Industry Feedback on Foreclosure Debacle; Rate Sheet Rebate vs. Processing Turn Times; Best Practices Lender Guide; Acceptable Income Types

Poor Toni Braxton filed for bankruptcy again, illustrating that problems in the economy and the housing market affected everybody.

According to Access Hollywood (who says I am not well read?) the 43-year-old singer lists her debt between $10 and $50 million and lists her assets somewhere between $1 and $10 million. (That is quite a range!) She owes money to AT&T, Verizon, Sprint, Tiffany & Co., The Four Seasons Hotels, DirecTV, Neiman Marcus, Orkin Pest Control, American Express, FedEx, the IRS, and the DMV's in Nevada and California. Apparently she and her company filed Chapter 7 "following a prolonged health crisis that hindered her ability to work and perform...this course of action will enable her to fulfill her obligations to the IRS, rid her of upside down real estate in Atlanta and take care of her two small children."

Here is something interesting to note. The owner and president of a mid-sized (and growing) mortgage company wrote to me and said, "Rob, for several months now we no longer manage to price, we manage to turn times. It doesn't matter if a particular investor has a better price. If its turn times are worse than others, we will send our loans elsewhere - we want these loans off our books pronto. And believe it or not, there are investors out there who are rumored to be not examining files as closely as others, can fund more quickly, and their volumes have really increased - us and others are giving them lots of business." (And please don't ask me which investor(s) fall into this group - I don't know, nor will I ask - it doesn't strike me as viable in the long run.)

An industry observer wrote to me. "Who would ever lend money, if they aren't going to get it back? Would you 'loan' someone $500,000 if they weren't under any obligation to pay it back?" Of course not." Another wrote, "Some borrowers may be asking, and opens up the whole moral question that walk-aways have been dealing with, which is, 'Do I really have to pay for my home (mortgage) if no one knows who owns it?'" Another industry vet wrote, "I really hate the whole whiny bunch of failed home owners. You signed the mortgage, you defaulted. Now go away. If you don't like the rule or law, move to Russia or China."

The lack of ability for some borrowers to refinance is not lost on astute investors and they have been shifting money into securities tied to debt from homeowners who are the least willing or able to refinance. Fannie Mae-guaranteed securities with 5.5% coupons (5.75-6.125%) that are backed by 30-year mortgages with average balances of less than $85,000 have improved in price more than similar generic debt. Homeowners with smaller loans don't benefit as much from a drop in monthly payments as borrowers with bigger mortgages, while facing similar closing costs, and are thus less likely to refinance.

And of course one of the reasons that borrowers can't refinance, besides lack of equity, is the increased documentation currently required. "Many of the recent investor changes have pointed toward increased documentation, not so much stricter guidelines," an experienced agent wrote about processing a loan. "Borrowers have to prove they have a job when the loan funds. FHA borrowers have to have a 3.5% down payment even if it is a gift. Borrowers need to know that the appraisal fee needs to be paid to the appraisal management company upfront, as this is a bona fide closing cost. It is a new world, but those who are adapting are prospering."

Yesterday I mentioned that HUD had stopped 20 companies from originating FHA loans in certain branches. Let me repeat, in certain branches - not the entire company. But HERE is the official list of companies: . And if you're interested in knowing why, HERE you go

On the commercial side of things, J.P. Morgan Chase sold $1.1 billion of commercial-mortgage securities yesterday in the largest transaction of its type in a very long time. Good news for that sector, the triple-A rated tranche with a 10-year term was priced at 1.50 percentage points above the benchmark swaps rate, to yield 3.959%. That compares with a spread of about 305 basis points on comparable bonds issued prior to 2008, when underwriting standards were more lenient, JPMorgan data show. It is the 7th notable CMBS sale this year, and hopefully signals bank willingness to lend to stronger borrowers, and investor confidence that landlords can meet monthly payments as the economy recovers.

The large investors can often be a very good source of "Best Practices" information for smaller lenders. A few weeks back correspondent clients of CitiMortgage received a helpful "Best Practices" guide to income documentation. It is too lengthy to reproduce but it goes into details on Wage Earner Income ("All non-self-employed borrowers who receive a W-2 at year end must provide the W-2 as evidence of total earnings - includes hourly, weekly, biweekly, part-time, seasonal, bonus, commission, and tips/gratuity.") Non-Employment income must have acceptable documentation for borrowers earning money from alimony, foster care, disability, pensions, etc. - make sense stuff. "All income used to qualify must be documented in the loan file. Income from sources other than the ones addressed above may be considered provided the borrower has received the income for at least 2 years and documentation supports that it will continue for at least 3 years."

And of course some types of income are not acceptable in the current environment, including draws, capital withdrawals, expense reimbursement, education benefits, income from illegal activities... is any of this a  surprise? The income calculation must be included in the file.  Overtime income must have a two year consistent history, rental income must be documented with a rental agreement, a signed 4506-T is required on all loans for the latest two years, include the latest  W-2 if the borrower is a W-2 employee, etc. Citi's bulletin went on the make recommendations on sole proprietorships, partnerships, corporations, and so on.

At this point, expectations are that the overnight Fed Funds rate stays near 0% well into 2011, if not further. And traders know the old saying, "Don't fight the Fed". We've already seen this with low rates - and no one expects rates to trend higher in the near future. For mortgage rates, there has been some good news lately. A recent speech indicates that the Fed will keep an eye on MBS spreads and step in if spreads get too wide. Prepayments have been predictable and manageable. And MBS investor demand has been strong. If rates rise, the primary-secondary spread remains wide enough that originators have ample room to tighten (lower profit margins) if they want to maintain refi volume.  And even if rates fall further, traders believe that originators will remain somewhat reluctant to lower rates much into the high 3's. (Even a move from 4.25% down to 4.125% puts the mortgage into a different, possibly still illiquid, security, and lenders are slow to do that.)

As we all learned in geometry, it takes two or more points to make a line, and although there is always a lot of anticipation in the press about the monthly employment numbers, one should keep in mind the trend rather than the actual data point. Of course now we are dealing with "QE2", which is not the cruise ship Queen Elizabeth II but instead Quantitative Easing 2, which is something that the Fed is considering if the economy heads down again or is wallowing. But with yields trading at record lows, a lot of that (the Fed doing another round of easing) has to be built in already. Of course, one component that can push rates higher is our economy's deficit, and the need to sell US Government securities to finance it, and in fact we have another auction next week.

Yesterday MBS's finished up (better) between .250 and .375 and only $1.7billion was sold. One trader wrote, "Higher coupons are the best performers by multiple ticks helped by heavy money manager buying all day. 3.5s are the worst performers with supply focused there and demand almost entirely in higher coupons." 10-year notes were about unchanged at 2.40%.

This morning Nonfarm payrolls came in at -95,000 with a 9.6% unemployment rate; hourly earnings were unchanged. Private sector jobs picked up 64,000. FULL RECAP. Rates once again have moved down, we find the current yield on the 10-yr at 2.37%, and mortgage prices better by .125-.250. Monday is a Federal holiday, and there will be no commentary - have a good weekend.

Lisa's husband had been slipping in and out of a coma for several months. Things looked grim, but she was by his bedside every single day. One day as he slipped back into consciousness, he motioned for her to come close to him. She pulled the chair close to the bed and leaned her ear close to be able to hear him.

"You know" he whispered, his eyes filling with tears, "you have been with me through all the bad times. When I got fired, you stuck right beside me. When my business went under, there you were. When we lost the house, you were there. When I got shot, you stuck with me. When my health started failing, you were still by my side. "And you know what?"

"What, dear?" she asked gently, smiling to herself.

"I think you're bad luck."