on upcoming regulation and the role of the CFPB, trends in loss mitigation, third party vendor compliance issues, foreclosure challenges, investor reporting, and MSR ownership.  For more details, go to Armadillo and registration is available at RoadRunner.

Wells Fargo & Co., the biggest U.S. mortgage lender, is eliminating about 1,800 more jobs in its home-loan production business as rising mortgage rates curtail borrowers' demand for refinancing. This is in addition to its earlier announced cuts: RightSizing?

PennyMac is now accepting RMIC, RIAD, and CMG mortgage insurance in addition to  Radian, PMI, and MGIC on Freddie Mac Open Access and DU Refi Plus transactions.  As a reminder the MI certificate needs to disclose the coverage amount, initial rate, MI type, payment type, and premium amount.

Barry E. writes, "You've mentioned Downpayment Assistance Programs, and the Lift program that many cities have. Readers in California should not forget this program."

Flipping over to the markets, there is no scheduled news today - but we had some yesterday of note. Namely, Existing Home Sales reached a six-and-a half year peak in August, 13% higher than one year earlier. Existing home sales, including those of single family homes, townhomes, condominiums and coops, have remained above their year-ago levels for the past 26 months. On top of that, the Philly Fed numbers came in higher than expected and we know it has a strong correlation to ISM. Rates sold off after these numbers, in spite of general happiness from the Fed announcement the day before.

Yes, the Fed is still the dominant buyer: $85 billion a month, divided by about 21 business days per month gives us about $4 billion a day. Total net agency MBS purchases by the New York Federal Reserve Bank for the week ending Sept. 18 were $15.3 billion. But that wasn't enough to keep Wednesday's rally going, although mortgages held in very well: the 10-yr was down by nearly .375 whereas mortgage-backed security prices were only off a few "ticks." After a plethora of economic data this week, today we have zip. As a rough proxy, the 10-yr. yield at the close Thursday was 2.75%, and in the very early going we're nearly unchanged at 2.74% - as are agency MBS prices.