Wells Changes Appraisal Policy and Where Does Penalty Money Go?

By rchrisman@robchrisman.com

 

IRISH GHOST STORY (Rated, I guess, PG, for language.)

[This story happened a while ago in Dublin, and even though it sounds like an Alfred Hitchcock tale, it's true. But, uh, don't bother fact checking it.]

 

John Bradford, a Dublin University student, was on the side of the road hitch-hiking on a very dark night and in the midst of a big storm.

The night was rolling on and no car went by.  The storm was so strong he could hardly see a few feet ahead of him. 

Suddenly, he saw a car slowly coming towards him and stopped. John, desperate for shelter and without thinking about it, got into the car and closed the door ... only to realize there was nobody behind the wheel and the engine wasn't running. 

The car started moving slowly. John looked at the road ahead and saw a curve approaching. Scared, he started to pray, begging for his life.  Then, just before the car hit the curve, a hand appeared out of nowhere through the window, and turned the wheel. John, paralyzed with terror, watched as the hand came through the window, but never touched or harmed him.

Shortly thereafter, John saw the lights of a pub appear down the road, so, gathering strength, he jumped out of the car and ran to it... Wet and out of breath, he rushed inside and started telling everybody about the horrible experience he had just had.

A silence enveloped the pub when everybody realized he was crying ... and wasn't drunk.

Suddenly, the door opened, and two other people walked in from the dark and stormy night. They, like John, were also soaked and out of breath. Looking around, and seeing John Bradford sobbing at the bar, one said to the other...

"Look Paddy ... there's that fooking idiot that got in the car while we were pushing it!"

 

 

It has been 30 years since John Gutfreund, who died yesterday, ran Salomon Brothers. Yes, time flies. Most of the United States begins Daylight Saving Time at 2AM on the second Sunday in March (and reverts to standard time on the first Sunday in November). Why do most states do this for four months out of the year? Good question - there are certainly moves afoot to leave clocks (and our biorhythms) alone. But many in the U.S. lose an hour of sleep Saturday night, and have 24 hours to adjust until the Monday commute.

 

Settlement is the name of the game for lenders, investors...and the rating agencies. Moody's Investors Service Inc. agreed to pay $130 million to settle claims by the California Public Employee Retirement System (Calpers) over allegedly inflated ratings on residential-mortgage bond deals. Moody's averts a trial - good luck picking a jury on issues like these, right? The settlement follows one from a year ago that Standard & Poor (owned by McGraw Hill Financial) paid $125 million to settle claims by Calpers over grades on subprime mortgages. (The case is California Public Employees' Retirement Systems v. Moody's Corp., CGC 09-490241, California Superior Court, San Francisco.)

 But the fun never ends! The U.S. Justice Department is rumored to be deciding whether it will sue Moody's over similar claims about mortgage bonds. Bloomberg notes that, "The multiyear inquiry into Moody's was among the remaining live investigations into the mortgage lenders, Wall Street banks and ratings firms that the government has sought to hold accountable for the crisis. A year ago Standard & Poor's paid $1.5 billion to resolve allegations that it inflated ratings to gain business during the housing boom.

 "Moody's said in October that since 2007 almost 60 cases over bond ratings had been filed and that fewer than 20 percent of them remain unresolved. Internationally, six such cases remained as of September, according to Moody's, while 21 of those suits have been dismissed or withdrawn."

 Let's not forget Fitch. Fitch settled negligence claims brought by Calpers in 2011 after denying liability. That settlement didn't require any payment to Calpers, leading some critics of rating agencies to say that "it got off easy."

 All these millions and billions...where does it go? The WSJ did a story on exactly that: where has the $110 billion in fines paid by the largest banks go? (Let's not forget the money funneled by banks and mortgage companies directly to homeowners and homeowner groups, not directed through government channels!) Of the 30 settlements and $110 billion, "roughly $50 billion ended up with the U.S. government with little disclosure of what happened next, according to a Wall Street Journal analysis...

 "The Treasury Department received almost $49 billion of the funds, including money the agency received directly and sums funneled to it by other departments, including government-chartered housing associations Fannie Mae and Freddie Mac. How the money is spent isn't specified. About $45 billion was earmarked for "consumer relief," a category that includes money dedicated to helping borrowers and funding housing-related community groups. The Justice Department, whose prosecutors led many of the negotiations with banks, collected at least $447 million. How it spends the money isn't specified.

 "States received more than $5.3 billion, usually to spend as they saw fit. Almost all states received payments from a national settlement in 2012 over mortgage-servicing abuses, and seven also received payments in the Justice Department's blockbuster mortgage-securities settlements that started in 2013.

 "Roughly $10 billion went to other recipients, including housing-related federal agencies, two federal agencies responsible for cleaning up failed banks or credit unions, and whistleblowers who helped the Justice Department. Some funds from these deals typically revert to the Treasury." Transparency and accountability seem to be lacking - let's hope the government isn't addicted to the income from collecting fines as it is collecting all of the profits from Freddie and Fannie.

 My cat Myrtle doesn't exactly walk around chanting, "Alt-A all the way!" But then again she seems open to the idea. And investors have been searching for any pickup in yield since the world went QM. A while back a story from the WSJ discusses how big money managers are lobbying lenders to ramp up their Alt-A originations. Unfortunately the mainstream press associates these with "liar loans."

 And a couple months ago there was a story about how hedge funds are moving into the lending marketas banks are forced by regulators to dial back to their exposure to certain types of loans.

 And yesterday plenty of tongues were wagging about how SoFi is starting a hedge fund that will buy its own loans and potentially those from other lenders - and have already raised millions to do it. Bloomberg's Noah Buhayar writes, "It's seeking to attract more money from wealthy individuals, funds of hedge funds and other institutional investors that may not want to buy whole loans directly from the company or securities backed by the debt...Online lenders are trying to meet their growth ambitions by pursuing new strategies to entice investors.

 The hedge fund, run by an independent trustee, will initially buy SoFi loans and could eventually put half of its capital into debt from other online lenders. "With no annual management fee, the fund will charge 25 percent on returns above 3 percent, plus the short-term government debt rate."

 "Growth has been swift. In 2012, SoFi (Social Finance - certainly a good place if anyone reading this wants to refinance their student debt - or that of their kids) funded about $90 million of loans. These days, it originates more than $1 billion a month (of a variety of types), CEO Cagney said in an interview in February."

 This week the commentary had plenty of appraisal chatter. An announcement from Wells Fargo Funding yesterday certainly received some attention as it is changing its tack regarding correspondent client appraisals. Starting April 4^th "We've got two big process enhancements coming soon for Non-Conforming Loans...Sellers will have the ability to order direct - order appraisal products for Non-Conforming Loans directly from any Wells Fargo Funding-authorized appraisal management company (AMC): Clear Capital, PCV MurcorTM (NEW! Authorized AMC beginning April 4), Rels Valuation, and ServiceLink. And to deliver direct - deliver the first-generation Adobe PDF and industry-standard XML for your final appraisals on Non-Conforming Loans directly via our Wells Fargo Funding website utilizing our new appraisal upload feature."

 Wells went on to tell its correspondents that "Rels Valuation's Share with Investor function will be retired in May 2016. Sellers who currently order directly from Rels Valuation and use their Share with Investor function to send appraisal data to Wells Fargo Funding will need to migrate to our new Direct Deliver functionality." As always, read the actual bulletin for full details.

 I don't know how I let this one slip by me. On March 3, in order to comply with the requirements of the Helping Expand Lending Practices in Rural Communities Act, the CFPB adopted a procedural rule, published in the March 3, 2016 issue of the Federal Register (81 FR 11099), that will allow mortgage lenders and other interested parties to request areas to be designated as rural for the purposes of federal consumer financial laws. These newly designated rural areas will be in addition to current rural areas, which are determined via a county-by-county basis or by census tracts.

Attorney Black, Mann & Graham LLP notes, "This rule is designed to increase the amount of small lenders that qualify for specific exemptions under federal consumer financial laws. These exemptions, designated for small lenders that originate a significant amount of transactions in rural or underserved areas, include eligibility to generate qualified mortgages that contain balloon-payments and exemptions from required escrow accounts for higher-priced mortgage loans. Eligibility requirements and the specifics for these exemptions are listed in Sections 1026.35(b)(2)(iii) (click here) and 1026.43(f) (click here) of 12 CFR Part 1026 (Regulation Z).

 While I am yammering about rates, they've been ambling higher recently. Why? Because they grew tired of moving lower. Wednesday folks blamed it on nervousness ahead of today's ECB meeting. There wasn't much else to blame it on, although possibly a sloppy 10-year T-note auction. The usual entities were buying (the Fed, money managers, and banks) and the usual entities were selling - mostly 30-year loans that go into 3% or 3.5% securities.

 Thursday brings the highlight of the week with the ECB governing council meeting followed by the statement, at 7:45AM EST, and Draghi's press conference at 8:30AM. In the States we have 8:30AM's weekly jobless claims... and that's about it until the $12 billion reopened 30-year bond auction. We closed Wednesday with the 10-year, as a proxy for agency MBS rate movement, at 1.89%.