Credit Unions Still Offer HELOCs; FinReg Reform Update; HUD Guidance on FHA Approval; More Investor Bulletins

If you have lots of money, who needs a loan? Because with THIS HOUSE, appraisal comps could be difficult. There is a 30 second commercial clip, but worth the wait, especially if you've never seen a 747 on top of a mountain.

When I was actively participating in secondary marketing activities, besides being asked where rates were heading the next day, I sent out rate sheets every morning. Agents always wanted rates that were below par and above par, where the borrower would pay points or get a rebate respectively. Right now, in the MBS market, every 30-yr security is trading above par. Put another way, there are no 30-yr Fannie 3.5%'s out there, comprised of 3.75-4.125% mortgages...What's an investor to do?!

Fortunately for investors, not so fortunate for originators, early pay-offs of higher coupon product has been relatively low - fewer refinances. This has led recent production of 30-yr mortgages in the high 5% range, or even low 6% range, to trade very well, perhaps instilling a little more confidence in the MBS market.  As one analyst said, "The refi wave is more of an illusion than reality" for reasons we all know. (If we had no income, no documentation, and no appraisal loans, things would certainly change!)

Last Friday I discussed Home Equity lines, and the problems that commercial banks and mortgage servicers were having with them. I received a few comments from credit union employees, pointing out that "credit unions are still an excellent source for home equity lines" since they are focused on their local markets and are "more likely to lend at higher CLTV's as values begin to recover."

I know that there are different types of credit unions. In a related, yet unrelated story, the National Credit Union Administration (NCUA) approved a $1 billion charge to pay for the corporate credit union bailout. This follows last year's charge of $1.1 billion, $337 million of which went to the corporate bailout and the remainder to replenish reserves for the National Credit Union Share Insurance Fund. These monies must be accrued by credit unions for the second quarter, and paid by August 30th. Unfortunately the corporate assessment is expected to push over a thousand credit unions into the red for the second quarter, over five hundred into the red for the year, and 60 credit unions into undercapitalized territory. According to NCUA almost half of the nation's 7,800 credit unions reported losses for fiscal 2009.

If you'd like to see cutting edge news on compensation in large banks, you're in luck. The Federal Reserve completed its first round of in-depth analysis of incentive compensation practices at large, complex banking organizations. Apparently many large banks have already put these changes in place, especially to ensure that incentive compensation plans do not encourage excessive risk-taking. READ MORE. The next step, of course, is for our government to study compensation in specific business lines and financial firms - like mortgage companies. I can hardly wait...

Elvis impersonators take note: Wells Fargo Funding is opening up a new site in Las Vegas. It seems that "The Coach", grappling with the regulatory process of dotting i's and crossing t's, is not only having its staff (like probably every other investor out there) work overtime and increase efficiency, but is also expanding its capacity, in part by developing a new operations location in Las Vegas. Wells made sure to point out that "One thing we will not do, however, is cut corners that help us ensure quality and prevent fraud."

Chase, pursuant to Freddie Mac's policy change, is also rescinding its policy on Detached PUD's. "Detached PUDs are available on all products, including Freddie Mac/LP transactions" effective immediately.

SunTrust, pursuant to Fannie Mae's appraiser's license & certification number policy, "effective for all closed conventional loans delivered to SunTrust for purchase on or after Thursday, July 1, 2010, SunTrust will require loan files to include a copy of the appraiser's state license (or state certification in the absence of a license) issued by the state in which the subject property is located. If the appraiser is either a subcontractor or an employee of a supervisory appraiser or appraisal firm, and the field appraiser's work was directly supervised, a copy of the supervisory appraiser's state license or certification will also be required."

U.S. Bank Home Mortgage Wholesale Division is implementing additional income verification requirements that will help identify loans that may be subject to fraud and misrepresentation. "All loan files must contain documentation from the IRS to validate the income used for qualification. The most recent year's available IRS Tax Return Transcripts (1040) for all borrowers must be included in the loan file. The income used to qualify the borrower must be supported by the income reported on tax transcripts from the IRS. Additional IRS verifications such as W2 or 1099 transmittals should also be included if they are required to validate income. If a borrower is not required to file an income tax return, the loan file must include a written explanation as to why the borrower was not required to file an income tax return."

As the reconciliation between the House and Senate versions of the financial reform bills continues, Barney Frank is asking conferees to drop a "qualified" mortgage exemption that would allow nongovernment loans to be securitized without risk retention. He would prefer to totally exempt FHA, VA, and Rural Housing Service guaranteed loans from a 5% risk retention requirement for MBS issuers. However, issuers of Fannie Mae and Freddie Mac MBS would have to retain 5% of the credit risk under the Frank proposal. Of course, this would create a big benefit for Ginnie securities, comprised of FHA & VA loans, compared to Fannie & Freddie securities. Most in the biz prefer a Senate-passed provision that would allow regulators to totally exempt safe, fully documented mortgages from risk retention, regardless of whether the loan if conventional or government.

HUD has finalized regulations that will have a significant impact on small- or medium-sized lenders' ability to participate in the FHA's mortgage insurance programs. But, what does this mean for real estate brokers? If you own an interest in an affiliated mortgage company that is approved to originate FHA-insured loans - take note. The elimination of FHA-approved loan correspondents and an increase in required minimum net worth for FHA-approved mortgagees are two important items. Back on 5/20 HUD stopped approving new applications for loan correspondents (this term is different than that used by investors, by the way), and all loan correspondent approvals obtained before this date will expire on December 31, 2010. HUD will also increase the minimum net worth required for all FHA-approved mortgage companies from $250,000 to $1 million (in May 2011) and then up to $2.5 million. FHA-approved mortgagees that qualify as small businesses, under SBA definitions, must have a $500,000 net worth.

Going forward, if an affiliated mortgage company is an FHA-approved loan "correspondent", the new regulations will have fewer effects on the mortgage company's ability to originate FHA-insured loans. After the end of this year, this category of company will no longer have FHA approval and will no longer be required to submit annual audited financial statements to HUD. Yet, these affiliated companies may still broker FHA-insured mortgage loans to FHA-approved mortgagees (like Citi or Wells) as third-party originators. The FHA-approved mortgagee must choose to sponsor the third-party originator, and the FHA-approved mortgagee will become fully responsible for all aspects of the mortgage loans - but the third-party originator will not be permitted to close FHA-insured loans in its name. This change could impact the state licenses currently held by a real estate broker's affiliated entities.

But if an affiliated mortgage company is an FHA-approved mortgagee (like BofA or Chase), this company must increase its net worth to $1 million in one year and up to a maximum of $2.5 million in three years. So looking ahead a year, FHA-approved mortgagees can increase their net worth to maintain their status as FHA-approved mortgagees, or give up their FHA approvals and participate in the FHA program as third-party originators. If the net worth increase doesn't occur, these affiliated entities will be required to broker their FHA loan applications to FHA-approved mortgagees as third-party originators, and brokering of FHA loans as a third-party originator means that these affiliated entities will be required to disclose the amount of back-end compensation received on the loans. (As most know, currently they are not required to disclose any back-end compensation received from servicing-released premiums.) READ MORE

Turning to the market, there isn't really much going on. Stocks were close to flat yesterday after rallying early in the day on some news from China. 30-yr A-paper mortgages, which started off the day worse by about .250, improved, and many investors sent out some price improvements. But overall, it was pretty quiet.

A young lawyer and a senior citizen are sitting next to each other on a long flight.
The lawyer is thinking that seniors are so dumb that he could get one over on them easy.
So the lawyer asks if the senior would like to play a fun game. The senior is tired and just wants to take a nap, so he politely declines and tries to catch a few winks.
The lawyer persists, saying that the game is a lot of fun. "I ask you a question, and if you don't know the answer, you pay me only $5. Then you ask me one, and if I don't know the answer, I will pay you $500," he says.
This catches the senior's attention and to keep the lawyer quiet, he agrees to play the game.
The lawyer asks the first question. "What's the distance from the Earth to the Moon?"
The senior doesn't say a word, but reaches into his pocket, pulls out a five-dollar bill, and hands it to the lawyer.
Now it's the senior's turn. He asks the lawyer, "What goes up a hill with three legs, and comes down with four?"
The lawyer uses his laptop and searches all references he could find on the Net. He sends e-mails to all the smart friends he knows; all to no avail.
After an hour of searching, he finally gives up. He wakes the senior and hands him $500. The senior pockets the $500 and goes right back to sleep.
The lawyer is going nuts not knowing the answer. He wakes the senior up and asks, "Well, so what goes up a hill with three legs and comes down with four?"
The senior reaches into his pocket, hands the lawyer $5 and goes back to sleep.