Primer on MI Rescission; Updates from Wells, Flagstar, Freddie, PMI, FAMC; Rates Lower

My five-year-old nephew wanted to caddy for my brother's golf game. "You have to count my strokes," my brother told him. "How much is six plus nine plus eight?"

"Five," answered the nephew.

"Okay," my brother said, "let's go.."

Mortgage banking is a numbers game. Although the illustration above might remind some of their CFO, in other circles it might illustrate what some mortgage bankers are facing right now: MI rescissions. Rescissions are not new. But what is this chatter about MI companies and their rash of rescinding coverage? One well-informed person wrote to me and said, "It seems that some MI companies are employing a rescind now/appeal later approach."

It is important to remember that MI companies generally only see a claim, filed by a servicer, after the foreclosure and the property becomes an REO. (They also see them during short sales and in a few other instances.) Of course, servicing companies keep the MI companies apprised of any 60 days-or-greater delinquencies, so it is on their radar screens. There are a few MI companies that have a reputation for rescinding on everything, but not every MI company is looking to put back every loan to the lender.

The loans that are entering this process were mostly originated from 2005-07, and a portion of them are Pick-a-Pays, Option ARM's, and the like, and in addition MI companies are seeing fraud, misrepresentation, loans not meeting the original terms of bulk commitments, and over-statement of value in them. Total loan volume increased dramatically during those years, so certainly the total number of MI rescissions has increased. Any issues with fraud or misrepresentation are a sure "red flag" when it comes to an MI company refusing to pay a claim. RMIC, for example, has a program for delegated claims servicing that will let the investor/servicer handle their own claims under certain parameters. 

Also adding to the increased number of loans being examined is the moratorium that servicing companies faced earlier this year. As I mentioned, the MI company usually only sees a claim when the loan becomes REO, and if there was a moratorium or backlog, they may only be seeing the loans now. MI companies have done what they can to staff up to meet the increased workload, especially on the investigation side of things, but like servicers they are trying to meet the onslaught of problem loans that have cropped up. Currently MI companies expect to pay out tens of billions in claims, with no conservatorship or TARP monies, through this cycle.

Given the possible losses, it should come as no surprise that rating agencies, often accused of mis-rating billions of dollars of MBS's in previous years, are watching the MI companies closely. Especially with delinquencies moving into prime mortgages faster than expected, the rating companies are watching companies such as Old Republic, PMI, Radian, Genworth, United Guaranty, CMG Mortgage Insurance, and California Housing Loan Insurance Fund (CAHLIF). In fact, a few weeks ago S&P downgraded Mortgage Guaranty Insurance Corp (MGIC) to B+ /Negative Outlook.

Back to the economy! Wall Street MBS desks reported a light day yesterday, without much volatility. Originators are mostly selling their 4.75%-5.125% mortgages, although the Fed continues to buy higher coupons. We saw Construction Spending rise 0.8% in September, the biggest gain in a year, the ISM Factory Index came in well above forecasts, and Pending Sales of existing homes here in the US rose over 6% in September. These "pending sales" are up almost 20% versus a year ago, which many attribute to the tax credit and "really good" prices on the low end.

The FOMC meeting begins today, with the announcement tomorrow at 2:15PM EST with no change expected rates, but perhaps they tweak the language. The Fed may try to find a way of talking about what the conditions are under which interest rates would rise rather than simply pretending that there are no conditions under which rates would go up." So far this morning stock markets are "taking it on the chin", rates are better, with the 10-yr down to 3.40% and mortgages a smidge better.

Wells Fargo's Correspondent channel instituted some FHA Streamline Refinance Policy Changes, following HUD's Mortgagee Letter 2009-32. After 11/17 FHA Streamline refinances purchased must meet the revised FHA policy in addition to meeting the current Wells' policies of

A minimum credit score of 640, adequate payment history, etc. What has changed is that Wells Fargo will no longer require an AUS certificate with FHA Streamline Refinances because HUD has instructed lenders not to use TOTAL on streamline refinances, and that Wells Fargo will align with HUD's revisions on seasoning, net tangible benefit for the borrower, maximum CLTV when Streamline Refinances are serviced by Wells, etc., etc., etc. It is best for clients examine the list directly from WF.  Wells Fargo will continue to require Sellers provide an LP Feedback Certificate or DU Findings Certificate for all other FHA loan types besides the Streamline. (Speaking of which, after December 7, 2009, Wells Fargo Funding will limit the maximum CLTV allowed to 100% for FHA Streamline refinances that are not serviced by Wells Fargo.)

Wells Fargo is also adopting Fannie Mae's qualifying ratio of 45% for Prior Approval loans. "On or after December 7, 2009, Wells Fargo will require the maximum qualifying debt to income ratio for the following conventional conforming Prior Approval underwritten loans, regardless of Loan Score and LTV."

Remember that although Congress has passed a resolution regarding the loan limits, it is not law. Yesterday Flagstar addressed the current question about temporary high cost loan limits. "It appears as if these high cost loan limits will be extended through 2010. Therefore, we will continue to purchase loans under the temporary limits until further notice. An official announcement will be made once additional information becomes available."

Some lenders found themselves on Citi's "Black List". Freddie Mac, as it turns out, also maintains an Exclusionary List "to protect the integrity of our mortgage purchase and servicing functions. The Exclusionary List is a list of people and institutions excluded from engaging in business transactions with Freddie Mac, either directly or indirectly. Over the next several months we are updating this list, and when reviewing it you will notice a significant amount of new information. You must keep the Exclusionary List confidential and use it only to ensure that no excluded person or organization is involved in a mortgage purchase or servicing transaction with Freddie Mac." It can be found on their selling systems: please don't ask me for it - I don't have it, don't have access to it, etc.!

Starting on 11/15, PMI is going to expand a number of their underwriting guidelines. Clients are waiting for information, but "condominiums will be insured at the same levels as Single Family Residences, to a maximum 95% LTV in non-distressed markets.  (Attached housing in Florida is not eligible.), Cash-Out Refinances will be eligible to a maximum 85% LTV with a 720 credit score in non-distressed markets, second homes will be eligible to a maximum 90% LTV with a 720 credit score in non-distressed markets, Construction-Permanent Loans in non-distressed markets will be eligible to a maximum 95% LTV to $417,000 with a 680 credit score, and 90% LTV to $625,500* with a 700 credit score (no coverage during the construction period, rehabilitation loans are not eligible), High-Balance Loans can be insured in non-distressed markets up to 90% LTV with a 700 credit score, and up to 90% LTV with a 740 credit score in distressed markets, and AZ, CA, FL, HI, MD, MI, NV, NJ and RI will now be eligible for High-Balance Loans with a maximum 85% LTV and 740 credit score."    

Franklin American, after 11/18, is revising the maximum loan amount calculations for FHA Streamlines. "The UFMIP refund, if applicable, must now be subtracted from the loan calculation
- Discount points may not be included in the new mortgage amount." They are also changing their "Net Tangible Benefit Guidelines" for refi's so that the borrower's total payment (PITI) must be reduced by the greater of 5% or $50, if transaction changes the loan type to a fixed rate loan from an ARM, the new the fixed rate may not be more than 2% above the existing ARM interest rate, and term reductions will no longer be eligible.

Luigi (the father) says to his son: "I want you to marry a girl of my choice."
Son says: "I will choose my own bride!!!"
Luigi says: "But the girl is Bill Gates' daughter..."
Son answers: "Well, in that case...ok."
Next Luigi approaches Bill Gates and says: "I have a husband for your daughter..."
Bill Gates answers: "But my daughter is too young to marry!!"
Luigi says: "But this young man is a vice-president of the World Bank..."
Bill Gates answers: "Ah, in that case, ok."
Finally Luigi goes to see the president of the World Bank.
Luigi says: 'I have a young man to be recommended as a vice-president."
President answers: "But I already have more vice-presidents than I need!"
Luigi says: "But this young man is Bill Gates' son-in-law..."
President answers: "Ah, in that case, ok.''