Friday, November 29, 2013

RateAlert Free Snapshot 11/29/2013

What happened yesterday?

We had a brief pause at our open with the Durable Goods Orders and then MBS tanked on the powerful one-two punch of stronger than expected manufacturing data and Consumer Sentiment.

Headline Durable Goods Orders dropped -2.0% vs estimates of -1.9%, this is a low number and generally great for bond pricing but it did basically match expectations and this was during the period of the government shutdown. Plus the prior reading was revised upward from 3.7 to 4.1. This is a wash and MBS largely shrugged off this report.

Initial Weekly Jobless Claims 316K vs est 330K this is generally negative for bond pricing as any improvement in the labor picture pressures bonds.

The One-Two Punch:

1) The Chicago Purchasing Manager's Index came in at 63.0 vs market expectations of 60. A reading above 50 shows manufacturing and economic expansion. This was negative for MBS pricing and rates.

2) The University of Michigan's Consumer Sentiment Index reading hit 75.1 vs market expectations of 73.5 - This was also negative for MBS pricing and rates.

Demand for our 7 year Treasury note auction decreased with a bid-to-cover ratio of 2.36 which is lower than our recent average of 2.52, this would normally have pressured MBS even more but our support level located at our 100 day moving average held as traders began to "park" their funds into bonds over the holiday. This helped move MBS off of their bottom. MBS had been trading at a session low of -62BPS and then were pulled back up above our 100 day moving average.

Nov. 29: The CFPB Issue: its take on affiliate fees (don't forget about loans less than $100k), and several other recent announcements

We should all be more physically fit, right? Leave it to those crafty Muscovites to come up with something clever to prove it: SquatsForSubwayTickets.

We have 28 business days until QM is the law of the land, and even after this commentary discussed the CFPB's policy there still seems to be a small amount of confusion out there about affiliate fees, and the 3% threshold. Paul Mondor did acknowledge that he and other Bureau representatives had voiced policies in the past, and he made a point of indicating that this was the Bureau's definitive position despite those past, contrary statements. For example, a policy was verbally stated during the MBA Regulatory Compliance Conference last month. Mr. Mondor was a presenter at that conference and repeatedly stated that all fees paid to an affiliate must be counted in the 3% points and fees calculation, regardless of the amount retained by the affiliate. This was, per the CFPB, is incorrect, as what was stated by David Silberman at the MBA's committee meeting.

Those individuals, and the CFPB, have disavowed those past statements specifically, and want the industry to know it. Last week the commentary noted a conversation, also had last week, with Managing Counsel Paul Mondor regarding affiliate fees and the 3% points and fees calculation for QM loans. The policy is indeed: "just the portion of the fees that is paid to the affiliate and kept by the affiliate is counted in the 3% points and fees calculation."

End of story on the CFPB's policy...but that doesn't stop companies from "overlays" or taking specific actions regarding interpretations. For example, I received this note: "Rob, regarding the 3% threshold for points and fees, some aggregators are taking a very defensive position when it comes to your points about counting all affiliate fees versus the portion that is kept by the affiliate. Some are divesting themselves of ownership interests they have in title entities, for example, for this reason along with ownership interest it had with other affiliates (like credit). LOs at other banks are being told they are going to count 100 percent of the appraisal fee, tax service fee, and flood fee because the lender has ownership interest in all three companies. When I added up all the fees that needed to be counted towards the high fee test it looked like only loans at $100k or less are affected. In all cases my company could still do the loan because we were below the 3 percent (or other cap at lower loan amounts). We cannot, however, offer much of a buy down to borrowers as it would throw us over the cap. The same logic goes for a fee to float down or return to float etc., the fee involved could throw us over the cap. I should mention in our market the origination I was using was in the $800-$1,000 range maximum and I was taking an expensive appraisal price at $550 to calculate. The guys out there charging $1,800+ per origination will likely not be able to do a $100k loan as they will be over the 3% number."

But lenders should remember that for loans less than $100,000, there is indeed a scaling that happens. Check out ATRQM, page 36. "For a loan to be a QM, the points and fees may not exceed the points-and-fees caps. The points-and-fees caps are higher for smaller loans: 3 percent of the total loan amount for a loan greater than or equal to $100,000, $3,000 for a loan greater than or equal to $60,000 but less than $100,000, 5 percent of the total loan amount for a loan greater than or equal to $20,000 but less than $60,000, $1,000 for a loan greater than or equal to $12,500 but less than $20,000, and 8 percent of the total loan amount for a loan less than $12,500."

There are many new lending laws going into effect this January; one of which is the addition of section 1024.20 to Regulation X, which requires lenders to provide a loan applicant (one which has applied for a federally related mortgage loan) with a list of homeownership counseling organizations no later than three business days after the lender/LO/Broker receives the completed application. The final rule is effective on January 10^th 2014, and applies to all transactions in which an application is received on or after that date. Agents or organizations required to make this offering will want to acquire the list by either: (a) a CFPB-maintained website, or, (b) data made available by the CFPB or HUD. Those wishing to utilize the first source for the official list can refer to the CFPB's website which will automatically generate the required list subject to the applicant's zip code: CampCounselors.

And for any doc drawing & funding employees, or escrow folks, who have been taking a really long nap, as a reminder On November 20th the CFPB issued a rule requiring mortgage lenders to provide borrowers with two new mortgage disclosure forms that will replace the existing Initial TIL disclosure, the GFE and the final TIL disclosure. The so-called "know before you owe" mortgage forms were developed to help consumers understand their options, choose the deal that's best for them, and avoid costly surprises at the closing table. Also, the rule sets forth limits to how the final transaction can change from the original loan estimate. The CFPB claim the forms will enable consumers to easily identify risk loan features such as prepayment penalties, balloon payments, and negative amortization loans. The final rule is scheduled to take effect on August 1, 2015.

On November 15, the CFPB announced a settlement with RMIC, who were accused of paying illegal kickbacks to mortgage lenders in exchange for insurance referrals in violation of Section 8 of RESPA." Buckley Sandler, LLP writes, "The settlement resolves allegations that the company entered into captive reinsurance arrangements with lenders across the country pursuant to which the insurer at first ceded approximately 12% of its premiums per referral to lenders' captive reinsurers, but over time ceded increasingly large percentages of its premiums-up to 40% for each referral-in exchange for lenders' continued referral of customers." Restitution for RMIC comes in the form of a $100,000 in penalties and is subjected to regular and mandatory compliance reporting and monitoring for four years. Plus, the company is enjoined from entering into or otherwise obtaining any new captive mortgage reinsurance arrangements for a period of ten years and, with respect to pre-existing arrangements, must forfeit any right to the funds not directly related to collecting on reinsurance claims: 15 yard penalty, on the offense, for taunting.

And as mentioned in the commentary last week, payday lenders have not escaped the CFPB's notice. The writing has been on the proverbial wall for a few years now: the practices of payday lenders will certainly be within the scope of the CFPB. Earlier this summer, the CFPB gave notice that it would hold supervised creditors accountable for "engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive when collecting their own debts, in much the same way third-party debt collectors are held accountable for violations of the FDCPA." So it is with no surprise that I read last week the CFPB announced the resolution of an enforcement action against Cash America International, one of the largest payday lenders in the country. The consent decree alleges that the lender and an online lending subsidiary made hundreds of payday loans to active duty military members or their dependents. What's so wrong with that? Well, it violates the Military Lending Act. In its first action against a payday lender, the CFPB will receive $5 million in penalties, and has ordered $14 million in refunds for the overcharging of customers, the "robo-signing" of documents in debt collection lawsuits and (gulp) "impeding an investigation". Another 15 yard penalty, on the offense, for taunting.

On November 18, the CFPB published a report that examines the amount of money spent by financial institutions to inform and influence consumers' decisions about financial products and services. The report finds basis after spending a year researching financial institution's marketing campaigns; they concluded that financial institutions spend 25 times more money marketing financial products and services to consumers than on educating consumers about them. The CFPB, of course, asserts the need to improve consumers' access to objective information as opposed to marketing material. The report relays detailed findings about financial education spending across six major sectors and about annual spending on awareness advertising and direct marketing of financial products and services. The complete report can be here.

And don't forget that last month the five federal regulatory agencies (FED Board of Governors, CFPB, FDIC, NCUA, and OCC) issued a statement to address industry questions regarding fair lending risks associated with offering ONLY qualified mortgages. According to the CFPB, creditors have asked for clarity regarding whether the disparate impact doctrine of ECOA and its implementing regulation, Regulation B, allows them to originate only Qualified Mortgages. For the reasons described in the statement, the five agencies do not anticipate that a creditor's decision to offer only Qualified Mortgages would, absent other factors, elevate a supervised institution's fair lending risk. The agencies note the decisions creditors will make about product offerings in response to the Ability-to-Repay Rule are similar to decisions creditors have made with regard to other significant regulatory changes affecting particular types of loans. The statement counsels that creditors should continue to evaluate fair lending risk as they would for other types of product selections, including by carefully monitoring policies and practices and implementing effective compliance management systems. Here you go: AcronymsUnite.

In a recent Ballard Spahr CFPB Monitor, they asked an interesting question: should a financial institution sign up to use an online company portal to view consumer complaints submitted about them to the CFPB? Once a bank registers with the CFPB, the agency will give them a portal where they can log into, receive, review, and respond (to the agency) to forwarded complaints which have been logged by consumers. Alan Kaplinsky writes, "Under the Dodd-Frank Act, only large banks are required to respond to the CFPB about how they have handled consumer complaints. However, by registering with the CFPB to access complaints, a company assumes an obligation to follow the CFPB's procedures set forth in the "Company Portal Manual." Those procedures include the CFPB's requirement that all company portal users provide the CFPB with a response to each complaint within 15 days of when the company received the complaint in the portal. A response must include the steps taken to resolve the complaint with the consumer. Within the 15 days, a company can request up to an additional 45 days to provide a response. However, complaints for which a company has not responded within 30 days of receipt (or 60 days if additional time was requested) will be tagged for CFPB review and investigation. The manual states that regular reports are provided to the CFPB Offices of Supervision and Enforcement about complaints for which companies have failed to provide "a timely response." Sounds like the ever-shrinking lunch hour for Quality Assurance people just got shorter. However, for the "glass half-full" kind of people out there, this could represent an opportunity to mitigate CFPB exposure, as the agency has always made it clear that they will use complaints logged as a deciding factor of which "non-banking" institutions (mortgage originators) to examine. By reviewing complaints through the portal, a company may gain insight into the issues on which the CFPB may focus if the company is examined and an opportunity to be better positioned for such an examination.

By the way, Ken V. asks, "Does the CFPB just come in the door to do an exam, or does it give lenders warning?" That's an easy one - the CFPB provides a warning several weeks before the exam team walks through the door. The time is used by lenders to gather the (often times) immense number of documents, files, rate sheets, etc., that the CFPB has requested.

Who has time to worry about interest rates when we need to attend to all of this? Well, the markets, which are indeed open today, demand some thought. But can this be any clearer? Fed Chair Bernanke in a recent speech made clear the Fed was committed to keeping short term rates low for an extended period and reiterated the current 6.50% unemployment rate and 2.50% inflation rate are thresholds and not triggers. He said even after the unemployment rate declines below 6.50%, as long as inflation is below 2.50% the Fed would be patient before increasing the Fed funds rate. So yes, of course we'll see some fluctuations out there, but generally rates should stay put. Wednesday's closing yield on the 10-yr was 2.74% and we in the very early going, with no scheduled news, we're at 2.75% with agency MBS prices close to unchanged.

The barman says, "We don't serve time travelers in here."

A time traveler walks into a bar.

Wednesday, November 27, 2013

Housing Market

http://globalhomefinance.com

A new housing brief from the U.S. Census Bureau shows that median home values in many small counties across the nation held steady after the most recent recession, while values in large counties declined. These findings come from the Census Bureau's recently released brief which uses the American Community Survey three-year estimates to focus on homeownership rates and home values for smaller areas. Contained in the report is some pretty interesting data for Wednesday-morning economists.

The gathered statistics show that in 67% of the 1,038 smaller counties (with populations between 20,000 and 65,000) the median home value in the post-recession period of 2010-2012 was not statistically different from the recession period of 2007-2009. Similarly, the median home values in 37 of the 50 smallest counties of this size were not statistically different from the recession period. In contrast, median home values in 43 of the 50 largest counties declined over the same period. Nationally, the median home value was $174,600 in the post-recession period, a $17,300 decline from the recession period of 2007-2009. New York County, NY had the highest median home value at $812,300 in 2010-2012. Santa Clara County, CA had the second highest median home value at $634,000, followed by Honolulu County, HI ($556,400) and Kings County, NY ($556,300), which were not significantly different from each other.

For the folks who like to look at the negative side of things, there is a little bit of dour news. In the third quarter, investment in home improvements was $178 billion, while construction spending on new single family (SF) houses and townhouses was $172 billion, each about one percent of GDP. Similarly, in Q1 spending on home improvements was $161 billion, slightly above the $157 billion spent building new SF structures. Normally new SF construction spending is double spending on improvements. Worse, to date in 2013, new SF construction spending is flat. Still, Home Depot isn't complaining.

The mortgage market is a complex web of supply and demand, over multiple instruments, coupled with an assumption that buyers, sellers, and investors will all behave rationally. It is this belief in 'rationality' that confuses many outside the industry. Over the past few years "under water" has gone mainstream; no longer belonging to submariners and mortgage banking veterans. It's a word few wish to hear, and a word few homeowners wish to repeat. Over the past few years as markets have found their equilibriums, however, and rates have remained synthetically low, there may be hope for struggling homeowners. According to a recent Bloomberg article, the number of Americans who are underwater on their mortgage fell at the fastest pace on record in the third quarter of this year as home prices rose. They write, "The percentage of homes with mortgages that had negative equity dropped to 21 percent from 23.8 percent in the second quarter....the share of owners with at least 20 percent equity climbed to 60.8 percent from 58.1 percent, making it easier for them to list properties and buy a new place." If this somehow means home owners are more likely to sell their properties, or somehow are more likely to refinance their properties, I don't know. What I do know is the conversation to sell, or the conversation to refinance, after years of forced payments certainly may be irrational. For the full story visit PastPerformanceIsNoIndicator.

Part of the recovery is due to lending, and thus the agencies, and a couple weeks ago Fairholme Capital Management announced its proposal to purchase the insurance businesses of Fannie Mae & Freddie Mac. "So what?" you ask? The plan calls for the creation of new state-regulated insurance companies followed by those entities purchasing the insurance businesses of the GSEs. The new entities would be capitalized with about $35 billion of restricted capital from the conversion of existing GSE junior preferred stock into common equity in the NewCo, and a $17 billion rights offering for new cash equity. The GSEs' retained investment portfolio and legacy guarantees would be left in the old entities and run-off.

Those who know about these things believe that little or nothing will come of this - but it is somewhat interesting to think about anyway. The White House has repeatedly reiterated its belief that the GSEs should be liquidated. For example, in one speech (the "Housing Speech in August) President Obama stated: "one of the key things to make sure it doesn't happen again is to wind down these companies that are not really government, but not really private sector -- they're known as Freddie Mac and Fannie Mae." Furthermore, James Stock reaffirmed the White House's preference to wind down the GSEs. So it would seem that the White House, and therefore the Treasury Department, has little to no interest in any GSE reform plan that is not predicated on the liquidation of the GSEs. Also, Congress rarely gives power away if it can help it - and it prefers to think that the fate of F&F is in its hands. The Fairholme proposal states that its purchase would "catalyze reform" since the core tenets of the plan are consistent with outstanding reform proposals. True, but GSE reform efforts have taken significant steps forward during this Congress and analysts are skeptical that lawmakers will embrace a proposal which would seemingly limit their legislative optionality in the future. The Fairholme proposal goes to great lengths to note that its plan can be consummated without Congressional approval but we believe that lawmakers will openly oppose this concept and that the political pressure from Capitol Hill will continue playing a key role in this conversation. Every quarter that the GSEs make billions, every quarter that the quality of their portfolio improves, every quarter that they further the agenda of the current administration, merely pushes back GSE reform until 2015, after the 2014 election, if not until 2017, after the next presidential election.

The industry has one less concern - for now. "With Single-Family Seller/Servicer Guide (Guide) Bulletin 2013-25, we are announcing that our 2014 base conforming loan limits will be maintained at the existing 2013 levels. The loan limits in designated high-cost areas will also remain unchanged with the exception of some counties where the loan limit will increase. The Guide Bulletin is in line with the Federal Housing Finance Agency (FHFA) announcement today regarding the 2014 conforming loan limits. It is important that you review the information on the FHFA website for the 2014 loan limits permitted for specific counties in high cost areas. Super conforming mortgages that you intend to sell to Freddie Mac are subject to the loan limits set by FHFA for designated high-cost areas." So noted Freddie Mac to its clients, and here is Fannie's.

The timing of the loan amount announcement harkens back decades - it was always announced around Thanksgiving. Although the announcement provides some certainty, and some relief, it is hardly a surprise. With the change to the filibuster rules, detracting from the Senate's power while adding to Obama's, it is generally believed that he will use this to further his agenda. And part of his agenda is Janet Yellen and Mel Watt. And Mel Watt, among other things, appears to prefer leaving limits where they are - so his predecessor Ed DeMarco (assuming Watt is confirmed in December) was very considerate and left things alone. (Why change something like that, only to have it changed back in three weeks?)

While we're yammering about Mr. Watt, many in the industry are looking forward to his confirmation, although some of that might be misguided. There is a lot that might happen under his watch. Guarantee fees, for example, might be reduced - after all, the perceived risk of current originations is down dramatically. And not a week goes by without someone asking me about the possibility of HARP 3.0. Geez! The folks "in the know" believe that changes could be made to the program eligibility date, the amount of paperwork, the ability to refinance an existing HARP loan, or requiring portfolio lenders such as banks to refinance loans. Yes, changing the date range will help, as will allowing borrowers to refinance an existing HARP loan. But do we really want the government telling banks that they must allow changes to their portfolios. (Talk about a slippery slope of government interference in the private sector!) And paperwork...wow, imagine having to do paperwork to obtain a mortgage?! And, although I don't have the numbers in front of me, most think that tweaking the current program will certainly not result in another huge wave of refinances as the industry saw in 2011, 2012, and the first half of 2013.

Folks who follow agency-activity think that there might be a flurry of activity regarding the FHFA heading into the holidays. Isaac Boltansky with Compass Point Research & Trading, LLC writes, "We expect there to be a flurry of FHFA-related activity heading into the end of the year including: (1) the confirmation vote of Rep. Watt between December 9 and 20, 2013; (2) the release of proposed PMI capital rules; and (3) the release of the FHFA's 2014 Conservatorship Scorecard."

Compass Point Research & Trading also observes, regarding the FHA's loan amounts, "It is important to note that the FHA's high cost ceiling loan limit for certain areas will be reduced at the end of the year without Congressional action. Specifically, the high cost ceiling of $729,750 will be reduced to $625,500 beginning on January 1, 2014 unless there is a sudden shift on Capitol Hill. Our sense is that neither lawmakers nor the White House will push to maintain the FHA's high cost ceiling. Notably, the White House has publicly stated its support for the FHA and GSE high cost loan limits being realigned. An August 2013 White House fact sheet states: 'we recommend allowing FHA loan limits to fall at the end of 2013 as currently scheduled.' We expect the GSE and FHA high cost loan limits to be aligned once again beginning in January 2014."

Turning our collective gaze to rates, while you're sitting around the table tomorrow here's a bit of trivia that you can throw out: the Federal Open Market Committee has kept short-term interest rates unchanged for five years. Of course, short term rates don't directly influence 30-yr rates, but you get the point.

Not that anyone is going to be locking many loans until next week, yesterday we learned that both September and October Building Permits numbers came in higher than expected. But the surge was focused in multi-family dwellings. (Housing Starts for both months will be released on December 18 due to the government shutdown.) And on top of that, RealtyTrac reported that residential property sales, including single-family homes, condominiums and townhomes rose 0.2% in October from September and up 13% from October 2012. Case Shiller reported that its 20-city Index year-over-year rose by 13.3% in September and just above the 13.0% expected, up from 12.8% in August to the largest yearly gain in 7 1/2 years.

For this morning and today, given the weather and the holiday, don't expect much from the markets. The MBA applications index showed a slight drop last week, to the lowest level in 10-weeks, confirming what many lenders are seeing. We had weekly Jobless Claims for the period ending 11/23 (-10k to 316k) as well as October Durable Goods orders (-2%, as expected). At 9:45AM EST comes the November Chicago PMI, followed by the November University of Michigan survey 10 minutes later and then at 10AM EST completes the releases with October Index of Leading indicators (+0.7 last). The Treasury the gets the jump on the holiday by auctioning $29 billion 7yr notes at 11:30am, 90 minutes prior to the more customary 1PM time slot. The markets will close early today, be closed tomorrow, and although they will be open Friday, don't look for much - the folks manning the trading desks won't want to be there anyway. For numbers, the yield on the 10-yr T-note, a very rough proxy for movements in agency MBS prices, closed Tuesday at 2.70%; in the early going this morning we're at 2.72% and agency MBS prices are worse by .125.

It's the day before Thanksgiving, and the butcher is just locking up when a man begins pounding on the front door.

"Please let me in," says the man desperately. "I forgot to buy a turkey, and my wife will kill me if I don't come home with one."

"Okay," says the butcher. "Let me see what I have left." He goes into the freezer and discovers that there's only one scrawny turkey left. He brings it out to show the man.

"That's one is too skinny. What else you got?" says the man.

The butcher takes the bird back into the freezer and waits a few minutes and brings the same turkey back out to the man.

"Oh, no," says the man, "That one doesn't look any better. You better give me both of them!"

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog is, "A Primer on Swaps, and the Implications of Change in the Secondary Markets". 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://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx or www.TheBasisPoint.com/category/daily-basis. For archived commentaries or to subscribe, go to www.robchrisman.com. 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.)

Today's Rate Volatility: HIGH

What happened yesterday?

Mortgage backed securities (MBS) closed up only +1 basis point from Monday's close which caused 30 year fixed rates to move sideways.

Another day....another trading session that was been capped by our 10 day moving average.

This ceiling of resistance has now held for four straight trading sessions and has caused our benchmark FNMA 3.50 December coupon (and therefore interest rates) to move sideways.

We received some better than expected news on the housing front this morning. Building Permits (which had been delayed due to the government shut down) were stronger than expected (1034K vs est 925K) and the Case-Shiller Home Price Index continued its upward trend (13.3% vs est 13.0%). The combination of these two reports provided some very small downward pressure on MBS (upward pressure on rates) in early trading.

The biggest report of the day was the Consumer Confidence report. It came in lighter than expectations (70.4 vs est of 72.9). This was bullish (good) for mortgage rates and MBS made another run at the 10 day moving average...briefly trading above it. But the Richmond Fed Manufacturing Index was much better than expectations (13 vs est of 3) and that helped to provide some headwinds to the MBS rally. In the end, MBS returned to trade right back where we started in the morning.

We did have a 5 year Treasury auction: $35 billion at 1.340% with a bid-to-cover ratio of 2.61 which is a slight pull back in demand from our recent average of 2.67. This did not have an impact on pricing yesterday.

What is on the agenda for today?

Don't miss out on the mortgage industry's premiere insight and commentary. Subscribe to RateAlert Executive today and get today's lock advice, complete market commentary and forecast for today, and watch the full Morning Coffee Update video with Bryan McNee - all available only to our Executive subscribers.

Tuesday, November 26, 2013

Funding VS Closing

http://globalhomefinance.com

Who doesn't enjoy a good lawyer joke? You may have even read one or two in this commentary. A good friend of mine, who happens to be an attorney, likes to say, "That joke would be slanderous.....if it wasn't true." So when, a few months back, I came across a Bloomberg article regarding the attorney fees banks have racked over the past few years, I had to forward it along to him. He replied back with a "cease and desist" letter, God bless him. Of the six largest banks, JPMorgan Chase and Bank of America have piled up $103 billion in legal costs since the financial crisis, more than all dividends paid to shareholders in the past five years. According to the article, around 40% of the legal and litigation outlays arose since January 2012, and banks are warning the totals may surge as regulators, prosecutors and investors press new claims. They write, "The prospect is clouding outlooks for stock prices, and by some estimates the damage could last another decade. JPMorgan and Bank of America bore about 75 percent of the total costs, according to the figures compiled from company reports." JPMorgan devoted $21.3 billion to legal fees and litigation since the start of 2008, more than any other lender, and added $8.1 billion to reserves for mortgage buybacks - and this doesn't even include the last several months.

Moving on to something more fun to talk about, as others abandon the mortgage broker and exit wholesale lending, an aggressively growing company is expanding its traditional broker and correspondent business in the Northeast. The Southern California-based FNMA Direct Seller-Servicer, approved GNMA Issuer and VA Automatic lender, continues to expand its footprint across the country. The company is currently hiring experienced Wholesale Account Executives in Ohio, Maryland, D.C., Virginia, Massachusetts and New Hampshire. The company offers wide open territories, competitive compensation and best in class service. Qualified Account Executives with a minimum two year proven track record of success can forward their confidential resumes to me at rchrisman@robchrisman.com.

And congrats to Dean Miller, the new president of the retail division of Benchmark Bank and Affiliated Mortgage. "Dean brings over 30 years of knowledge and experience to his new role with Affiliated Mortgage, most recently serving as Dallas Market Manager for F&M Mortgage Group. In that role, he worked closely with the team of loan officers to maximize their potential and efficiency while helping to build a strong retail platform operationally. In his new position, Dean, a UT grad (hook 'em!) will manage day to day operations and sales of the Retail Division and will report directly to the Executive Team. His objective is to methodically grow the division while refining processes and maintaining Affiliated's customer-centric philosophy. And speaking of Affiliated, due to its continued expansion the company is looking for successful operational staff and account executives to join its team. Please contact www.affiliatedtpo.com if you wish to learn more. (Affiliated is a wholly owned subsidiary of Benchmark Bank, which has been a banking leader since 1964. Affiliated is a direct Seller/Servicer for FNMA and Issuer/Servicer for GNMA and offer a wide spectrum of programs, including Conventional, Texas Cash- Out, FHA, VA, USDA and Texas Veterans Land Board, and also offers warehouse lines.)

The commentary noted that in August 2015 there will be a change to the mandatory waiting period ("effective August 2015 a home BUYER will now have a MANDATORY 3 day waiting period before the loan can fund, like a refinance now"). Those "in the know" say that the new regulation does not address loan funding, only loan closing. The 3 day requirement is prior to closing. A purchase can close and fund the same day. And the new rule did not make any modifications to the rescission requirements.

But things are not that easy. Some use the term "when your loan closes" and others use "when your loan funds." The first problem is that there is no definition of "closing date" in RESPA/TILA. Therefore are companies are forced to define the closing date for themselves. In the East, it is often assume that the note date is the closing date because the note date is when all the parties come together to sign and close the transaction - called a table closing. In Western states, closing is done via an escrow process and all the parties do not come together and instead the two parties visit the escrow agent for signing. The escrow agent does not "close" the loan by recording it until three things have happened: all parties signed, all money is in, and all escrow instructions have been met. A borrower could sign on a Tuesday, but not fund & record, and therefore close, until Friday. Even the agencies don't "get this" and even they sometimes use note date and closing date interchangeably.

I received this stab at things from an escrow officer west of the Mississippi: "Those terms are not necessarily universal. On the east coast the 'closing' is when everyone sits down to sign, and often times the lender funds the loan at that time. In California, for example, 'closing' means the transfer of ownership (i.e. recording the grant deed at the county). The funding of the loan is when the lender releases the loan funds to the closing agent and authorizes the disbursement of those funds. We usually request loan funding the day prior to closing. However, often times funding can occur in the morning and we are able to close the same day in the afternoon. It all depends on timing since we have to comply with specific recording times at the county."

And Andrew Liput, president of Secure Settlements, writes, "Sounds like they want three days with a final HUD-1 to avoid last minute term and price changes. The definition of a 'closing' depends upon your perspective. The funding date is the date that the money leaves the lender or their warehouse bank and is wired to the settlement agent. This starts the clock ticking on interest and other costs of funds. For a lender that is the key date. From a legal perspective, the transfer of property takes place when consideration is exchanged for the property transfer instrument (deed). Recording is not necessary to effectuate the transfer...once you have the original deed and consideration has passed (funds are transferred to the seller or their agent), then the transaction is 'closed.' Recording puts the world on notice of the transfer and amends the title, but the deed date establishes the date of ownership. In this regard I see no real difference between East and West Coast transactions, except that the settlement or escrow agent may take longer to disburse funds. In both instances the document dates control the legal definition of when the property transferred (i.e. the closing). In my opinion the CFPB is considering the closing date to be the document date...the date of the deed and the note reflect the date of the transaction. I think it is more likely that this will play out that there will be a three day PAUSE between final documents and the closing date...essentially freezing the rate and other terms as set forth in the disclosures and the HUD-1. Once that period passes the parties can proceed to the table for the closing, regardless of whether it is wet or dry. Here is the problem....what happens if a buyer chooses to exercise the right to rescind? It will create chaos for sellers and a whole lot of litigation by attorneys regarding the motive for a seller to back out of the financing.

Supposedly in the recent comment period for RESPA/TILA modification, I have heard that various lenders have requested clarity on the closing versus funding event issue from the CFPB. I hope so - it would be nice to have the same definition for the same event across the nation.

There continues to be some measure of uncertainty in the residential lending industry about affiliated relationships, and how they factor into the points and fees test. Not helping the confusion have been some verbal comments which vary somewhat from the written comments, or those put forth in various presentations, regarding the affiliate provision of the points and fees test (as a refresher, page 37 of ATRQM). It is my understanding after doing a little research, and a discussion with Paul Mondor, Managing Counsel in the Office of Regulations at the Consumer Financial Protection Bureau, that just the portion of the fees that is paid to the affiliate and kept by the affiliate is counted in the 3% points and fees calculation. Often times a title company and a lender/creditor, or an appraisal management company and a lender, are in "affiliated" relationships, with shared ownership. The title agent, for example, may receive money at closing but then pass on a portion of that money to other entities - those portions that are passed on are not included. The portion that is counted in the points and fees threshold is the amount paid to the affiliate and kept by the affiliate.

So the only part of the charges from an Affiliate that are included in the points and fees calculation is that portion of the charges that are retained by the Affiliate. In the regulations, title services are excluded from the finance charge, for example. But then, in the "3rd step" in determining what is included in the points and fees calculation, items that were previously excluded are brought back in unless the charge is "reasonable," the creditor receives no portion of it, and the money is not paid to an affiliate of the creditor. At that point, the money that is paid for title services to an affiliate may be included in the calculation- but the question then turns to how much of the payment? As an example that I used in Saturday's commentary, a reader wrote, "For example, an Insurance Agency is an Affiliate of a creditor and the charge on the HUD is to that insurance Agency for $1,000 for the Homeowner's Policy. The Agency passes through $900 to the Insurance Company, e.g. AETNA, and retains $100 as their brokerage fee. Only the portion retained by the affiliate, i.e. $100, is included in Points and Fees. Accordingly, if the Affiliate is a Title Company, and the affiliate retains the Escrow and Notary Fees those fees are included in Points and Fees. And when it comes to Title Insurance premiums, again only that portion of a premium retained by a Title Company as commission, for example, is included in the Points and Fees, not the portion passed through to the Insuring Company for the Title Insurance coverage.

If you have questions, they are easy to submit to the CFPB through its industry-dedicated interpretive guidance email address: CFPB_RegInquiries@cfpb.gov. Also, the CFPB has put a lot of industry-focused compliance resources here: RegulatoryImplementation. Seek and ye shall find. And if ye can't find it, shoot them an e-mail!

Yesterday the commentary discussed the use of gift funds for various programs. Dean Dardzinski, Pacific Northwest Sales Manager for MGIC writes, "In regards to your comment about agency loans and the ability of a borrower to receive a gift for the down payment and closing costs, this was something FNMA began allowing nearly three years ago when they released DU version 8.4. MGIC allows the use of gift funds in the transaction when you receive a DU Approve/Eligible, no overlays or additional requirements; just follow your findings and the Agency's donor requirements. For those loan officers and companies who have been aware of this guideline, they've been able to increase their borrower's purchase power by upwards of 10%. As loan officers search for topics to discuss with Realtors, I'm sure they would get a lot of attention with this one. Contact your local MGIC account manager to learn more."

And Rob Arnaud with HomeBridge writes, "I just wanted to let you know that HomeBridge now is offering 5% down Conventional with all gift funds."

Turning to the markets, and the fixed-income markets (which include bonds like mortgage-backed securities), the National Association of Realtors confirmed something real estate agents have known about: although conditions were mixed across the country, pending home sales continued to move lower in October, marking the fifth consecutive monthly decline. The Pending Home Sales Index, a forward-looking indicator based on contract signings, slipped 0.6 percent to 102.1 in October from an upwardly revised 102.7 in September, and is 1.6 percent below October 2012 when it was 103.8. The index is at the lowest level since December 2012 when it was 101.3; the data reflect contracts but not closings. The reasons were the government shutdown (waiting for IRS income verification for mortgage approval), limited inventory, and falling affordability conditions.

But the markets stayed in a tight range Monday - who needs the volatility heading into the holiday? And the financial press doesn't seem to have much talk about, although today the Housing Starts & Building Permits duo is due out, and Consumer Confidence will be released. The results from the 5-yr Treasury auction will come out around 1PM EST. So far rates aren't doing much: the risk-free US T-note closed Monday at a yield of 2.74% and this morning it is...2.73%.

A logician's wife is having a baby. The doctor immediately hands the newborn to the dad.

His wife asks impatiently: "So, is it a boy or a girl"?

The logician replies: "Yes".

Today's Rate Volatility: HIGH

What happened yesterday?

Mortgage backed securities (MBS) closed UNCHANGED (+0 basis points) from Friday's close which caused 30 year fixed rates to move sideways.

Our benchmark FNMA 3.5 December coupon made a run at a rally but simply couldn't sustain it.

Pending Home sales came in at -0.6 vs market expectations of a gain of 1.3. Certainly a miss. But the prior period was revised upward from -5.3 to -4.6 which is actually good news. Plus, when you take into account that this is from the period of the government shut down that put all IRS tax verifications on hold....this is not a bad report all.

As a result, MBS could not sustain their levels above our 10 day moving average.

We had a 2 year Treasury note auction at 1:00EST. Results: $32 billion with a yield of 0.3%. The bid-to-cover ratio was very strong at 3.54 which shows increased demand compared to the average ratio of 3.28. But as we have discussed, the 2 year note is too short of a term to impact longer term rates like mortgages.

So...a weaker than expected Pending Home Sales is supposed to be reflective of weakness in our economy which is why bonds temporarily rallied but then failed. The stock market which is supposed to sell off with weak economic data (because it is supposed to lead to reduced earnings) rallied! The stock market, as measured by the DJIA, hit a new intra-day record high.

What is on the agenda for today?

Monday, November 25, 2013

Mortgage Company Oppurtunities

http://globalhomefinance.com

Many banks and mortgage banks have training programs for new people in the business. But many argue that the vast majority of people in residential lending are pretty "white bread" (there, I said it) and the industry needs to increase its diversity. In fact, the Institute of International Education reports that 49% of the 819,644 foreign students studying at US colleges during last year's school year (2012-13) are natives of China, India or South Korea. And the University of Southern California (USC) has more foreign students than any college in the United States.

Looking for opportunities, Carrington Mortgage Services is expanding its Retail Branch Network, and is looking for retail teams nationally. Carrington is a Ginnie Mae Direct Servicer Seller offering an aggressive comp structure, benefits, and a wide variety of loan programs: FHA/VA direct GNMA, Conventional, Fixed, Jumbo, ARM, loans down to 580 FICO, and no overlays for FTHB on its FHA purchase program. Its affiliate, Carrington Real Estate Services, works closely with it in local community markets. Interested retail candidates contact John Cervantes at john.cervantes@carringtonmh.com.

And a client of MenloCompany, a mortgage consultancy firm, a National Retail Origination Lender, headquartered in Minneapolis, Minnesota is expanding aggressively in markets across the United States. Having been in business for nearly 10 years, the retail firm has built a strong culture focused on retail transparency, stability, professional development and efforts to help you grow your production. If you are a company looking to be acquired, or an experienced Branch Manager with a team that does more than $1.5M per month, or a Sr. Loan Officer with a track record for performance, please visit BranchSmart or you can email Rick Roque, at rick@menlocompany.com.

Tying in with information I had last week regarding hedging non-QM loans...

The last survey I took was regarding how happy I was with my long-distance carrier, and ended with me hanging up right in the middle of the age-and-income bracket question. I never get the cool interviews, but Barclay's Securitized Product Research team does. The department recently conducted a two-week online survey of clients to gauge views on hedging non-agencies against macro-risks. The survey was distributed and conducted by a third-party firm contracted by Barclays to conceal the identities of the individual respondents. As a result, the survey results exclude any stratification across investor types. Out of the 12 questions on the survey (examples being, on what would you base your rate hedge ratios? What would you assume for housing across your rate shifts?) I found: "In the current situation, how much current carry are you willing to spend on hedging risks?" most interesting. Half the respondents were willing to give up 10-20% of their carry as hedging costs. Another one-third would only pay 5-10% but one-fifth were willing to give up more than 20% of their carry to hedge out the risks. As Barclays notes, in general, investors should be encouraged to consider some hedges for their portfolios. However, it doesn't make sense for all investors to attempt to fully hedge their interest rate and/or credit risks. The cost of hedging using certain types of securities may be prohibitively high compared with the carry on some non-agency positions. As a result, Barclays advises a "judicious in sizing the hedges as well as opportunistic in putting on hedges when costs are lower" approach.

The top wholesale lenders & brokers sure like Moody's all of a sudden. Third-party originated (TPO) loans previously maintained a reputation for putting residential mortgage-backed securities investors at heightened risk, but times are changing and TPO loans originated after the financial crisis are exhibiting the highest of performance standards today. Moody's Investors Service released a report saying loans originated by third-party brokers and correspondent lenders continue to equal retail loans in payment performance, thanks to higher underwriting guidelines and additional scrutiny of loans sourced by third-party originators. The link to the report is above, but one quote was, "The narrower gap in recent loan performance is because of tighter lending and regulatory controls over TPOs".

HUD recently released Mortgagee Letter 2013-41. The letter clarifies the self-reporting requirements of all single family FHA originations. The requirements addressed include: what must be reported, the timeframe for lenders' internal reporting to senior management, the timeframe for lenders' external reporting to FHA, how findings should be reported, FHA's review process, and the repercussions of failing to report to the FHA (gulp). Here's one take on the new rules.

What is the public reading about the desirability of the FHA program? Here is the latest. At least FHA allows 100% gifts, right? See next paragraph...

I am not an underwriter, but that doesn't stop me from receiving questions about it. "Rob, do you hear anything from the agencies with regard to using gifts as down payments?" No, I don't - that is definitely an underwriting issue, and whenever I write about underwriting, I receive plenty of input about exceptions. That being said, coincidentally Guy Schwartz from CMG sent out a note about this exact topic. "Sometimes we think there is very little left to learn or there is some scenario we have not seen before. For example, the following conversation, 'Where is your money for down payment and closing costs coming from?' To which the client states after a long pause, 'Ah, it's coming from my cousin, he owes me money.' It seems like people lend lots of money to cousins on a hand shake, because if you ask for the audit trail of this money it never exists. We get the cousin story frequently, and all we can do is look at each other and think, 'oh no not the cousin story AGAIN!' Thankfully FHA allows 100% gift of funds for down payment and closing costs. For conventional loans we have always believed that for a 20% down payment all of the funds may be a gift. Furthermore it was our understanding that if the borrower has 5% of their own money for a down payment they may get a gift for any amount. Well as Gomer Pyle use to say, 'Surprise, Surprise, Surprise' we found a little known secret.

"FNMA says, 'All funds for the transaction can come from a gift. Subject to MI if the LTV>80%.' Provided the property is a 1 unit primary residence (non-applicable for high-balance mortgage loans). Wow, we did not believe this until we saw it in black and white. We did check with one MI company and they said they were okay with this guideline. When a loan involves a non-occupant co-borrower, however, Freddie Mac still requires the borrowers to have 5% of their own money. FNMA will require the borrower to have 5% of their own money if: they are purchasing a 2-4 unit primary residence, second home, or if the loan is a high balance mortgage loan amount. Just a reminder here is a list of acceptable donors: a relative (spouse, child, other dependent or individual related by blood, marriage, adoption, legal guardianship) a fiancé, fiancée or domestic partner. The donor cannot be, or have an affiliation with, an interested third party to the transaction. So now when we get the cousin story, instead of looking at each other we will ask, 'Do you think your cousin can gift the money back to you?'"

On November 15^th the federal bank regulatory agencies with responsibility for CRA rulemaking published their final revisions to "Interagency Questions and Answers Regarding Community Reinvestment." The revisions provide additional guidance to financial institutions, and to the public, on the agencies' CRA regulations, and focus primarily on community development. Community development activities are considered as part of the CRA performance tests for large institutions, intermediate small institutions, and wholesale and limited purpose institutions. Small institutions may use community development activity to receive consideration toward an outstanding CRA rating. The amendments mainly provided clarity to: how the agencies consider community development activities that benefit a broader statewide or regional area that includes an institution's assessment area, guidance related to CRA consideration of, and documentation associated with, investments in nationwide funds, and address the treatment of loans or investments to organizations that, in turn, invest those funds and use only a portion of the income from their investment to support a community development purpose. For more information on the CRA, including the Q&A portion of the report, and the agencies' CRA regulations, visit FFIEC.

What's so wrong with actor Alec Baldwin and a bunch of guys pretending to be Vikings telling me I can "earn" up to 2% cash back on credit card purchases? Well, the CFPB believes these rewards programs can involve "detailed and confusing rules" and they will be reviewing whether rewards disclosures are being made in a clear and transparent manner. The CFPB's recent report on credit card programs identified rewards product disclosures as one of many card practices that "pose risks to consumers and may warrant further scrutiny by the Bureau." Bloomberg News recently reported that the examinations cover the marketing of rewards programs, "particularly the marquee promise of a given card, such as cash back, or redeemable airline miles, and what a customer needs to do to get it." The article notes that there is no apparent sudden rise in consumer complaints about rewards, but the CFPB has targeted the programs because they are the primary reason consumers choose a particular card. Mr. Baldwin never returned our phone calls regarding this story, and as to why they never made the Hunt for Red October II. Here's the story from Bloomberg - the mortgage industry likes it when the CFPB turns its gaze to some other industry... like how car salesman earn different commissions for selling different cars...

How about some recent vendor & conference news?

Congrats to National MI, which announced that it has been approved to write mortgage guaranty insurance in Florida. Approval by the Florida Office of Insurance Regulation marks the 49th state for mortgage insurer.

Starting December 16, Essent is decreasing monthly premiums by 5 basis points across all rate categories effective for commitments issued on or after December 16, subject to regulatory approval. Updated rate cards can be found in the full announcement. For availability of rates by state, please see the Rate Availability chart that will be posted to Essent's website by 12/16.

LoanSifter announced its new "Fair Lending Compliance Tools" for clients who need to "help stop a Fair Lending compliance violation before it happens? Ensure you have a proactive Fair Lending review policy that can be audited? Quickly see how differently originators are pricing loans to borrowers? Automate your Fair Lending process?" LoanSifter has added new resources to proactively ensure compliance to Fair Lending and other regulatory requirements.

For industry events, the MBA is presenting its second-annual Independent Mortgage Bankers Conference next month in Florida "...designed to address the myriad challenges facing the non-bank lender and to provide critical information, strategies and connections needed to get an important leg up in both today's and tomorrow's markets." Sessions include a panel of warehouse lenders, an open discussion with warehouse lenders and independent mortgage bankers, a special networking reception to connect warehouse lenders and independent mortgage bankers, and Industry Outlook featuring leading independent bank leaders focusing on business challenges including refocusing on production efforts. For more information go to IndependentConference.

As a quick note, the world's largest alternative asset manager, Blackstone Group, has reportedly spent $5 billion to buy about 30,000 single family homes in the US in a bet prices will rise and renting them out will be no big problem. Watch out if they don't, or it is: the fear among Realtors is that if Blackstone's return on these properties is not satisfactory, it will be time to sell 30,000 properties.

Turning to the markets...darn there's a lot of news this week, especially for a shortened week when many companies are closed Friday in addition to the holiday Thursday. Today is Pending Home Sales. Tomorrow we'll have the Housing Starts and Building Permits duo, along with Consumer Confidence (were you one of the 5,000 households asked?), and the S&P/Case Shiller Indices with their two month lag telling us what happened back in September. Wednesday will be Durable Goods - always volatile, since a couple aircraft orders can swing the number - Initial Jobless Claims, the Chicago Purchasing Manager Survey, and the University of Michigan Consumer survey. Friday we had a 2.75% close on the yield on the 10-yr. T-note; this morning we're at 2.75% and agency MBS prices are worse a couple ticks - taking back some of Friday's improvement.

A computer programmer's wife tells him: "Run to the store and pick up a loaf of bread. If they have eggs, get a dozen."

The programmer comes home with 12 loaves of bread.

What is on the agenda for this week?

Date	Time (ET)	Economic Release	Actual	Market Expects	Prior
25-Nov	10:00 AM	Pending Home Sales	-	1.30%	-5.60%
26-Nov	8:30 AM	Housing Starts	-	915K	891K
26-Nov	8:30 AM	Housing Starts	-	920K	NA
26-Nov	8:30 AM	Building Permits	-	932K	918K
26-Nov	8:30 AM	Building Permits	-	932K	NA
26-Nov	9:00 AM	Case-Shiller 20-city Index	-	13.00%	12.80%
26-Nov	9:00 AM	FHFA Housing Price Index	-	NA	0.30%
26-Nov	10:00 AM	Consumer Confidence	-	72.4	71.2
27-Nov	7:00 AM	MBA Mortgage Index	-	NA	-2.30%
27-Nov	8:30 AM	Initial Claims	-	330K	323K
27-Nov	8:30 AM	Continuing Claims	-	2875K	2876K
27-Nov	8:30 AM	Durable Orders	-	-2.20%	3.80%
27-Nov	8:30 AM	Durable Goods -ex transportation	-	0.20%	-0.20%
27-Nov	9:45 AM	Chicago PMI	-	58	65.9
27-Nov	9:55 AM	Michigan Sentiment - Final	-	73	72
27-Nov	10:00 AM	Leading Indicators	-	-0.10%	0.70%
27-Nov	10:30 AM	Crude Inventories	-	NA	0.375M
27-Nov	10:30 AM	Natural Gas Inventories	-	NA	-45 bcf

We have a holiday-shortened week with the bond market closed on Thursday. It will reopen on Friday but then close early at 2:00EST.

We do have some big name economic reports this week with Durable Goods, Initial Jobless Claims, Chicago PMI, Consumer Confidence and Consumer Sentiment getting the most attention.

We also have three Treasury auctions this week:
11/25 - 2 year Note.
11/26 - 5 year Note.
11/27 - 7 year Note.

Wednesday is the most important trading day of the week. Many bond traders will react to the data and then take off for the weekend by lunch even though the bond market will remain open until 5:00EST. So, volumes will be thin in the afternoon and on Friday as well. So, a relatively small block of trades will cause the market to be "skewed". This is only temporary. When traders return on Monday in full force, volumes will return to normal levels.

So for our Taper gauge remains at same level as Friday:

For the week, our downside is limited as many traders will "park" their funds into the safe-haven of bonds to avoid any international volatility while they are off for the holiday. Durable Goods Orders is very key on Wednesday. We have seen some very strong volatility with MBS after the last couple of reports. A strong report will cause a sell off....a weak report and MBS will rally.