Minimal Regional Disparity in Mortgage Rates; Loan Buybacks Roll Downhill; CFPB Watchdog; LP Open Access Not So Open

I have a friend who is convinced that here in the United States, there are two large Chinese food manufacturing facilities: one for east of the Mississippi, and one for the west. And this is just to make transportation easier - they use the same recipes and ingredients. He says that no matter if it is Bangor, Twin Falls, Pensacola, Phoenix, or Coos Bay, the pot stickers are the same, the shrimp fried rice is the same, etc.

I bring this up because in the "old days", before the internet when fax machines and land-line telephones ruled the world, mortgage rates were different in different parts of the US. There was an actual difference between rates in certain areas versus other areas. Like difference in broccoli & beef, with the internet, competition, and ability to process loans distantly, regional differences have largely disappeared. Loan production is monitored on a national and regional basis, however, but rates are almost identical.

What is not regional is the number of rescission "week days" this month. Veterans Day (also known as Armistice Day - 11/11) and Thanksgiving Day (11/25) will not be included in borrower's right to rescind nor will wires be sent - just a reminder.

The Nationwide Mortgage Licensing System and Registry (NMLS) produced some news on credit reports for originators, or perhaps anyone dealing with borrowers. An individual can now authorize a credit report through the NMLS. And remember that all licensed residential mortgage loan originators participating in NMLS will be required to complete the credit authorization process, regardless of any prior state requirements. READ MORE

This from a broker on LP Open Access: "You gotta love the agencies, Freddie and Fannie. We, the taxpayer, own both companies by default now. But are there any wholesale buyers taking LP Open Access loan submissions from mortgage brokers? My limited understanding is that Freddie won't give the lenders the incentive or guarantees that Fannie does. In fact, it is odd that the two, being tax payer owned, don't have the same credit profile. In fact, Freddie even makes it a little tougher to verify if they own the borrower's mortgage or not. On the front lines it's tough to explain why Fannie will offer the product to majority or originators and Freddie will not."

And this from someone else on buybacks: "It seems the successful lawsuits are just getting ramped up to force buybacks to the major companies and Fannie & Freddie are about to join the mix, full force.  And once major investors get hit, they will let it roll downhill to the individual mortgage banks (& brokers if they can find them). We all signed similar agreements with Chase, Wells Fargo, Countrywide, etc. to "buyback" the mortgage if the loan ends up not meeting Fannie & Freddie guidelines. During the last two years roughly 50% of the accumulators' mortgages came, not from their retail operations or brokers, but from mortgage bankers. In 2004-06, probably over 70% came from mortgage bankers or brokers. Buybacks will flow on down the line and I think it will force additional small business job losses as the mortgage bankers fold, and further restrict new lending as everyone tightens for the buyback's findings. Justified or not, it will have additional severe impacts on mortgage lending."

One of the primary provisions is the introduction of a new federal consumer protection regulatory function housed within the Federal Reserve - the Consumer Financial Protection Bureau (CFPB). The CFPB is going to be huge - who is going to regulate the regulator?

The CFPB will have broad powers to regulate, examine and enforce the Home Mortgage Disclosure Act (HMDA), Home Ownership and Equity Protection Act (HOEPA), Real Estate Settlement Procedures Act (RESPA), S.A.F.E. Mortgage Licensing Act, Truth-in-Lending Act (TILA), Financial Reform Act, the Alternative Mortgage Transactions Parity Act, Equal Credit Opportunity Act, most of the Fair Credit Reporting Act, Fair Debt Collections Practices Act, portions of the Gramm-Leach-Bliley Act, etc. The CFPB is supposed to be fully operational in July, at which point consumer financial protection functions (like the Fed, or HUD) will be transferred. But existing federal agencies may continue to monitor or issue proposed or final regulations up until July - like the new TIL payment disclosure change at the end of January, or the new loan originator compensation rules that are effective for applications taken on and after April 1.

It will be interesting to see how the government dictates risk profiles and analysis to lenders. Of course, keeping the consumer safe is one of its key missions - many argue that the CFPB is not there to help lenders. All lenders will be required to confirm borrowers' ability to repay their loans, mostly using verified income sources. Many expect that new disclosures will be required that provide the borrower with more information about the economics associated with their loan such as total loan costs, mortgage originator compensation and information about increases in the interest rate and payments over the life of the loan. The CFPB may dabble in improved protections for borrowers with high-cost mortgages including new limits on fees and penalties, further regulating mortgage loan originator compensation, limiting prepayment penalties, or instituting certain lender protections for mortgages that do not have risky features or mortgage origination fees in excess of 3% of the loan amount.

PMI removed 25 Metropolitan Statistical Areas (MSA) - nearly 1,300 zip codes - from its Distressed Markets List in September and it is now adding 9 MSA/MSADs. These are the nine: San Jose-Sunnyvale-Santa Clara, CA, Santa Cruz-Watsonville, CA, Santa Rosa-Petaluma, CA, Kankakee-Bradley, IL, South Bend-Mishawka, IN-MI, Hagerstown-Martinsburg, MD-WV, New York-White Plains-Wayne, NY-NJ, Poughkeepsie-Newburgh-Middletown, NY, and Providence-New Bedford-Fall River, RI-MA.

Word has it that M&T Bank (NY) and Wilmington Trust (DE) announced plans to merge. M&T is expected to pick up $8.3 billion in deposits and $8.1 billion in loans from Wilmington, and the shareholders of WT will receive 0.05 shares of M&T stock per share held. M&T is a huge presence in the Northeast, and this would increase their branches from 800 to 848. For the third quarter, Wilmington Trust reported a net loss of $365 million and another loss in the 2nd quarter of $116.4 million.

Some news that was a touch stronger than expected, along with some nervousness about the outcome of the elections and QEII, pushed the markets around yesterday. Stocks did very little, and only $1.9 billion of mortgage-backed securities crossed the wires but still MBS prices worsened between .250 and .50, depending on coupon. Most investors passed this decline onto their rate sheets. There is no lack of yapping about the elections, and most are probably tired of seeing or hearing campaign ads. Okay - maybe it is just me. Anyway, Republicans are expected to take the majority in the House of Representatives and the Senate is expected to lose some Democratic seats but not lose their majority. After which we'll receive a whole new wave of conjecture from the pundits about what it means for the economy.

Perhaps more importantly, today is the beginning of the Federal Open Market Committee Meeting, with the announcement coming tomorrow.  They've already purchased $1.7 trillion of Treasury securities and MBS's. After their announcement, and over the next several months, rates will go up, go down, or stay the same - no surprise there. What most lenders are concerned with is whether or not credit conditions will ease - rates are certainly low enough, and banks certainly have enough cash. If QEII results in that, then fine. This QE2 asset purchasing is generally viewed as bad for the dollar, because the Fed would be essentially printing money to pay for the long-term bonds it plans to buy. Investors who want the dollar to rally are hoping for one of two options; either the Fed says it plans to buy fewer bonds than speculated, or the program rolls out slowly. The concerns focus on the amount of Treasury buying expected and the belief that it will not be much and will be spread over a long period of time, which will have little effect on lowering long-term interest rates. But in general the Fed will be walking a fine line of too little easing (the act is wasted) and too much easing (interest rates may not decline due to inflation fears).

Bloomberg economics commentator Caroline Baum wrote about QEII yesterday, "The Fed embarks on this program with the intention of lowering yields on long-term Treasuries, which in turn will bring down mortgage rates and corporate bond yields. Surely there must be two or three households holding back on a home purchase because the 30-year mortgage rate at 4.2 percent is too onerous...Either the Fed is operating under a misconception about how QE2 will reduce unemployment and raise inflation, or it has failed to communicate the transmission mechanism to the public. Neither is a plus. About the best thing anyone can say about the well-advertised and anticipated QE2 is that it won't do much good. The worst thing is that it will inflate asset prices, which we don't call inflation."

On the same topic a Bank of America/Merrill Lynch trader wrote, "The Fed is the only game in town. Fiscal policy will not be forthcoming, as such, so the Fed will use every tool in the kit to achieve their aims. The Fed wants inflation; therefore, we will eventually have inflation. The language may be "worry of deflation", but it will be "student body right" to inflate."

Of course, after today's election and tomorrow's Fed policy statement, all attention will turn to the October employment report on Friday. With all of that, bonds are pretty quiet. The 10-yr yield is sitting around 2.60% and mortgages are up slightly from Monday's close.

You can retire to California where...

1. You make over $250,000 and you still can't afford to buy a house.
2. The fastest part of your commute is going down your driveway.
3. You know how to eat an artichoke.
4. You drive your rented Mercedes to your neighborhood block party.
5. When someone asks you how far something is, you tell them how long it will take to get there rather than how many miles away it is.
6. The 4 seasons are: Fire, Flood, Mud, and Drought.