Mortgage Rates Getting Better

Two soap operas created more than 40 years ago, who taught us not to bother getting married since it’s only going to last until next season anyway, were canceled: “All My Children” and “One Life to Live” are history. My soap opera knowledge extends to seeing the doc drawers sobbing while watching Luke & Laura in the lunch room so I am not an expert on those or “General Hospital,” but supposedly this leaves only four English-speaking soaps on network TV.

25 basis point increase…FHA…MIP…Monday. ‘Nuff said – FHA lenders everywhere are scrambling to take down those FHA case numbers ahead of Monday’s MI change. Operators standing by!

Mortgage originators are required, under the SAFE Act, to authorize a credit report be pulled. (“All licensees will be required to authorize a credit report through NMLS”: NMLS  But it seems that state governments don’t like employers “discriminating” potential hires based on credit history, and in fact state governments & consumer groups are very concerned about the trend of employers to use credit check in the hiring process and might start offering legislation against it. Here is the latest on this potential double standard: CreditReportsforHiring?

One area of confusion is compensation based on product type, which has increased to the point of Wells Fargo’s correspondent group notifying clients, “…loans from originators or aggregators where compensation policies allow for varied compensation based on product type are not eligible for purchase…the rule states that LO compensation cannot be based upon a transaction’s terms or conditions. The rules also prohibit ‘steering’ a consumer to a product offering less favorable terms in order to increase LO compensation. According to the Federal Reserve Board, while product type is not a “term or condition”, it is likely a ‘proxy’ for a term or condition. Under the regulation, compensation that varies based on a characteristic that is a proxy for a term or condition is also prohibited…Wells Fargo remains concerned about the viability of proving compliance, even in instances where a variation of time and effort of the loan originator can be established.”

(Editor’s note: I have not seen other aggregators come out with scrutiny on their correspondent clients’ compliance to LO Comp, in spite of the servicer who is first in line to refund fees and pay penalties on a non-compliant foreclosure. And it’s also the large aggregators who are also the prime targets for class action suits, which is always a risk with new and untested regulations.  If the correspondent’s client shuts down, or can’t pay the penalty, then it’s the servicer who will have to take the hit. Maybe I’m missing something…)

Another is occupancy. Yesterday I mentioned that, “EverBank spread the word to brokers that, “Since N/O/O loans do not follow the new Dodd Frank Rule, ‘We can continue business as usual with them when registering and submitting. Please note you will not have to price them under Lender Paid, brokers can use the previous procedures, and when registering the loan (EverBank’s system) will not give you that option.” This is a great example of the subjective interpretative nature that still exists in the industry around many of these rules, and the discrepancy between Dodd Frank and TILA.

Any companies sending folks to the Secondary Conference in New York in a few weeks, and dealing with repurchase requests, may want to spend some time with The Prieston Group and the American Mortgage Law Group. They’ll be there for “consultations, information and solutions related to repurchase defense and management.” You may want to shoot an e-mail to if you have questions about services and strategies that reduce the incidence of repurchases (This is not a paid announcement, by the way.)

Regarding the proposed Qualified Residential Mortgage provisions, Brian B. from Two River Mortgage wrote, “One of the errors that Congress fails to note about the 20% down payment requirement is that it is basically wrong! The focus of QRM should not be on LTV, and instead be on reserves & credit history and use the historical numbers, pre-2005. One of the reasons Thornburg’s portfolio actually performed so well was the required reserves. Yes, some of the P&I payments were $5-$10,000, but if the borrower had $800,000 that’s a much better ‘burn rate’ than a borrower who has a $1,200 PITI payment and only $3,600 in reserves. Both could lose their job, but whose in a better position to survive? I’m willing to bet that the foreclosure rate has a direct correlation to the savings rate of the borrowers, and that those with a 401(k) but unemployed are more likely to be current on their mortgage. Stressed, but current.” Here is the latest: BloombergQRM

Bank of America announced it is eliminating 1,500 jobs in its mortgage origination business (by closing 100 regional fulfillment centers) and shifting another 350 jobs from creating new home loans to handling troubled existing loans. Per the WSJ article, “This is just the latest move by (BofA) to get away from creating new home loans and instead turn its focus on the massive pile of bad home loans it has, many of which it got from the purchase of Countrywide Financial…Through a series of announcements the bank has now moved about 4,000 employees from the creating side to the troubled mortgage side. Executives have also been rotated.”

Bank of America released its results this morning. Revenue came in close to expectations, but per the CEO mortgage operations and compensation issues impacted earnings. The bank reported net income of $2.0 billion, less than expected, compared with $3.2 billion in the same quarter a year ago, and lost $2.39 billion in its residential mortgage unit, compared with a $2.07 billion loss in the same quarter a year earlier. On the mortgage side, revenue dropped and expenses increased – according to the earnings release, Bank of America’s “representations and warranties provision” was $1 billion in the first quarter, compared to $526 million in the first quarter of 2010. The bank said more than half of the provision is attributable to mortgage repurchases funneled through Fannie May and Freddie Mac.

Fannie & Freddie are often lumped together, especially since they are both under FHFA. But Wall Street traders and mortgage investors have noticed a trend recently: the Freddie Mac MBS market share has declined over the last few quarters, attributed to a combination of best execution strategies on the part of originators, acquisitions or closures of originators that were traditionally only Freddie Mac MBS issuers (like TBW & WAMU) and a more aggressive tightening/pricing of credit by Freddie Mac. Between 7/10 and 3/11, the outstanding balance of Fannie MBS’s increased by $17 billion whereas it has decreased by $75 billion for Freddie Mac MBS during this period. Freddie Mac’s share of new issuance declined from more than 40% in 2005-07 to around 36% in 2011, much due to BofA & Wells reducing the amount they securitize through Freddie, as well as WAMU and TBW’s demise. Sellers are reporting that the historical Gold-Fannie spread has suffered in the last 6 months, and originators are seeing better execution by putting loans into Fannie securities.

RealtyTrac’s March housing study reports a 15% decrease in foreclosure activity between the fourth quarter of 2010 and the first quarter of 2011, as well as a 27% decline compared to the same period a year ago. But before you break out the champagne, the decline is being attributed to extended processing timelines, not an improving market. Per the CEO, “Weak demand, declining home prices and the lack of credit availability are weighing heavily on the market, which is still facing the dual threat of a looming shadow inventory of distressed properties and the probability that foreclosure activity will begin to increase again as lenders and servicers gradually work their way through the backlog of thousands of foreclosures that have been delayed due to improperly processed paperwork.”

Their report noted that judicial foreclosure states, such as Florida and Massachusetts, “accounted for some of the biggest quarterly and annual decreases in the first quarter.” For the month of March, foreclosure filings were up 7% from February and were reported on 239,795 U.S. properties. Nevada has the highest rate of foreclosure filings with a total 32,000 properties, or one in every 35, receiving one, and Las Vegas posted the highest number of filings on the metropolitan level, at 26,275, or one in every 31 homes. Nevada was followed closely by Arizona and California at the top of the foreclosure activity lists. California foreclosures currently account for 25% of the entire market.

In spite of a decent amount of news yesterday (CPI, a strong $13 billion 30-yr auction), there wasn’t much volatility yesterday, and by the end of the day the 10-yr closed at 3.49%, the Dow was up about 20 points, MBS selling volume was light, and MBS prices closed the day nearly unchanged from Wednesday’s levels.
Last month the Consumer Price Index was +.5%, the largest monthly gain since June 2009. It would seem that producers have been grappling with higher raw material costs for some time and due to sluggish demand have been unable to pass on much of the increased costs to us. It was expected to be +.5 for March also, and came in at that with the core rate +.1%. The Empire State Manufacturing Index shot up to “21.7”, a strong number. Later we have Industrial Production and Capacity Utilization, and a preliminary Michigan Sentiment reading, which are generally not as “market moving” as the CPI number, or for that matter the debt problems with which the US and Europe are grappling. After the numbers the 10-yr is at 3.43%, and agency MBS prices are better by .250 or more depending on coupon. Rob Chrisman

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