Proposed AMC legislation; Jumbo Production Forecast Falls; FBI investigating flood maps

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There has been a lot of appraisal news in recent weeks, the most important perhaps being that six government agencies issued a proposed rule that would implement minimum requirements for state registration and supervision of appraisal management companies (AMCs). Just so we're clear, an AMC is an entity that serves as an intermediary between appraisers and lenders and provides appraisal management services. In accordance with section 1124 of Title XI of the Financial Institution Reform, Recovery, and Enforcement Act of 1989, as added by section 1473 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the minimum requirements in the proposed rule would apply to states that elect to establish an appraiser certifying and licensing agency with the authority to register and supervise AMCs.  

The proposed rule would not compel a state to establish an AMC registration and supervision program, and there is no penalty imposed on a state that does not establish a regulatory structure for AMCs. However, an AMC is barred by Section 1124 from providing appraisal management services for federally related transactions in a state that has not established such a regulatory structure. Under the proposed rule, participating states would require that an AMC register in the state and be subject to its supervision, use only state-certified or licensed appraisers for federally related transactions, such as real estate-related financial transactions overseen by a federal financial institution regulatory agency that require appraiser services, require that appraisals comply with the Uniform Standards of Professional Appraisal Practice, and so on - over a dozen more requirements. 

The proposed rule would provide participating states 36 months after its effective date to implement the minimum requirements. It certainly has some heavy-weight backers: the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Consumer Financial Protection Bureau (CFPB), the Federal Housing Finance Agency (FHFA), and the National Credit Union Administration (NCUA). The public will have 60 days to review and comment on the proposal. Publication of the proposal in the Federal Register is expected shortly, but for more visit AMCChanges. 

Mike Ousley with Direct Valuation Solutions writes, "In the original Dodd-Frank Act there were provisions that generally followed the new proposed rule for participating states to register AMCs, however, it was generally perceived that the states had 36 months to establish a supervision program that would comply with Dodd-Frank.  What's interesting about this proposed rule is the following: 'The proposed rule would not compel a state to establish an AMC registration and supervision program, and there is no penalty imposed on a state that does not establish a regulatory structure for AMCs. However, an AMC is barred by section 1124 from providing appraisal management services for federally related transactions in a state that has not established such a regulatory structure.' One could theorize that certain state appraisal regulatory agencies, many that are run by independent appraisers upset that AMCs even exist, would push to have their state opt out of AMC regulation and supervision, thus barring AMCs from all federally related transactions within their state. Lenders active in those states that had relied upon AMCs to manage the appraisal assignment and management process would then be forced to either establish an affiliate AMC and deal with the CFPB rules on affiliate charges as related to qualified mortgages and the 3% points and fees calculation, or contract directly with appraisers within those states by utilizing a platform such as Direct Valuation Solutions to assign, track and deliver appraisals for federally related transactions. The AMCs that fought the original registration and supervision by states may now be forced to actually embrace and push for more state level oversight of their activities in order to not get left out entirely." 

Mike Simmons, with Axis Appraisal Management, wrote, "Kudos for noting one of the standout provisions that allows states, without penalty, to opt out of establishing an AMC registration and supervision program. What's noteworthy is that while those states that elect that path won't be penalized, their citizenry will. Since AMC's will be proscribed under Section 1124 from providing management services, borrowers will either be limited in their choices of loans and lenders, or face increase costs from having a shorter list of lenders invest in building and managing their own panels in what will be a small number of states. Since there are 38 states that currently have AMC laws, perhaps this an elliptical way for the rule to encourage 100% participation? Given the fact that states benefit financially from the fees levied on AMC's for maintaining such oversight, and that they can and often do impose higher standards versus the new federal rule, we'd be surprised at less than full participation. For those of us who truly embody service in this era of increased regulation, the contribution we add to lenders, appraisers, consumers and their communities is both significant and valuable."

Hey, what company would rather do 4 loans for $200k each or 1 loan for $800k? It is easy to make the argument that doing one loan for the same amount as the others combined requires less time and cost, and limits the odds of future problems. That debate aside, independent mortgage LOs continuing to "complain" about the rates offered by banks like Wells Fargo on their jumbo loans - but hey, if I am a bank, I'd rather only service one $800k loan than four $200k loans with lower rates. And research staffs are cutting their estimates of the total jumbo biz for 2014, which is really too bad for the scores of hedge funds and money managers investing money into thinking they're going to be next coolest thing in jumbo loans. "Demand from banks for jumbo loans prompted JPMorgan Chase & Co. analysts this month to lower their forecast for 2014 issuance of non-agency, or private label, securities to $5 billion to $10 billion, from about $20 billion." And just to bring you up to date, Redwood Trust issued a new MBS for $342 million.

 

Flood insurance legislation has been in the news, and now the FBI is investigating flood maps. Darren M. contributes, "Interesting recent research into FEMA flood map changes."

 

Here we are, on the last day of the first quarter, staring at a new week of economic news - and who knows what might happen overseas! Today is the Chicago Purchasing Manager's Survey, tomorrow is the ISM Manufacturing Index (from purchasing managers of 300 manufacturing firms about general trends) and Construction Spending, Wednesday are the ADP employment numbers (always of questionable predictive ability for Friday's employment data) and Factory Orders. Thursday we'll find have Initial Jobless Claims and some trade balance figures. On Friday, April 4^th, we'll have the usual series of employment data, arguably the most important U.S. data of the month. For numbers in the early going, the 10-yr closed Friday at a yield of 2.71% but this morning is up to 2.75% and agency MBS prices are worse about .125.

  

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The CFPB on payday lending & FCRA; Focus on 2nd lien; Are we talking not enough or too much?

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As I have written in the past, payday lending has been, and will continue to be, the focus du jour of the CFPB. The Bureau has been building a case against what it sees as, not only a pervasive problem, but a systemic problem as well. It is expected that the Bureau, will issue a notice of proposed rulemaking in which it concludes that repeated payday loan borrowing is "unfair" or "abusive" under the Dodd-Frank Act. On the same day of Director Cordray's speech at a field hearing on the issue, the CFPB released a payday lending report, in which it addressed "loan sequencing," which ultimately is at the heart of the issue. Ballard Spahr writes, " In conjunction with a hearing in Nashville, the CFPB Office of Research has released another payday lending report, this one focused on measuring "loan sequences," which it defines as "a series of loans taken out within 14 days of repayment of a prior loan." Specifically, the CFPB considers a renewal to mean either rolling over a loan for a fee or re-borrowing within 14 days after repaying a loan. The Bureau likely will use this new, broad definition of "renewal" to prevent consumers from repeatedly borrowing within the same pay period that they repay a prior loan." Many expect the CFPB will move forward with their rulemaking efforts irrespective of alternative credit options, which may be available to payday consumers. Director Cordray's remarks.

I'm not sure I'd want to be reminded twice by the CFPB to do anything, let alone be in compliance of the Fair Credit Reporting Act (FCRA). But such appears to be the case with the Agencies recent bulletin. Back in September, the CFPB released a bulletin to companies that furnish information to consumer reporting agencies (CRA) reminding them of their obligation under the FCRA to investigate consumer disputes forwarded by a CRA and that they have an obligation to "review all relevant information" relating to the dispute; warning that it will take "appropriate supervisory and enforcement actions to address furnisher violations of the FCRA or other federal consumer financial laws, including requiring restitution to harmed consumers." In this most recent bulletin, the CFPB yet again reminds such business' of their obligation to remain compliant under the FCRA, and to investigate disputed information referred to them and it is not sufficient under the requirements of the FCRA to simply direct the consumer reporting agency to delete the item without first conducting an investigation.

MountainView Capital Group spread the word that "Second Lien and HELOC Demand Exceeds Supply in Secondary Market". As veteran LOs and industry observers can predict, a lot of homeowners with very low fixed-rate 1^st liens are going to want to refinance out of them, and the demand for 2^nd mortgages (HELOCs, TDs, whatever) will only increase as homes appreciate. MountainView says, "Very few packages of home equity loans, including second liens and home equity lines of credit, were offered in the secondary market during 2013, according to a market activity analysis by residential whole loan sales advisor MountainView Capital Group. The lack of offerings was in spite of investor demand and an uptick in new origination. 'Second lien trading activity during 2013 was light and down from 2012 levels, both in total unpaid principal balance and number of transactions,' said Jonas Roth, a managing director at MountainView Capital Group and an author on the company's latest market activity analysis. 'This was primarily due to a finite number of sellers, and 2014 looks like more of the same,' added Roth." MountainView saw its share of second lien deals, but the report notes that, "Non-performing second liens had higher demand than performing second liens during 2013. However, large financial institutions, the major holders of non-performing second liens, were unmotivated to sell these assets, even though massive amounts are migrating to an out of statute category...Bright spots for 2014 are that there are more niche buyers with state-specific inquiries, significantly more capital on the sidelines looking for product, and stronger pricing versus what we have seen in the past," said Roth."

The report finished up with, "Pricing for performing second liens with life of loan clean pay histories is generally in the mid-60s to low 70s as a percentage of UPB. Additionally, there are a few buyers who have paid into the 80s for specific characteristics such as higher coupon, lower combined loan-to-value percentages, and overall larger pool sizes. Re-performing second liens trade in a wider range: from the low 20s to the 50s, depending on consistency of cash flows and other favorable pool characteristics. Secured, non-performing second lien loans trade between one percent and five percent of current UPB. The high end of the range would have loans that include attractive first lien statuses and CLTVs, low bankruptcy percentages, and favorable geography. Unsecured, non-performing seconds trade in the 10 to 50 basis point range. Higher bankruptcy percentages and out of statute loans are the reasons pricing continues to fall."

Using a FICO credit score of 650, if that is the line drawn in the sand for "subprime", which is arguable, about 15 per cent of Helocs entering the repayment period over the next five years are considered subprime, according to the OCC. Per Kelly Kockos, head of home equity at Wells Fargo, the biggest originator of such loans, "The bulk of the customers are choosing to enter their repayment period" rather than refinance.

Thursday rates dropped again with the yield on the 10-yr. heading back to 2.67%. Traders reported the interest in buying U.S. fixed income securities to the heightened tensions related to Ukraine and Russia. Once again, we are seeing events overseas determining our rates, and once again, when tensions lessen in a peaceful way, we are exposed to rates moving higher. But on top of that supply of MBS is lower than the demand, which also helped push prices higher and rates lower. (Yesterday's report from the NYFRB showed agency MBS purchases totaled $10.8 billion for the week ending March 26, or $2.16 billion per day on average. With another $5 billion in tapering starting in April, buying for that month is estimated to ease slightly to an average of $2 billion per day.) 

For housing news, the National Association of Realtors released its monthly Pending Home Sales Index for February which was not only weaker than expected but it was its eighth consecutive decline and lowest level since October 2011. But as with any housing news, one must wonder if it is due to real estate slowing or a lack of properties available for sale. 

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Executive Rate Market Report

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Weekly jobless claims were better than expected; -10K to a low 311K filings, continuing claims also fell to 2.82 nil from 2.87 mil last week. The four-week average of claims, a less-volatile measure than the weekly figure, fell to 311,750, the lowest since Sept. 28, from 327,250 in the prior week. On the March employment report out next Friday, the current early estimate is for an increase of 190K after increasing 175K in Feb.

Q4 final GDP was expected at +2.7% from +2.4% on the preliminary report last month; it was revised better to +2.6%, according to the Commerce Dept. the increase in GDP was most due to an increase in spending for health care (ACA).  

More strong news from Britain; retail sales in the country were up 1.7% in Feb from Jan (-2.0%); the increase in sales was three times higher than analysts were predicting, yr/yr sales were up 3.7%.

Prior to the 8:30 data this morning the US stock indexes were trading better, by 9:00 however the key indexes had reversed and were trading weaker. When does better economic data generate selling in equity markets? When the strength of the economic outlook leads to increased fears that interest rates will be raised sooner rather than later. Janet Yellen made it clear a week ago that the Fed is now turning its attention to increasing rates rather than the last four years of supporting stock markets with almost zero interest rates. Today’s better claims and improving conditions in some of the EU economies took a little wind out of traders betting on a better stock market today. It is way too early today to predict how stocks will end the session but another day like yesterday cannot be ruled out (the DJIA ended down 99 points).

Feb pending home sales reported by NAR at 10:00 was expected to be down 0.8% from Jan; as reported sales were down 0.8% to the lowest level since Oct 2011; yr/yr down 10.5% and the 8th straight decline in pending home sales in a row.

This afternoon at 1:00 Treasury finishes this week’s borrowing with $29B of 7 yr notes. Yesterday Treasury sold $35B of 5s with one of the strongest demands in recent years; expect another well bid auction again today but likely not as strong as the 5.

Tuesday the March consumer confidence index was at a six year high. Bloomberg has another measurement called the Bloomberg Consumer Comfort index; out this morning and the lowest level of comfort in seven weeks. The index fell for a second week, to minus 31.5 in the period ended March 23 from minus 29. For the first time since early February, all three components of the gauge, which also includes measures of the buying climate and personal finances, decreased in the same week. Which one is the correct one? Or are neither correct?

The 10 yr note is at a very key level at 2.70%, since late January each time the 10 cracked 2.70% it didn’t last long before the rate moved back to the 2.77% level. Support for US interest rates is coming from some safety trades on the continuing Russia/US threats over economic sanctions and the remote possibility that Russia will invade Ukraine to grab more territory. Support also coming from the weakening stock markets. Neither supports have much teeth though; the wider outlook that the Fed will end monthly buying of MBSs and treasuries and move to begin increasing short term rates sooner than what had been thought until Yellen’s comments last week are going to keep interest rates from declining much. The technicals are still holding essentially neutral readings; although the 10 today is below its 20, 40 and 100 day averages, the current level is at critical chart resistance.

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Have & Have-not" Gap Widening; More update on MI changes

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Whenever I riffle through my rich neighbor's trash cans looking for paystubs and trying to figure out how much money they make, the motion light comes on and I have to run away. Seriously, I continually hear from underwriters and LOs about how not only is the gap between the "haves and the have-nots" is widening but about how people driving fancy cars and living in fancy houses have nearly no savings. As one veteran broker wrote to me, "Welcome to what we see daily. It is my experience dealing with higher net worth people that this paycheck-to-paycheck group is rapidly growing. The number of people we see who are commissioned or self-employed who have taken a 50% pay cut over the past 4+ years is staggering. At the time they had DTIs below 25 and are now living pay check to pay check, and can't sell their house for a number of reasons. For many the rent would cost more even for a smaller home." The mainstream press has picked up on the story.

Yesterday the commentary discussed MI, and the ability, or lack thereof, of borrowers to have the servicer remove it. Michael U. contributes, "The answer you got on MI was good but it was missing one component. For less than 2 years of ownership, if you can prove that you made dollar for dollar improvements that bring the property down to 75% LTV, MI can drop off. Our servicing department quotes this to clients and we are following agency guidelines. In his client's case, as the rep from MGIC stated, after 2 years Ocwen will likely drop it if they can prove a 78% LTV with an appraisal at the client's cost."

And Scott D. chimed in, "One clarification of the Homeowners Protection Act that is often overlooked but is terribly important:  the PMI will automatically be dropped when the loan reaches 78% of the original value through amortization of its scheduled payments (which means that if a borrower prepays, the prepayments are ignored).  99% of mortgage professionals never knew that it's based on the scheduled payments not the actual payments. 'B. Automatic Termination. The Act requires a servicer to automatically terminate PMI for residential mortgage transactions on the date that: the principal balance of the mortgage is first scheduled to reach 78 percent of the original value of the secured property (based solely on the initial amortization schedule in the case of a fixed rate loan or on the amortization schedule then in effect in the case of an adjustable rate loan, irrespective of the outstanding balance), if the borrower is current; or if the borrower is not current on that date, on the first day of the first month following the date that the borrower becomes current (12 USC 4902(b)).'"

We have a lot of home sales information seemingly coming at us every week. Steve Kaye with Catalyst Lending reminds us, "Regarding the information on anemic home sales that is periodically released, ('One reason existing home sales are so anemic is because few homeowners can afford to sell. There are roughly 75 million owner-occupied households, of which 10 million are underwater and 10 million have insufficient equity in their homes to afford a down payment on a new home. So 27% of all owner-occupied homes are effectively off limits under standard loan programs. As such, the 5 million expected home sales this year, 10% of the available stock, is good,' per economist Dr. Elliot Eisenberg.) Another factor that few include in this conversation is the millions of former homeowners who fell victim to either foreclosure or short sale, thus removing them from the market, at least for a while. The housing market thrives on the 'move up' buyer and we have literally removed this sector from the marketplace (or, rather, they removed themselves). Combine this with the 27% of 'off limits' homeowners, and one can see how home sales will more than likely continue to trickle more than pour for the next few years at least." Thanks Steve! 

Sure enough, New Home Sales dropped 3.3% in February to 440k, a five-month low. You can blame it on the weather, rising mortgage rates & costs, or whatever, but year-over-year sales (Feb 2014 vs Feb 2013 in this case) were negative for the first time since September 2011. New home sales represent about 10% of all home purchases.  The median price for a new home sold in February fell 1.2% from the same period a year earlier to $261,800, and the average sales price was $317,500.  There were 189,000 new homes for sale at the end of February, which represents a supply of 5.2 months at the current sales rate.

We also learned Tuesday morning that the Conference Board's index increased to 82.3 in March, exceeding all estimates and the highest since January 2008, from 78.3 in February.  And the S&P/Case-Shiller, with its two-month lag, showed that the pace of home price gains slowed. Hey, no tree grows to the moon, right? "The 20-city home value index cities advanced in the year to January at the slowest pace since August." Better than going the other way, right?

This morning we've already had the MBA's application numbers. (I guess those guys get up earlier than everyone else, since their number comes out every Wednesday at 4AM PST.) The average number of mortgage applications slid 3.5% on a seasonally adjusted basis from last week's revised level. Application volume has now dropped in five of the past six weeks according to the MBA. (Some of the stronger companies out there, however, are bucking that trend - good for them!) We've also had the volatile Durable Goods number for February. Expected +1.0 from -1.0 last, it was actually +2.2% with January revised to -1.3%. There are two Treasury auctions on tap: a $13 billion 2-year floating rate note and a $35 billion 5-year note. In the early going rates are nearly unchanged: we had a 2.74% close on the 10-yr yield Tuesday and it is 2.75% this morning; agency MBS prices are worse a smidgeon.

 

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Dropping MI and MI master Policies; FTC Guidance on Background Checks

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Huh? Did someone say baseball season is here? Here's 18 seconds of non-mortgage humor

 

Dave McGill, a senior AE with UG, mentioned that “all mortgage insurers are required by the GSEs to establish new master policies that will go into effect on July 1st of this year. The GSEs are requiring standardization of many aspects of these new master policies, including rescission relief after 12 months on full file underwrites (i.e. files that are submitted to and underwritten by the MI company on a non-delegated basis) and relief after 36 months on delegated files where the MI piece is underwritten by the lender. These and other required changes will establish a more common master policy among all MI companies, thus eliminating much of the variance that we see among the different policies that are in effect today." Thanks Dave!

So where do standardized uniform master policies leave MI companies trying to differentiate themselves in the business? Turn times, service, paying claims immediately jump to mind. And companies have personnel or roles that others don't, of course. For example, Arch MI has a dedicated economist - Ralph DeFranco, Ph.D. - whereas other MI companies do not. I am sure they'll all figure it out...

While I am yammering on about MI, here's a recent note: "My client refinanced and the resulting LTV was approximately 85% so he had a private mortgage insurance payment. That was over a year ago and the homes are appraising quite a bit higher now. Due to appreciation he inquired about having the PMI dropped. But his servicer Ocwen sent two letters basically saying that it will not consider a current value that considers market conditions such as appreciation. Is this normal or legal?"

Rather than suggest something that would be in the realm of common sense, I asked a contact at MGIC. She replied, "Ocwen is not obligated to drop the MI until the loan meets the requirement of the Home Owners Protection Act (HPA) which generally requires that the servicer drop MI coverage once the loan amortizes to 78% of the original value. (There are some caveats depending on the original loan type.) Aside from that, it's really up to the servicer. Most servicers follow agency standards and will consider dropping MI coverage when the value (appreciated) reaches 20% with proof of equity AND two years payments, as agreed. But there is no law requiring that they drop it. The borrower could refinance into an uninsured loan or wait for the loan to amortize to 78% (with an 85% loan, that won't take too long). MGIC has a QuickLink on our homepage for MI cancellation at MGIC. There's a good consumer brochure that can be emailed as well as a detailed explanation about the HPA."

It's been said that it's hard to find good help, or at least that's what my wife tells me when I load the dishwasher incorrectly (if it fits, it's goin' in!). HR departments are usually tasked with the due diligence process of prospective employees, and in the process normally run some kind of background profile. Recently the Federal Trade Commission and the Equal Employment Opportunity Commission have issued guidance on doing background checks. Any time you use an applicant's or employee's background information to make an employment decision, regardless of how you got the information, you must comply with federal laws that protect applicants and employees from discrimination. That includes discrimination based on race, color, national origin, sex, or religion; disability; genetic information (including family medical history); and age (40 or older). The joint publication covers areas such as the use, and disposal of acquired information, along with how it can be used to arrive at employment decisions. The guidance can be found here.

In early March, the agencies issues the final Dodd-Frank Act stress test guidance for companies with total consolidated assets between $10 billion and $50 billion, the so-called "medium-sized firms." As most may know, medium-sized companies are required to conduct annual, company-run stress tests under rules issued by the agencies in October 2012 to implement a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act. These companies are required to perform their first stress tests under the Dodd-Frank Act by March 31, 2014. The agencies' stress test rules are flexible to accommodate different risk profiles, sizes, business mixes, market footprints, and complexity for companies in the $10 billion to $50 billion asset range. Consistent with this flexibility, the final guidance describes general supervisory expectations for these companies' Dodd-Frank Act stress tests, and, where appropriate, provides examples of practices that would be consistent with those expectations.

Carrington has lowered its minimum credit requirement to a FICO score of 550 in its wholesale channel, and expanded its guidelines on a number of FHA, VA and USDA loan programs, extending eligibility to more property types and reducing overlays. "In addition to reducing its minimum FICO requirements to 550, Carrington has added to and enhanced a number of its primary product offerings to further complement this strategy and increase its accessibility for the underserved market."

The market didn't really do much exciting on Monday, so once again, I am not going to waste your time explaining why it didn't. But we have a decent chunk of scheduled news today: 9AM EST has the FHFA housing price index and the Case-Shiller house numbers, 10AM EST we'll see New Home Sales for February (468k last) and Consumer Confidence. And the Treasury doesn't want the primary dealers out there to forget about its auction of $32 billion of 2-yr notes. Looking at the numbers, the 10-yr. yield at the close on Monday was 2.73%, and in the early going we're unchanged at 2.73% - and there isn't much change to agency MBS prices.

 

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Bank consolidation continues; The basics of what the servicing sales mean for Lenders

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"The reason the golf pro tells you to keep your head down is so you can't see him laughing." Someone, somewhere, is laughing at the press' focus on "the return" of the subprime lending business. Well, maybe not, but certainly the American public is seeing it in the press.

Over on the banking side of things, consolidation continues. In California ("Eureka"), Grandpoint Bank ($2.0B) will acquire Wedbush Bank ($243mm) for an undisclosed sum. Not to be left out of things, in Texas ("Friendship") CommunityBank of Texas ($2.5B) will acquire Memorial City Bank ($280mm) for an undisclosed sum. In Ohio ("With God, all things are possible"), Westfield Bank FSB ($830mm) will acquire Valley Savings Bank ($128mm) for an undisclosed sum. And in Missouri ("Salus populi suprema lex esto") Commerce Bank ($23B) sold 3 branches to New Era Bank ($263mm) for an undisclosed sum. And investment banker KBW announced that CT's Salisbury Bancorp, Inc. and NY's Riverside Bank have entered into a definitive agreement and plan of merger in an all-stock transaction valued at approximately $28 million. The combined organization expects to have approximately $808 million in total assets, $630 million in total loans and $682 million in total deposits with 13 branch locations across Connecticut, Massachusetts and New York.

Yes, the evolution of the banking industry continues. At least we have the flood bill out of the way. (NAR's president Steve Brown released, "Realtors commend President Obama for signing into law the Homeowner Flood Insurance Affordability Act, H.R. 3370, to curb flood insurance rate hikes for homes and commercial properties...NAR welcomes this law for the relief and protection it will bring to businesses and families nationwide, who are experiencing financial hardship because of the extreme and sudden premium increases triggered by the Biggert-Waters reforms to the National Flood Insurance Program.  We believe the law is a responsible and balanced solution to the skyrocketing rate hikes and will ensure a slow and steady phase in of risk-based increases.")

And who can keep track of the servicing business? Many folks attended the recently held IMN conference on residential mortgage servicing rights (MSRs) in Manhattan. The primary focus of attendees was on the regulatory front and the consensus view was the regulators might slow down the process and increase the costs but MSR transfers were going to continue. Another point that came up regularly was the sharp decline in returns on investing in prime MSRs as the number of participants in that market has increased sharply. Returns on prime MSRs were generally seen as being in the high single digits. Hey, that beats what I'm earning on my bank account!

Seriously, a representative of the CFPB was there (Laurie Maggiano) and went as far as saying that the CFPB's views on many of the changes that are happening in the servicing market, such as sales of excess servicing and servicing advances, is still evolving. Maggiano reiterated that the focus of the CFPB was on the impact that these changes in the market are having on the borrower. It's tough implementing new rules and successfully completed six million modifications! Selling large blocks of servicing is not quick, nor necessarily easy. Starting in 2014 the FHFA has had to approve all transactions over $3 billion in UPB. Interestingly, say people "in the know", it has a different focus from the GSEs so it adds to the time-line to close sales.

What will mortgage servicing look like next year? In five years? I don't know, but I do know that everything will change, in one way or another; from the interaction with the customer, to operational responsibilities, to information systems, to accounting valuation, to trading, it will all be conditioned to comply with governmental oversight. Last month CFPB Deputy Director Steven Antonakes, at the MBA's National Mortgage Servicing Conference & Expo gave a strongly worded speech in which he stressed compliance and industry expectations. Mr. Antonakes stated, "Nearly eight years have passed and I remain deeply disappointed by the lack of progress the mortgage servicing industry has made. For a man who has spent the last 24 years, the bulk of his career, as a banking regulator, his words should not be undersold. With "the fundamental rules have changed forever" and that "business as usual has changed in mortgage servicing," his comments ring loud and clear. The Deputy Director explained the CFPB's expectations to servicers: reach out to the customer, monitor transfers closely, honor any modifications made by prior servicers, forced place insurance as a last resort.

But the servicing buyers are out there. Prime MSR sales are very competitive with 15-25 bidders, 8 of which are very competitive. As a result returns on prime MSRs investments have contracted from the mid-to-high teens a couple of years ago to high single digits currently. And while we're on numbers, one driver of MSR sales currently is the high capital consumption with new MSRs being booked in the 110 basis point range. This makes origination meaningfully cash flow negative. A year ago MSRs were being booked at smaller levels and gain-on-sale margins were much higher so there was less cash flow pressure on originators.

What do these flow and bulk deals mean? Well, for one, many mortgage banks that thought they would hold onto their servicing for decades, and the steady cash flow from the asset, have found that they needed the cash now. Tax implications aside, they need to sell the servicing. Secondly, and in a related issue, the sale of servicing effectively bypasses the traditional aggregators. My capital markets gal at fictional "Chrisman Mortgage" may not like the SRP values that she is seeing by selling to Wells, or Chase, or by selling to the agencies and simultaneously spinning off the servicing to one of the agency's servicing partners. So we hold the servicing and sell it through bulk sales, or we sign a deal with a non-bank buyer to buy it on a flow basis. Either way, the implications to the traditional bank/aggregator correspondent business model are obvious, and not good for that channel. But how much experience do new servicers have in evaluating the cost to service? Time will tell, and although the marginal cost to service loans goes down as the portfolio increases, the regulatory and compliance costs are only expected to increase.

President Truman famously called for a one-handed economist, so he would not have to hear, "on the other hand..." But there continues to be a lot of conflicting information about the U.S. economy. And we have certainly learned, through developments in China, Europe, and Russia, that our numbers aren't the only determinant of rates.  

But this week we have a fair amount of scheduled U.S. news that could nudge rates one way or the other. As I head to Denver this morning there is zip; tomorrow is Personal Income and Personal Spending/Consumption, and Consumer Confidence. There is also a slew of housing numbers: the House Price Index, S&P-Case Shiller numbers, and New Home Sales. On Wednesday, March 26^th, Durable Goods Orders will reflect the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. Investors watch this as durable goods is a leading indicator of industrial production and capital spending. On Thursday Gross Domestic Product (GDP) will represent the total value of the country's output; we'll also have Initial Jobless Claims and Pending Home sales.

 Here's the one for and about economists, and efficient market theory.

Two economists are walking down the street when ones sees a hundred dollar bill and points it out to his friend. "Is that a $100 bill lying in the gutter?"
"No" his friend replies. "If it were a $100 bill, someone would have picked it up already."
So they walk on by.

 

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Is the LO Occupation at Risk? Securitizing Rental Properties; CFPB on YouTube

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It is so sad that America ranks 25th in the world in math. But at least we're still in the top 10. Speaking of math, the Census Bureau tells us that the wealthiest 10% of American households own 80% of all US stocks (12.1 million households out of 121 million).  Since the total market capitalization of the US stock market is roughly $23 trillion, it suggests that $18.4 trillion of stocks is owned by just 12.1 million households or an average of $1.5 million of equities for every wealthy household.

The last time I used a travel agent was in 1986, when I was grappling with five weeks through the South Pacific (including New Guinea). The travel agent occupation has suffered due to computers, the internet, and consumers going directly to the carrier. Is the LO occupation at risk? Does a company like Bank of America or Wells Fargo really need 8-10,000 of them - each? One can make that argument, and this Bloomberg article mentions LOs specifically. 

It's been said that living in major metropolitan areas isn't easy; as one person I know who lives in the heart of San Francisco put it, "you have to want to live here, nothing is easy; from parking to buying groceries, it's always difficult." It's a life-style choice for sure, one which can exclude home ownership, especially for first time buyers who face median home prices in SF of $925k. However, San Francisco recently announced a program to promote homeownership within the city limits - DAPs are not dead, and open doors for would-be transplants. The city is now willing to lend certain first-time home buyers up to $200,000 toward the down payment on their first house or condominium. SF Gate writes, "The program provides down-payment help in the form of a loan to first-time buyers of market-rate homes who make up to 120 percent of the area's median income. The city runs similar programs for people buying below-market-rate homes and for others such as police officers and firefighters." When the homeowner sells or refinances, the loan has to be paid off along with a percentage of the property's appreciation, depending on how much of the purchase price the city covered.

Whether it is San Francisco, or Phoenix, or Miami, there are plenty of rentals out there. Reuters has an article on securitizing rental properties: a potential Colony Capital securitization of single-family rental properties. Colony Financial owns approximately 25% of the equity in Colony American Homes, which comprises approximately 33% of CLNY's equity. Many analysts view securitization as a positive catalyst as it provides a source of low-cost capital and mechanism for investors to "get credit for" home price appreciation. For example, assuming a 6% unlevered cash flow yield, we believe returns on equity could exceed 15% (depending on execution, including the advance rate and cost of funds). This would be the second such securitization in the sector following Blackstone's Invitation Homes securitization in October, which was well-received. According to the article, JP Morgan and Credit Suisse may begin marketing approximately $500 million of securities today and into next week.

I know a lot of workers around the country are blocked from watching YouTube videos while at work. While the temptation is too great for some not to watch, the rest of us use the medium for its intended purpose: to keep abreast of CFPB field hearings and bureau educational videos. The CFPB's page currently has over seventy videos ranging from introductory compliance videos, to messages from Director Cordray.

Generally, 'open source' refers to a computer program in which the source code is available to the general public for use and/or modification from its original design. Contrary to programs you may purchase and run on your desktop, which are normally 'closed source', 'open source' software is at the opposite end of the spectrum. The source code is included with the compiled version and modification or customization is actually encouraged (Linux operating system is an example of open source). I bring this up due in large part because the CFPB has published open source code to allow lenders to integrate the web-based tool into lender applications or websites, in the hopes banks will build and customize web-based tools for consumer use. Ballard Spahr writes, "In the press release, the CFPB notes that the web-based tool can be used to find the 10 closest HUD-approved housing counselors to a consumer's location and print or save the results...Also, the press release states that lenders can use the tool to comply with housing counseling requirements under Dodd-Frank." As Ballard points out, it is unclear at the moment whether using this tool would bring about compliance, or "safe harbor", for lenders who utilize the source code to build the tool into their websites or applications. The CFPB on GitHub.

 

As a reminder, the CFPB announced it will begin the rulemaking process for changes to the reporting requirements under the Home Mortgage Disclosure Act (HMDA). The agency will assemble a Small Business Review Panel, seeking early feedback on ways to improve HMDA requirements; however, early-on, it is apparent that HMDA data will ultimately become a greater area of focus with regulators in the future. The announcement included possible changes to the following areas: making lenders report information that will help regulators gauge access to credit in the mortgage market (explaining rejected loan apps, whether the lender considered the loan to be a Qualified Mortgage,  borrower's DTI); requiring lenders to report additional information that can alert regulators to problems in the industry (length of the loan, total points and fees, length of any teaser or introductory interest rate, applicant or borrower's age and credit score); requiring financial institutions to report additional underwriting and pricing information; streamlining HMDA reporting to align with existing data collection methods already used by the mortgage industry to collect information on processing, underwriting, loan pricing, and secondary market sales. For the agency's official news visit HMDA.

 Plenty of folks in the industry are waiting for the CFPB to level financial penalties on originators, since they, in simple terms, are viewed as being responsible for their company's compensation plans. As a reminder, back in December, the CFPB ordered GE CareCredit to refund $34.1M for deceptive health-care credit card enrollments. CareCredit offers personal lines of credit for health-care services, including dental, cosmetic, vision, and veterinary care. So who is the primary driver of this finance, you ask? Well, doctor and dentist offices, of course...Timeo Danaos et dona ferentes. Currently, the product is sold by more than 175k enrolled providers across the country, and there are approximately 4 million active cardholders. According to the CFPB, roughly 85 percent of CareCredit borrowers were placed in a deferred-interest financing plan. Under this "no interest if paid in full" plan, consumers make monthly payments while CareCredit assesses 26.99 percent annual interest on a consumer's balance throughout a promotional period, which can range from six to 24 months. If any portion of the balance has not been paid when the promotional period ends, the consumer becomes liable for all of the accrued interest. The bureau claims that such lending programs, have deceptive enrollment processes, inadequate disclosures, and poorly trained staffs. So the CFPB, keeping in-line with their belief that an educated consumer creates low market volatility (ok I just made that up, but it's not too far off) has posted "What's the deal with health care credit cards?"

Sliding over to the markets, it is becoming harder to argue that the jobs market is flailing. The number of Americans filing applications for unemployment benefits held last week near the lowest level in almost four months, a sign the labor market continues to strengthen. That was enough to push rates higher, and agency MBS prices were pressured most of the day. Analysts continued to ruminate, and act on, thoughts that Fed Chair Yellen saying rate hikes could start six months after the end of QE. That is quite a shift from today's environment in which the New York Federal Reserve Bank is buying $2.16 billion per day of agency MBS. 

For numbers, agency MBS prices were worse than Wednesday by about .125; the yield on the U.S. 10-yr T-note ended Thursday at 2.77%. While the Malaysian airplane disappearance is setting records for a news story that has no news, not much happened overnight in the financial markets. In the early going we're unchanged from Thursday's closing levels

 

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Correspondent growth; Fitch analyzes non-QM market & DOJ report on fraud

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 "I named my dog '5 Miles' so that I can legitimately tell people I walk 5 Miles every day."……..Happy Spring!.....

 

The Impac Mortgage Correspondent lending team continues to expand and is adding correspondents. It's a two-step process to become an approved correspondent seller with Impac Mortgage: 1) download and complete the Correspondent Lender Questionnaire (PDF), then 2) email the completed questionnaire to imcorrespondentpackages@impacmail.com. Impac is highlighting its underwriting: "Impac is your underwriting wingman with a full slate of choices available to sellers via a live person, ready to handle questions and give quick answers - aka, you can reach someone. The list of functions they handle includes flexible underwriting options, which are tailored to their customers' requirements, including: Pre-close Underwriting which provides for no PTD or PTF conditions, only those conditions required for purchasing the loan. Clients may also choose to have a Full Underwrite from Impac's underwriting team on any of its programs and products offered, as well as Manual Underwriting for its FHA / VA programs, and full underwriting on both Standard and Streamline 203k loans to correspondents. Or, feel free to refer any underwriting scenario to Impac Correspondent by email at UWCorrespondent@impacmail.com. 

No one should equate non-QM loans with subprime loans, and every borrower should exhibit the ability to repay. The rating agencies are warming to the non-QM idea, and in an edition of "Consumer Financial Services Watch" K&L Gates' Laurence Platt noted that "Non QM Lending Facilitated by New Fitch Ratings Criteria". Here is the link to the Fitch report. Mr. Platt writes, "Non-QM lending received a big boost this week when Fitch Ratings issued its criteria for analyzing residential mortgage-backed securities under the ATR and QM rules issued by the CFPB. It announced that it would apply a relative 'credit enhancement' adjustment (i.e., extra collateralization) to non-QM loans pooled to back RMBS, but the level of credit enhancement reflects its belief that the risk of massive losses on such loans is relatively slight. In reliance upon required third-party due-diligence reviews, Fitch said that it would assume the accuracy of an originator's designation of loans as 'safe harbor' QM loans, higher-priced QM loans or non-QM loans." 

His letter goes on. "Violations of the ATR requirements can lead to affirmative claims against creditors and defensive claims against assignees for potentially significant monetary damages consisting of actual damages, $4,000 in statutory damages, a refund of finance charges paid at closing, and three years of interest actually paid and attorneys' fees. Concern over the amount of such damages and the potential impact of a borrower claim on a foreclosure action has caused some lenders and purchasers to restrict their loan purchases to loans that are conclusively presumed to satisfy the ATR requirements. The lack of an active securitization market for non-QM loans, however, constrains those who want to participate in this segment of the market but want an ultimate 'take out' for non-QM loans that they make, purchase or finance. 

"Fitch identified a number of 'key ratings drivers' that informed its analysis, only some of which relate to potential performance of the loans. As a threshold matter, any transaction must include adequate representations and warranties, 'robust' enforcement mechanisms and indemnification for breaches. It also will review the originators' and aggregators' processes for ensuring compliance with the ATR rules, both in design and in implementation. Fitch also will require additional credit enhancement for deal structures that deduct expenses from available trust funds rather than from a mortgage pool's net weighted average coupon rate." 

Mr. Platt writes, "But the heart of the analysis relates to the likelihood of losses based on ATR violations resulting in defensive claims against assignees. A rating of a securitization is based in part on estimated cash flows on the loans backing the RMBS. Losses resulting from ATR violations would impact such cash flows unless the loan is repurchased based on a breach of a selling representation and warranty. So the key is trying to model the number of potential claims and the likelihood and severity of losses resulting from such claims. This is where Fitch took a very practical perspective. In determining the probability of an ATR violation, Fitch first looked at the probability of default as determined by its mortgage loan loss model. It limited its analysis to defaults in the first five years of origination, which in its view excluded 40% of defaults that its model predicted would occur, although it decreased the size of this exclusion for short-term, hybrid adjustable-rate loans. It then differentiated between states that require judicial foreclosure and states that permit nonjudicial foreclosure, positing that borrowers in nonjudicial states are less likely to seek counsel and file a claim in court. Also relevant to its analysis is credit quality: it assumes that non-QM 'lite' loans, such as jumbos with debt-to-income ratios only slightly above 43%, pose a lesser risk. Fitch also created assumptions for probability of resolution as a percent of challenges and anticipated legal fees to defend such challenges." 

His note concludes, "The result of this analysis is an assumption that, at least for now when there is not yet any judicial precedent that would provide additional guidance regarding ATR challenges, higher-priced QM loans and non-QM loans '...reflect a low probability/high severity scenario whereby Fitch expects a limited portion of defaulted loans to challenge ATR/HPQM status but that significant legal costs will result.' Interestingly though, it concluded that 'Fitch expects loan modifications to be the most common resolution to ability-to-repay disputes for higher priced QM loans.'"   

Here is some bedtime reading: "Audit of the Department of Justice's Efforts to Address Mortgage Fraud". Unfortunately fraud is not dead in lending (or probably any other business, for that matter), and you can read all about it here. 

Redwood Trust has not issued a non-agency bond since 2013. But that is about to change. (The story also includes an update on other non-agency news.) 

Rates: up some, down some. Yesterday it was up some after the FOMC statement, SEP projections, and Fed Chair Janet Yellen's first press conference. As expected, the Committee announced another $10 billion in tapering, split equally between MBS and Treasuries, while forward guidance was shifted to a qualitative approach from quantitative with the 6.5 percent threshold for the unemployment rate removed. But the Fed turned out to be much more hawkish, a surprise to some given the recent data (much attributed to weather), and analysts opined that there is a strong potential for a Fed rate hike in mid-2015. The 10-year Treasury note was down/worse about .75 in price, and agency MBS prices fell between .5-.625. 

So beginning in April, outright MBS purchases from the Fed will decline to $25 billion from $30 billion. Thomson Reuters writes, "Combined with paydowns, MBS buying is projected to decline from $2.3 billion per day over the last half of March to just over $2 billion in the first half of April. Although supply/Fed-demand technicals remain supportive over this time, it is deteriorating. Currently, originator selling is averaging roughly $1.2 billion recently, but is anticipated to increase as purchase activity strengthens into the spring home buying season." 

Rates were quiet overnight, but today we'll have Initial Jobless Claims, which is expected to increase to 322k from 315k, Existing Home Sales for February, Leading Economic Indicators for February, and the Philly Fed survey for March. At 5AM Hawaii time the Treasury announces details of next week's auctions of 2-, 5- and 7-year notes and 2-year floating rate note (e: $109 billion) and at 7AM HST auctions $13 billion reopened 10-year TIPS. Our risk-free 10-yr T-note closed Wednesday at 2.77% and in the early going is nearly unchanged as are agency MBS prices.

 

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