COMMENTARY

By Jonathan Foxx

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group, the first full-service, mortgage risk management firm in the country.

On Monday, September 6, 2010, we will celebrate Labor Day.

It is a time for reflection. Gone are the tolerance for a child labor workforce, 12-16 hour days, sweat shops, low and subsistence wages, employment discrimination, dangerous working conditions, management retaliation against employees, willingness to accept unequal pay for equal work, massive overtime without due and fair compensation, and preventing employees their right to assemble or form unions.

Our industry, the mortgage industry, has suffered greatly in the current economic environment. And on this Labor Day we should be mindful of the loss amongst our own ranks of members of our fine, professional work force.

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Rates continue to trend lower, helped yesterday by the release of the FOMC meeting’s minutes which alluded to the possibility of the Fed reinvesting in MBS’s. (But heck, as one trader told me, low mortgage rates are helping agency-qualified borrowers, not others in the economy like renters who can’t qualify, not those that don’t have jobs or those that simply pay cash for houses.) “A few members worried that reinvesting principal from agency debt and MBS in Treasury securities could send an inappropriate signal to investors about the Committee’s readiness to resume large-scale asset purchases,” the Fed said in the report, referring to mortgage-backed securities. The minutes from the August 10 meeting made it clear that the Fed is far from ready to restart Quantitative Easing Round 2.

It didn’t matter than consumer confidence improved, or that a house price index showed higher prices: by the end of the day the yield on the 10-yr was back down to 2.48% (and the price up by .5) and mortgages were better by .250. $1.8 billion in MBS’s hit the market. In fact, after Monday and Tuesday’s improvements, Friday’s sell-off is all but forgotten except by those who locked in loans on that day. Rate sheet current coupon mortgages prices closed up (better) by .250. Fannie 4’s are well above 103, and when you throw on some servicing the price is north of a 4 point rebate. So imagine the profits out there if anyone is offering 4.5% mortgages at par…

Speaking of locking loans in at higher rates, my Wall Street acquaintances seem to be seeing banks and hedgers buying back MBS positions. Correspondent and wholesale lenders are carefully monitoring pull through! And folks on lock desks are reminding agents and brokers of existing renegotiation policies – no one wants higher fallout, and they’re willing to compromise to keep the loans. Mortgage News Daily reports that secondary managers are “cautiously adding hedges/coverage as needed while negative convexity is still a legitimate concern and the TBA market is in need of structured cash flows with a longer life.” Thirty year mortgages with a 4.25% rate can go into either a 4% security (by buying down the guarantee fee) or 3.5% security (and having the investor buy up the guarantee fee), but 4.125% and below can only go into a 3.5% security and therefore give hedgers less flexibility. Which is one reason rate sheets, up until recently have big price drop-offs from 4.25% on down.

The Mortgage Bankers Association of Pennsylvania hired a law firm to review the loan originator compensation issue. (Thank you MBAOP – remember that everyone is advised to hire their own counsel and do its own reviews.) “The Federal Reserve has adopted regulations which prohibit payment to loan originators based on the terms or conditions of the transaction, other than the amount of credit extended. The rule prohibits compensation to a loan originator for a transaction based on the interest rate, APR, LTV, or the existence of a prepayment penalty. Similarly, if a creditor pays a loan originator more for a loan originated to a borrower with a lower fico score and a higher interest rate, than to a second borrower with a higher fico score and a lower interest rate, this will also be prohibited by the regulation. Such compensation is prohibited, whether it be as a commission, bonus, or in any other form.”

The memo goes on to state that the firm believes, “Compensation based on the amount of credit extended or on the following factors is permissible: 1. The loan originator’s overall loan volume, whether it be dollar amount of credit extended or total number of loans originated; 2. The long term performance of the loans originated; 3. Whether the customer is an existing customer or a new customer; 4. A fixed payment for each loan originated; 5. The percentage of applications that result in consummated transactions; 6. The quality of the loan originator’s loan files submitted to the creditor; and 7. A legitimate business expense, such as fixed overhead costs. The regulation does not prevent a creditor from offering a higher interest rate in a transaction as a means for the consumer to finance the loan originator’s compensation, nor based on the creditor’s assessment of the credit and other risks involved. The regulation also provides that, if a loan originator receives compensation directly from a consumer in a consumer credit transaction secured by a dwelling, (a) the loan originator may not receive compensation from any person other than the consumer in that transaction; and (b) no person who has reason to know of the consumer paid compensation to the loan originator shall pay any compensation to the loan originator.”

“It’s hard to make a comeback when you haven’t been anywhere.” Conversely, banks have certainly made a comeback: FDIC-insured institutions reported an aggregate profit of almost $22 billion in the second quarter of 2010, a $26 billion improvement from the $4 billion net loss the industry posted in the second quarter of 2009. This is the highest quarterly earnings total since the third quarter of 2007. Earnings remain low, however; the primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses. http://www2.fdic.gov/qbp/index.asp

The first social security cards were issued in late 1936, and as most people know the first three numbers are a geographic code. Enough of trivia – I received some responses from yesterday’s story about applying income under a falsified number to the new card in order to qualify for a loan. “So, my mother went on her first job interview in New York City after having lived in small towns her whole life. When she was filling out the job application, she was so embarrassed because she didn’t know her social security number that she made one up. That made up SSN has been her social security number to this day.” “As odd as your first paragraph sounds, the law does accommodate people like this.  If you worked with an illegal social security card for 10 years and then are given a green card with a valid social security cared you can petition the Social Security Administration to transfer credit for all taxes paid under the illegal card to the now legal card.” “When our office started using the 4506, a loan officer said, ‘I hear there’s a new rule that we can’t use white out on tax returns anymore.’” “I once asked a client for his social security number and he responded, ‘Which one?’”

Buyback drama continues – according to an article in the WSJ, in the first quarter of 2009 J.P. Morgan “cut a deal with the government agencies that resolved certain current and future repurchase claims stemming from WaMu mortgages. Nice!http://topics.wsj.com/article/SB20001424052748703467004575463563588596660.html

“Commercial real estate markets showed surprising resiliency during the second quarter, with property transactions rising solidly and leasing activity holding up better than expected. We remain cautious in our outlook for commercial real estate and construction.” So states Wells Fargo’s economics department. “The rise in delinquency rates in recent years was mostly caused by the sharp contraction in employment, retail sales and the rate of household formation growth. The apparent improvement in demand may be overstated, as many firms are taking advantage of soft market conditions to upgrade space and locations. The larger immediate issues with commercial real estate continue to be the overhang of commercial real estate loans coming due over the next few years and the large number of development projects that have been partially completed or less, which continue to weigh on community bank portfolios. After showing some resiliency earlier this year, commercial real estate prices fell sharply in June.”

With all of the appraisal, HVCC, AVM, AVC, etc., rules and regulations, it is hard to remember the loan programs that don’t require an appraisal. Say what you want about the difficulty or popularity of any of them, these include VA streamline IRRRL (Interest Rate Reduction Refinance Loan) for loans usually serviced by the same investor, FHA Streamline without appraisal for most any servicer for an existing FHA loan, HARP Conventional DU Fannie Mae Refi Plus with an appraisal waiver, HARP Conventional Freddie Mac Relief Refinance with an appraisal waiver – usually for loans serviced by the same servicer, any conventional loan that gives a DU "PIW" (Property Inspection Waiver) or LP "PIA" (Property Inspection alternative), and a Fannie Homepath purchase – appraisals are not even allowed.

HUD establishes Area Median Incomes (AMI) which are used to determine borrower eligibility for the MyCommunityMortgage / HomePossible products. FHFA published the 2010 AMIs which will be effective on the following dates: manually underwritten loans: new registrations on or after September 1, 2010, AUS scored loans (DU 9/23, LP was done on 8/22).
Today we’ve already had the MBA’s application index (apps were up 2.7% last week, with refi’s up 2.8% and purchases up 1.8%), and the ADP numbers which were down 10,000 but notoriously questionable about predicting overall employment data (the ADP # does not include government hiring). Later we’ll have Construction Spending and another ISM number. The current 10-yr is at 2.53% and mortgages are worse by about .125-.250.

Two beggars, one a Catholic, one is Jewish, are in Vatican City. They are sitting side-by-side on a street in near St. Peters Cathedral. One beggar has a large cross in front of him; the other beggar, the Star of David.

Many people walk by and look at both beggars, but only put money into the hat of the beggar sitting behind the large cross.

A priest comes by, stops and watches the throngs of people giving money to the beggar behind the large cross while none give money to the beggar behind the Star of David.
Finally, the priest goes over to the beggar behind the Star of David and says, "My poor fellow, don’t you understand? This is a Catholic country; this city is the seat of Catholicism, the home of the Pope. People aren’t going to give you money if you sit there with a Star of David in front of you, especially when you’re sitting beside a beggar who has a large cross. In fact, they would probably give to him just out of spite."

The beggar behind the Star of David listened to the priest, turned to the other beggar with the large cross and said, "Moishe, look who’s trying to teach the Goldstein brothers about marketing!"

Rob

(Check out

http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx. For archived commentaries, go to www.robchrisman.com. Copyright 2010 Rob Chrisman.  All rights reserved.  This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.

MORTGAGE COMPLIANCE

According to news reports circulated since August 27, 2010, the HECM Saver is on the way! Sources are alleging a conference call with Vicky Bott, HUD’s Deputy Assistant Secretary, in which she supposedly announced plans to implement a new variant of the Home Equity Conversion Mortgage, referred to as the "HECM Saver," that will provide seniors with a reverse mortgage option that significantly lowers upfront costs by virtually eliminating the upfront Mortgage Insurance Premium that is required under the current HECM option.

Bott is also alleged to have said that there will be accompanying changes intended for the existing HECM product, now to be referred to as a "HECM Standard," and that the HECM Saver and changes to the HECM Standard are expected to be effective in early October 2010.

Apparently, this new report is said to have emanated originally from the National Reverse Mortgage Lenders Association (NRMLA), which has no such announcement on its website.

There is no direct confirmation yet from HUD regarding this new HECM Saver: no Press Release from HUD, no statement from HUD in the Federal Register, and so forth – only, as of this writing, rumors and hints.

We will monitor this matter closely and provide the actual HUD-FHA issuance, including guidelines, when and if the new HECM Saver is offered.

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

I was talking to a correspondent rep yesterday, and he said, "I just got the best question from a client. The client (not a mortgage banker or broker) asked, "Hey, we have a borrower that up until now has been using a social security number that was ‘not issued by the Social Security Administration’. They now have a green card and a valid SS number – can we go back and transfer the old income on the invalid SS# for the last few years in qualifying the borrower for a new loan?" Ha – you just can’t make this stuff up.

I realize that it is almost September, but it is interesting to see what the agencies did for MBS issuance in July. Fannie Mae issued over $42 billion in MBS, up 6.4% from June, and the highest level of MBS issuance since February. Freddie, however, dropped slightly from June to July at about $26 billion, possibly due to a drop in the purchase of refi’s. Fannie reported that the serious delinquency rate (90 days or later) on its guaranteed single-family mortgages was down for the 4^th month in a row, and fell below 5% for the first time since October 2009. Freddie’s serious delinquency rate on its guaranteed single-family mortgages fell once again, remaining below 4% for the second consecutive month.

HUD reported that FHA-to-FHA refinancing applications were up 58% from June to July. The implications of this for investors is that they are starting to see divergence between the application data that is released by FHA every month versus the MBA applications data, which is interesting in that the FHA publishes actual application data while the MBA publishes results based on a survey.  One change that may impact this is the UMIP and MIP change regarding the rule that the borrower’s total payment must be reduced in order to qualify.

One reader wrote, “This change will increase the borrower’s payment by a net $60 which will make it difficult for most of the borrowers to qualify on an FHA streamline.  On a streamline you have to reduce the borrower’s total payment (including escrows and MIP) by 5% in order to qualify the borrower. After the change 35 out of 100 will qualify compared to 70 out of 100.  In other words, currently we can lower someone’s interest rate by 50bps, save them approximately $80 a month and they would qualify.  Now we have to add an additional $60 (this is on average the increase in MIP) to the $80, totaling $140, which means we have to lower their rate by at least 1% to qualify.  This will cut out a large part of the market and deny consumers the ability to lower their payment. On a VA the rule only applies to P&I (excluding escrows) which makes sense.”

Another writes, “The goal of HUD is simple: they want borrowers with lower DTI ratios. This is not late-breaking news – we are seeing the same thing with agency loans as DTI across the board seems to be slowly converging on 45% whereas it was formerly just limited to DU/LP findings, often going up to 60%. LP was at a 55% cap and I think still is with some lenders, but that may be changing soon.”

As part of the implementation of the Dodd Frank Wall Street Reform and Consumer Protection Act, the FDIC announced a series of roundtable discussions with external parties. The first discussion is today and will focus on the new resolution authority provided in Dodd-Frank for the largest financial firms. “Government officials, industry executives, academics, and investors will discuss the framework of the resolution process, the treatment of creditors and the creation of living wills. Subsequent discussions will be announced onhttp://www.fdic.gov/financialreform/.” If you don’t already have an invitation, you won’t be able to participate, and saying "it was lost in the mail" probably won’t work. But feel free to listen in: http://www.fdic.gov/regulations/reform/forum.html

The FDIC has also issued the public list of institutions that it has scheduled for a CRA examination during the fourth quarter of 2010. To see if your favorite bank is on it, go to this site and follow the links: http://www.fdic.gov/news/news/press/2010/pr10199.html.
Last Friday I discussed how the non-agency biz was evolving. One company, as it turns out, is responding to the lack of liquidity and secondary market outside of the GSE’s. Capital Solutions Group specializes in non-conforming mortgages for borrowers with the ability to repay and offers a dependable source of liquidity for both brokers and borrowers. On top of that, the company is even accepting investors and offering 10% to 20% yields. Interested parties can contact Rod Colombi at rcolombi@capitalsolutionsgroup.co regarding potential loans and/or investment information.

(And no, this is not a paid announcement. CSG may be going back to the way non-agency loans were done 15-20 years ago. “For owner occupied homeowners the product is usually a 30-yr fixed or 30-yr, fixed for 7, IO/ARM that is fully amortizing with LTV’s less than 65% and the borrower must demonstrate the ability to make the loan payment.  They have to be able to repay the loan. We will evaluate all sources of documented income from W-2’s to bank statements, tax returns, partnerships, etc – no stated income nor high cost loans.  For non-owner loans we focus more on bridge products with terms of less than 2 years. For non-owner occupant borrowers we will also focus on ability to pay, bank statements, ability to sell other properties or assets, cross collateralizing, etc. FICO scores are a factor but not the driver, and each loan and situation is evaluated individually.”)

Last week I also mentioned current business conditions for mortgage bankers and brokers. One wrote, “If a wholesale company, calling on brokers, doesn’t have substantial volumes coming in their door, they either have a rate or a performance/turn-time issue. The good wholesalers are all 2-3 weeks for underwriting. As for us, starting about 3 weeks ago we’re swamped and can’t keep up.”

Kenneth Harney recently wrote a piece focusing on deals falling out because of a low appraisal. “Lenders unilaterally may be lowering the numbers on the appraisals submitted to them in order to avoid accusations that the loans they sell to giant investors Fannie Mae or Freddie Mac are based on inflated appraisals – even slightly inflated. Such value inflations can expose lenders to dreaded “buyback” demands, forcing them to repurchase loans at huge costs.” But starting tomorrow Fannie Mae is prohibiting lenders who sell it loans from changing appraisers’ numbers – lenders must contact appraisers to “resolve” any disagreements about the valuation. “If that’s not possible, they should order a second appraisal – not just chop the value supporting the real estate contract.” Freddie has yet to weigh in.

Yesterday I said that “Flagstar alerted brokers doing business in North Carolina that starting Wednesday the state points and fees percentage limit for North Carolina will be lowered to 4% (currently at 5%)…Please note that FHA MIP, VA funding fee, and PMI are currently included in North Carolina’s points and fees calculation.” A reader noted that only 1.25% of any funding/guarantee/UFMIP related to a government loan product will be included in the 4%.

Fairway Independent Mortgage Corp. will be entering the nationwide wholesale market for select banks, credit unions and brokers. The company did over $3 billion last year, and the group that will be running its wholesale division is from Union Federal Bank and MidAmerica Bank. "As the mortgage industry continues to rebound, we see a fantastic opportunity for us in the wholesale market," said CEO Steve Jacobson.

Everyone knows that interest rates fluctuate, but the last several business days have drilled this home. It doesn’t help when you combine major economic news with light volumes and thinly staffed trading desks. Friday saw a lot of volume, and bond prices dropped. Yesterday, however, the supply dried up, and economists began to pick apart options that the Fed has to improve the economy. Ongoing worries regarding domestic and global growth sent equities lower and Treasuries higher. After all, housing is still very sluggish, even with these great rates, as evidenced by the Existing and New Home Sales figures last week. If the borrowers or property don’t qualify under current guidelines, what difference do rates make? And if consumers don’t have jobs, they can’t really go out and spend money to boost the economy.

(One thing to note in yesterday’s Personal Income and Personal Consumption numbers was the change in the savings rate here in the US. – it was revised down in June, and dropped even more in July to 5.9%. While higher savings will allow consumers to improve their balance sheets, a moderately lower saving rate could indicate a pickup in consumer spending – unless it is because more folks are jobless.)

Anyway, Monday only $1.4 billion in MBS’s traded hands – a light day as mortgage bankers perhaps held off selling in the rally while brokers and agents who locked in loans Friday during the sell-off gritted their teeth. Rate sheet mortgages, which began the day about .125 better in price than Friday, would up the day about .625 better. (But higher coupons barely budged – Fannie 6’s, for example, were better by less than 125.) The yield on the 10-yr Treasury dropped from 2.65% on Friday to 2.53%, and is down again to 2.50% with mortgages better by about .125. Today we have some ISM survey numbers, the Chicago PMI, Consumer Confidence, the release of some Fed minutes, and the S&P/CaseShiller Home Price data.

A Red Sox fan, with two ice chests full of lobster, was stopped by a game warden in the bay off Chatham.  As he was leaving a cove well-known for its lobsters, the game warden asked the man, “Do you have a license to catch those lobsters?”
“No, sir”, replied the Red Sox fan. “I ain’t got a license heah. You must understand, these are my pet lahbstahs.”
“Pet lobsters?”
“Ay-yah!  Every night, I take these lahbstahs down to the bay and let ‘em swim ’round for awhile.  Then, when I whistle, they jump right back into these ice chests heah and I take ‘em home.”
“That’s a bunch of hooey! Lobsters can’t do that.”
The Red Sox fan looked at the warden for a moment and then said, “It’s the truth Mr. Government Man. I’ll show ya. It really works.”
“’O. K.”, said the warden. “I’ve got to see this!”
The Red Sox fan poured the lobsters into the bay and stood and waited.  After several minutes, the warden says, “Well?”
“Well, what?” says the Red Sox fan. 
The warden says, “When are you going to call them back?”
“Call who back?”
“THE LOBSTERS!”’ replied the warden.
“What lahbstahs?” replied the Red Sox fan.

Rob

(Check out

http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx. For archived commentaries, go to www.robchrisman.com. Copyright 2010 Rob Chrisman.  All rights reserved.  This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman