Another Review of Originator Compensation Regs; Loan Programs That Don't Require an Appraisal; JP Morgan Cuts Deal to Reduce Buyback Exposure
Rates continue to trend lower, helped yesterday by the release of the FOMC meeting's minutes which alluded to the possibility of the Fed reinvesting in MBS's. (But heck, as one trader told me, low mortgage rates are helping agency-qualified borrowers, not others in the economy like renters who can't qualify, not those that don't have jobs or those that simply pay cash for houses.) "A few members worried that reinvesting principal from agency debt and MBS in Treasury securities could send an inappropriate signal to investors about the Committee's readiness to resume large-scale asset purchases," the Fed said in the report, referring to mortgage-backed securities. The minutes from the August 10 meeting made it clear that the Fed is far from ready to restart Quantitative Easing Round 2.
It didn't matter than consumer confidence improved, or that a house price index showed higher prices: by the end of the day the yield on the 10-yr was back down to 2.48% and mortgages were better by .250. In fact, after Monday and Tuesday's improvements, Friday's sell-off is all but forgotten except by those who locked in loans on that day. Rate sheet current coupon mortgages prices closed up (better) by .250. Fannie 4's are well above 103, and when you throw on some servicing the price is north of a 4 point rebate. So imagine the profits out there if anyone is offering 4.5% mortgages at par. $1.8 billion in MBS's hit the market.
Speaking of locking loans in at higher rates, my Wall Street acquaintances seem to be seeing banks and hedgers buying back MBS positions. Correspondent and wholesale lenders are carefully monitoring pull through! And folks on lock desks are reminding agents and brokers of existing renegotiation policies - no one wants higher fallout, and they're willing to compromise to keep the loans. MND reports that secondary managers are "cautiously adding 3.5 hedges/coverage as needed while negative convexity remains a legitimate concern and the TBA market is in need of structured cash flows with a longer life." Thirty year mortgages with a 4.25% rate can go into either a 4% security (by buying down the guarantee fee) or 3.5% security (and having the investor buy up the guarantee fee), but 4.125% and below can only go into a 3.5% security and therefore give hedgers less flexibility. Which is one reason rate sheets, up until recently have big price drop-offs from 4.25% on down. READ THE MND STORY HERE
The Mortgage Bankers Association of Pennsylvania hired a law firm to review the loan originator compensation issue. (Thank you MBAOP - remember that everyone is advised to hire their own counsel and do its own reviews.) "The Federal Reserve has adopted regulations which prohibit payment to loan originators based on the terms or conditions of the transaction, other than the amount of credit extended. The rule prohibits compensation to a loan originator for a transaction based on the interest rate, APR, LTV, or the existence of a prepayment penalty. Similarly, if a creditor pays a loan originator more for a loan originated to a borrower with a lower fico score and a higher interest rate, than to a second borrower with a higher fico score and a lower interest rate, this will also be prohibited by the regulation. Such compensation is prohibited, whether it be as a commission, bonus, or in any other form."
The memo goes on to state that the firm believes, "Compensation based on the amount of credit extended or on the following factors is permissible:
- The loan originator's overall loan volume, whether it be dollar amount of credit extended or total number of loans originated;
- The long term performance of the loans originated;
- Whether the customer is an existing customer or a new customer;
- A fixed payment for each loan originated;
- The percentage of applications that result in consummated transactions;
- The quality of the loan originator's loan files submitted to the creditor; and
- A legitimate business expense, such as fixed overhead costs.
The regulation does not prevent a creditor from offering a higher interest rate in a transaction as a means for the consumer to finance the loan originator's compensation, nor based on the creditor's assessment of the credit and other risks involved. The regulation also provides that, if a loan originator receives compensation directly from a consumer in a consumer credit transaction secured by a dwelling, (a) the loan originator may not receive compensation from any person other than the consumer in that transaction; and (b) no person who has reason to know of the consumer paid compensation to the loan originator shall pay any compensation to the loan originator."
MORE COLOR ON ORIGINATOR COMPENSATION
"It's hard to make a comeback when you haven't been anywhere." Conversely, banks have certainly made a comeback: FDIC-insured institutions reported an aggregate profit of almost $22 billion in the second quarter of 2010, a $26 billion improvement from the $4 billion net loss the industry posted in the second quarter of 2009. This is the highest quarterly earnings total since the third quarter of 2007. Earnings remain low, however; the primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses. FDIC REPORT
The first social security cards were issued in late 1936, and as most people know the first three numbers are a geographic code. Enough trivia - I received some responses from yesterday's story about applying income under a falsified number to the new card in order to qualify for a loan...
"So, my mother went on her first job interview in New York City after having lived in small towns her whole life. When she was filling out the job application, she was so embarrassed because she didn't know her social security number that she made one up. That made up SSN has been her social security number to this day."
"As odd as your first paragraph sounds, the law does accommodate people like this. If you worked with an illegal social security card for 10 years and then are given a green card with a valid social security cared you can petition the Social Security Administration to transfer credit for all taxes paid under the illegal card to the now legal card."
"When our office started using the 4506, a loan officer said, 'I hear there's a new rule that we can't use white out on tax returns anymore."
"I once asked a client for his social security number and he responded, 'Which one?'"
Buyback drama continues - according to an article in the WSJ, in the first quarter of 2009 J.P. Morgan "cut a deal with the government agencies that resolved certain current and future repurchase claims stemming from WaMu mortgages. Nice!
"Commercial real estate markets showed surprising resiliency during the second quarter, with property transactions rising solidly and leasing activity holding up better than expected. We remain cautious in our outlook for commercial real estate and construction." So states Wells Fargo's economics department. "The rise in delinquency rates in recent years was mostly caused by the sharp contraction in employment, retail sales and the rate of household formation growth. The apparent improvement in demand may be overstated, as many firms are taking advantage of soft market conditions to upgrade space and locations. The larger immediate issues with commercial real estate continue to be the overhang of commercial real estate loans coming due over the next few years and the large number of development projects that have been partially completed or less, which continue to weigh on community bank portfolios. After showing some resiliency earlier this year, commercial real estate prices fell sharply in June."
With all of the appraisal, HVCC, AVM, AVC, etc., rules and regulations, it is hard to remember the loan programs that don't require an appraisal. Say what you want about the difficulty or popularity of any of them, these include VA streamline IRRRL (Interest Rate Reduction Refinance Loan) for loans usually serviced by the same investor, FHA Streamline without appraisal for most any servicer for an existing FHA loan, HARP Conventional DU Fannie Mae Refi Plus with an appraisal waiver, HARP Conventional Freddie Mac Relief Refinance with an appraisal waiver - usually for loans serviced by the same servicer, any conventional loan that gives a DU "PIW" (Property Inspection Waiver) or LP "PIA" (Property Inspection alternative), and a Fannie Homepath purchase - appraisals are not even allowed.
HUD establishes Area Median Incomes (AMI) which are used to determine borrower eligibility for the MyCommunityMortgage / HomePossible products. FHFA published the 2010 AMIs which will be effective on the following dates: manually underwritten loans: new registrations on or after September 1, 2010, AUS scored loans (DU 9/23, LP was done on 8/22).
Two beggars, one Catholic, one Jewish, are in Vatican City. They are sitting side-by-side on a street in near St. Peters Cathedral. One beggar has a large cross in front of him; the other beggar, the Star of David.
Many people walk by and look at both beggars, but only put money into the hat of the beggar sitting behind the large cross.
A priest comes by, stops and watches the throngs of people giving money to the beggar behind the large cross while none give money to the beggar behind the Star of David.
Finally, the priest goes over to the beggar behind the Star of David and says, "My poor fellow, don't you understand? This is a Catholic country; this city is the seat of Catholicism, the home of the Pope. People aren't going to give you money if you sit there with a Star of David in front of you, especially when you're sitting beside a beggar who has a large cross. In fact, they would probably give to him just out of spite."
The beggar behind the Star of David listened to the priest, turned to the other beggar with the large cross and said, "Moishe, look who's trying to teach the Goldstein brothers about marketing!"