Defense of VA Fees; Force Place Insurance Update; Overcoming non-QM loan Liabilities

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Suddenly the entire industry seems interested in three things: using the Federal Home Loan Banks as a pseudo-warehouse line, jumbo deals, and force-place insurance. Regarding this last issue, Kate Berry with American Banker wrote an article of interest: "FHFA Should Sue Banks on Force-Placed Insurance: Watchdog". "The Federal Housing Finance Agency should sue force-placed insurers and large banks for inflating prices and generating losses for Fannie Mae and Freddie Mac, the agency's inspector general says. Fannie and Freddie suffered $158 million in 'financial harm' in 2012 alone from reimbursing servicers for 'excessively priced' force-placed insurance. The government-sponsored enterprises reimbursed servicers for $327 million in force-placed insurance premiums last year and for $587 million in premiums from 2009 to 2011, the report found. The 24-page report by the inspector general recommends that the FHFA assess whether to sue insurers and banks to recover damages. The FHFA has agreed to complete an assessment on whether to litigate within a year. Two insurers, Assurant Inc. (AIZ) and QBE Holdings, write more than 90% of force-placed insurance coverage. They priced premiums paid by the GSEs that were 79% above what was considered 'reasonable' to cover claims, the inspector general's report found. Yet the FHFA, as the conservator of Fannie and Freddie, never determined whether to sue to recover damages. FHFA officials 'cited competing priorities, such as finalizing other financial settlements, as the reason for not completing such an assessment,' the report found. Force-placed insurance made headlines in 2011 when mortgage borrowers were hit with hefty premiums, usually after they defaulted and went into foreclosure. The hazard insurance is purchased by the servicer or creditor when a struggling homeowner fails to maintain coverage on the property." 

So let's dig into this a little. The Federal Housing Finance Agency Inspector General conducted an audit on the lender-placed insurance premiums Freddie & Fannie paid on homes that have defaulted in the past several years. In the audit, the FHFA IG found the GSEs suffered $158M of financial harm due to excessively priced lender-placed insurance coverage in 2012 alone. The report states the GSEs paid $914M of insurance premiums during the years 2009-2012. As part of the audit findings, the FHFA IG recommends the FHFA sue the servicers and insurers to recover damages related to the excessive premiums that were charged. Those "in the know" think that if the FHFA were to attempt to recover damages related to excessive fees on lender-placed insurance, we should not expect any potential litigation to be a significant hit to the large banks involved in servicing large delinquent portfolios. But it could have a material impact on special servicers that have a less diversified revenue base and service highly delinquent GSE mortgage portfolios.

Saturday's commentary had a note from an LO about calibrating VA fees with other programs. I received several notes to the contrary. "What am I missing something here? Is the originator forced to provide VA loans? If someone doesn't like the program, don't participate in the program. VA does not say you cannot charge, it says the Vet cannot pay. The seller, realtors, and originators are allowed to cover any fees they want to cover. Maybe LOs don't make as much, but the program is a good one and has been around for a long time. The program is pretty much as it has always been. Don't like it, don't do it." 

And Theresa Springer, CGA, CAPS and Senior Loan Officer and Sales Manager with Eagle Home Mortgage writes, "All I can say to that Arkansas LO that wrote in on VA loans today, is 'SUCK IT UP.' I write many VA loans monthly along with my other loans and if the seller is not going to pay those non-allowables, our company surely will without a peep, so they can send their VA clients our way. These men and women help to keep us free so we CAN write loans and argue with the CFPB and complain about all our issues in a free press and do what we want in our lives FREELY.  I make enough profit on my other loans to cover all my VA loans and then some very nicely, especially with selling the SRP." 

Finally, Guy Keith contributed, "The 'intent' of the VA loan program is to 'help' the veteran, who has served our country and helped preserve our freedoms at the risk of their lives, to buy a home.  The VA program is one of the rewards for their service to our country. This is not a program to make it easier for lenders and affiliates to make their fees. The VA decided that they did not want the veteran to pay certain fees in the loan process. The VA no-no came about where the veteran had no down payment and the seller paid the closing costs which allowed the veteran to buy a home with no money.  Many veterans coming home from military service don't have money for a down payment. The military is not known for paying exorbitant salaries to its soldiers. So helping the veteran buy a home needed to have something in it to help them.  Thus the VA no-no and the limitation on what the veteran can pay. 

"Forward to today's home market and the VA no-no does not work nearly as well since there is a shortage of homes compared to the number of buyers.  Because of this, sellers won't pay for anything right now. That being the case, the only way the non-allowables can be paid it by the lender through premium pricing. It may not seem fair to the lender, but the market drives these things. So in the short term, the veteran pays a slightly higher interest rate (although in some states the 1% the veteran can pay usually is more than enough to pay the non-allowables), but the offset is that their closing costs are several thousand dollars less.  They pay a higher interest rate, but the market is driving this based on supply and demand.  VA rates are always among the lowest available and with no mortgage insurance, even with a slightly higher interest rate to cover these costs; their payment is lower than with any other loan program. Since a termite report and clearance is required on all VA loans, the loan officer needs to communicate with the real estate agent so they know this when they make an offer.  This can definitely be an issue if the seller does not want to pay it. But again, the termite requirement is to protect the veteran.  We may not agree with some of the requirements, but if that's the case, then don't do VA loans." 

Scores of lenders are contemplating doing non-QM loans. One of the major concerns is the potential for future liabilities. "Three companies, Strategic Compliance Partners ('SCP'), VidVerify and Litigation Guard, have laid the groundwork for a solution to assist both borrowers and lenders in overcoming the potential risks posed by the new regulations. The concept, says Ari Karen, SCP's CEO and a principal of the Offit Kurman law firm, 'is basic.' 'The major difference between NonQM and QM loans is that new rules create liabilities on loans that in reality may not necessarily be riskier simply because they fall into the NonQM box. By developing a process which marginalizes and manages that liability up front, we remove the obstacles associated with NonQM or borderline QM loans.' 

"Litigation Guard's QMReview 'closes the gaps left by traditional origination, processing and underwriting protocols that often result in claims against lenders. QMReview educates the borrower at all phases of the loan process, improving the borrower's ability to properly choose a loan, and 'unequivocally ensures that borrowers understand exactly what they are getting and why,' says Karen. It provides safeguards to ensure that lenders and borrowers are 'on the same page throughout the loan process.' Further, the process provides an automated residual income analysis and decision algorithm, relying upon the borrower's actual net income, savings, and realistic spending habits, to determine the borrower's ability to repay. According to Karen, the innovative QMReview process 'will not only minimize the liability for lenders - it will result in a better experience for borrowers and overall better and safer loans.' 

"From a purely legal perspective QMReview relies upon the concept of an independently based and alternative assessment to demonstrate a lenders' good faith belief that the borrower can repay the loan.  This assessment is performed in three distinct phases.  First, there is an independent certification performed by SCP that the lender maintains sufficient compliance infrastructures.  Second, a borrower receives a series of short videos (created by VidVerify and reviewed by SCP) that present information in an understandable manner to assist him or her in making educated decisions and asking the right questions throughout the loan process.  Viewership is tracked to ensure that the borrower has received and reviewed the information. Third, an automated borrower interactive residual income analysis documents and confirms the ability to repay.  It also utilizes creates documentation that prevents potential misrepresentations, omissions, steering, and other harms that have been common fodder for lender lawsuits." For more information contact Chris Tiso (CEO of Litigation Guard), and no, this is not a paid ad. 

Flipping over to the markets, there is no mystery about what the Fed is going to buy in terms of securities. If you ever want to know, check it out for yourself at the Fed's schedule. It is pretty hard to attribute any market move to the Fed's activities when it publishes, in advance, what it is going to buy! The question is more like, "Will originators and MBS holders lock/originate/sell what the Fed wants to buy?" 

We do have a lot of news this week, along with the bond markets closing early Thursday and being closed entirely on Friday. Today we'll have the Chicago Purchasing Manager's survey and Pending Home Sales. Tomorrow we'll have some Manufacturing and Construction Spending numbers. Wednesday we'll have the MBA lock numbers (just ask your lock desk now and spoil the surprise) along with the ADP employment data and Challenger Job Cuts numbers, and Factory Orders. Thursday all ---- breaks loose! The markets are closing early, but ahead of that we have the Trade Balance, weekly Initial Jobless Claims, and change in Nonfarm Payrolls, Unemployment rate, and hourly earnings. Friday the 10-yr closed at 2.53% and in the early going today we're back to 2.51% and agency MBS prices are a shade better.

The last day of the quarter and half way through the year. A short week but a lot of data and Fed speak; the stock market will close at 1:00 on Thursday and markets closed on Friday. In the meantime there are a number of key reports and the June employment data to work through, kind of like cramming for a final exam. Interest rate markets started slightly better this morning with stock indexes a little lower. Not much news over the weekend; the turmoil in Iraq spreading into Syria, the Islamic State of Iraq and al-Sham (ISIS) expanding its foothold in Syria after recent gains in Iraq. Not much reaction to the mid-east mess in our markets, but eyeballs are focused on the events as they unfold.

The DJIA opened -41, NASADAQ -1, S&P -2; 10 yr 2.53% unch and 30 yr MBS prices +6 bps frm Friday’s close.

The first report this week; at 9:45 the June Chicago purchasing mgrs. index, expected at 64.0 frm 65.5 in May, as reported the index was a little lower, at 62.6. There was no noticeable reaction to the weaker index, still well over 50 and still implies expansion. With employment data on the horizon it will take a huge miss on the rest of this week’s data to move markets.

The second report of the week at 10:00; NAR’s May pending home sales (contracts signed but not yet closed), was expected to up 1.0% frm April’s increase of 0.4%. A surprising increase of 6.1%; NAR saying sales increases are being fueled by an increase in inventories.

We don’t expect any significant changes in the stock or bond markets until Wednesday if Janet Yellen rocks the boat in her speech at the IMF conference; most likely she won’t drop any tape bombs though. Thursday’s June employment report is as usual elephant in the room. The status of the economy continues to roil markets, interest rates at low levels suggest the bond market is betting on a weaker 2014 growth that most presently expect to be at about 3.0% to 3.5%; the stock market is worrying but so far no mass selling. Uncertainty keeps stock indexes from taking off in another run higher, the same uncertainty is keeping stocks frm declining. Interest rates at these levels will need additional assurance that the Fed will not increase rates early in 2015 as some Fed officials are now thinking. That assurance will require continual weaker economic outlooks. The initial reaction the stronger May pending home sales already has pushed MS prices 6 bps lower than at 9:30 this morning.

This Week’s Economic Calendar:

Monday:

9:45 am June Chicago Purchasing Mgrs. index (64.0 frm 65.5 in May)

10:00 am May pending home sales (+1.0% frm +0.4% in April)

Tuesday:

10:00 am June ISM manufacturing index (55.6 frm 55.4 in May)

May construction spending (+0.5% frm +0.2% in April)

No Time June auto and truck sales (+16.4 mil frm 16.8 mil in May)

Wednesday:

7:00 am MBA mortgage apps

8:15 am ADP Private jobs in June (+213K, May 179K)

10:00 am May factory orders (-0.3%, +0.7% in April)

11:00 am Janet Yellen at IMF conference

Thursday:

8:30 am weekly jobless claims (314K +2 K)

June unemployment rate (6.3% unchanged frm May)

NFP jobs (+211K)

Private jobs (210K)

Avg. hourly earnings (+0.2%)

May US trade deficit (-$-45.1B)

10:00 am June ISM services sector index (56.2 frm 56.3 in May)

1:00 pm Markets close

PRICES @ 10:20 AM

10 yr note:-1/32 2.54% unch

5 yr note:-1/32 (3 bp) 1.65% +1 bp

2 Yr note: unch 0.47% unch

30 yr bond: +4/32 (12 bp) 3.36% -0.5%

Libor Rates: 1 mo 0.151%; 3 mo 0.234%; 6 mo 0.326%; 1 yr 0.545%

30 yr FNMA 4.0 July: @9:30 106.03 +6 bp (-6 bp frm 9:30 Friday) (-9 bp on 3.5 coupon)

15 yr FNMA 3.0 July: @9:30 103.79 +13 bp (+7 bp frm 9:30 Friday)

30 yr GNMA 4.0 July: @9:30 106.72 +8 bp (-7 bp frm 9:30 Friday)

Dollar/Yen: 101.44 +0.02 yen

Dollar/Euro: $1.3660 +$0.0011

Gold: $1315.20 -$4.80

Crude Oil: $105.57 -$0.17

DJIA: 16,866.77 +14.93

NASDAQ: 4408.81 +10.88

S&P 500: 1963.69 +2.73

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MI Master Policy News; FHA's LEAP Difficulties

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Jeff Lipes notes, "Statistics are like bikinis, they reveal some very interesting information, but hide the most interesting parts." The ABA reports community banks now spend about 15% of revenue on compliance to meet regulatory requirements. True, the cost of doing business for a regulated business does not drive Congress or the CFPB decision-making, but these costs are passed on to the consumer - who can have quite a voice.

On the MI-front, Fannie Mae and Freddie Mac have announced an effective implementation date of October 1, 2014 for new mortgage insurance master policies. U.S. Mortgage Insurers (USMI) noted that, "New master policies provide assurances about the consistent handling and payment of claims and bring greater transparency to contractual protections for lenders and investors with regard to "representations and warranties." This important step forward is a component of meaningful reforms that will help ensure that the industry maintains a strong financial position and meets its obligations." 

Back in March this commentary had a quote from Claudia J. Merkle, an EVP and Chief of Insurance Operations at NMI Holdings, Inc. (National MI) in response to comments about standardized MI master policies, "I'd like to pass along an important distinction about National MI. A good analogy: BMW and Yugo are the same in that they are both cars, but there is a lot of variation between the two. I encourage lenders to be skeptical of any MI firm that openly brags that we are all the same. I have personally been involved with the GSEs and the FHFA through the National MI master policy development process, and although some firms would like to have the market believe that all of the policies are the same, there are some significant differences that will either save or cost the lender real dollars. Later this year, the new MI master policies will be similar to the extent that they all contain the general principles required by FHFA and GSEs, but they are not mandated to be entirely identical." 

I received this note from the Northeast: "Our company strives to comply with the myriad of rules and regulations with which we are faced. We are having difficulty paying our recertification fee on FHA LEAP. Do you know of any tricks to it? It is like the FHA's version of the Obamacare website fiasco." I don't know any tricks, but Karen Garner of the Collingwood Group certainly has the background and current situation nailed down. "For what it is worth, you are in good company.  Everyone is having problems.  The good news is that FHA knows it so the worry over being sanctioned should go away. In my experience the FHA will give guidance about extending the recert IF its staff doesn't get it up and working soon. As I understand it management hopes to have things fixed by the end of June (next week) so if it is not fixed then yes I am sure they will. They have already extended the deadline before because LEAP was not out so I think they will do it again. But to be safe, my suggestion is to try and log in and if you get an error message, print the screen.  I've been in compliance over 30 years and we are all about the paper trail. That way if anything should happen you would have evidence that you tried and it was their system that did not work." Thank you Karen, and here is what has been sent by the FHA: 

"As most lenders are aware, FHA's Lender Electronic Assessment Portal (LEAP) version 3.0 was deployed on May 27, 2014.  While FHA is enthusiastic about the long-term business transformation benefits of LEAP 3.0, we are aware that users are currently having difficulty executing some functions in the system. FHA is working diligently to resolve these issues, and hopes to have LEAP operating at its full capacity as quickly as possible. Lenders facing access issues, particularly with the functionality for providing access to independent public accountants for purposes of recertification functions, should visit the "IPA Registration and Assignment Instructions" on the LEAP information page. For access issues related to certifying officials or other lender functions in LEAP and/or FHA Connection, lenders should access the LEAP 3.0 User Manual. The FHA Connection User Guide can be found here. 

"FHA is also aware of difficulties lenders are encountering in LEAP when adding new branches, making changes to existing branches, and changing Cash Flow Accounts.  FHA is highly focused on correcting these issues, and hopes to have these functions working properly very soon. Finally, FHA is aware of the complications that some lenders have faced in submitting their annual re-certifications in LEAP.  Many of these challenges have now been addressed, and lenders should continue working to meet the June 30 deadline for submitting their recertification packages. Visit the LEAP Information Page or the online resource."

 Donna Beinfeld with Donnashi writes, "The LEAP (Lender Electronic Assessment Portal) will be used not only for new mortgagee applications, but also for the re-certification process and other HUD lender assessment activities. I spoke to a member of the HUD Resource Center and he indicated they are aware of the issues with new applications not being processed because of an error on their end. For lenders who have pending new mortgagee applications the process is as follows. Call the HUD Resource Center (800-225-5342), indicate you are a lender and then press 4, which is for all other questions. They do not have a specific extension for LEAP related questions and issues. The Resource Center individual will take your name, company name, etc., and forward your call to a LEAP specialist. The LEAP specialist can tell you the status of your application. Since payment of your application fee, and other fees related to FHA loans once you are approved are handled through Pay.gov, I highly recommend a company applying to work with HUD registers with www.Pay.gov before they start this process. The information available to the lending community related to LEAP can be found here, or for a PowerPoint on the program go to ApprovedMortgagees.  

 Thomson Reuters reported that Auction.com, the largest online real estate dealer in the US, will stop selling residential mortgage loans. "The company, which made a name selling distressed properties after the financial crisis, came under fire last year in connection with a lawsuit over RMBS loans sold on the site. RMBS bondholders sued Nationstar Mortgage Holdings for selling roughly US$150m in soured securitized home loans on Auction.com without notifying them. EVP Rick Sharga said that the decision to exit the residential loan market was unconnected to the case, which was settled out of court, and based on a desire for growth instead. IFR reports, "It's not that this doesn't work online," he said. "It's just a question of where the best return is...Auctions.com has also been selling bulk pools of soured residential and commercial loans from servicers in an eBay-type auction. It will continue selling commercial real estate loan and properties. It said it sold more than US$7bn in real estate online last year. Auction.com was valued at US$1.2bn in March after Google Capital made a US$50m investment in the platform. Others shareholders include Starwood Capital Group, Starwood Property Trust, Stone Point Capital and funds managed by affiliates of Fortress Investment Group."

 Turning to rates, it almost seems that regardless of the news, rates seem quite comfortable where they are - surprising given the bad news out yesterday. Durable Goods Orders for May fell -1.0%, the first drop since January. And Q1 GDP, in its final number, was -2.9%, below the expected fall of -1.8% and down from second revision of -1.0%. This was the biggest loss since Q1 2009. Analysts were quick to slice and dice the numbers, and when the dust settled it turned out a portion of these dismal numbers can be explained away due to weather and Obamacare! Nonetheless, rates improved slightly with the 10-yr closing at 2.56% and agency MBS prices better by about .125.

 

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Pay Attention to Diversity in Counterparties; State-Level Changes of Note

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I was recently walking in a large city, on my way to do a warehouse field exam, when a young man on a skateboard passed me going the other direction. He was wearing a green t-shirt that said, "Quit Your Day Job." That's a bold statement for a Tuesday afternoon, I thought. Wells Fargo writes, "The labor force participation rate in the United States has fallen from 66 percent prior to the Great Recession to less than 63 percent at present, and our calculations show that roughly one-half of this decline is attributable to demographic factors." According to Wells' Economics group, older age cohorts tend to have lower rates of labor force participation than their younger counterparts, and the aging of the workforce in recent years has played an important role in depressing the overall rate of labor force participation in the United States. Other advanced economies have also aged in recent years, putting downward pressure on their respective labor force participation rates. "What is unique to the United States, however, is the drop in labor force participation among prime-age workers that is attributable to cyclical and non-demographic structural factors." I wonder if it's too late to learn how to skateboard?

One of the Dodd-Frank laws deals with companies doing business with companies that are women or minority-owned. "DiversityBusiness.com, the nation's leading multicultural social media site, recently recognized VRM Mortgage Services (VRM) and PCV Murcor (PCV) as two of the nation's "Top Businesses" for 2014. This exclusive award recognizes and honors individuals who have established themselves as a world-class community of entrepreneurs that continue to transform the way we live and advance our economy forward. The award, known as the Div500, represents the most unique class of companies with the distinction of fostering a culture of sustainable growth among the communities they serve. Keith D. Murray, MAI, founder, president and CEO of VRM and PCV, was one of a handful of entrepreneurs to have multiple companies recognized with the award. VRM was ranked 46th on the list of African American-Owned U.S. Businesses." Congrats to VRM! 

Minority or not, every lender has seen their cost of compliance skyrocket. Although these costs are passed on to consumers, lenders still need to set up compliance management systems, so this blurb from AllRegs was timely.

 

Let's check in on some recent state-level changes, since it is not enough for lenders to track what the CFPB, HUD, the FHFA, aggregators, the State of New York, etc., are making them do!

 

Recently, Colorado enacted legislation that requires servicers of residential loans, including lenders and other parties that offer a borrower a loss mitigation option or seek to enforce the power to foreclose and sell the residential real estate that secures a delinquent loan, to establish a single point of contact with a borrower. Starting in January, the bill obligates the single point of contact to inform the borrower about loss mitigation options, the status of the borrower's loan, circumstances that may result in foreclosure, and procedures to submit a notice of error or information request. Further, the bill prohibits the servicer from initiating foreclosure proceedings unless the borrower has not qualified for, accepted, or complied with the terms of a loss mitigation option. The bill provides that if a servicer is engaging in prohibited "dual tracking," the public trustee must follow certain procedures, including continuance of the foreclosure sale and withdrawal of the notice of election and demand, provided the borrower is complying with all applicable terms of a loss mitigation option. In addition, the bill requires a foreclosing lender to disclose that it is illegal for a foreclosure consultant to require a deposit or charge fees in advance for providing services, and requires that the posted notice include a statement regarding the borrower's ability to file a complaint with state and federal authorities if the borrower believes the lender or servicer has violated certain provisions of the bill.

Louisiana will be requiring mortgage loan servicers to obtain a license. On May 29, Louisiana Governor Bobby Jindal signed HB 807, which requires companies that service mortgage loans in the state to obtain a state license. The bill amends the state's Residential Mortgage Lender Law to require a company to obtain a state license by June 30, 2015 if it collects or remits payment for another, or if it holds the right to collect or remit payments for another, of principal, interest, tax, insurance, or other payment under a mortgage loan. The bill subjects mortgage loan servicers to existing licensure requirements and establishes the process to be used to determine the amount of the surety bond mortgage loan servicers must obtain. Finally, the bill requires any individual who services mortgage loans (which, according to the Louisiana Office of Financial Institutions, includes individuals who modify mortgage loans) to register as a mortgage loan originator through the NMLS. The Louisiana Office of Financial Institutions is expected to issue guidance on the new law later this year. 

About 1,400 miles away, Connecticut established an alternative foreclosure method. On June 3, Connecticut Governor Dannel Malloy signed HB 5514, which establishes an alternative to the state's current foreclosure methods. Under the new law, which takes effect October 1, 2014, a court will be permitted to approve a foreclosure sale on the open market provided the lender requests such a sale and the borrower consents. The new method is available only for a first mortgage on a one-to-four family residential property that is the borrower's principal residence. The bill establishes industry procedures for such sales (including requirements for the foreclosure notice, property appraisal, listing agreement, and purchase and sale contract, and requires foreclosure notices to advise borrowers of the market sale option), as well as judicial procedures. The new law prohibits a borrower who consents to foreclosure by market sale from participating in the state's foreclosure mediation program, but grants such a borrower the right to petition the court to participate under certain circumstances. 

Speaking of foreclosures, South Carolina established a new expedited procedure for mortgage foreclosures on abandoned properties. Governor Nikki Haley signed SB 1007, which allows a mortgagee or its successor to petition a court for an expedited judgment of foreclosure if the property is not occupied and meets at least two of several conditions-e.g. windows or entrances are boarded or otherwise closed, doors are smashed or continually unlocked, utility services have been terminated-and provided the property does not fall within certain exceptions-e.g. it is seasonally occupied or the owner is deceased and the heirs can be identified. 

They say all Marines are rifleman, and all Navy Sailors are firefighters; when I speak to mortgage originators I like to say "everyone works in compliance." It's with that in mind that I mention Buckley Sandler's upcoming FinCrimes Webinar: Design and Maintenance of a Financial Crimes Compliance Program. The webinar will be of particular interest to in-house legal, compliance, and risk management personnel at banks and other financial services providers. Key topics will be: expectations for structuring and implementing a financial crimes compliance program, key issues and concerns regulators are looking at now, common missteps, and observations about the evolving global regulatory environment based on guidance from multi-lateral bodies such as the FATF and Wolfsburg Group. The meeting is scheduled for tomorrow, June 26, from 12-1PM EST, and pre-registration is required. 

Apparently the difference between littering and not littering, in my neighborhood, comes down to whether or not you scotch taped a "FREE" sign to your 20 year old sofa before you leave it on the corner. Many things in life aren't very clear, however, HUD's wishes regarding reverse mortgage advertising rules and HECM insurance limits isn't not one of them. On the 18^th of June the Federal Housing Administration published two Mortgagee Letters on the Home Equity Conversion Mortgage program. HUD announced policy changes that reduce risk to the Mutual Mortgage Insurance (MMI) Fund and support sustainability of the HECM program.  The changes mentioned in the letter address risks associated with certain fixed interest-rate products and remind mortgagees of their responsibilities related to marketing and advertising. 

No one that I know of base the future of their business on the projections of "experts" or economists, which is a good thing given how wrong many of them were six months ago when predicting rates would be going up soon. Even recently, analysts are pointing out how well mortgages have performed during the second quarter of 2014. For example, Fannie 3.5s & 4% securities (containing many of the loans being originated now) are up/better by almost two points since the beginning of April despite the Fed continuing to scale back their MBS purchases! Average daily origination has increased during that time period - so someone besides the Fed is buying them!

At some price, someone will pretty much sell anything they own. (Well, maybe not my cat Myrtle, but then again, I have never received an offer.) Purchases of new homes in the U.S. rose in May by the most in years (+up almost 19%), but the housing news was not all unicorns and walks on the beach. The FHFA House Price Index reported no change in US house prices in April versus March (but still up 6% versus a year ago), and the S&P/Case-Shiller Home Price Index (with a two-month lag) showed that the rate of price appreciation had slowed - but it was still up nearly 11% versus a year ago. "Overall, prices are rising month-to-month but at a slower rate...Last year some Sunbelt cities were seeing year-over-year numbers close to 30%, now all are below 20%." Gosh - is that so bad? And if that weren't enough, the Black Knight Financial Services Home Price Report has prices up .9% month-over-month and up 6.4% year-over-year. (The reason for the difference between the reports is that the FHFA's covers only sales with a conforming mortgage, Case-Shiller covers everything, and the Black Knight report uses an algorithm to correct for distressed and short sales.)

And not only did the Richmond Fed tell us that manufacturing was picking up in its region, but those consumers are darned optimistic - at least the Conference Board tells us we are. The index hit "85.2" - the highest since early 2008. With all this good news, one would think that rates would move higher on the anticipation of more borrowing for expansion, or the threat of inflation. But nope, rates went down, mostly attributed to a "flight to safety" bid related to Iraq. Both the 10-yr T-note and agency MBS prices improved about .250.

But today is a new day, as they say, and we've already had some news. The MBA reported that applications fell about 1% last week. Also out today will be May Durable Goods, expected flat from +0.6, and the final Q1 GDP reading, projected at -1.7% from a preliminary -1.0% (old news?). The Treasury has two auctions scheduled: $13 billion in reopened 2-year floating rate notes at 11:30AM and $35 billion 5-year notes at 1PM EST. In the early going the 10-yr's yield is down slightly to 2.57% and most agency MBS prices are better by a shade.

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ABA Renews Freddie's Alliance; Agency & non-Agency Lawsuit News; Analyst Digs at Stonegate

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One thing that will help the FHA regain the business it has lost due to high insurance premiums is Fannie & Freddie further increasing their G-fees. MBA president Dave Stevens sent a note out regarding potential G-fee hikes by Freddie and Fannie (through their conservator the FHFA). The story, from Inside Mortgage Finance's Charles Wisniowski, notes, "A coalition of investors in Fannie Mae and Freddie Mac stock wants the Federal Housing Finance Agency to increase the guaranty fees that the two charge their seller-servicers, a position that lenders won't be too thrilled with. In a comment letter to FHFA Director Mel Watt, Investors Unite Executive Director Tim Pagliara urged the agency to take into account 'the critical purpose of setting appropriate guaranty fees,' noting that the Finance Agency does not have a mandate (as conservator) to manage Fannie and Freddie as not-for-profits. Pagliara is also chairman and CEO of CapWealth Advisors. Fannie and Freddie have 'profit-making purposes onto which public mandates are layered' and they should charge g-fees that earn an 'appropriate market-based return on the capital employed,' whether its taxpayer funds or private capital, Pagliara writes. G-fees are now north of 50 basis points. 'Increasing guaranty fees will provide more cash flow, with which the GSEs can build capital and be restored to safe and solvent condition,' the letter added. 'Maximizing returns is not only consistent with, but arguably required by, the conservatorship.' The FHFA issued an official call for public comment on how the GSEs should calculate guaranty fees and whether the agency should proceed with a planned 10 basis point hike that was announced last year but postponed." 

And while we are yammering about the agencies, Freddie Mac is pretty excited about the ABA renewing their alliance "to help banks compete in the mortgage market." Apparently a 0% cost of funds isn't enough! Seriously, "the American Bankers Association - through its Corporation for American Banking subsidiary - has renewed its Freddie Mac alliance to provide ABA members with endorsed solutions which provide exclusive benefits to assist in their mortgage lending business. The alliance offers ABA member banks access to a special set of secondary market advantages including loan origination tools, customized training, and portfolio management services." After the usual glowing comments from officials, the release explained, "The Freddie Mac/ABA alliance offers member banks reduced service fees from third-party vendors and other price benefits, compliance software, and cash sale advantages on a variety of Freddie Mac fixed-rate mortgage products. Participants can obtain Mortgagebot at a reduced cost and utilize the online originating software to directly access Loan Prospector, Freddie Mac's automated underwriting service." 

JPMorgan Chase & Co. is a bank, and also sells its shares to Freddie Mac, but for a little variety is reportedly planning a $303.7 million sale of non-agency 15-year home-loan bonds. The non-agency ice is starting to thaw a little: Premium Point Investments LP's WinWater Home Mortgage LLC completed its first non-agency bond transaction, a deal tied to about $250 million of jumbo loans, and Citigroup Inc. is planning a similar $219 million offering. Many banks are perfectly happy to put those loans on their books to match their liabilities (deposits), of course, but, "We're seeing repeat and new issuers attempt to bring the market back," said Michele Patterson, a senior director at Kroll Bond Rating Agency. 

Who buys non-agency securities? Well, institutional investors do, and a group of them, including Blackrock and PIMCO, filed a lawsuit against several residential mortgage-backed security trustees. The lawsuit claims that trustees failed to protect bondholder interests as they did not enforce repurchase obligations of sponsors/originators on loans with Rep and Warranty breaches, and that trustees failed to act upon Events of Defaults (EODs) committed by the Master Servicer/servicers for faulty servicing practices including improper foreclosures and robosigning, which caused meaningful losses to bondholders. Additionally, servicers were not notifying the trust about R&W breaches they were made aware of during the course of servicing the loans and that too constituted an Event of Default upon which trustees failed to act.  

Analysts think that the filing of this case could have broader implications for the RMBS market including potential disclosure of tolling agreements on specific deals by trustees, and possible delays in reviewing JP, Citi G&B proposed offers. I have not seen the court filing, but supposedly some of the trustees mentioned in the suits reportedly include Deutsche Bank, US Bancorp, Wells Fargo, Citigroup, HSBC, Bank of New York, and my dog Sweetie. (Okay, just threw Sweetie in to see if you were reading this.) The plaintiffs claim that the trustees failed to properly administer the mortgage trusts by not forcing lenders and issuers to repurchase faulty loans. Trustees have long argued that their role is far narrower and that their primary responsibility is to administer the operations of the trust. 

Lawsuits and settlements are now a way of life for the industry. The latest noted settlement came last week as the "FHFA notches new MBS settlement for Freddie, Fannie", this time with the Royal Bank of Scotland. "The Federal Housing Finance Agency has reached a settlement with RBS Securities for $99.5 million as it works as a conservator to settle lawsuits on behalf of Freddie Mac and Fannie Mae related to sales of mortgage-backed securities." 

Kroll Bond Rating Agency has the advantage of not being around years ago to mistakenly rate billions of dollars of residential mortgage-backed securities. KBRA released its ABS Report for the 1^st quarter of 2014. "KBRA released the first quarter 2014 U.S. consumer credit update report, (highlighting) trends within the U.S. economic and consumer landscape and provides insight into the potential impact of these trends on the performance of consumer asset-backed securities. Kroll, among many things, noted that unemployment for younger cohorts remains high particularly for the 20-to-24 year old cohort, temporary employment continues to rise which bodes well for the unemployment rate, student loan balances continued to exhibit strong growth, auto loan balances have exhibited growth while credit card balances have decreased, and mortgage debt levels grew slightly. 

Speaking of consumer behavior, it is obviously important, and there is a lot going on with all of us. I took the liberty of writing a little more in-depth piece about where the consumer is, what we're worried about, and what it might mean for the economy.  

One of the disadvantages of being a publicly held stock is having analysts weigh in on your company. Stonegate Mortgage found this out, with Seeking Alpha writing, "We believe Stonegate Mortgage investors will suffer significant losses as many issues we identify play out...We believe management changed definitions for adjusted earnings without appropriate disclosures, and excluded recurring expenses (that don't reconcile). Both appear violations of SEC reporting guidelines (Reg G)...Stonegate continues to raise capital on overstated projections and an MSR mark 32% higher than its peers..." One must ask if these statements apply to other residential lenders as well; and note that the analyst is short Stonegate.

This week we have a lot upon which to chew (one never wants to end a sentence in a preposition!). Today is Existing Home Sales, tomorrow is New Home Sales, the FHFA House Price Index (what housing prices have done that have Fannie & Freddie loans), along the S&P Case Shiller Indices with their two month lag, and Consumer Confidence. Wednesday will be Durable Goods Orders and GDP - very important. Thursday we can look forward to Personal Income and Consumption/Outlays, some PCE numbers, along with the usual Jobless Claims, and on Friday, if anyone's still around, the University of Michigan Consumer Confidence survey numbers.

 

Executive Rate Market Report:

 

Treasuries and MBSs opened stronger this morning with the 10 falling to 2.59% and testing its recent low at 2.58%. At 9:00 MBS price +9 bps from Friday’s close and 29 bps better than at 9:30 Friday morning. This is a big week for the bond and mortgage markets; a number of reports on the housing sector, the final Q1 GDP, PCE reported with May personal income and spending, Treasury auctioning $94B of notes.

Last Tuesday after months of generally ignoring any immediate concern that inflation would increase, the May CPI jumped to +2.2% yr/yr. The increase shook investors and traders, then Janet Yellen on Wednesday commented that the higher inflation in May was in her opinion just ‘noise’ within the data, taking a little sting from the CPI. On Thursday then, the Philadelphia Fed reported that the prices paid component in its business index increased 12 points to 35 from 23; once again inflation fears increased. It doesn’t take a lot to ignite inflation concerns with long term interest rates at these current low levels; inflation is the kiss of death for investors holding fixed income investments. Last week Treasury auctioned inflation indexed notes, the rate bid translated to the auction suggests investors are now expecting 2.28% inflation over the next year. Some now changing their outlook for when the Fed would begin increasing rates from mid-2015 to the first quarter of 2015. Stay tuned as undoubtedly inflation is now make on investor and traders radar. The next look at inflation is Wednesday with the Q1 GDP data, and Thursday with personal income’s PCE.

At 9:30 the DJIA opened -14, both NASDAQ and S&P were unchanged; the 10 yr note at 2.60%, up from 2.59% at 9:00, 30 yr MBS price +3 bp, down from +9 at 9:00.

May existing home sales at 10:00; estimates were for an increase of 2.2% from April to 4.75 mil units (annualized). As reported sales increased 4.9% to 4.89 mil; the mid-west was where most al the gains were from. The median sales price $213,400, up 1.% from April and +5.1% yr/yr the slowest yr/yr increase since April 2012. Based on the pace of sales in May there is a 5.6 month supply. Still no increase in first home buyers; we believe first home buyers are not going to step up compared to previous housing market rebounds. Young people do not have the same drive to buy as they used to have before the recession; too much debt, can’t save enough for a down payment, and tight credit and low incomes.

Around the world:

• A preliminary Purchasing Managers’ Index for China, the biggest consumer of industrial metals, rose to 50.8, exceeding the 49.7 median estimate of analysts in a Bloomberg survey.
• The euro-area PMI composite gauge slipped to 52.8 in June, less than the 53.4 reading from the median of 25 estimates in a Bloomberg survey of economists.
• Fighters from an al-Qaeda breakaway group seized all Iraq’s border crossings with Jordan and Syria. Kerry headed for Baghdad today.
• Obama told CBS in an interview that will be aired in full today that the conflict could spread to other countries, including Jordan. The militants “are engaged in wars in Syria where -- in that vacuum that’s been created -- they could amass more arms, more resources,” Obama said, according to a transcript.
• European Union countries accused Russia of continuing to let fighters and weapons flow into Ukraine and demanded President Vladimir Putin make good on a pledge to back a plan for a truce as fighting continued.
• Brent oil traded near the highest level since September and West Texas Intermediate was little changed as militants in Iraq seized more territory and President Barack Obama warned that the crisis may spill over into other countries.

We are still getting neutral technical reads on our data; the 10 yr is quiet and has been that was since early June. A mixed set of circumstances; Iraq and Ukraine are on the radar being monitored daily but so far the US markets are not being directly impacted. Inflation was resurrected last week but Janet Yellen took the other side of that view. The 10 has strong resistance at 2.58% and strong support at 2.66%. All of our models are neutral now, not bullish and not bearish. The 10:00 repot of stronger May existing home sales took a little out of the rate markets and stopped the selling that was taking stock indexes lower.

This Week’s Economic Calendar:
          Monday,
             10:00 am May existing home sales (4.75 mil, +2.2%), +4.9% as reported 4.89 mil
         Tuesday,
             9:00 am Apr Case/Shiller home price index (20 city yr/yr +11.4% from +12.4% in March)
                          Apr FHFA home price index (+0.5%, down from +0.7% in March)
            10:00 am May new home sales (440K, +1.8%)
                           June consumer confidence index (83.7 from 83.0 in May)
            1:00 pm   $30B 2 yr note auction
        Wednesday,
            7:00 am weekly MBA applications
            8:30 am May durable goods orders (+0.4%, ex transportation orders +0.3%)
                         Q1 final GDP (-1.8% from -1.0% on the prelim; GDP deflator +1.3% unch from the prelim)
            1:00 pm $35B 5 yr note auction
       Thursday,
            8:30 am weekly claims (-2K to 310K)
                         May personal income and spending (income and spending both +0.4%; core PCE +0.2%)
           1:00 pm $29B 7 yr note auction
       Friday,
          9:55 am June U. of Michigan consumer sentiment index (81.9 from 81.2 from 2 weeks ago)

 

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