Change in Views on Credit

The Importance of Water: Interview with 101 year-old Hattie Mae MacDonald of Winifred, Kentucky.

Reporter: "Can you give us some heath tips for reaching the age of 101?"

Hattie: "For better digestion, I drink beer. In the case of appetite loss, I drink white wine. For low blood pressure, I drink red wine. In the case of high blood pressure, I drink red wine. And when I have a cold, I drink Schnapps."

Reporter: "When do you drink water?"

Hattie: "I've never been that sick."

 

Since its Friday let's veer away from mortgages for a quick moment. With the recent rash of celebrity and music deaths, including the Jefferson Airplane's Paul Kantner yesterday, here is a site that lists the "Top 100" musical stars still alive. How old is Willie Nelson? Heck, those turning 80 this year include Bill Wyman, Englebert Humperdinck, Kris Kristofferson, and Charlie Daniels. But while we're on entertainment, it certainly seems that lenders' commercials will be evident during the upcoming Super Bowl. There are rumors of an ad by SoFi. And rumored to be one by Quicken Loans.

Australia's Computershare, which purchased Specialized Loan Servicing for $113.6 million about five years ago, announced that it signed an agreement to acquire Altavera Mortgage Services, a provider of independent, third-party mortgage origination services to residential mortgage lenders.

 Flagstar reported revenues that beat many expectations due to higher MSR (servicing) income, higher NII, a rep & warranty benefit, and lower expenses. But generally analysts are trimming future earnings for "Flag" and other publicly held residential lenders due to lower mortgage volume forecasts. (Can everyone lower their expenses? We'll see!) Flagstar's gain-on-sale income declined to $46 million from $68 million in 3Q15. Mortgage origination volume fell by 26% to $5.8 billion, down from $7.9 billion in 3Q15. The company reported a GOS margin of 92 bps down from 105 bps in 3Q15 and up from 87 bps in 4Q14. Management attributed some of the weaker earnings in mortgage banking to the new TRID disclosure requirement.

 Europe's biggest lender HSBC will no longer provide mortgages to some Chinese nationals who buy real estate in the United States, a policy change that comes as Beijing is battling to stem a swelling crowd of citizens trying to get money out of China.

 Walter Investment Management Corp. announced the acquisition of assets from Residential Credit Solutions (RCS) including certain assets of the RCS servicing platform and the transition of core operational employees to the Ditech servicing organization. The deal also involves WAC entering into new subservicing agreements with RCS and the transfer of certain existing residential mortgage loan subservicing agreements. This involves $9.8 billion of UPB. RCS had previously announced that it has decided to close its operations in Fort Worth, TX, a move that will result in an estimated 134 jobs being eliminated.

 Lenders are focused on compliance, credit, and profitability, the order depending on the lender, and let's see what has been happening with credit lately.

 Marty Flynn, EVP with Colorado's Advantage Credit wrote to me discussing "Trended Credit Data" and the Agencies. "Your readers may recall Fannie Mae's October 2015 announcement regarding their planned use of trended credit data beginning in 2016: Fannie Announcement on Trended Data.  Although implementation information from Fannie has been scant since then, the credit reporting agency community, aka credit resellers, have recently received updates from the two national credit bureaus who are participating in Fannie's trended data initiative at this time, Equifax and Transunion. By the way, Experian is expected to start mandating trended credit data beginning in 2017. 

 "With Fannie's trended data policy as the backdrop, Equifax and Transunion have mandated all credit resellers operating within the mortgage industry to start delivering trended credit files to their mortgage lender clients. This includes mortgage tri-merge origination, prequalification, secondary use and credit reports for quality control. Equifax and Transunion both state that the trended data policy will extend to all credit reports accessed by mortgage lenders/brokers and there will be no carve-out for non-conforming loans. Conversion to trended credit data is expected to occur throughout March.  Equifax, Transunion are allowing a grace period for credit report price adjustments pertaining to the new (higher) cost of trended credit files. Expect new pricing from resellers to be effective around June.

 "It is estimated that over 26 million consumers today are "credit invisible" and this will help lenders by increasing home ownership and mortgage access among younger consumers and first-time home buyers. In addition we should see scoring a higher percentage of consumers that were deemed un-scoreable by traditional risk scores, making the best lender terms available to a larger proportion of the population, identifying borrowers headed towards mortgage default earlier, and identifying 'transactors' versus revolvers with up to 30 months of utilization history." Thanks Marty!

 Credit Plus announced the availability of Reps and Warranties coverage for all of its verification services. The coverage allows customers to better defend their companies against the negative financial consequences of a possible loan default and the resulting repurchase requests. The firm has undergone a stringent review process to obtain certification of its processes and as a result, its customers are able to obtain the insured products. The insurance is underwritten by an insurer rated A by A.M. Best and A+ by Standard and Poor's. By offering insured products and extending the benefits of Reps and Warranties coverage to its customers, Credit Plus is acknowledging and responding to the Consumer Financial Protection Bureau's (CFPB) and Office of the Comptroller of the Currency (OCC) expectation that lenders are now ultimately responsible for practicing effective third-party risk management.

 Fannie Mae will implement expanded whole loan committing grids on Monday, Feb. 1, providing greater transparency and enhanced certainty of execution for 15-year and 30-year commitments. This change will give its whole loan sellers the transparency of the specified market that has historically been available through an MBS execution. View the infographic by clicking the link.

 Fannie Mae is targeting the release of Desktop Underwriter (DU) Version 10.0 for the weekend of June 25. DU Version 10.0 will include enhanced credit risk assessment using trended credit data, and simplified and automated underwriting for borrowers with multiple financed properties. Release Notes will be posted by the end of February and may include additional items. We are providing a DU Version 10.0 Preview Notification and Integration Impact Memo to allow lenders and technology solution providers time to prepare.

Freddie Mac spread the word that servicers are "now able to directly change the reporting of a third-party sale to an REO status without submitting a rollback request. We've updated our foreclosure sale reporting error codes to more accurately reflect today's housing market and align with Servicers' business needs."

 As has been mentioned in this commentary, Freddie Mac and Lenders One have established a new alliance. This relationship will give Lenders One members who are Freddie Mac Seller/Servicers pricing and execution benefits, enhanced access to mortgage products, and professional training and development opportunities.

 Pacific Union Financial has updated its VA non-delegated DTI to include no maximum required for AUS approved recommendations. Also, specialty high balance cash-out refinance transactions are allowed. Also updated are its Conventional guidelines regarding ineligible programs. Guidelines have been updated to indicate that the Fannie Mae HomeReady and Freddie Mac Home Possible programs are not permitted.

 Fannie Mae has the new HomeReady Income Eligibility Lookup tool provides lenders and other housing professionals with a quick and easy way to determine potential eligibility for HomeReady. Simply use the tool to look up census tract income eligibility by property address or by Federal Information Processing Standards (FIPS) code. This easy-to-use tool is available 24/7 to provide you with the information you need to serve your customers. Also, if you haven't had a chance to take a look, check out all the HomeReady resources available on the HomeReady page

 Fannie Mae and Freddie Mac (the GSEs) have updated the Release Notification on their respective Uniform Collateral Data Portal (UCDP) websites with additional details about the UCDP appraisal-sharing solution, featuring the Feb. 7, 2016, release date. This new functionality enables correspondent lenders to easily share appraisal information in UCDP with their aggregators. Aggregators will have access to real-time results for their correspondents' appraisals to ensure they have the most up-to-date information.

 Wells Fargo has expanded its prior approval High Balance Loan programs to align with recent Fannie Mae's changes. Expanded LTVs/TLTVs/CLTVs, addition of cash-out refinance for 2-4 unit primary units, 2^nd homes and investment properties. Contact Wells for its temporary lock and registration procedures for its expanded products.

 NYCB Mortgage Table Funding Clients are no longer required to use the Record of Account IRS Transcripts for Conforming loan transactions only. The Return Transcript may be provided for underwriting purposes. Examples include: YTD paystub & 1 W2 = 1 year completed 4506T, YTD paystub and 2 W2s = 2 years completed 4506T, 1 year personal tax returns = 1 year completed 4506T and 1 year IRS transcripts. The requirements noted above do not apply to High Balance loan amounts, Jumbo Fixed, Portfolio ARM, and Portfolio Fixed loan programs. Two years of IRS Transcripts are required for loan approval on these products.

 Sun West announced several changes to its conventional high-balance product guidelines. Investment properties now offered for high-balance transactions with FICOs greater than 660, Maximum LTV/CLTV extended up to 95% for fixed-rate mortgage transactions for single unit principal residences, Removed requirement of field review of property for loan amounts greater than $625,500 with an LTV, CLTV, or HCLTV ratio greater than 80%, LTV, CLTV, and HCLTV ratio maximums for high-balance product for borrowers with 5-10 financed properties now aligned with standard product requirements, Non-Occupying borrower's income and liabilities are now considered by DU for all principal residence mortgage transactions. Previously, only the credit and assets were considered by DU.

 Turning to something simple like interest rates, by the time all was said and done Thursday rates hadn't moved much versus Wednesday's closing levels. But fixed-income securities initially shot higher after a pitiful December Durable Goods number, then sold off on an oil spike as the Russian energy minister talked about cutting supply, and then rallied back as oil retreated and equities sold off. LOs saw some rate changes by lenders. The $29 billion 7-year Treasury auction was met with strong demand, drawing the highest indirect bid since the Treasury began issuing 7-year notes in 2009! Mortgage rates are now close to their lowest levels in three months and most rates sheets are in the 3.75-3.875% range on conforming 30-year fixed.

 This morning we've already seen the BOJ (Bank of Japan) surprise everyone by deciding to bring deposit rates into negative territory - so you have to pay them to keep your money! We've also had the Q4 GDP (Gross Domestic Product) figures (+.7%), and the Q4 Employment Cost Index (+.6%). Coming up are some secondary numbers: the January Chicago Purchasing Manager's Index and the January Michigan Sentiment number. We closed Thursday with the 10-year yielding 1.99% and after these early numbers it is down to 1.94% and agency MBS prices are better by .250.

Rent Trends And Multifamily News

Toilet Seat Painting:

My wife, Bubbles, had been after me for several weeks to varnish the wooden seat on our toilet. Finally, I got around to doing it while Julie was out. After finishing, I left to take care of another matter before she returned.

She came in and undressed to take a shower. Before getting in the shower, she sat on the toilet. As she tried to stand up, she realized that the not-quite-dry epoxy paint had glued her to the toilet seat.

About that time I got home and realized her predicament. We both pushed and pulled without any success whatsoever.

Finally, in desperation, I undid the toilet seat bolts. Bubbles wrapped a sheet around herself. I drove her to the hospital emergency room.

The ER Doctor got her into a position where he could study how to free her. (Try to get a mental picture of this.)

Bubbles tried to lighten the embarrassment of it all by saying, "Well, doc, I'll bet you've never seen anything like this before."

The doctor replied, "Actually, I've seen lots of them...... I just never saw one mounted and framed."

 

Zillow is predicting that the rental market will cool down this year. Median U.S. rents grew at a 3.3 percent annual pace in December, to $1,381 per month. This pace is expected to drop to 1.1 percent by December 2016, with median rents rising to $1,396 per month. New apartments being built in markets like Seattle and Washington D.C. is evidence of builders trying to keep up with the demand. As more apartments become available, rent prices should begin to decline, and it's expected that rent may drop this year in some markets like Indianapolis, Oklahoma City and Las Vegas. Although, rental decline is not expected to drop on the West Coast, as rent in L.A. is expected to rise 2.8 percent this year and 5.9 percent in San Francisco. Overall, rents on a national level will not rise as quickly as they have been and this year's expected hottest markets like Omaha, Boise and Richmond will have a balance between strong income growth, low employment and affordable rent.

Now, about rents and multi-family trends... did you know that Bloomberg reports that between 2011 and 2015 loans for multi-family developments at insured depository institutions increased 45% and made up 17% of all commercial real estate loans held by financial institutions. Regulators have indicated this will be one area they will be closely reviewing when they exam banks in the coming year.

 Fannie Mae and Freddie Mac expect to break more records this year in their lending on multifamily properties. That means both agencies will have to keep up the tremendously busy pace they set in 2015. And Greystone has provided $18 million in Fannie Mae MAH loans to refinance three affordable apartment communities owned in Tacoma, WA. The three properties are in Lakewood Village, Chateau Rainier and DeMark Apartments. The loan has a 30-year term with a fully amortizing schedule, which includes 477 units and has floor plans ranging from one to three bedrooms.

 "What's the deal with the rising multifamily market?" That was the question being asked at a recent gathering I attended. Well, pick your poison: a large portion of aging boomers are choosing to downsize and live in housing communities, millennials prefer the flexibility of renting over owning, gross underemployment has created economic barriers to potential buyers, stagnant wages haven't kept pace with inflation, etc. That question could be the world's worst road trip game, next to license plate poker. Needless to say, the American consumer is demanding more multifamily dwellings.

 According to the NAHB, multifamily housing starts, at the end of 3Q15, were at a decade long high, with 425,000 starts. So, where do all the cash flows from this sector end up? In mortgage backed securities, specifically Multi-Family Mortgage Backed Securities (MF MBS), and the agencies have an integral part in the process. FNMA, FHLMC, and GNMA makeup a large portion of the $1Trillion secondary market for these products with market shares of: 26%, 24%, and 10%, respectively (other market participants include CMBS, Banks/Thrifts, Life Insurance Co's, and State/Local Agencies).

 Multifamily loans are made to borrowers under varying terms, such 10 years, 7 years, fixed-rate, adjustable-rate, full or partial interest only periods. During the life of a multifamily loan, the balance is generally amortized over an amortization term that is significantly longer than the term of the loan. As a result, there is little amortization of principal, resulting in a balloon payment at maturity. The borrower usually repays the loan in monthly installments that may include only interest for the entire term of the loan, only interest for a portion of the term and then both principal and interest, or principal and interest for the entire term of the loan.

 MF MBS are often issued with prepayment penalties that protect the investor in case of voluntary repayment by the borrower. Prepayment protections are most frequently in the form of lockout periods, defeasance, prepayment penalties or yield maintenance charges. For those interested in these features, here's how each works. Lockout Periods: A prepayment lockout is a contractual agreement that prohibits any voluntary prepayments during a specified period of time, the lockout period. After the lockout period, some instruments offer call protection in the form of prepayment penalties. Defeasance: With defeasance, rather than loan repayment, the borrower provides sufficient funds for the servicer to invest in a portfolio of Treasury securities that replicates the cash flows that would exist in the absence of prepayments. Prepayment Penalty: Prepayment penalty points are predetermined penalties that must be paid by the borrower if the borrower wishes to refinance. FNMA notes, "for example, a 5-4-3-2-1 prepayment penalty point structure means if the borrower wishes to prepay during the third year, the borrower must pay a 3% penalty for a total of $103 rather than $100." Yield Maintenance Charges: A yield maintenance charge is the most common form of prepayment protection for multifamily loans/securitizations. It is basically a repayment premium that allows investors to attain the same yield as if the borrower made all scheduled mortgage payments until the maturity of the security. Yield maintenance charges are designed to discourage the borrower from voluntarily prepaying the mortgage note. The yield maintenance charge, also called the make-whole charge, makes it uneconomical to refinance solely to get a lower mortgage rate.

 Loan servicing is pretty straight forward. The mortgage bank or a third party may service multifamily loans going into an agency MF MBS. The master servicer is responsible for day-to-day loan servicing practices including collecting loan payments, managing escrow accounts, analyzing financial statements inspecting collateral and reviewing borrower consent requests. All non-performing mortgages are usually sent to the special servicer. The special servicer is responsible for performing customary work-out related duties including extending maturity dates, restructuring mortgages, appointing receivers, foreclosing the lender's interest in a secured property, managing the foreclosed real estate and selling the real estate.

 The MBA has released its Third Quarter 2015 Commercial/Multifamily DataBook highlighting that the national economy has grown at a seasonally adjusted annual rate of 2 percent during the third quarter, after already having grown 3.9 percent in the second quarter. The unemployment rate also declined to 5 percent in October due to an increase in job growth. The commercial mortgage borrowing and lending sector increased in the third quarter, and commercial and multifamily debt outstanding also rose the same quarter. Banks contributed to 85 percent of the total increase, adding $32 billion to their holdings of commercial real estate loans, which is the largest amount since 2007. Total commercial/multifamily debt outstanding debt reached $2.76 trillion at the end of the third quarter, an increase of $38 billion. Multifamily mortgage debt outstanding stood at $1.02 trillion, increasing 1.9 percent from the previous quarter.

 Turning to bonds & rates, I love it when the Fed says that inflation remained subdued and global economic conditions are uncertain.  When aren't global economic conditions uncertain? Yesterday U.S. Treasuries recovered their pre-FOMC losses as investors appear to have been braced for a hawkish surprise from the Fed. The FOMC held rates steady, as was widely expected, and also failed to change its language with respect to falling energy prices despite significant declines since the FOMC's December meeting. The statement also said that the committee is "closely monitoring" global financial and economic developments.

 The 5-year Treasury auction met a poor reception (after a lackluster 2-year auction on Tuesday) but the focus was on the overall bond market. It "traded heavy" throughout the morning/early afternoon until the FOMC statement after which everyone focused on the dovish tilt to the statement. This quickly "gave a bid" to Treasuries which in turn helped rates but pushed the stock market lower.

 Not that the markets care about our actual data anymore, but we've had Initial Jobless Claims for the week ending 1/23 (278k, down from 294k), and December Durable Goods and Durable Goods ex-transportation (-5.1%, worse than expected, and -1.2%). Coming up is more housing news, with December's Pending Home Sales, and a $29 billion 7-year Treasury auction. For numbers once again this week the 10-year's yield ended the day at an even 2.00%, well below where it was when the Fed raised short term rates, and this morning we're at 1.99% with agency MBS prices better by .125.

New Mortgage Products - More On Risk Sharing

(Warning: religious overtones for those sensitive to them.)

 

Three men were playing golf. The course was a wicked dogleg with a large water hazard.

The first man stepped up to the tee and hit a sharp slice into the water hazard. He walked up to the water; it parted and he lofted his ball within one foot of the hole.

The next man stepped up and hit the ball. Sure enough, he sliced it so that it landed on top of the water. He walked across the surface of the water and hit the ball within six inches of the hole.

The third man stepped up, hit the ball, and sliced it. The ball was just about to land in the water when a trout jumped out of the water and grabbed it in his mouth. An eagle swooped down, scooped up the fish, and flew off. As the eagle banked over the green, lightning struck it, it dropped the fish, the fish dropped the ball, and it landed in the hole for a hole in one.

Moses turned to Jesus and said, "I really hate playing golf with your Dad."

 

There are traveler trailers and motor homes but have you heard of a Home RV? EscapeHomes owner Dan Dobrowoski has created a tiny home, the Traveler XL that is also movable, and it's only 319-square feet! Ideal for Millennials camping out in the parking lot rather than buying a downtown Denver loft for $800,000, the price starts at $74,500. The Traveler XL has a queen-size, first-floor bedroom, sleeps as many as eight people and can include full-sized appliances for additional cost. These tiny homes range from micro cottage and portable homes to micro apartment units

New products? Yes, they're coming out.

 For correspondents looking for new products, Deephaven Mortgage continues to provide innovative products to help originators find opportunity in an ever evolving origination market. With the release of the Deephaven Investor Advantage Loan (DIAL) program, we have designed a professional investor's product with a variety of simplified financing options. This new product is an asset-based underwrite that allows for loan amounts up to $2M, purchase and refinance transactions up to 75% LTV, foreign national borrowers, properties with 1 - 4 units, and the optionality of both ARM structures and IO payment periods. Please contact Brett Hively or complete the contact request form at deephavenmortgage.com to become an approved seller of Deephaven Mortgage products today!

 Subservicer oversight costs continue to increase and it isn't easy finding areas where you can satisfy the regulatory mandates while saving money.  Having visited most of the major subservicers in the last 12 months, Mortgage Quality Management & Research (MQMR) and its sister company, Subsequent QC, are once again organizing coordinated onsites to save lenders time and money. This year MQMR will be sending its servicing team and vendor management team to perform a combined audit of subservicers on behalf of multiple lenders.  Save money by sharing the costs with other lenders while receiving the added benefit of having a servicing and vendor management specialist performing the review.  For more information about upcoming subservicer audits, reach out to Casey Hughes.

 A while back Chris M. wrote that his kids gave him this one: "What did the lemon say to the teacher?" "Sorry for being tarty." So let's play catch up on new products and interesting changes to existing products.

 Kinecta Federal Credit Union has slightly loosened its rate lock commitment requirements. Files are now eligible for 45 and 60 day locks with the contingency that a Loan Estimate request has been submitted.

 Stearns Lending is now offering Freddie Mac's Home Possibleand Home Possible Advantage programs. With the launch of the FNMA HomeReady product Stearns will purchase the My Community Mortgage (MCM) product through April 30th, 2016. Yes it is now offering FNMA HomeReady. Want to learn more? Click Here.

 Fifth Third's policy has been updated to no longer restrict 1031 exchanges for the seller. A 1031 exchange is a real estate transaction involving the sale of one investment property with the tax on the capital gain deferred due to the qualified purchase of another like-kind property in exchange. However, 1031 exchanges for the borrower remain ineligible.

 Caliber Wholesale can qualify FHA borrowers with 600 minimum FICO when they are applying for a fixed-rate loan, buying a primary residence and maximum LTV/CLTV is 96.5/105%.

 Lakeview Servicing announced it is now offering Lender Paid Mortgage Insurance for loans with LTV's greater than 80%. 

 NewLeaf's High Ratio and Access product guidelines have been updated to allow lower reserve requirements and other enhancements. Also, NewLeaf has created a job aid to assist in walking borrowers through the simple steps of eConsent and eSign. The job aid is available at the following link: NewLeaf Wholesale eConsent and eSign Customer Experience

 Remember when...Ditech began purchasing Piggyback Closed End Second Qualified Mortgages that fall into the Rebuttable Presumption classification and which otherwise meet our loan purchase eligibility requirements? Loans were classified as QM Rebuttable Presumption when the APR was greater than or equal to the Average Prime Offer Rate (APOR) for a comparable transaction as of the date the interest rate is set + 3.5%.

 But Ditech has seen exceptional growth in its Correspondent Lending Division in the last 18 months. To continue this momentum, the company is expanding the services it offers to a larger number of correspondent clients by focusing on the non-delegated lending space. In addition, Ditech's Correspondent Lending Division has brought on board two leaders in the non-delegated space to develop its market share across the country. Congratulations to John Dubisky, Sales Director for the Eastern Region of the U.S. and Marcy MacDonnell, Sales Director for the Western Region of the U.S.

 Mid America Mortgage, Inc. owner and CEO Jeff Bode announced the firm has developed Mid America Concierge, an online marketing support portal for its strategic business partners, including real estate agents and brokers. The portal provides Mid America's partners with access to marketing and promotional materials, in addition to services for lead generation, social media marketing, customer relationship management (CRM) and more. Click the link to learn more.

 Citadel Servicing's Non-Prime product extends options to 90% LTV, 2yrs from Foreclosure or Bankruptcy. If you would like more information, inquire via email to sales@citadelservicing.com. And 2nd mortgages are back at Citadel Servicing. Borrowers can qualify with up to 85% CLTV, 1 day seasoning from short sale, up to $1milion combined loan amount, loan amounts up to $500,000, bank statements used for income self-employed.

 Kinecta updated its Fixed Seconds matrices to reflect the following changes: the minimum credit score is reduced from 720 to 710 and the maximum loan amount decreased from $500,000 to $450,000. In addition, its Jumbo ARM cash-out seasoning requirements were clarified based on investor guidelines. Clarifications include cash out ineligibility for properties listed for sale within the last 12 months. To be eligible for a cash-out refinance, the borrower must have owned the property for a minimum of 6 months prior to the application date.

 NYCB Mortgage is now accepting HomeReady Mortgage applications for loans registered on or after January 24^th.

 Started in this commentary Monday, the discussion about risk sharing continues and I received this note from Pete Mills with the MBA. "Rob, Scott Olson's comments on risk sharing are puzzling. The bottom line is that FHFA has added expansion of up front risk share to the GSE scorecard, and it is being done today in a form that is completely inaccessible to smaller lenders, and in a way that could undo years of efforts by MBA to eliminate G-fee differentials based on the asset size or volume of deliveries by the seller.

 "It is precisely because of the JPM structure that Scott highlighted in his note to you that we are insisting that FHFA expand risk share options to all lenders. Since the GSEs are committed to doing these transactions, we object to the fact that the up-front versions can only be done with very large institutions. Our letter to Director Watt clearly points this out. We believe any risk sharing should not be limited to only a few large institutions. MI companies are eager to participate and create an offering that all lenders - IMBs, community banks, and credit unions - would have access to. I encourage your readers to read our letter to the Director and imagine how unleveled the market will get without expanded risk share offerings for all sellers, considering, again, that FHFA plans to expand the use of up front risk share."

 Shifting to the actual day-to-day bond markets few mortgage bankers that I know of base their business plan on interest rates. But they should know that JPMorgan has moved its expectation for the next FOMC rate hike from March to June given global events, ongoing strength in the dollar, and deterioration in inflation measures. And JPMorgan has cut its Q4 GDP projection from 1.0% to 0.1%, following weaker-than-expected December retail sales and an expectation for lower business inventories. And a weaker economy tends to favor lower rates - but no one is talking about yet another refi boom yet.

 Tuesday agency mortgage-backed securities ended the day "higher and tighter to Treasuries", and the stock market turned in a nice performance as well. The 10-year yield managed to break through 2% just ahead of the close finishing near the highs of the day. Yes, the Fed continues to use early payoff monies to purchase new MBS although no MBS FedTrade operation will be conducted today due to the FOMC announcement.

 This morning we've already had the MBA's tally of last week's apps (+9% adjusted for the holiday - purchases +5% and refis +11% accounting for 59% of all applications). Later we have December New Sales at 9AM CST expected slightly higher, and the Treasury will auction $15 billion 2-year FRNs at 10:30AM CST and $35 billion 5-year notes at 12PM CST. Finally the FOMC statement is due at 1PM CST. We closed the 10-year at the easy-to-remember 2.00% yield Tuesday and this morning things are roughly unchanged from those levels.

Lender & Bank M&A - Stats, And What Is Working?

I thought about carpooling with some co-workers to work, but the problem is that on the way to the office we have to go through a tunnel. I'm deathly afraid of this situation. Turns out I have carpool tunnel syndrome.

 

What does Florida have that the rest of us don't? The highest percentage of cash buyers according to Zillow's latest research. There are plenty of reasons for this, but as of the second quarter of 2015 with 51 metros analyzed, cash purchases of homes were far more common in Midwestern and Southeastern markets, particularly in Florida, than in the Western U.S. The five markets with the highest percentage of all-cash home purchases were all in Florida. Metros with small shares of cash buyers tend to have younger populations, while markets with higher shares of cash buyers tend to have a larger proportion of households headed by a widow/widower. (Interestingly, among the 10 markets nationwide with the lowest share of cash buyers, only one is not in the west - Worcester, Massachusetts, with 21 percent of home purchases made with cash. Colorado Springs has the lowest share of cash buyers among large metros analyzed, at 14 percent.)

Must be something in the water causing this rash of settlements: JPMorgan Chase has settled its legal scores in the Lehman Brothers case ($1.42 billion), with the State of Ohio ($150 million), and now bond insurer Ambac Financial Group Inc. ($995 million).

 No one doubts that banking and mortgage banking will see continued mergers and acquisitions this year. STRATMOR's Jim Cameron and Jeff Babcock attended the MBA's M&A workshop last week, and Jeff wrote, "If attendance at the last week's very successful M&A Workshop conducted by the Mortgage Bankers Association is a reliable leading indicator, the industry should experience a more robust level of deal activity than any recent period. Participants were an interesting blend of motivated buyers, M&A advisors, attorneys, and a few vendors. (If there were any prospective sellers, they would have been reluctant to raise their hand to disclose their intentions.) The Workshop panelists provided experiential information and insights for both buyers and sellers, supplemented by legal/regulatory considerations and post-closing dynamics and recommendations.

 "From the vantage point of an active player in the M&A space STRATMOR had several key takeaways. In the current seller's market environment, there is significantly greater investor demand than there are attractive, well managed retail platforms available for sale. Compared with organic recruiting, today's buyers believe that an acquisition growth strategy is more efficient, less risky and maybe even more cost effective. Perception that you can buy better talent than you can hire which favors the buy vs. build option. Left largely unaddressed was what factors might motivate sellers to explore their options (note that STRATMOR, in currently representing a handful of sellers, has learned some helpful lessons).

 "Experienced sellers encouraged their peers to conduct more extensive operational due diligence on their prospective buyers before closing the deal. While it's a cliché to emphasize the critical nature of cultural compatibility, both sides clearly benefit from digging deeper into the implications of cultural practices ... maybe even retaining an advisor to provide an independent assessment. Too little attention is typically paid to planning the integration/assimilation, causing unnecessary pain and suffering during that initial transition period ... much of which could have mitigated by better project management. An experienced acquirer brings many tangible benefits and valuable lessons to the seller organization. Originator compensation compliance has been elevated to a key consideration in M&A negotiations. And at the end of the process, it's personal chemistry and 'attitude' that can make the difference between success and failure." Thanks Jeff!

 And that is just mortgage bankers. What about bank M&A? Steve Brown with PCBB writes, "We had fewer bank and thrift (bank) deals in 2015 than in 2014 and the percentage of bank deals vs. the universe of the industry was right in line with longer term averages. (During the last 10 years) you find that for any given year the percentage of banks at the end of the year is roughly about 4% less than the percentage that started the year, or about 1% per quarter.

 "In 2015, the number of bank and thrift deals was 281 according to SNL Financial. This compares to 287 (in 2014), 227 (2013), 222 (2012) and 152 (2011). According to FDIC data, the number of banks and thrifts that existed at the end of 2010 was 7,659 vs. about 6,228 that were around at the end of 2015. That means about 1,430 banks went away or about 286 per year....what this basically tells us is that for 2016 (at least historically speaking), somewhere around 2% to 4% of banks and thrifts will merge away just as they have each year prior based on the pure math of it all. That means we start 2016 with about 6,228 and it will end up around 6,100 to 5,980 or so (125 to 249 deals). To be clear, we absolutely believe the industry will continue to consolidate, just not at the same pace as some might have you believe and based on the historical data."

 Just in the last week or so we learned that in Illinois Royal Savings Bank ($205mm) will acquire Park Federal Savings Bank ($146mm) for about $240,000 in cash. Wintrust Financial ($22B, IL), a 15 bank holding company, will acquire Foundations Bank ($125mm, WI) for about $30mm in cash. mBank ($746mm, MI) will acquire The First National Bank of Eagle River ($141mm, WI) for about $12.5mm in cash. And Pinnacle Bank ($8.5B, TN) will acquire an additional 19% of Bankers Healthcare Group for about $114mm, bringing its total ownership percentage to 49%.

 On the topic of risk sharing Scott Olson wrote, "On behalf of CHLA I wanted to respond to your column about GSE up-front risk sharing, since CHLA has a different take than the MBA does on this. CHLA is very concerned about the use of up-front risk sharing and its potential negative impact on independent mortgage bankers. CHLA is particularly concerned if upfront risk sharing is done by large vertically integrated bank/securities firms, as was the case in some large J P Morgan risk sharing deals that have been done  This approach creates the opportunity for the big banks to monopolize GSE lending if upfront risk sharing securities deals are the dominant form of risk sharing.  

 "Up-front risk sharing also raises the risk of a return to significant volume discounts, if the process is done upfront and there are no protections against this. The process described in your article describes how lenders could cut deals with the PMIs - and obviously the big banks with large volume are in the position to cut the best deals. Finally, it is not clear why doing the risk sharing upfront really reduces GSE risk compared to back end risk sharing. Above all, we need more transparency about the development of risk sharing and there needs to be more focus on the impact of up-front risk sharing the ability of small and mid-size mortgage lenders to access the secondary market through the GSEs.

 "FYI, here is a link to a Housing Wire CHLA Op-Ed from November on GSE issues - just below that is excerpted paragraphs about our concerns about up-front risk sharing. 'CHLA supports risk sharing - but is concerned about up-front risk sharing through securitizations by a few big vertically integrated bank/securities firms. These mega-banks could leverage risk-sharing securitization to generate funds to exclusively originate GSE loans through an affiliated bank. There are already two such deals totaling $2 billion with JPMorgan Chase. If this becomes the dominant form of risk sharing, small and mid-size firms could be shut out of the process. FHFA and the GSEs should be fully transparent about these risk sharing deals - and should ensure that small and mid-size lenders aren't shut out - by banning practices such as volume discounts and stopping mega-banks from dominating both risk sharing securitization and underwriting of the loans they fund.'"

 There wasn't a lot to talk about in the bond markets yesterday, so I won't waste your time: there were no major economic data releases, Treasury auctions, or Fed speakers (we are in the blackout period ahead of this week's FOMC meeting). We do have some news out today, however: the November Case-Shiller 20-City Index, the November FHFA Housing Price Index, and January's Consumer Confidence. We also have a $26 billion 2-year Treasury auction. The risk-free 10-year T-Note ended Monday yielding 2.02% and in the early going today it's sitting around 2.01% and agency MBS prices are a shade better.

Notes on Cyber-Attacks, Getting Through TRID

A couple is lying in bed. The man says, "I am going to make you the happiest woman in the world."

The woman replies, "I'll miss you..."

If someone hacks into your system and starts taking borrower social security numbers and passwords are you going to call Ghostbusters? Research by Ponemon finds that while 81% of respondents say their company has a data breach plan, only 34% say the plan is effective or very effective. That is better than the 30% who said that in 2014, but still shows plenty of room for improvement.

 David Stein with Bricker & Eckler writes, "I have a quick comment on a recent note you had regarding cybersecurity. I am presently working with the MBA and we will be publishing a 'Compliance Essentials' guide on use of the Social Media and the Internet by financial institutions. One big risk that often is overlooked: social media. Use of social media may allow hackers to conduct phishing and 'spearphishing' plots, which are effective tools to breach an institution's cyber security precautions. Some readers may be wondering why care should be taken in using social media as suggested in the blurb. Cyber breaches caused by phishing (based on social media identity) are one of the gravest concerns. Continuous education about these issues is one of the best tools to ward off attack."

 Steve Brown with PCBB writes, "The FFIEC recently issued a warning to banks that there has been a rise in both the frequency and the severity of cyber-attacks, with many instances now involving extortion. Such attacks can harm your bank in a myriad of ways, from the straightforward loss of liquidity or capital, to reputational harm resulting from fraud or data loss, and even the disruption of service. As a result, community banks need to focus efforts on fending off and mitigating the risks of cyber-attacks even more.

 "Given how quickly malware and ransomware is evolving, protecting sensitive information has become more difficult than ever. An unfortunate reality is that virtually no company, inside or outside of the banking industry, is invulnerable to attack. After all, many attackers are state-sponsored by countries with unlimited resources. Against that onslaught, what can any community bank do? For their part, regulators have tried to provide guidance in this area. They want banks to have programs in place that can effectively "identify, protect, detect, respond to and recover from" cyber-attacks.

 "Among the steps banks are encouraged to take are the performance of routine information security risk assessments; ongoing security monitoring, prevention and risk mitigation; implementation of and routine testing of the controls around critical systems; and frequent reviews and updates on incident response and business continuity plans. Beyond this, regulators also suggest banks focus on the fact that employees can sometimes pose the biggest digital security risk.

 "Because of this, it is equally important to make sure that employees are educated about the potential for cyber-attacks and the impact that simple things, such as opening a link within an email from an unverified source can have, or the importance of encrypting sensitive data. Given how much sensitive information banks exchange and rely on during a typical day, you may also want to consider following the lead of many companies that now forbid employees from using removable USB devices or from accessing any online sites not immediately related to the job function. Just as employees can inadvertently create breaches, so too can third party vendors. So, when performing security assessments it is also important to factor in the security systems and practices of your vendors as well." A great write-up Steve!

 Edgar reminds us, "You bring up an interesting point about compliance reviews, I commonly hear "but Fannie will buy it" and that is a true statement; however what many fail to realize is that there are tremendous negative implication for banks that banks that are deemed non-compliant. If a regulator audits a bank and they see a company purchasing loans that are non-compliant they can face fines; even worse they could have their CAMEL rating negatively impacted which can drive up the cost of their FDIC insurance, this cost impacts all lines of business. The costs can be huge. In addition to increased costs/reduced margins it can cost more for capital should they need to raise it. I think you raise an important point that the GSE's do not review for compliance and that the investors that do review can be a valuable resource in helping insure their business is safe."

 I received this note from a veteran originator. "It's interesting that all the TRID issues are clerical in nature, rather than fee issues.  That leads me to believe its sloppiness or lack of training that has caused these issues."

 And Mat Ishbia, president and & CEO of United Shore, sent, "I have some quick thoughts on TRID.  And I know I am in the minority but I am so sick of hearing everyone complain about it all the time. The CFPB is doing a good job trying to do the right thing for consumers. Is it perfect? No, very few things are but the intentions of requiring originators to get their fees right up front, use new forms which are better than the most recent ones we used, get the consumers their closing numbers 3 days before closing, and put the control of the closing in the lenders hands. All of these are great decisions and the right thing for our industry.

 "NOW for all the lenders complaining about how hard it is and whining about the new rules... They can blame themselves for not being prepared. At UWM we are closing loans in the same amount of time as pre-TRID - actually 1 day faster (23 business days currently vs 24 days pre TRID) and the only difference is we prepared for 12 months for the rule and wanted to make it easy for all of our brokers. Hearing everyone's negative comments is such a downer and annoying at best. Tell everyone to blame themselves for their lower production and blame themselves for slower closing times NOT the CFPB and the new rule. If people spent more time preparing and following the rule than complaining then they would be doing great and closing plenty of loans and helping out plenty of consumers. At UWM our fourth quarter was better than the second or third quarters of 2015, so blaming TRID is the wrong answer.   Blaming yourself is the truth for lack of preparation."

 Luke from MN sent, "I don't agree with this LO's comment, 'Lastly, the CD is much tougher to understand than the final HUD, if you ask the average borrower he will not understand the CD! Also note for all loan officers the CD does not minus any pre-paids that the borrower paid for such as the appraisal fee(s) therefore it will always show short to close which adds to the confusion for the average borrower.'

 "We are a correspondent lender so maybe things are a little different and we provide the CD.  On my CDs where the borrower has pre-paid for the appraisal and credit report we just list them as POC on the CD and the cash to close is correct.  Again, it sounds like the person above works as a broker so they may not have any control over the CD but I would want mine to be accurate with the correct cash needed at closing and this is how we work it up." Thanks Luke!

 Ballard Spahr's Richard J. Andreano, Jr. sent out a write-up on the recent attempt by the CFPB to address the construction-to-permanent loan issue. "The CFPB has issued what it calls a 'fact sheet' regarding the disclosure of construction-to-permanent loans under the TILA/RESPA Integrated Disclosure (TRID) rule, which the CFPB refers to as the Know Before You Owe rule.  The fact sheet falls far short of the detailed guidance sought by the mortgage industry.

 "A construction-to-permanent loan is a single loan that has an initial construction phase while the home is being built, and then a permanent phase for when construction is complete and standard amortizing payments begin.  Although, as noted below, the TRID rule does address such loans, the rule does not provide detailed guidance on how to complete the Loan Estimate and Closing Disclosure for such loans, nor are sample disclosures included with the TRID rule.

 "In the fact sheet, the CFPB notes that Regulation Z section 1026.17(c)(6)(ii) and Appendix D to Regulation Z continue to apply in the new TRID rule world, and the CFPB specifically notes that they apply to the Loan Estimate and Closing Disclosure. The cited section provides that when a multiple-advance loan to finance the construction of a dwelling may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one transaction or more than one transaction. The fact sheet indicates, as the CFPB staff had informally advised in a May 2015 webinar, that a construction-to-permanent loan may be disclosed in a single Loan Estimate and single Closing Disclosure, or the construction phase and permanent phase can be disclosed separately, with the construction phase being set forth in one Loan Estimate and Closing Disclosure and the permanent phase being set forth in another Loan Estimate and Closing Disclosure.

 "Appendix D provides guidance on how to compute the amount financed, APR and finance charge for a multiple advance construction loan, when disclosed either as a single transaction or as separate transactions. The TRID rule added a commentary provision regarding Appendix D to address the disclosure of principal and interest payments in the Projected Payments sections of both the Loan Estimate and Closing Disclosure. The commentary provision does not address other elements of the Projected Payments sections. Additionally, the CFPB does not clarify in the fact sheet that Appendix D applies only when the actual timing and/or amount of the multiple advances are not known.

 "Likely realizing that this guidance would fall short of the detailed guidance, and sample disclosures, sought by the industry, the CFPB's final statement in the fact sheet is "The Bureau is considering additional guidance to facilitate compliance with the Know Before You Owe mortgage disclosure rule, including possibly a webinar on construction loan disclosures."

The industry needs and deserves more than a webinar.  It deserves detailed written guidance with sample disclosures.  The failure of the CFPB to provide written guidance on other aspects of the TRID rule has significantly contributed to the confusion and uncertainty in the industry regarding TRID rule requirements.  It is frustrating to the industry that the CFPB continues to resist providing written guidance on TRID rule matters (as well as other matters), particularly when its sister federal agencies regularly provide written guidance on important matters."

 Loren Picard writes, "With regards to your comments about mortgage REITs, I thought I'd share some insights which I've accumulated from following the sector for quite some time. Stock prices are dramatically down and stock prices as a measure to book value are way up--40%+ in some cases.  Is anybody really surprised that mortgage REITs are trading at such discounts? It is hard to make a business case for why mortgage REITs should even exist given what is going on in the changing financial landscape. The Federal Reserve buys all the net new agency paper being issued, the private MBS market is thwarted because the big banks are holding jumbo loans on their balance sheets, the FHFA put a knife in the captive insurance subsidiary loophole mortgage REITs were using to obtain below market financing, and the threat (not necessarily reality just yet) of new fintech models picking off market share in investable assets all adds up to the question...why should they exist? Mortgage REITs are not making a case for themselves. Also, activists are starting to circle some of the more steeply discounted mortgage REITs with a two pronged argument: 1) The REITs should be liquidated to free up capital for more productive purposes; 2) Mortgage REITs have become too costly to manage given the high cost of internally managed REITs (as percent of equity) and the high cost of management contracts for externally managed REITs. It is much more efficient to hold mortgage assets in an ETF or mutual fund. REITs could reinvent themselves around a technology based acquisition strategy, but I'm not sure that is a core competency of mortgage REIT managements.  Once the first REIT gets liquidated, watch out below."