Realtor lawsuit; Bank mergers continue, shrinking numbers

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It has been quite a week, visiting mortgage and banking folks in California, Kansas, and now Texas. There are a lot of good, experienced personnel out there, and a lot of optimists - aside from all the Encompass & Mavent users out there gasping during Ellie Mae's temporary outage yesterday. And there is indeed reason for optimism in certain sectors. For example, one of every eight American households (nearly 14 million in all) rents a single-family home, and there will always be borrowers refinancing for some reason. But Wednesday we learned that the Mortgage Bankers Association Applications index fell in the Feb 21 week by -8.5% after prior -4.1%. (So we can assume that applications fell.) Refi's fell by 11% and purchases dropped by 4% with the Purchase index now at the lowest level since 1995. Refi share of applications fell to 58%, lowest since September 2013 when rates were nearing 3% on ten year notes. Sure, purchase apps are at a 19-year low, but hey, maybe half the borrowers who could have refinanced already have not yet: FannieStats.

 

In addition to residential lending, student loans, car loans, payday lending, and for-profit universities, the CFPB has reportedly turned its gaze to real estate agents. Are consumers being steered? A quick look at Berkshire Hathaway's real estate company site didn't turn up any recommended lenders, but there are plenty of conglomerates out there. A quick example is NorthStar Realty Finance Corp. which announced cash available for distribution. "During the quarter, NRF deployed $481 million of equity into $799 million of gross investments. Investments included: $337 million invested in RXR Realty, two commercial loans originated for a total of $104 million, and $345 million in manufactured housing acquisitions, financed with a $248 million of non-recourse mortgages. The company announced that it was close to executing an agreement on a $1.05 billion health care portfolio, which includes assisted living and skilled nursing facilities.... To date, NRF has raised a total of $1.4 billion in its sponsored, non-traded REITs."

 

And there is a class action lawsuit for $11.2 million against Long & Foster, a large real estate company, for RESPA violations. Long & Foster Real Estate is reportedly involved with another company sharing settlement fees and they are facing a lawsuit over it all.

 

I am sure NAR is watching developments closely, and it opens up many questions for lenders and originators. Some believe that the RE companies and builders that own and operate mortgage companies were out of compliance with RESPA. Folks who have been in the business for a while remember that it was not allowed prior to 2002.  There were affiliate business arrangements, but they were scrutinized and approved up front by HUD. In many states, title companies and other settlement agents have arrangements with the RE companies. All of them do it, often sharing a building and, I imagine, various costs, and it is certainly "easy" to refer a client next-door. RESPA, of course, allows the buyer to have a choice of escrow company - but how many buyers have a preference? Banks, lenders, real estate companies, builders, and so on are certainly known to steer borrowers toward using certain title/escrow/settlement services. And thus many originators believe that RE companies and builders should not be allowed to own & operate mortgage companies and/or T & E companies under the belief that it is a conflict of interest, and more costly for the consumer. As one LO from Nevada wrote me, "We don't need more regulations and layers of paper. We just need the old established rules enforced." 

Let's take a quick look at some recent aggregator changes. 

Per the recent revision to the Texas Supreme Court ruling, Chase is now considering per diem interest and discount points as "interest" for the purposes of calculating the 3% fee cap on 50(a)(6) transactions. 

Wells Fargo has amended the bulletin it had previously released that aligned its PUD and condo project flood insurance requirements with those of FNMA, e.g. that all projects have a gap dwelling policy if the replacement cost is less than 100% but more than 80%.  This applies only to condos, not PUDs.

 

Wells has made multiple changes to its adverse credit history guidelines for Conventional Conforming loans and has aligned its delegated requirements with those of Fannie and Freddie.  In cases where a borrower has filed for Chapter 13 bankruptcy, at least 24 months must have elapsed since the discharge date or at least 48 months from the dismissal date, while borrowers with multiple bankruptcy filings within the last seven years will be subject to a 60-month waiting period.  Foreclosures due to financial mismanagement will be subject to an 84-month waiting period.  With regard to deeds-in-lieu, foreclosures, and short sales, loans with a DU certificate are allowed with a 24-month period of re-established credit with a maximum LTV/CLTV/TLTV of 80%.  Cash-out refinances on LP or manually underwritten loans will not be permitted within 84 months, while rate/term refinances are allowed for primary residences, second homes, and investment properties.  Only primary residences are allowed for purchase transactions.  The updated guidelines will take effect for locks, re-locks, re-negotiations, and commitments on or after March 17^th.

 

While mortgage banks look for smaller shops to bring on board, banks are busy merging. The reasons banks merge differ. A study by Deloitte finds the primary M&A objective of directors is to pursue cost or scale efficiencies (56%) vs. only 32% for CFOs. Meanwhile, 64% of CFOs say the primary M&A objective should be product or service differentiation vs. only 45% of directors. SNL Financial reports the number of healthy bank acquisitions was 285 in 2007, 109 in 2009, 224 in 2012 and 225 in 2013. (Meanwhile, it has been several years since any new banks were created from scratch - de novo.) Recent announcements include...Cache Valley Bank ($683mm, UT) will acquire The Village Bank ($123mm, UT) for an undisclosed sum. Security Financial Bank ($292mm, WI) will acquire Peoples State Bank of Bloomer ($115mm, WI) for an undisclosed sum. And Banner Bank ($4.3B, WA) will buy 6 branches with $226mm in deposits and $95mm in loans from Sterling Savings Bank ($9.9B, WA) for an undisclosed sum. (The purchase is contingent on consummation of the previously announced merger between Sterling and Umpqua Bank). 

Turning to the markets and interest rates, it is hard to believe that we began the year with the 10-yr. yield at 3.00% and yesterday it closed at 2.64%. Refi territory? Not really - but we'll take it! Yesterday analysts attributed the move toward lower yield to a flight to safety related to Russia and Ukraine. And Fed Chair Yellen's testimony before the Senate Banking Committee went just fine - nothing groundbreaking. Initial Jobless Claims increased more than expected. By the end of the day agency MBS prices were better by .125-.250. And as long as the Fed continues to buy $2.2 billion of MBS, it seems to be soaking up fixed-income agency supply.

 

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Groups react to proposed Tax Changes; Chatter about "Subprime" loans - a misnomer

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Hope springs eternal, right? As the residential lending industry wraps up a couple rough months tomorrow, everyone is hoping for a more robust March and April. They are basing this hope on the seasonality of the purchase business out there, and the hope that the worst of the winter storms are past. Few are banking on lower rates, lower costs to originate, or a big influx of HARP-related business. Others are repeating the mantra, "Hope is not a strategy," and are moving ahead with expansion & hiring plans, scaling back operations staff due to production predictions that were too optimistic, analyzing capital increases or decreases, and adjusting projections. Life goes on and people need home loans - just not as many industry-wide as a year ago.
News out of Congress regarding possible changes to the tax code certainly turned some heads out there. Here is a statement by National Association of Realtors President Steve Brown: "NAR supports reforms that promote economic growth, but we strongly oppose severely altering the rules that govern ownership and investment in real estate. Real estate powers almost one-fifth of the U.S. economy, employs more than 17 million Americans, and contributes a quarter of all federal and state tax revenue and as much as 70 percent of local taxes. We are extremely disappointed with several of the provisions contained in U.S. House Ways and Means Chairman Dave Camp's tax reform draft released today, namely proposed limits on the mortgage interest deduction and capital gains, and the repeal of deductions for state and local property taxes. These proposed changes to the taxation of real estate will impact every single American, either directly or indirectly. NAR will carefully analyze the details of the Chairman's plan so we can best educate Congress and the public about how this plan would impact the owners, consumers, and producers of both residential and commercial real estate."

And Barbara Thompson, the Executive Director of NCSHA (National Council of State Housing Agencies) issued a statement on Chairman Camp's Tax Reform Discussion Draft. "On the one hand, we are pleased that House Ways and Means Committee Chairman Dave Camp's tax reform discussion draft preserves the Low Income Housing Tax Credit, though we are still analyzing the impact the many changes the draft proposes would have on the program. On the other, we are deeply disappointed that the discussion draft eliminates the ability of states and localities to issue tax-exempt bonds to finance affordable housing by terminating private activity bond authority. This authority allows states and localities to issue bonds for affordable housing, student loans, energy projects, water facilities, transportation developments, and other vital uses. State Housing Finance Agencies (HFAs) issue tax-exempt Housing Bonds to finance affordable mortgages for first-time homebuyers and rental housing developments. Forty percent of all Housing Credit production annually is made possible by Housing Bonds. Both programs have a proven track record of success in providing affordable housing help to the growing number of lower income people who need it. We urge Congress to ensure that any tax reform plan it advances preserves and strengthens both of these essential programs."

The CFPB said it is making mortgage loan servicing a "significant priority" for itself as it plans to make sure servicers are actively reaching out to customers in default to try to help them. The regulator said they expect servicers to pay "exceptionally close attention" to servicing transfers and only use force-placed insurance "as a last resort." But what happens when you combine servicing and subprime loans? Here is a take from Reuters. The press loves to use the word "subprime" since it seems to incite the pubic and regulators, and the industry should do what it can to stop using the term. Borrowers who don't have sterling credit have always existed, and always will, and will always want to borrow money - a fact somehow lost on some reporters.

But the definition of the word has always been nebulous, especially when it is tied to a FICO score (much to the dismay of other credit score providers). And "inconsistent income" has always been a problem for self-employed borrowers, generally the group mentioned as left behind in the Ability to Repay movement. Forgotten are compensating factors, such as LTV or assets in the bank. When Wells Fargo announced its retail group extending credit to that segment, it never uttered that term, but somehow it garnered plenty of press in spite of dozens of other lenders offering similar products especially in the FHA segment. Even Bloomberg jumped on the bandwagon with the headline, "Subprime Called Safer Makes Comeback as 'Nonprime'" in a story highlighting NewLeaf Lending. But gosh, haven't we been through this "slide down the credit curve" before?

 "Gone are the days when lenders handed out mortgages without requiring documentation and down payments. Today's purveyors of subprime call the loans 'nonprime' and require as much as 30 percent down to safeguard their investment. And they see a big opportunity for growth as tougher federal lending standards shut out millions of Americans with poor credit from the mortgage market. You're going to have to make all types of loans, ones that conform to all the new standards and ones that don't, to keep powering the housing recovery," said Bill Dallas, CEO of Skyline Financial Corp. in Calabasas, California. "There needs to be a solution for people who don't fit in the box, and rebuilding nonprime lending is it."

About $3 billion of subprime mortgages were made in the first nine months of 2013, matching the year-earlier period, according to Inside Mortgage Finance. In 2005, subprime originations reached $625 billion. But even that number, combined with jumbo securitizations, is less than 5% of overall historical production. Most companies are doing what they can to avoid non-QM lending, but in my discussions with CEOs they admit that eventually, if the investor market improves for this product, they will take a hard look at it. And then instead of Household, Beneficial, and Associated, we'll be hearing names like Advancial Mortgage, Athas Capital Group, B of I Federal Bank, Citadel Servicing, Impac, LoanStream Mortgage, New Leaf Wholesale, New Penn Financial, Parkside Lending, Quick Funding, Union Bank, Virage, and Western Bancorp. Regardless, the industry, and the press, should not equate non-QM with subprime.

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Executive Rate Market Report

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Yesterday interest rate markets improved, the 10 fell 4 bps to 2.70% and 30 yr MBS prices gained 35 bps in price. This morning no follow-through early; the rate markets remain range bound within an extremely narrow range, no direction but the outlook is a little better. The 10 opened at 2.71%, at 10:15 2.69% -1 bp. The 10 in a five bp yield range and 30 yr MBSs in a 50 bp price range. This morning the stock market is better, still the S&P has not been able to close in a new all-time high. From everything we are hearing and reading investors in stocks, even the most optimistic, are worrying that after the huge run up in 2013 the stock market may be momentarily running out of momentum. That view is likely why the interest rate markets have bucked the obvious and not increased. Although interest rates have held well for the last few weeks, there hasn’t been any significant change in rates; how much longer will the tight range remain is dependent on what happens in the equity markets. If the S&P closes at a new high and holds it for a day or two it will take away some hedging by investors that are holding treasuries currently.

The DJIA opened +17, NASDAQ +13, S&P +3; 10 yr 2.71% +1 bp with MBS prices unchanged from yesterday’s nice rally. Not much movement on the open and ahead of Jan new home sales at 10:00. Going into the new home sales the indexes had turned lower.

Bloomberg runs a lot of surveys with economists, nice to know what the dismal scientists are thinking. According to economists surveyed the yield on the 10 yr note will be 3.37% by year-end, with the most recent forecasts given the heaviest weightings. The move would hand a 2.8% loss to an investor who buys today, data compiled by Bloomberg show. If that becomes reality 30 yr mortgage interest rates at the end of the year will be about 50 to 60 basis points higher than where they sit now. The forecast is obviously predicated on the economy continuing to strengthen and a pick-up in the inflation rate. While we believe interest rates will increase, we are not quite that bearish. Essentially we are not that optimistic that the economy will expand at a pace presently widely believed. Improvement yes, just not what most presently assume when forecasting interest rates.

At 10:00 the economic data of the day; Jan new home sales, expected down 3.4% to 400K units (annually), were up 9.6% to 468K units, the strongest sales month since July 2008. Dec sales were revised higher, to -3.8% at 427K from 414K. It is a volatile series but that was a huge surprise. The reaction sent stock indexes back into positive readings but didn’t change the rate markets much. New home sales are not as significant as existing home sales because the data is a narrower sample. Earlier this morning the weekly MBA mortgage applications took another fall, last week down 4.1%, this week -8.5% for the overall index. The purchase index -4.0% while re-financing fell 11.0%; re-financings appear to be waning recently even though rates are still favorable. Possibly everyone that wanted to re-finance already has done it. The percentage of re-finances to overall apps dropped to 58%, the lowest since Sept 2013.

This afternoon Treasury will auction $35B of 5 yr notes and $13B of 2 yr floating notes. Yesterday’s 2 yr auction had strong demand but there is little correlation between the demand for 2s and demand for 5s and tomorrow’s 7 yr auction. Tomorrow morning Janet Yellen is scheduled to complete her required semi-annual testimony at the Senate Banking Committee, delayed by almost two weeks due to inclement weather in Washington.

Regardless of the outlook for higher interest rates, the technical picture is still slightly bullish for the 10 and MBSs. The 10 holding under its 2, 40 and 100 day averages and the 14 day relative strength index below 50. We have to stay with the technicals, there isn’t a lot of buying but equally there is no significant selling. The reasons may be murky and debatable but the market is where talk ends and money takes center stage.

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1st Alliance Selfie Penalty by the CFPB; What about loans that become non-QM

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Connecticut's 1^st Alliance Lending, LLC has been fined $83,000 by the CFPB for violating Real Estate Settlement Procedures Act (RESPA) rules. 1st Alliance apparently realized it had illegally split real estate settlement fees and notified CFPB on its own of the infraction. 1^st Alliance buys distressed mortgage loans from servicers, and then attempts to refinance those loans into new ones with lower principal balances through federally related mortgage programs (similar to Ocwen). Initially it obtained its funding from a hedge fund and split revenues and fees with the hedge fund's affiliates but ended that in 2011 although continued to split origination and loss-mitigation fees with the affiliates, a violation of RESPA which bans a person from paying or receiving a portion or split of a fee that has not been earned in connection with a real estate settlement. Read all about it because it's no longer good enough to turn in your competitor...

 

What happens if a QM loan is found to be a non-QM loan, say through some points and fees miscalculation, by the investor? As best I can tell, these loans currently cannot be cured. But there is certainly a move in the inner ranks of the industry to allow specific violations to be cured, somehow, depending on the reason the loan violated QM. Many in the biz say that, from a high level, QM seems very reasonable and is in everyone's best interest. But the fact of the matter is that if a "QM" loan doesn't fit inside the box (points and fees exceed QM cap, DTI over 43%, cannot obtain a GSE patch on 43% DTI, negative loan feature like IO or prepayment penalty, did not determine the borrower's ability to repay), it is moved from a "credit decision" to a "risk decision" by the investor. Lenders know that loans can be profitably originated and sold within the boundaries of QM. The problem is that it's not as easy as it looks, and the devil's in the details: a processor clicks the wrong box and the technology does not calculate the points and fees correctly, a borrower's employment is terminated a day before the loan funds but after everyone verifies income, an underwriter missed a lender announcement on how to document assets and now the AUS cert is invalidated. I think the industry is protesting because people make mistakes, and some of the old timers don't want to transition to the 21^st century.  I would like to see a better originator system of checks and balances for auditing loan quality.

 

On the other hand, although some people did not take QM seriously many did their homework, and read all of their investor's guidance on QM documentation, and personally audit each one of the files for QM compliance before loans are sold. There will be a learning curve and some expensive mistakes by the industry. And thus we find capital markets staff dusting off the business cards for scratched & dented loan buyers, and girding their loins for 70 cents on the dollar, or asking an under-utilized LO to refinance the customer into a QM compliant loan if that is an option.

 

Regarding the agencies auditing files, Frank Fiore, president of Matchbox LLC, writes, "Your comment in today's commentary is what scares me about certain lenders out there. Anyone that looks to agency approval for the fact that Fannie does not review their files as hard as Chase does truly does not understand the implications or being agency approved. Selling direct to the agencies requires a stronger set of QC and QA guidelines pre and post-closing. They have to be able to ensure that the loan has been run through a more stringent set of tests so that when that loan come back as a possible repurchase in 3 years from now, it can be defended. I advise all of my clients that before they sell a file to an agency they should be able to mark it complete and be able to support the closing of that file 3 years from now assuming no one that was involved with the file is still with the company to "defend" the decision to close.  Any lender that is looking to the agencies as an easier outlet than aggregators does not truly understand the possible repercussions that will be coming in 6-18 months from now, if not sooner."

 

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Fannie's numbers reflect trends, but do they review files?

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Loans have become harder to do, and underwriters that I have spoken to keep telling me that every deal is different. How many scenarios are there? Probably not as many as there are atoms in the universe, or possible games of chess. The Shannon number, named after Claude Shannon, is an estimated lower bound on the game-tree complexity of chess. Put more simply, people throw that out there when they're talking about the possible number of games of chess. I won't mire you down in the complexity, permutations, and different opinions, but it is up around 10 to the 123^rd power (10x10 one hundred and twenty three times). As a comparison, the number of atoms in the observable universe, to which it is often compared, is estimated to be "only" 10 to the 81^st power.

Congress returns to work this week, and a certain amount of attention will be devoted to the Senate Banking Committee. Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID), who are expected to unveil a GSE reform bill in the near future. But does the government really want to dispose of its Golden Geese: Fannie & Freddie? 

Last week Fannie Mae not only reported record earnings in 2013, but has paid back all of the bailout money owed to the Treasury. The fourth quarter of 2013 was its eighth consecutive profitable quarter for Fannie Mae, and the company posted net income for the entire year of $84.0 billion and pre-tax income of $38.6 billion. In 2012 the government sponsored enterprise (GSE) had both net income and pre-tax income of $17.2 billion. The 2013 annual net income includes a one-time release of the company's valuation allowance against its deferred tax assets. Fannie Mae reported net income of $6.5 billion for the fourth quarter and pre-tax income of $8.3 billion. Net income in the third quarter was $8.7 billion. The GSE will pay a $7.2 billion dividend to the U.S. Treasury in March bringing the total dividends in 2013 to $85.4 billion.  Since the company was placed in federal conservatorship in 2008 it has paid a total of $121.1 billion in dividends against $114.1 billion in draw requests. 

Are the earnings for real? Sure they are: both Fannie and Freddie have been benefitting from a recovering market that lifted home prices and kept a lid on loan defaults. Their return to profitability also allowed them to reverse write-downs of certain tax-related assets, which led to large one-time windfalls. Lastly, both agencies have been the beneficiaries of various lawsuits and settlements with mortgage aggregators, investment banks, and smaller lender who were, or are, counterparties.

 But what about 2014 and beyond? There is a wide range of thinking on who, what, when, where, and how the Agencies will transform - of even if they should. We are in yet another election year, and Congress is notoriously slow in making possibly controversial and difficult decisions in election years. Cynics are quick to say that there is little political reason to turn a money making enterprise over to private shareholders. There has been progress in the Senate Banking Committee about proposals for Freddie & Fannie. But, thinking back to high school civics, anything that comes out a committee has to go to the full Senate (or House of Representatives). And the House is doing the same thing. And then the bills are reconciled, voted on, and sent to the president. Many believe that in an election year, this might be a near impossibility, in which case the work is redone in 2015 based on the results of November's election. So even if a bill is introduced, it will be a long path, and even if eventually signed by the president, it will take years of hard work to affect change.

 Lastly, the issues involved are very complex. Not only are the Agencies' role in the primary markets very important (standardized, pricing, uniform appraisal standards, documents, and underwriting to name a few roles), but any changes could have a significantly negative impact on the securities in the secondary markets. The MBA, SIFMA, and other organizations are very involved in the discussions - no one wants to spook the investor community. 

Fannie Mae, for one, is certainly doing more business with smaller and mid-sized lenders. And that segment of the market is only too happy to sell the asset to the agencies, and either try to keep the servicing or sell it on a flow basis to someone other than an aggregator. The industry is abuzz about how the agencies are not engaging in any kind of meaningful pre-funding review, and that it is "easier" to sell to them. "Hey, they don't suspend our files like Chase does!" is something I have repeatedly heard. 

But industry vets agree that a) Fannie and Freddie are not in the business of not reviewing files, and b) it is only a matter of time until the Agencies come back to lenders to correct deficiencies or for buybacks. Any back-up here or there will be corrected, files will be thoroughly audited, and they can play hardball. But yes, F&F have grabbed market share from the aggregators while the servicing market has been in flux, and by sometimes offering better prices to smaller lenders than to the aggregators. Bloomberg reports that Fannie's top 5 customers accounted for 42% of its volume in 2012, 60% in 2011, and I am sure that the trend continued in 2013. Per the story, the decline in share from big originators in recent years reflects exits from 3rd-party channels by several, and large mortgage lenders leaving the business since 2006. Non-bank share is also increasing, and although the trends show reducing the "significant exposure concentration we have built up with a few large institutions" at the same time smaller firms' "potentially lower financial strength, liquidity and operational capacity" may raise counterparty & credit risk. That will certainly prove true in 2014 - counterparty risk is the name of the game. 

There has not been much volatility lately in interest rates - and no one minds. Congress returns this week with a heavy focus on housing finance reform and flood insurance. The House is expected to take up legislation similar to a recent Senate-passed bill that would delay spikes in premiums under the National Flood Insurance Program. 

But this week has plenty of potentially market-moving news. There is zip today; tomorrow are some housing price numbers as well as the S&P/Case-Shiller series, and Consumer Confidence. On Wednesday will be New Home Sales, Thursday is Jobless Claims and Durable Goods (always volatile, depending on if a big airplane or machinery order came in), and Friday we'll see Pending Home Sales, the University of Michigan Consumer Confidence number, the Chicago PMI, and revisions to the fourth quarter GDP number. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. Looking at the numbers, the closing yield on Friday of the risk-free 10-yr T-note was 2.73%, and this morning we're still there. Agency MBS prices are also about unchanged.

 

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Bank versus Non-Bank Originator Licensing (March 31 is approaching); Warning note on Giving Valuations to Borrowers

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A couple of weeks ago the commentary raised the issue of LICENSING. Below are some note regarding licensing: 

"I am still wondering what the thought process is with the CFPB's lack of enforcement requiring Loan Officers with bank owned mortgage companies becoming licensed.  As a regional manager, I have interviewed LO candidates who failed their test or background checks for licensing and then they walk down the street to a bank owned lender and go to work.  So how does working for a bank lender make an LO a better qualified LO?  But the more important question I have for the leaders of bank owned mortgage companies; if your bank is committed to providing the best trained loan officers in the mortgage business why doesn't your bank require your LOs to pass the licensing test, and the same background requirements that each state requires to become licensed?  Why does a government agency have to mandate or make it a regulation for a bank lender to require LO testing if they truly want to provide their customers with the most ethical, knowledgeable and best trained loan offers? All Realtors have to be licensed and all appraisers have to be licensed, so what is the thinking with excluding loan officers with depository lenders? The issues that brought about Dodd Frank and the CFPB were not restricted to just non-depository lenders; the bank lenders were right in the middle of it too.  I think we all want a level playing field and the goal should be to provide the most ethical and knowledgeable loan officer so our consumers are protected! The CFPB is supposed to be all about protecting the consumer; not protecting the banks."

 

[Editor's note: banks, and bank employees, have their own set of rules, background checks, testing, and so on. And they will often argue that their standards are higher than a mortgage banks. But you do bring up a great point, and Dave Stevens, in a speech two days ago, mentioned that reconciling business-specific LO discrepancies is on the MBA's agenda for 2014. So stay tuned!] 

I received a plethora of comments on both sides of this issue. Originators know that the opportunity to take Stand-Alone UST ends on March 31. The Stand-Alone UST is an adaptation of the NMLS National Test that is now accepted by 39 different state agencies. Taking the UST is highly recommended for any current licensee who might ever be licensed in another state.

 

Now that the dust has settled...

 "I keep seeing mortgage bankers and brokers crying 'not fair' about the big bank LOs not having to be licensed. If fairness is the issue, isn't it a good thing that they don't have to be licensed? Isn't that one of the biggest pitches against using a big bank - that the LOs are 'lesser' LOs because they aren't licensed for one reason or another? It seems to me that helping improve the qualifications of your competitor is a bit counterproductive. Of course, if the idea is to improve the mortgage industry as whole, then I get it."

 

Kevin Igoe with the Community Home Lenders Association writes, "This has been a major issue for the Community Home Lenders Association and we have worked aggressively to level the playing field. Our members are committed to bringing about fairness in the manner in which non-banks are treated in all aspects of the regulatory process."

 

And this note from Robert Eustis, CMB: "The Bureau is charged by Dodd Frank with 'ensuring that bank loan officers have training commensurate with their duties'. We know of no objective standard other than the Multi State Test, UST, that could show that the Bureau has accomplished its mission as set out by the law. The CFPB should promulgate a regulation requiring bank loan officers to take and pass the UST. That would be an easy way to achieve two goals: #1 that the Bureau has fully complied with the law, and #2 that non-bank lenders would play on a level playing field." 

"The write-up stating it is not a fair market to have bank LOs not having to take a test is somewhat annoying. From the beginning LOs at banks have been tested and audited by and on RESPA, ECOA, TILA, etc. etc. and they are audited by FDIC (and insured by which no broker is), OCC, and every other regulatory agency. A broker shop is only audited by the state Office of Financial Institutions which often only audits minimal things and has very limited power. I personally had a broker shop that had a LO that committed fraud by created VODs and VOEs with my company, Chase, and National City and the next year my local OFI gave the LO a license to open her own business. When we called to find out how this could be we were told that OFI does not have the right to deny a license for this reason. Bank LOs are held to a much higher standard and audited 10x's more than any broker shop. If we all want to play on an equal playing field then I think we should also all be audited by every regulatory agency.  I can guarantee you most brokers in the market would not pass 1/3 of those audits. I get so frustrated when I focus on learning every regulation and train my LOs how to stay compliant and a broker owned mortgage company walks in and sells to my clients they do not have to do any of it. Until the CFPB was created there was no one really auditing much out there on the broker side. I've been on both sides, it's not the same and honestly I doubt it ever will be unless broker shops want to be audited on every aspect of their business like a bank is." 

"I certainly agree with your question of the CFPB's lack of enforcement on LOs with a bank. I tried 8 months ago switching to contracting my business through a national bank from a state licensed mortgage company. I passed a credit check and a background check but, nothing to compare with renewing my state licenses for Kansas and Missouri respectively through NMLS. I only stayed with them for two months because of other issues within the organization, which by the way took government bailout funds. I went back to my state mortgage company. I have to question the validity of an organization that cannot even police its own lending policies being qualified to employee LOs that they hire with such lax standards. Certainly double standards apply. I was a conventional banker for 29 years before entering the mortgage business so, I know how they work. Most are certainly handled by responsible leaders." 

"The CFPB had told the industry it was not interested in re-opening the SAFE Act. Why, is simple. HUD was given the SAFE Act initially and HUD is exempt from the RFA. I was on a state broker board and wanted LOs licensed, and at the time I was also a registered rep with NASD. I fashioned it off of that platform. I was fearful of a bifurcated system like they had in Florida at the time. Ruth Faynor was the lead at getting the Florida system proposed but the big banks opposed it. It the end they came up with the dual system. And we saw the results. I know a copy of my paper went to a member of AArmR. Not claiming it was my idea. But in the original paper I wrote it was for a single platform anything less is disparate treatment. HUD said it wouldn't have an impact on small businesses because it was just on the LO. We all know that's a joke - even worse when you fill out the Call Reports. The CFPB's rules, on their face, consistently favor larger institutions at the expense of smaller companies. I do not know where SBA Advocacy has been. In 2007 they issued a study that said regulations cost small businesses $10,575 per employee. I cannot even fathom what that number is today when you account for Dodd Frank and Obamacare." 

Joe A. observes, "Regarding licensing, I am now at a community bank. But in prior years I ran my own company as a lender and broker so I feel I know both sides of the issue. Even though I am not required I keep my license in place but recognize the intense requirements of the banks for training their loan officers. However, it does not put the pressure on to the extent that brokers or non-bank lenders feel when they have to take the test. But let's be real for one minute. The true difference here is that the banks are involved in a constant month to month training curriculum. Most brokers and lenders wait to the last minute, take an online course (which is the same thing over and over, and applies to all players no matter how many years they have been in the business), and they move on until the next required test a year later. Both approaches accomplish pretty much the same except for the NMLS and State tests that 'require' you to take the test. You don't pass a test at the bank level and there's really no penalty. You don't pass it at the NMLS or state level and you're cooked."

 Finally, Dave Stevens with the MBA contributes, "As a matter of fact, it's the MBA that voted, and is advocating, to amend the SAFE Act and require LO testing and licensing for all loan originators regardless of business model. It's really important that lenders read our advocacy plans & comment letters before making statements that are simply incorrect. No organization has been as firm on equality for all lenders than the MBA. At the state level we often encounter groups that couldn't vote to support testing for all LOs because the boards were divided with big banks on their board. The difference was that we had a unanimous vote in favor of this because I called personally the CEOs of each big bank telling them what obligation they had as citizens of the mortgage system to promote equity and fairness. Again, our vote was unanimous and we had Wells, BofA, and the other large institutions, along with IMBs and community banks, all support it with no one opposed. This takes work and lenders have an obligation to know what is being worked on and not just assume with zero fact checking. A fractured industry because of people like this will absolutely lose the policy war." 

Switching gears, changing tacks, "and now for something completely different, Mike Ousley, president of Direct Valuations, warns lenders, "In the rush to comply with the CFPB Ability to Repay (ATR) and Qualified Mortgage (QM) rules on January 10th, many may have overlooked the CFPB rules in conjunction with Equal Credit Opportunity Act (ECOA) Regulation B Valuation Rule, effective January 18, 2014.  The CFPB has published this handy guide for consumers to use to protect themselves. So, along with the appraisal report, ANY commonly used reports, such as AVMs or even potentially the Submission Summary Report (SSR) provided by Freddie Mac through the Uniform Collateral Data Portal (UCDP) which includes its Home Value Estimator (HVE) Automated Valuation is required to be supplied to the borrower promptly, or three days prior to loan closing, whichever is earlier.  My questions is how are lenders prepared to deliver these valuations to the borrower (Lenders using the Direct Valuation Solutions fulfillment platform succeed seamlessly through its automated, secure delivery mechanism) and for the potential questions from consumers, not just on the appraisal, but also any other valuations used in conjunction with making (or declining) a loan?"

 

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Wells & 600 FICO scores; Fannie & Freddie & Suspicious Activity Reports

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 "You know you're a redneck if your home has wheels and your car doesn't." I don't know Jeff Foxworthy's credit score, nor does being a "redneck" suggest any thing about the ability to repay a loan. Credit scores are in the news, and underwriting criteria are selectively moving lower. I still don't think that my cat, Myrtle would qualify, but earlier this week in Alabama, and again here in Southern California, tongues are wagging about Wells Fargo's extending credit to borrowers with lower credit scores (600 FICOs) and thus, on the surface, perceive higher credit risks as it seeks to replace plunging residential mortgage lending volume. Of course that is through the retail channel, not correspondent, but many believe that other investors will follow suit. Wells' program is only for purchases, and I'd also be surprised if Wells went with standard FHA guidelines without a credit overlay since that FICO band has performed so poorly in past vintages compared with higher credit tranches. We've all been through this before: staffing aside, volume drops, margins drop to make up for it, product lines are expanded. But we have QM and non-QM this time - it will be interesting. And QM doesn't specify credit score. 

In other lender & aggregator news, Chase announced improvements to its non-conforming (jumbo) loan level pricing grid. And Prospect Mortgage, LLC has launched a new Builder Division in Texas focused on mortgage products for new home construction. Prospect's Texas Builder Division will be located in the Company's 30,000 sq. ft. facility in Irving, Texas. 

Speaking of banks, FinCEN said banks can do business with marijuana-related businesses but are responsible for conducting their own due diligence, making sure the business is operating legally and making sure the businesses not violating any DOJ rules or requirements. Banks would still have to file three different types of SARs, however and could face fines if AML laws are not followed. Given all of the risks, it is expected many banks will still determine it does not make sense to do business with such businesses. That is a question often asked by lenders in states that have either legalized marijuana use for recreational or medical reasons: how do we count the income of growers and retailers? Unfortunately for potential borrowers in that business, the income is usually not counted.

The Financial Crimes Enforcement Network (FinCEN) finalized anti-money laundering (AML) regulations that will require the housing government sponsored enterprises (read: Freddie and Fannie) to develop programs for the prevention of money laundering and to file suspicious activity reports (SARs) with FinCEN. This Final Rule adopts, without significant change, all of the regulatory provisions contained in FinCEN's November 2011 Notice of Proposed Rulemaking. The Final Rule requires that the Housing GSEs (Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks) file SARs directly with FinCEN instead of the current practice of filing less detailed reports through their regulator, the Federal Housing Finance Agency (FHFA). It is hoped that this will provide law enforcement and regulators with a more complete and timely national picture of suspected mortgage fraud and money laundering, as well as assist with investigations and prosecutions of significant mortgage fraud schemes. FinCEN closely coordinated this rulemaking with the FHFA, to which FinCEN is delegating responsibility for examining the Housing GSEs for compliance with the regulations. This rule is effective 60 days after publication in the Federal Register. The compliance date for 31 CFR 1030.210 is 180 days after publication in the Federal Register. 
 

To say the U.S. Census Bureau has access to data, is like saying Facebook has a few subscribers. I'm constantly impressed (maybe surprised?) at the technical and interactive mapping features coming out of the bureau in recent years; I can still remember when a once-per-decade phone call would come to the house. This month the Census Bureau is releasing the 2007-2011 5-Year ACS Estimates, which shows county-to-county migration flows crossed by educational attainment, individual income, and household income. The data, and subsequent map, give great illustrations to county specific immigration, out-migration, and net migration to the more than 16 million people who move across county lines each year. Some numbers are more interesting than others; while Los Angeles County occupies the top two spots in migration OUT of the county (with residents moving south and east to Orange County and San Bernardino), it also has the largest NET migration, from Orange County and Asia (which is not a county, I'll grant you that). While, the in, out, and net migration patterns found in the study suggest large migration hubs like the southwest (AZ and CA) and the northeastern corridor had the most migration activity, most of the migration was between neighboring counties. The same was found across characteristics, as most flows were in close proximity.

Email protocol has always confused me. If I am sent an email, but my name is in the 'Cc' line, am I obligated to reply? Or is this just a "heads up"? If so, is this an insult? And what's with 'Bcc'? Is this the ultimate form of disrespect? It's sort of a club, within a club, spreading information but retaining the distribution rights. "You and I know that he knows, but he doesn't know that we know"....these are the things which keep me awake at night. One email, however, I was glad to be blind copied on, came from Barclays Securitized Product Research Department. It's always interesting to read research papers coming from market-makers, and I was pleasantly surprised to read, in the face of dwindling pipelines and uber-compliance, Barclays view on areas of credit expansion. "With mortgage credit still at historically tight levels and the housing market continuing to normalize, we see scope for expansion in mortgage credit over the coming years. That said, the ATR/QM requirements imposed by the Dodd Frank bill will make it harder for credit to expand to pre-crisis levels...We think most of the credit expansion is likely to be within the QM box, with a lot of room left on FICOs and some on LTVs. Outside the QM rules, the area most likely to witness pickup in originations over the next few years is pristine credit IO loans." And many would agree. Their paper addresses possible expansion, going forward, into areas such as sub-prime and HELOCs, along with addressing common concerns, and barriers of entry for such originators. I read a lot of analytics in the course of the month, and this one is pretty good. 

Unintended consequences...The MBA is holdings its national servicing conference this week in Florida and the everyone is talking about the myriad of rules& regulations, and about how sometimes they conflict. On the same day that the CFPB's Steven Antonakes warned executives that the agency was taking a hardline stance on compliance with its new servicing rule, MBA officials complained that following the rule puts them in danger of blowing through Fannie Mae and Freddie Mac foreclosure timelines. Put another way, the CFPB has foreclosure timelines that actually are not acceptable by Fannie Mae and Freddie Mac, certain forms of borrower contact, and the timelines by which you must contact the borrower.
The fixed-income market, and thus interest rates, continued "up a little, down a little" Thursday, although the coin toss Thursday pointed to "down a little". One school of thought says that the economy is doing well but has had some weather-related setbacks, while another school of thought says that it's grim out there, and they are seeing no recovery whatsoever. But... one should never fight the Fed, and Janet Yellen & others see signs of recovery.

 

Speaking of the Fed, the latest report from the NY Federal Reserve Bank indicated official buying averaged $2.2 billion per day, and traders report originator supply coming in around $1 billion. But the question I am often asked is, "If we're seeing +/- $1 billion a day in lender TBA sales and there's 252 trading days in a year, that is only about $250 billion a year in mortgage production. The MBA predicts the industry will fund about $1-1.2 trillion this year - where is the other trillion?"
First, agency MBS issuance is projected at $700-800 billion. Any hedges, assuming an 80% pull through would account for $600 billion in MBS sales - still far more than the $1 billion traders are seeing. Traders report what they see individually, so one dealer may see $1 billion in agency MBS trades on a given day, and another may see a "different" billion due to different account coverage. 

But the majority of the difference comes from two sources. The first is large retailers, namely institutions like Wells, BofA, Citi, and Chase, who are originating loans that flow into their own servicing portfolios. These include jumbo, non-QM, non-agency, and some ARM products. And the second source of the discrepancy is lenders selling loans directly to the Fannie & Freddie cash windows. Hundreds upon hundreds of lenders are bypassing the aggregators and are selling loans directly to the cash windows. And many of these are the companies that, eventually, are selling flow or bulk servicing into the market. Just something to keep in the back of your mind... 

So Thursday the 10-yr was off slightly, closing at a yield of 2.75%, and agency mortgage-backed security prices were down/worse about .125. Today we'll close out the week with January's Existing Home Sales at 7AM PST. (It is expected at -4%.) In the early going the 10-yr seems content around 2.77% and agency MBS prices are down/worse .125 from Thursday's close.

 

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CA's Mortgage Tax Snafu; Loans for Millennial; Banks Merger Mania

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If your lock desk was really busy last week, you're bucking the trend. The MBA's survey of 75% of retail lenders showed that apps were off 4.1% with purchases leading the way (-6.3%) but with refis following along (2.7%). The computers that slice and dice the data tell us that the average loan size on refis was $5k lower to $204k, conventional purchases were off 7.3% week over week, and conventional refis were off 1.4%. FHA & VA purchases were down 6% and FHA/VA refis dropped 4%. When it is -8 degrees F., bopping around house hunting is probably low on the priority list. 

 

The residential lending industry is dealing with plenty of unintended consequences and perverse outcomes due to the excesses of the past, and the resulting onslaught of regulation. As an example, two years ago California's legislators agreed to, and Attorney General Kamala Harris trumpeted, a landmark deal with the nation's three largest housing lenders, which agreed to give "beleaguered" California homeowners $12 billion in relief from their underwater mortgages. Now the Sacramento Bee tells us, "Last fall, the monitor that Harris appointed to supervise the agreement reported that the $12 billion promise had become 'an $18 billion achievement,' half in principal reductions for those who wanted to remain in their home and half in short sales for those who wanted out. There is, however, a darker side to the situation. That $9.2 billion in principal reductions from the three big lenders, plus those granted by other mortgage firms, is considered to be income to those who received them - an average of $137,281 for first mortgages in the settlement and $91,261 for second mortgages. That means the homeowners who breathed sighs of relief last year could be hit with huge income tax bills. They wouldn't be federal taxes, because Congress exempted principal reductions from taxation. But they would be state taxes for 2013, because a temporary exemption expired at the end of 2012 and the Legislature didn't act last year on an extension due to a behind-the-scenes power play."

 As it turns out, now politicians have tagged the tax exemption on to another bill (SB 391) that imposes new fees. The fees would be on real estate transaction documents in an attempt to raise about $300 million a year for low-income housing. It's one of the Legislature's efforts to make up for the money that low-income housing programs lost when it and Governor Jerry Brown abolished local redevelopment programs two years ago.

Yes, capital is constantly being created and put to work. "Wall Street's latest trillion-dollar idea involves slicing and dicing debt tied to single-family homes and selling the bonds to investors around the world. That might sound a lot like the activities that spurred the global financial crisis in 2007. But this time, there's a twist. Investment bankers and lawyers are now lining up to finance investors, from big private equity firms to plumbers and dentists moonlighting as landlords, who are buying up foreclosed houses and renting them out." "Wall Street" continues to be a dirty term.

 

But plenty of younger folks want to work for investment banks and broker dealers. And those Millennials (age 18-34) needs loans. TD Bank's Malcolm Hollensteiner, Director of Retail Lending Products & Services, chimes in with information on what types of loans are millennials obtaining. "At TD Bank, Millennials made up 18% of total mortgage units closed in 2013. Alternately, their 'parents'" made up 47% of the total mortgage units closed in 2013. In terms of type of loans, Millennials make up 15% of TD's total ARMS customers, while their parents make up 50% of the bank's total ARMS customers. The most noticeable difference, aside from the quantity of loan units between the two groups, is apparent in the maturities. Millennials make up just 8% of total 15 year fixed loans, while parents make up nearly two thirds of total 15 year fixed loans, with 59%. In terms of 30-year fixed loans, the gap lessens with millennials making up 22% of the total number of 30 year loans, while their parents make up 42% of the total number of 30 year loans. (TD Bank offers up its Right Step Program as an alternative to FHA-backed loans.)

 

If I told you that there is mounting evidence that the nine year slide in the homeownership rate is nearing an end, would you believe me? Our dog, Cole, just shook his head. What if I told you that people who are employed by Wells Fargo, and who spend their days toiling away, crushing and processing housing numbers with the brute strength of an Olympic skater (think speed skating, not ice dancing) were the ones who claim that figure is accurate, would that make you a believer? Despite mitigating expectations entering the New Year (after slow December numbers and downward revisions for Q4) Wells' Economic team has assembled a very good February '14 Housing Chartbook. They write, "Despite diminished expectations, we do not believe the underlying fundamentals of the housing recovery have suddenly taken a turn for the worse. We have long held that the housing recovery would be a long, difficult slog and now that investors appear to be backing away from the market, it has become abundantly clear how modestly the underlying fundamentals have actually improved." While I wouldn't categorize their view as 'bullish', I would say they are cautiously-optimistic, in the face of economic recovery.

 The banking mergers continue unabated, although one recently announced deal was cancelled (Ohio's deal where the Guernsey Bank was going to acquire The Ohio State Bank). Citizens Business Bank ($6.6B, CA) will acquire American Security Bank ($426mm, CA) for $57mm in cash or about 1.33x tangible book value. Regulators closed St. Francis Campus Employees Credit Union ($51mm, MN) and sold it to Central Minnesota Credit Union ($759mm, MN). First Financial Holdings ($8.0B, SC) said it will consolidate its five banking divisions under the single name of South Sate Bank and change the holding company name to South State Corp. The banking divisions are First Federal Bank, Community Bank & Trust, The Savannah Bank, North Carolina Bank and Trust and South Carolina Bank and Trust. North Shore Bank, a Co-operative Bank ($474mm, MA) will acquire Saugusbank, a Co-operative Bank ($208mm, MA) for an undisclosed sum. Stockman Bank of Montana ($2.6B, MT) will acquire Basin State Bank ($157mm, MT) for an undisclosed sum. And Iberiabank ($13.1B, LA) will acquire First Private Bank of Texas ($350mm, TX) for $64mm, or about 1.64x tangible book. First Federal Bank of the Midwest ($2.0B, OH) will acquire First Community Bank ($102mm, OH) for $12.9mm in cash.

 

Rates continue to waffle around, up a little, down a little. Yesterday we had a fair amount of news, most of it weak and so improved bond prices initially. January's Housing Starts declined 16% to 880K units, far below the consensus of 950K although the December data was revised higher by 49K units. Building Permits fell 5.4% to 937K, below the consensus of 980K. Analysts continued to talk about the bad weather in parts of the nation. We also learned that inflation at the producer level continues to not be a problem, despite what many "experts" thought would happen with the Fed's Quantitative Easing. Producer prices are up a little over 1% versus a year ago.

 Besides the bad housing stats, perhaps of more importance were the Minutes from the January 29 Fed Meeting. Generally, the Fed appears to be content with gradually scaling back purchases and providing less stimulus in the future assuming the economy continues to muddle along. So after a little rally in the morning, after the Minutes the 10-yr, and agency MBS prices, worsened between .125 and .250.

****Government surveyors came to Ole's farm in the fall and asked if they could do some surveying. Ole agreed, and Lena even served them a nice meal at noon time.

The next spring, the two surveyors stopped by and told Ole, "Because you were so kind to us, we wanted to give you this bad news in person instead of by letter."

Ole replied, "What's the bad news?"

The surveyors stated, "Well, after our work here, we discovered your farm is not in Minnesota but is actually in Wisconsin!"

Ole looked at Lena and said, "That's the best news I have heard in a long time. I just told Lena this morning that I don't think I can take another winter in Minnesota."****

 

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