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

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.

____________________________________

WHO’S IN CHARGE HERE?

I never blame myself when I’m not hitting. I just blame the bat and if it keeps up, I change bats. After all, if I know it isn’t my fault that I’m not hitting, how can I get mad at myself?
Yogi Berra

Let’s admit it: the tendency to pretend we’re holding somebody or some entity “accountable” for the mortgage crisis, when we’re really not, is just a fashionable avoidance of that unpleasant word: “blame.” Once that label sticks, it’s on to dealing with the nasty culprits!

Blaming is purported to be cowardly, even passive; and being held accountable is lauded as proactive and high-minded. So, the word “accountable” is now in vogue, instead of “blame.” Frankly, the word “accountable” in today’s world is merely politically-correct, euphemistic Newspeak for the fact that “you know you did wrong, I know you did wrong, everybody in the world knows you did wrong, but you’ll pay no penalties whatsoever for doing anything wrong.”

Although the tone-at-the-top mantra of the Obama Administration is “let’s look forward and not look back,” or the Bush Administration’s tactic of retroactively making lawful what was heretofore unlawful (or unconstitutional) remains beyond contest, or the on-going trading of opaque financial instruments seems to continue in an entirely unregulated market, or many government departments and agencies are still remaining reactive at best during a crisis – in the Newspeak of our times, we are assured of accountability, which now apparently means there’s nobody to blame at all, nobody held responsible for the meltdown, nobody to put in jail. Everybody’s free to go and, we’re admonished, it doesn’t do any good to blame anybody for anything, since we can’t fix this mortgage mess unless and until we all can get along, be bi-partisan, be post-partisan, and look to the better angels of our nature!

Accountability these days seems to mean no adverse consequences to the perpetrator and no blame for anybody. If you find a person to blame, that person’s not accountable; and if you find somebody who is accountable, that person is not to blame. While lobbyists, dogmatists, political catechists, and ideologues just make stuff up, they’ve found the culprit for sure, those bad actors portrayed as directly and indirectly culpable, the rapacious mortgage originators: they certainly should be blamed, reined in, re-regulated, and de-incentivized for having largely contributed to the worst financial crisis since the Great Depression!

Portraying mortgage originators as the culprit is a politically useful narrative meant for the consumption of low information voters; but, as we’ll see, there is plenty of blame in this game and, to date, not much real, old-fashioned accountability – the kind that has real world consequences – except, of course, for those who originated the mortgages in the first place.

Results are what you expect,
consequences are what you get.
Anonymous

On Tuesday, June 22, 2010, a Conference Committee met in Room 106 of the Dirksen Senate Office Building, in Washington, to reconcile Senate and House versions of H.R. 4173, known as the Wall Street Reform and Consumer Protection Act. That bill ostensibly was drafted to create a new consumer financial protection “watchdog,” bring about an end to “too big to fail” bailouts, set up an early warning system to “predict and prevent” the next crisis, and bring transparency and accountability to exotic instruments such as derivatives. Led by Representative Barnie Frank (D-MA) and Senator Christopher Dodd (D-CT), the conferees reviewed and voted on new regulations as well as additions, deletions, and revisions of existing regulations.

The list of new regulations and amendments to existing regulations, consisting of thousands of pages, read like the attenuated, convoluted, cross-tabulated Index Section of a Whodunit’s Guide to the Perplexed. Seated around a large, rectangular dais, the Committee’s politicians called one another out, speechified, postured, and legislated to protect their respective constituencies, absolved themselves of ever having allowed their own politics to contribute to the financial crisis, while the Clerk recorded votes, staff members raced around, and lawyers scurried about with various and sundry red-lined versions of financial reform legislation.

On Friday, June 25, 2010, all the backroom, sub rosa, deals were ironed out, all the special interests had their way or lost their sway, and the votes tallied up mostly across party lines: Democrats – Aye; Republicans – Nay. The Ayes had it!

Congratulations filled the conference chamber, Representatives and Senators praised one another, staff high-fived and hugged one another, and President Obama hailed the legislation as the “toughest financial reforms since the ones we passed in the aftermath of the Great Depression." Now only House and Senate approval was needed, and thence the President’s multi-pen signature, to become the law – which it did on July 21, 2010, just before noon. The legislation, now known as the Dodd-Frank Act, became the law of the land.

Among the many features of the legislation, the following was gaveled in:

• Requiring Lenders to Ensure a Borrower’s Ability to Repay: Establishing a “simple federal standard” (sic) for all home loans to ensure that borrowers can repay the loans they are sold.
• Prohibiting Unfair Lending Practices: Prohibiting the financial incentives for subprime loans that “encourage lenders to steer borrowers into more costly loans,” including the bonuses known as yield spread premiums that “lenders pay to brokers to inflate the cost of loans.”
• Penalizing Irresponsible Lending: Issuing monetary penalties to lenders and mortgage brokers who don’t comply with new standards by holding them accountable for as high as three-year’s interest payments and damages plus attorney’s fees (if any), and, protects borrowers against foreclosure for violations of the new standards.
• Expanding Consumer Protections for High-Cost Mortgages: Expanding the protections available under federal rules on high-cost loans — lowering the interest rate and the points and fee triggers that define high cost loans.
• Mandating Additional Mortgage Disclosures: Requiring lenders to disclose the maximum a consumer could pay on a variable rate mortgage, with a warning that payments will vary based on interest rate changes.
• Establishing an Office of Housing Counseling: Establishing a special office within the Department of Housing and Urban Development (HUD) to “boost homeownership and rental housing” counseling.

 ___________________________________________ 

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.

Bill Coppedge is ON VACATION and OFF THE GRID. 

The news clips portion of this blog returns Tuesday, September 7.

Earlier this month I mentioned that buybacks are, and are expected to be, a big issue for many originators regardless of size. Two of the most common reasons for repurchase are the discovery that the borrower has debts that were not disclosed to the lender/investor, and problems with appraisals. Buybacks tend to flow from Fannie and Freddie to the large investors and accumulators, and then down through mid-sized and smaller lenders.

The buyback problem is either dealt with "in-house", which has its own set of issues regarding time, expense, and dedicated personnel, or out-sourced to a company specializing in helping companies deal with them. Pyramid Quality Assurance, for example, specializes in "M/I Rescissions and Repurchase Defense." Companies like Pyramid bring in experienced underwriter-analysts to review and analyze each loan file subject to a rescission or repurchase demand then formulate a response. And they have a good sense of what is working for other companies in dealing with buybacks. (If you need more information, contact Scot Baker at sbaker@pyramidqa.com 

Few people feel that mortgage banking is a non-profit proposition. And even though we still have seven months until the compensation rules change/may change, loan officer pay seems to be on the front burner for many originators. For example, Nationstar, a wholesale company calling on brokers, just told their clients that starting last week it will "cap the Broker’s Net Yield Spread Premium (YSP) to the following: Fixed-rate loan products – 3%, ARM loan products – 2%. Nationstar is defining Net YSP as the following: Gross YSP less any and all investor and Nationstar price adjustors. If brokers want to credit fees for the borrower, the fees must be deducted from the broker’s Max YSP of 3% on Fixed-rate loan products and 2% on ARM loan products."

It is believed that the Federal Reserve’s mandate guts yield spread premium, at the risk of borrowers using a little higher rate to cover some of their closing costs. Eternal bond math, however, tells us that an investor will pay more for a higher yielding fixed-income security, all else being equal (including risk). The rule will all but ban YSP’s, which are paid to the broker or loan officer for originating a loan with a higher interest rate (sometimes in exchange for lower up-front settlement costs). But the Dodd-Frank Act, which call for an outright ban on yield-spread premiums, allows regulators (like the Consumer Financial Protection Bureau) to make exceptions and resolve any issues.

Kate Berry, in an American Banker article, states that "To make mortgage costs more transparent, the Fed rule will let lenders pay yield-spread premiums only in cases where the borrower is not paying an origination or other fee to the lender. In practice, such cases are unlikely, since the lender typically charges borrowers some form of origination fee." She writes that, "Small brokers may be forced to quit the business if they only earn 1% of the loan amount, which may not be enough to cover their own costs. Both brokers and retail loan officers may end up joining mortgage banks and correspondent lenders that pay a salary, a commission or any other incentive based on factors other than the interest rate or loan terms. Correspondent lenders said they may take secondary market profits and use that gain-on-sale income to pay loan officers, particularly high producers that currently earn 4% or more per loan." Either that or the borrowers will be charged up to 2 percentage points in origination charges or up-front fees, compared with about 1 point these days.

Of course, banks and the owners of originators could end up pocketing most of what they had previously paid to loan officers and brokers on top of (potentially higher) points and fees collected from the borrower and secondary market gains from the sale of loans. Or they may tweak the pay to reflect performance measures like pull through and volume. Others are screaming "bloody murder" and asking why Realtors can still earn a fixed commission of 5-6%.

Just as the industry is dealing with Southwest Securities either entirely or severely cutting warehouse lines, words comes from MetLife Bank that it is finally gearing up a warehouse line. MetLife hired two former Sovereign Bank executives (Charley Clark and Paul Chmielnski) to get the ball rolling, and supposedly MetLife will be hiring warehouse personnel during the 3^rd quarter

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." Also this Wednesday Flag will begin accepting FHA TPO applications from brokers and correspondents seeking its sponsorship to originate FHA loans and the application and requirements will be available on its website on that date.

U. S. Bank Home Mortgage Wholesale Division told its broker clients that it "will begin requiring that all Conventional and FHA appraisals, dated on or after September 1, 2010, meet the appraisal requirements per Fannie Mae’s Announcement SEL-2010-09 (06/30/10)" which include interior photos. "For our CUSB and Table Fund Lenders, that order through USBHM’s Appraisal Services web site, we have arranged for all applicable requirements to be followed."

If someone is going to buy a car, often they will take a gander at the J.D. Power and Associates rankings. Borrowers, however, either don’t have a choice in the company that eventually services their loan, or doesn’t consider the servicing reputation when choosing a lender. But JDP ranks loan servicers based on the responses from 4,500 homeowners in May and June of this year. (Considering how many borrowers are out there, some may argue this is a pretty small sample.) These days loan modifications, and the attitude and competency of the servicer’s employees, figure prominently into the rankings. BB&T (Branch Banking & Trust) ranks highest in customer satisfaction among primary mortgage servicers, followed by SunTrust Mortgage, U.S. Bank, Wells Fargo, and Fifth Third. http://businesscenter.jdpower.com/news/pressrelease.aspx?ID=2010171

Union Bank told its broker clients of a change to its credit score requirements for loan amounts above $2 million (yes, there are lenders that do loans above $2 million), raising it to a FICO of 700 starting today. And for its "Portfolio Express" line, the existing loan being refinanced must have been originated by Union Bank, but told brokers that properties located outside of CA, OR, and WA are also eligible.

The relatively flat yield curve impacts many aspects of mortgage banking. Not only does the spread between ARM and fixed rate mortgage rates decline, but for example Wells’ wholesale told it brokers, "Costs are down, and Wells Fargo is passing the savings along to you. The daily lock extension fee has been reduced from 3 bps to 2 bps."

Last week was a volatile week for mortgage rates, which rarely helps efforts to hedge pipelines, capped off by Friday’s big sell-off. $3.2 billion in mortgages were sold, as usual mostly 4% but also a good portion of 4.5% securities, which include 4.75-5.125% fixed-rate loans. We began with a downward revision to the 2^nd Quarter GDP number – but not as "downwardly revised" as most expected. And then came Chairman Bernanke’s speech at the Kansas City Fed’s Jackson Hole Conference. Bernanke said the central bank has the tools to prevent the U.S. economy from slipping back into a recession, is prepared to use them, suggested that there will be continued expansion as households rebuild their savings, banks increase lending and companies become more willing to hire (in 2011). After this stocks shot up and fixed-income prices went lower & rates higher. 30-yr bonds worsened by over 3 points, 10-yr prices dropped 1.5 points and yields shot up into the mid-2.60% range, and mortgage security prices dropped (worsened) between .5 and .625.

It’s a new week, and one can expect things to become quiet as we move toward Friday’s start of the Labor Day Weekend – at least after we find out the employment data on Friday. Estimates seem to call for Nonfarm Payroll to drop about 65k, with 115k census-related layoffs and +50k in private sector growth. Personal income and spending came in close to expectations, up 0.2% and 0.4%, respectively.  The Chicago PMI will be released tomorrow along with the minutes from the August 10 Fed meeting and one of the ISM survey numbers. Throw in ISM Manufacturing Pending Home Sales, ISM Services, Productivity, Construction Spending, Consumer Confidence, Jobless Claims, and Factory Orders, and one has a busy, potentially volatile, week. Ahead of all this we findthe 10-yr at 2.59% and mortgage prices better by .125.

A cleaning woman was applying for a new position.

When asked why she left her last place of employment, she replied, "Yes, sir, they paid good wages, but it was the most ridiculous place I ever worked.  They played a game called Bridge, and last night a lot of folks were there. As I was about to bring in the refreshments, I heard a man say, ‘Lay down and let’s see what you’ve got.’

Another man said, ‘I’ve got strength but no length.’

Another man says to the lady, ‘Take your hand off my trick!’

I pretty near dropped dead just when the lady answered, ‘You jumped me twice when you didn’t have the strength for one raise.’

Another lady was talking about protecting her honor and two other ladies were talking and one said, ‘Now it’s time for me to play with your husband and you can play with mine.’

Well, I just got my hat and coat and as I was leaving, I hope to die if one of them didn’t say, ‘Well, I guess we’ll go home now…..This is the last rubber.’"

Rob

(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx. For archived commentaries, go to ww.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.

The August commentary is an excerpt from Pat’s presentation, "Cradle to Grave:  The Economic Crisis and Recovery", given Sunday, August  22 at the Mortgage Bankers of the Carolinas Convention in Hilton Head, South Carolina.

In the this month’s commentary:

1. Reviving the Economy – To Push or Not to Push
2. Will the Economy Rise from the Dead?
3. Mortgage Markets in 2010 and 2011
4. Lenders with One Foot in the Grave

  >>> CLICK TO READ

Economic Commentary August 26 2010

To Our Clients, Colleagues and Friends,

• Compass Analytics tracks and publishes the daily spread between best efforts and mandatory pricing.  We asked Rob Kessel there to share their methodology with us, and he told us “The true Best Efforts-Mandatory spread can only be derived by looking at mandatory prices across investors against their best B.E. prices, looking at specific, closed loans.”  
  He explained further that they do this daily over a 50 bps range of note rates, using best efforts and mandatory prices obtained by mid-sized sellers ($60-80 million). Both Corky and I used Compass Analytics in our past lives, and when you’re looking for a hedging advisor, you absolutely need to consider them. When I went to work for Baldwin & Howell in 1977, they used Compass (it was called Tuttle & Co. then), so they’ve been around for over thirty years.

• When I joined Baldwin & Howell, my boss was James Johnson (we called him JJ), and after 2-3 days I went to him and said “JJ, the goal here is to get as many loans as possible, right?  So if that’s the case, after all this effort in getting these loans, why do you just turn around and sell them.”  Naïve, or just dumb?
• We were performing a FOCIS-plus on a Missouri bank last week, and they have a cost of funds of about 13 bps.  This is not a typo.  One obvious recommendation to a company like this is: Slow down your shipping!
• Everyone knows what the Triple Crown is, where you lead the league in home runs, runs batted in, and batting average. But what about a Negative-Triple Crown, for the player with the worst numbers in these three categories?  After 388 at bats, Cesar Izturis of the Baltimore Orioles has only one home run, 24 runs batted in, and a .237 batting average.
  If he can keep his numbers down, he has a very good chance to lead the league with the worst numbers in all three categories.  This photo could explain his anemic numbers.  It’s awfully hard to be a good hitter when you insist on using a broken bat. 
  

• As more mortgage banking companies think about hiring a Risk Management Officer, we get asked from time to time what that person would do.  Along with developing systems to measure risk, a good starting point is to have that person constantly asking “What could wrong?”  A good CEO will do that anyway, and if he isn’t doing so, he should be.  No matter how long you’ve been doing something in a company, and certainly for new ventures, asking the question “What could go wrong” and then probing deeper and deeper is a good approach.
• Yet one more person in Mortgage Land whose kid is starting college this year.  Gary Egkan (originally Freddie Mac, now Radian) took his son to the University of Arizona . It seems like yesterday Gary gave me a chocolate cigar when his son was born.

• As usual, UC Berkeley’s incoming students reflect the changing face of America . The ethnic breakdown of the entering freshman class at UC Berkeley is 42% Asian American, 31% Caucasian, 12% Chicano/Latino, 3% African American, 3% Filipino, with 7% refusing to state their ethnicity or reporting it as "other."  I still have my yearbooks from Cal , and flipping through the pages, it looks like the school was about 95% white back then.
  The American Dream will be closer to being fulfilled when 1003’s, college applications, and all government forms stop asking people about their race. Anyway, Here’s a nice photo of the entrance to the Cal campus.
  

• We’ve preached for 25 years that banks shouldn’t own mortgage companies or have them as subsidiaries, that they should just be part of the bank.  Anyway, we recently advised a mid-west thrift in their acquisition of a mortgage company, and their CEO wrote the following to us: “The Federal Reserve called me last week as they are going to take over regulation of our holding company from the OTS. They had heard in the local press of our mortgage company expansion and wanted to know if it was an operating subsidiary of the holding company (it isn’t). If it was, they wanted to see a business plan, copy of board reports, policy, etc. etc   Because it is the actual bank operation they dropped the line of questioning.”  A perfect example of why you shouldn’t have your mortgage operations in a subsidiary.
• When my daughter was being recruited for some mid-Atlantic college equestrian teams, she sand I had dinner in Baltimore with secondary marketing executive Ellen Wilson.  Ellen wrote about Hannah starting college: “You must be very excited for Hannah.  Being a freshman is really FUN.  Six months from now, how many of can say we had a 100% increase in our total number of friends, at least a 50% increase overall knowledge, and a 75% increase in total alcohol tolerance?” Ellen definitely has a way with words.
• People think secondary marketing types lead boring lives, and I just heard that again the other day.  I won’t name names, but some of you North Bay types will remember the secondary marketing fellow who had two families.  He cheated on his wife, and when he got the woman pregnant, he maintained two families, secretly, maybe 90 minutes apart.  He’d tell one family he was going away on business and spend time with the other family, and vice versa.  I knew him fairly well and I didn’t have a clue.  He died of cancer maybe 20 years ago, and when he had only days to live, he confessed everything to both families.  Sad, tragic, maybe pathetic, but not just another secondary marketing guy living a life of boredom.

• Here’s one reason, we think, why mortgage companies sell for so little these days: If you don’t have servicing, probably 95% or more of your income comes from loan production, right?  And given that rates will someday rise, and probably to the point of eliminating a big percentage of refinances, aren’t you really making a huge bet on rates staying low forever?  Isn’t that like betting everything on red? MacDonald’s will probably keep selling Big Macs forever, but how long will mortgage companies keep doing refinances?  This isn’t a question of a Black Swan possibly lurking out there.  It is there, and everyone knows it’s there.  We just don’t know when the Black Swan of higher rates will show itself.
• On the above point, would you buy stock in a mortgage banking company that had no servicing and made all its money on loan production?  You would?   Really?  What multiple would you use?  Are you sure?
• Angelo Mozilo, what a great story of a butcher’s kid who built such a successful company. Anyway, two thoughts on a Saturday morning for those who would criticize him: (1)  You judge a man by the entirety of his life, and not just the last thing he did, and (2) We run into dozens and dozens of former Countrywide employees all over the country, and every one of them has always praised him.  Doesn’t that say a lot about a man, when his former employees universally have so much respect for him?
• Here’s an interesting question:  How do employees and Directors stand up to charismatic leaders with forceful personalities.   How do you tell them they’re wrong?  I’d like to think that if I had been on his Board, I’d have told Mozilo “Look, this hyper growth at the bank will not have a good ending.  You’ve got to slow it way, way down, get it under control, and let’s show regulators that we’re only going to only budget 15% growth.  You know mortgage banking a thousand-fold more than I do, but I know the regulators, and this rapid growth at the bank will kill us one day unless wee slow it down.” 
  
• President Kennedy knew that people tended to tell him what they thought he wanted to hear. So during the Cuban Missile Crisis, he often had all his advisors meet in the Cabinet Room without him, joining them only after they’d hashed things out. In the same spirit, we think Bank Boards should meet without their CEO in the room more often, especially if the CEO has a strong personality.
• The person next to me on a flight home from St. Louis was a Southwest airline pilot. He was quite talkative, and when I asked him about those Northwest pilots, he said “Yeah, they were probably sleeping, but it’s not dangerous as long as you don’t run out of gas.”  He told me that he’ll often tell his co-pilot that he’s going to close his eyes for a short nap, and he also told me he does lot of reading on longer flights.”  I kind of wish he hadn’t told me that
• That was kind of scary, but even scarier was the pilot started talking about rock music and insisted that statement that Little Richard was the true founder of Rock ‘n Roll.  Look, no one had better hair than Little Richard (photo below), but Chuck Berry’s lyrics spoke much more to the teenagers of the 50’s.  He sang about dating and cars, and even though he was kind of a pervert (he served time for messing around with a girl slightly underage) his songs were really about white, suburban teenagers and their clean-cut lives.  His songs were often lyrical:  “Last time I saw Marie, she was waving me goodbye, with hurry-home drops on her cheeks that trickled from her eyes…”  Hurry-home drops?  What great writing! 
  
  

By contrast, here are some of the lyrics to Little Richard’s all-time hit Tutti Fruity:   “Wop-bop-a-loo-lop a-lop-bam-boo, Tutti Frutti, all rootie, Tutti Fruity, all rootie, Tutti Fruity, all rootie a wop-bop-a-loo-lop a-lop-bam-boo…”   People, is there any doubt that Chuck Berry was truly the poet of rock and roll and not Little Richard?

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Garrett, Watts & Co.

“Helping lenders increase revenues, control costs, and better manage risk.”

• Corky Watts   (408-395-5504)
• Mike McAuley   (281-250-2536)
• Joe Garrett   (510-469-8633)

Bill Coppedge is ON VACATION and OFF THE GRID. 

The news clips portion of this blog returns Tuesday, September 7.

Mortgage broker is becoming a vanishing breed – Market downturn, subsequent regulations have squeezed many out of the industry – By Jeff Swiatek – IndyStar.com

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(in the end the consumer will pay) New Fees Weighed for Mortgage Industry – By DEBORAH SOLOMON And NICK TIMIRAOS – .. "To suggest the private market can come back in and take the place [of the government] is simply impractical. It won’t work," said Pacific Investment Management’s Bill Gross at last week’s summit. … – WSJ Real Estate

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Wells Fargo “Strongly” Opposes Accounting Board’s New Rules on Loan Value – By Dakin Campbell – …  said it disagrees with an accounting board’s plan that would require banks to report the fair value of loans on their books.  “We strongly oppose the expansion of fair value as the primary balance-sheet measurement attribute for virtually all financial instruments,” Wells Fargo Controller Richard Levy wrote in the Aug. 19 letter. “It will only serve to cement a short-term focus on fair-value measures.” – Bloomberg

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(has examples) Mortgage fraudsters find new schemes – Posted by Teresa Mears – Lenders have tightened the rules, but crooks are finding new ways to steal, including identity theft. – MSN Money
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US Commercial Real Estate Slump Not as Bad as S&P Feared – … The slump in the U.S. commercial property market didn’t quite plumb the depths of the downturn in residential real estate, but although we see signs that home prices are nearing the bottom, commercial real estate could fall further. Despite a surge in foreclosures in the U.S. commercial real estate market, there were fewer defaults in commercial mortgage-backed securities (CMBS) than Standard & Poor’s Ratings Services originally expected. … – Research Recap

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proposal worth reading – Alternative Housing Finance: How Does “SwapRent” Work – Posted by Larry Doyle -Sense on Cents
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Deutsche Bank Summarizes Future of GSEs, Government Guarantee – by JACOB GAFFNEY – HousingWire

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Report on Fannie, Freddie gives new theory for collapse – By Zachary A. Goldfarb – … But Thursday’s report from the Federal Housing Finance Agency said that Fannie and Freddie’s portfolios weren’t the major driver behind the companies’ losses.  Rather, it was the role the companies played as a guarantor of mortgages that led to most of their losses, the FHFA said. Geithner has also pointed to the weight of souring guaranteed loans as a source for the companies’ troubles…. – Washington Post

Bill Coppedge is ON VACATION and OFF THE GRID. 

The news clips portion of this blog returns Tuesday, September 7.

Wall Street debates prospect of bond bubble – By Adam Shell -  NEW YORK — Is a bubble brewing in the normally sedate U.S. government bond market? ...  In early April, the 10-year note yielded nearly 4%. On Friday, it was 2.62%, and last week, it hit its lowest yield since March 2009. Its all-time low yield was 2.06% in December 2008, three months after the collapse of Lehman Bros. nearly sparked a global financial meltdown. – USA Today
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The economy goes in and out, and from time to time the US manufacturing sector booms.  But this chart, put together by Paul Kedrosky, makes it pretty clear: as a share of total non-farm payrolls, manufacturing jobs are only going in one direction (down). … – Clusterstock at Business Insider

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Bernanke Must Raise Benchmark Rate 2 Points, Rajan Says – By Scott Lanman and Simon Kennedy – … Interest rates near zero risk fanning asset bubbles or propping up inefficient companies, say Rajan and William White, former head of the Bank for International Settlements’ monetary and economic department. After Europe’s debt crisis recedes, Fed Chairman Ben S. Bernanke should start increasing his benchmark rate by as much as 2 percentage points so it’s no longer negative in real terms, Rajan says. … – Bloomberg

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European Covered Bonds Shift Close to Sovereigns as Traders See Danger - by JACOB GAFFNEY – As the covered bond legislation in the United States sits in committee awaiting an eventual vote in the House of Representatives, traders in Europe – where the product is traditionally based – report that prices are being pushed to "dangerous" levels. – HousingWire

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`Greenspan Put’ Fading, Federal Reserve Loses Market Clout, UniCredit Says – By Alexis Xydias – Investors should not live in hope that fresh Federal Reserve stimulus efforts will underpin stock prices because the U.S. central bank has lost the clout to offset a slowdown, according to UniCredit SpA. … “A more pessimistic assessment of the ability of the U.S. central bank going forward to successfully counter-steer in the event of economic downswings or crises will probably have far-reaching ramifications for the behavior of equity investors.” … – Bloomberg

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(Bill Gross recaps his testimony in Washington) Mr. Gross Goes to Washington – by Bill Gross – PIMCO 
1.  Americans now know that housing prices don’t always go up, and that they can in fact go down by 30%–50% in a few short years.
2.  Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending.
3.  Private mortgage lenders will demand extraordinary down payments, impeccable credit histories and significantly higher yields than what markets grew used to over the past several decades.
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Mullen: National Debt is a Security Threat -  Michael Cheek -  The national debt is the single biggest threat to national security, according to Adm. Mike Mullen, chairman of the Joint Chiefs of Staff. Tax payers will be paying around $600 billion in interest on the national debt by 2012, the chairman told students and local leaders in Detroit.
“That’s one year’s worth of defense budget,” he said, adding that the Pentagon needs to cut back on spending  – Executive Gov.com

MORTGAGE COMPLIANCE

On August, 13, 2010, Fannie Mae clarified certain aspects of its Loan Quality Initiative requirements stated in its March 2, 2010 Announcement (SEL-2010-01).

In the March update, Fannie "required lenders to determine that all debts of the borrower incurred or closed up to and concurrent with the closing of the subject mortgage are disclosed on the final loan application and included in the qualification for the subject mortgage loan."

An unintended consequence of Announcement SEL-2010-01 was the interpretation by some lenders that Fannie Mae was implementing a new requirement that the borrower be re-qualified up until closing. Indeed, we have worked with lenders that were asked by investors to repurchase loans because the former did not re-underwrite prior to closing for undisclosed liabilities that had led to excessive income ratios – even though, prior to closing, the lenders had not updated credit and had no knowledge that the borrowers had undisclosed liabilities. We successfully rebutted these repurchase demands, but Fannie’s update lingered.

Many lenders believed that the March update required a new credit report just before the closing of the loan. The new Announcement (SEL-2010-11) now states that "this was not Fannie Mae’s intent."

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.