Fannie & Freddie Better Together?; Plenty of Investor Updates; Broker Compensation Bill Opinion;
We've all been through regulatory changes before in the mortgage industry. Congress makes a law which is signed by the President, and then FHFA, Fannie, Freddie, HUD, etc. etc figure out what to do about it. Then they tell everyone that "x" number of months from now changes will take place, and then the large investors decide if and how they will implement those changes. Anyone looking for immediate word on changes will be sorely disappointed.
Speaking of which, with regard to compensation changes, a mortgage industry veteran wrote to me and opined, "I don't get all this whining. True, few industries' practitioners are required by Federal Law to disclose their margins/markups upfront. Many industries work on a "time and materials" basis, and certainly and any investor or well-run originator always know commission/transaction costs. Lender fees and third party fees are passed straight through to the borrower. MLO's compete by establishing with their prospects a clear understanding of the Origination Fee (as a flat dollar amount or percentage of loan amount) right up front, which ends up on the new GFE, Box 1. It requires the loan officer tell their customer right up front what his service is worth and stick to that regardless of what ends up happening with YSP up to the point of locking. If I establish a "price point" of, say, 150 bps while negotiating the deal and, after loan application and registration, the borrower chooses to float, changes in available YSP credited to him or in discount charged to him for his chosen Note Rate are HIS affair. No more games! What a relief! I, for one, have no problem telling my customer what I'm worth, charging, and collecting it."
As it stands now, the flood insurance program goes through the end of September. In what seems to be a rare preemptive move, the House of Representatives passed H.R. 5114, to improve the National Flood Insurance Program (NFIP) and reauthorize the program for 5 years. H.R. 5114 phases in actuarial rates for pre-FIRM properties - those built before the effective date of the first Flood Insurance Rate Map (FIRM) for a community, raises the maximum coverage limits, provides notice to renters about contents insurance and establishes a Flood Insurance Advocate. The bill still has to be passed by the Senate, and then be signed by the President. READ MORE
With 17 of them, what does Florida lead the nation in? The answer: failed banks. Regulators have closed 96 banks so far this year, six on Friday. The FDIC was named receiver and found buyers for all of the failed banks, agreeing to absorb 80% of losses on the riskier asset pools acquired by other institutions. Heck, who wouldn't want that deal? North American Financial Holdings of Miami (with $900 million to invest) acquired Metro Bank (FL), Turnberry Bank (FL), and First National Bank of the South (NC). The OTS closed Woodlands Bank (SC) and the FDIC arranged for Bank of the Ozarks to assume the failed bank's assets and deposits. The OTS took over Olde Cypress Community Bank (FL) and the FDIC found CenterState Bank (FL) to run them. Mainstreet Savings Bank (MI) is no longer, bought by Commercial Bank (MI).
The President will be signing the Financial Reform Bill today. Out of the 2,300 pages, none of them attempt to reform Freddie or Fannie - most say because F&F deserve their own reform bill and that will happen in 2011 after the US Treasury completes its study . Fannie was created in 1938 to help buy mortgages from financial institutions and free up capital that could, in turn, be lent to consumers by banks, and Freddie was created in 1970 to do the same for S&L's and to keep Fannie from being a monopoly. Investors - foreign and domestic - had the belief that loans backed by Freddie and Fannie carry an implicit US government guarantee. These two GSEs functioned as quasi-private companies that bought, bundled and securitized trillions of dollars of mortgages, in the form of mortgage-backed securities, and currently hold or guarantee more than $5 trillion of them. (There are others GSE's - Government Sponsored Enterprises - like the Federal Home Loan Banks, the Farm Credit System, and Farmer Mac. Of course there is HUD & the FHA, and the VA program.)
The problem is, of course, that taxpayers, through the US government, have anteed up about $150 billion to keep them afloat, their value (and the value of the stock) has plunged, and analysts expect many more billions will be required to keep them solvent. The 25 basis point "guarantee fee", added to the interest rate of the borrower, is not enough. Foreign investors who own their debt are concerned about the safety of their holdings, in turn requiring a higher return on their money for the additional risk - and to lower the risk we have effectively nationalized the two companies although their debt is not included on the government's balance sheet. In fact, the Congressional Budget Office cannot audit either one, and if one combines the government bailout money of F&F with the existing budget deficit, it totals about $16 trillion, over 100% of our GDP.
Critics, taking a 30,000 foot view, say many countries have high levels of homeownership without the government playing such an important role in housing. Canada, not exactly a world economic powerhouse, does not have the equivalent of Fannie & Freddie, nor does it allow the deduction of mortgage interest from taxes. There has been no need for government bail outs of banks in Canada, which has 33 million people - about the size of Florida and Illinois combined.
Fannie and Freddie could be combined - they are both under the auspices of the FHFA anyway - and then slowly liquidated with the securitization of mortgages going back into private companies. Or they could be kept in place, and charge a higher guarantee fee - like .5. Obama administration has already removed private intermediaries from the student loan business. No matter what happens, at this point, given the reliance of "the system" on Fannie & Freddie, it would require massive re-engineering of all of that and it's by no means a straightforward thing to do.
From an investor point of view, many believe that the two will be combined, in which case investors will have to differentiate between the old bonds and the new bonds since a combination of the two would meld underwriting, remittance, servicing, etc., etc., and investors will want to know the "rules" for new pools and price them accordingly. The "accumulators" like Wells, Citi, Chase, and BofA usually sell to both, but often have strategic relationships with one or the other.
On a micro, loan originator level, when comparing Freddie versus Fannie many originators believe that Fannie is a better loan, with DTI capped at 45%, and no excess MIP charges to the borrower. But compared to a few years ago, the differences between DU and LP are much fewer. If they were combined, ironing out the differences at the production level might be relatively easy: figure out what servicing and underwriting characteristics gave them the lowest delinquency rates, and use those. Loans underwritten since the government takeover are among the cleanest in history. But consumers like a choice, probably more than just an FHA loan and a private bank's loan product. No one expects the government's work on Fannie & Freddie to shoot the US housing market in the foot, but we'll have to stay tuned - everyone has an opinion.
The investor changes just keep coming. Recently SunTrust's Jumbo Solution Second Mortgage product line came out, and the company updated its guidelines for the Portfolio Affordable Housing, Key Loan & Jumbo Solution Second product line(s). Flagstar's Fannie Mae Cooperative Property product lines are in many pricing engines, as is Fannie's DU Refi Plus EA product line. Chase made some adjustments to its non-agency product; Wells Fargo to its jumbo line-up.
Freddie provided its clients "additional guidance" about its Florida Condominium Effort, and introducing several new requirements for Servicers in regard to short sales, Home Affordable Foreclosure Alternative (HAFA) electronic default reporting (EDR) codes, and payment of non-performing loan invoices. Freddie also are revised several servicing processes and provided additional guidance on matured loans and property inspections. It is relatively extensive, and anyone originating condo loans should view it for themselves: http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1016.pdf
After a relatively short tenure, on August 1st CitiMortgage will be eliminating its Tiered Pricing Reward Program, which is part of its Star Performance program. "The Business Risk Score (BRS), which drives Tiered Pricing, will no longer be used as a Star Performance metric. However, we will continue to share key loan quality results with you to help drive a mutually beneficial quality relationship." Best Efforts Pull Through Rewards will no longer have BRS requirements, although Citi will continue to use the BRS within CitiMortgage for internal purposes.
Citi's correspondent channel received an update for "Best Practices for Completing HUD Form 92900A." Its clients should pay attention, as Citi listed the "common discrepancies we have identified in our Quality Control and other reviews of loan documentation. The best practices are being offered to assist correspondents in avoiding quality and suspense items."
Flagstar revised its FHA underwriting overlay for purchase transactions where the borrower's down payment, closing costs, discount points and/or pre-paid expenses are derived from gifts, grants, community second programs, eligible down payment assistance programs and/or loans from family members. Seller-funded down payment assistance programs remain an ineligible source of funds to close for all FHA loans. Flagstar Bank's gift overlays, too extensive to re-print here, are based on the borrowers' credit scores (640-679, above 680) and are applicable to loans from all brokers and correspondents, including DE Delegated correspondents. Starting this Friday Flagstar will be increasing the minimum credit score requirement on all loans with a DU EA recommendation, and LP loans with an A-Minus recommendation. "All loans, regardless of LTV, registered as an Expanded Approval or A-Minus loan will require a 680 credit score." On the good-news front, Flagstar reinstated its Fannie Mae HomeStyle Renovation Program - brokers must be approved to register them, so contact your AE.
Freedom Mortgage told its brokers that the FHLMC Open Access product is no longer available, that investment properties with a sales price or appraised value < $100,000 will require a full second appraisal, that all appraisals must be dated within 120 days of the Note date (appraisal updates or re-certifications are no longer acceptable), and that properties listed for sale at the time of application are not eligible for financing with Freedom Mortgage. (Freedom Mortgage is also doing VA Interest Rate Reduction loans -IRRL - without an appraisal, IF the broker submits several documents including loan submission forms, signed and dated 1003, TIL & GFE, Itemization of Fees, HOEPA form, etc., etc.)
Union Bank, for its wholesale mortgage clients, updated its ARM Program Disclosures. Starting August 2nd, "the Conversion Interest Rate verbiage has been revised to reflect a change from 3/8ths of one percentage point (0.375%) to an amount not to exceed 5/8ths of one percentage point (0.625%). The Promissory Note and Rider will also reflect the change from 3/8ths of one percentage point to 5/8ths of one percentage point." UB's disclosure forms are also being revised.
Friday rates dropped, with the yield on the 10-yr dropping back below 3%. (The 10-yr Treasury, not directly tied to mortgage rates, but historically used as a guide, closed at 2.94%.) "Falling inflation and tumbling consumer sentiment enhanced the allure of safe-haven government bonds", pushed 10-yr prices up over a half a point and the yield down to 2.93%, and in turn flattening out the yield curve. Mortgage prices went along for the ride. MBS prices improved by about .250 in price and numerous investors had rate improvements although it remains to be seen if the entire .250 was passed on in whole loan prices. $1.8 billion in new production was sold and bought, the vast majority being 4% coupon (mid-4% 30-yr fixed rate mortgages).
It is a light news week. Tomorrow we'll have some construction figures, Thursday the usual Jobless Claims, Existing Homes Sales, and the Conference Board's Leading Economic Indicators. HERE is the full events calendar
Two hillbillies from Sugar Grove, NC, walk into a restaurant. While having a bite to eat, they talk about their moonshine operation.
Suddenly, a woman at a nearby table, who is eating a sandwich, begins to cough. After a minute or so, it becomes apparent that she is in real distress.
One of the hillbillies looks at her and says, "Kin ya swallar?"
The woman shakes her head "no".
Then he asks, "Kin ya breathe?"
The woman begins to turn blue and shakes her head "no".
The hillbilly walks over to the woman, lifts up her dress, yanks down her drawers and quickly gives her right rump cheek a lick with his tongue!
The woman is so shocked that she has a violent spasm and the obstruction (pulled pork) flies out of her mouth and onto the table.
As she begins to breathe again, the Hillbilly walks slowly back to his table.
His partner says, "Ya know, I'd heerd of that there 'Hind Lick Maneuver' but I ain't niver seed nobody do it!"