Fannie Mae Imminent Default Indicator; Borrower Funded Temporary Buydowns; DR Horton Out of the Red; Anti-Flipping Debate

I thought that I knew what a bank was, until those clever folks at the internet gave me SOMETHING ELSE to contemplate

Happy Groundhog Day. Few offices outside of Punxsutawney, PA use this as a holiday, whereby since 1887 if the groundhog (Punxsutawney Phil) sees his shadow we have six more weeks of winter. If he doesn't see his shadow, we will have an early spring. (Never to be outdone, the Great State of Texas chose its state mammal, an armadillo, to predict the weather for their first Armadillo Day.) The National Climatic Data Center reports that Phil's predictions have been correct only 39% of the time. Worse than a coin toss!

Do we really need, in the United States, a return to more lenient credit? Self-employed borrowers aside, probably not, as many believe that it helped contribute to the credit issues we have now. Yet the press makes a big deal out of banks in the United States not loosening the flow of credit to consumers and businesses. It is truly a "supply and demand thing", the credit markets are, and a recent report by the Federal Reserve shows banks aren't tightening credit standards as much as they were a year or two ago, but they haven't yet loosened the flow of credit to consumers or businesses. "The net percentage of banks that were tightening standards was close to zero but positive for most types of loans," the Fed said in its quarterly survey of senior loan officers at 55 U.S. banks and 23 foreign banks doing business in the country. In the January survey, most banks reported that demand for most types of loans is still weakening further, the Fed reported.

For prime mortgages, 17.0% of banks reported tighter lending standards, down versus 21.5% reporting the same last quarter. Non-traditional mortgages were worse, and had a higher amount of tightening with 29% of banks tightening standards, and 27% of banks are continuing to tighten lending standards for commercial real estate. READ MORE

It appears that the folks at Fannie Mae appreciate the work that Freddie Mac has done on its Imminent Default Indicator (IDI) statistical model. (The IDI predicts the likelihood of default or serious delinquency for mortgage loans that are less than 60 days past due.) Fannie announced the introduction of the use of IDI through Fannie Mae's HomeSaver Solutions Network (HSSN). Their HSSN requires the use of verified income documentation before entering the borrower into a trial period plan, and Fannie "is changing the requirement for the imminent default screen to require an imminent default evaluation for all borrowers that are either current or in default but less than 60 days delinquent. This policy change achieves consistency in the treatment of Fannie Mae loans with the treatment of non-GSE loans under the Treasury Department's Supplemental Directive 09-01." This will be effective March 1 for servicers of conventional mortgage loans held in Fannie Mae's portfolio that are part of an MBS pool. "Fannie Mae servicers who are required to use IDI by March 1, 2010 by other investors must implement the use of IDI for mortgage loans owned or securitized by Fannie Mae on the same date. All other servicers must implement the use of IDI as soon as possible but no later than June 1, 2010."

"Effective immediately, Wells Fargo Wholesale Lending can no longer accept borrower funded (paid) temporary buydowns until further notice."

Based in Texas, home builder D.R. Horton reported a net income of $192 million their fiscal first quarter, compared with a net loss of $62.6 million in the year-earlier period. The results for the quarter ended Dec. 31 included a tax benefit of $149 million and their home-building revenue rose 23% quarter-over-quarter to $1.1 billion. I doubt if Horton is doing much building in New York's Hampton Islands. But the Hamptons saw home sales there rise 59% year-over-year, and the median price (half above, half below) was up almost 5% to $917k.

Although some lenders are still "discussing" complying with HUD's change, some lenders are falling into line with HUD's waiver of the anti-flipping time frame. The latest is wholesaler Freedom Mortgage, out of Arizona, and MetLife. Flagstar will continue to prohibit FHA and VA financing for properties owned less than 90 days unless the seller meets certain Flagstar criteria. Most other investors are still cogitating on it.

Speaking of MetLife, they had a little bit of bad news yesterday when they were downgraded by one of the rating agencies (Fitch Ratings). Fitch is concerned about MetLife's commercial real estate investments and the impact of the recent economic slowdown and financial crisis. "Continued deterioration in the commercial real estate market could trigger 'higher-than-expected investment losses' for MetLife."  When one looks at MetLife's invested assets, commercial real estate-related assets, including commercial mortgage loans, commercial mortgage-backed securities and equity real estate, make up 16%.

Wholesaler Reunion Mortgage are giving their brokers an option that "enable Reunion to use the broker's same credit report and score, and still meet the requirement for a report issued in Reunion's name. Brokers will continue to provide a credit report dated no more than 60 days prior to funding. If the report is from one of Reunion's four approved credit partners, we can reissue the exact same report in our own name." Brokers must follow very specific procedures (found on Reunion's website) for the four, which are CBCInnovis, Settlement One, First American CREDCO, and Credit Plus. This is similar to major wholesalers, such as Bank of America who allows for the broker to use their DU credit report via DO download to BofA's site or they can use their report to run DU on the investor's site.

Yesterday the market saw December New Construction Spending data which showed another decline of 1.2%, balanced against a stronger-than-expected ISM number. Trading firms reported that origination flows were very light to start the week. One trader reported, "Today's strength is due to residual shorts getting cleaned up. Activity from the customer base includes $1-1.5 billion in supply from the originator community, light Fed buying, solid interest from structured desks, two way activity in 4.5s from hedge funds, and light buying overnight from Asia."

One analyst feels that it will be very difficult to break the resistance level of 3.50% on the 10-yr (currently at 3.64%), which, for mortgage originators, means that mortgage rates are unlikely to drop much from where they are now. All of the supply from the US Treasury to finance the deficit is not helping matters, in spite of solid demand from foreign investors, nor does the anticipation that the Federal Reserve will end their MBS Purchase Program on time at the end of the first quarter. So unless/until Treasury yields drop much, look for rates to stay where they are. The only news out today is Pending Home Sales, not much of a market mover, and the mortgage market is roughly unchanged from Monday afternoon's price level.

You are driving down the road in your car on a wild, stormy night when you pass by a bus stop where three people are waiting for the bus: An old lady who looks as if she is about to die, an old friend who once saved your life, and the perfect life partner you have been dreaming about....

Which one would you choose to offer a ride, knowing that there could only be one passenger in your car? Think before you continue reading.

This is a moral/ethical dilemma that was once actually used as part of a job application. You could pick up the old lady, because she is going to die, and thus you should save her first. Or you could take the old friend because they once saved your life, and this would be the perfect chance to pay them back. However, you may never be able to find your perfect mate again.

The candidate who was hired (out of 200 applicants) had no trouble coming up with his answer. He simply answered: "I would give the car keys to my old friend and let him take the lady to the hospital. I would stay behind and wait for the bus with the partner of my dreams." Sometimes, we gain more if we are able to give up our stubborn thought limitations. Never forget to 'Think Outside of the Box.'

A modern cynic would say the correct answer is to, "run the old lady over and put her out of her misery because the health care plan in this nation won't pay for her, make love with the perfect partner on the hood of the car, then drive off with the old friend for a few beers.