Reverse Mortgage Primer; Feedback on Originator Licensing Backlog in California; More Risk-Based Pricing Disclosure Updates

As the population ages and retirement savings are strained, assuming property values rise or are stable, home equity loans will continue to be in the press. The FHA runs the Home Equity Conversion Mortgage Program (HECM) whose purpose is to provide income to house-rich but cash-poor seniors. The HECM market constitutes over 90% of the entire US reverse mortgage market. Just like the bulk of FHA and VA loans are placed into GNMA (Ginnie Mae) securities, these loans can collateralize a HMBS (HECM Mortgage Backed Security) which is backed by our government.  Each HMBS pool is from a single originator and contains exclusively fixed or adjustable rate loans.

Home Equity loan amounts are essentially based upon the borrower's current home equity and age. A reverse mortgage does not have to be repaid until the borrower no longer occupies the property and the house is sold, which is the key difference between a HELOC and a reverse mortgage as the reverse mortgage allows the home owner to extract equity without ever incurring any loan payments. Since the borrower is not required to make monthly payments, the loan balance simply grows with the accretion of interest, service charges, insurance fees and draws. The loan pays off when the house is sold and the proceeds are then used to pay off the accreted loan balance. At maturity, GNMA will make up any shortfall between the accreted HECM loan balance and the home sale proceeds.

For investors, research has shown that GNMA reverse mortgage loans "terminate at a fairly consistent multiple to mortality rates." A research piece from Cantor Fitzgerald mentions that mortality and age are highly correlated (is that surprising?) and every pool has each loan's borrower age information. But since it is impractical to apply a separate age dependent prepay curve to each loan within a pool, a base, pool level, prepayment curve was devised. This base prepayment curve applied to GNMA reverse mortgage pools attempts to capture the two age related termination features of these loans, mortality and mobility.

Yesterday I mentioned the rumored backlog in California of the DRE approving originators. I received a few responses from the originator ranks. "Delays in licensing those who want to be licensed are ridiculous. If the government wants to play such a large part in our mortgage process, they'd better have more well-trained manpower."

Another mortgage company owner wrote, "This is a huge problem. I estimate that at least 30% of all loan officers & brokerages are in some kind of "non-compliant" limbo. I think this is heading in a really bad direction as the California DRE is really messed up and behind, and when this happens errors tend to multiply."

And from Nevada: "I am told by the NV MLD that most agents have deficiencies and it will take until March to get everyone cleared and transitioned instead of 12/31.  I am also told MLD thinks NV will have around 2,000 mortgage broker agents cleared when all is said and done.  In 2006 there were over 30,000 so-called agents."

Here is an interesting situation. It seems that the FDIC recently expressed a new policy that bank directors have no right to possess copies of bank documents relevant to their defense of a potential suit by the FDIC as receiver. A letter was sent from the American Association of Bank Directors urging the FDIC to "clarify immediately that the FDIC supports the right of bank directors to copies of bank records they need in order to defend themselves against suits by the FDIC and others." The FDIC has aggressively sought to enforce this previously undisclosed policy by filing a lawsuit against attorneys representing bank directors in the defense of proceedings by the FDIC aimed at recovering losses from their clients. But if history is any kind of guide, during the S&L crisis the RTC and the FDIC "routinely barred bank directors from having access to copies of bank records that would allow them to refresh their memories of actions taken as directors, sometimes ten years or more prior the bank's failure." The FDIC has also taken the position that banks may not pay for the defense of their bank directors against potential lawsuits by FDIC as receiver. One can read the actual letter at http://www.aabd.org/ and thank you to Susan Jacobsen at LUV2XLPR Inc. for sending this note in.

PHH got the word out to its clients that starting Saturday the new federal law will require all borrowers to be provided with the Risk-Based Pricing notice within 3 business days of having credit pulled. "There are two versions available; one for applicants with credit scores and one for applicants without credit scores. Please be sure the correct form is utilized. Also, each borrower is required to receive their own individual disclosure even if credit was ordered jointly. In order to ensure compliance with this new regulation, PHH will require this disclosure to be issued in PHH's name on all loans with credit pulled as of January 1, 2011."

What moved interest rates yesterday? It was not entirely the fault of the Conference Board's Consumer Confidence number, which unexpectedly dipped from 54.3 in November to 52.5 in December. Nor the October S&P/Case-Shiller Home Price Indices (used, along with a few dozen other home price metrics to track the price path of typical single-family homes located in each metropolitan area provided). According to the index, prices in October declined 0.8% year-over-year for the 20-City Composite Index versus an expectation of unchanged, while the 10-City Composite rose 0.2%. It was not the fault of the blizzard which impacted Monday's trading, as many Wall Street folks managed to hire people to dig themselves out of the snow and head into work. (Volumes were still very light.) But the 10-year Treasury note plunged about a point and the yield finished at 3.48% primarily due to a weak 5-year note auction. MBS prices dropped 1 point on lower coupons and about .75 on 4.5 securities (which contain 4.75-5.125% mortgages).

There are no economic releases or Fed appearances scheduled for today. In fact, usually the MBA comes out with its weekly mortgage application survey, but it is closed this week and the survey for the week ending December 24 will be released next week. The only event is the $29 billion 7-year note auction at 1:00PM EST, along with the usual Fed POMO purchases. Currently the yield on the 10-yr is still sitting at 3.49% and MBS prices are up about 25bps. 

(Please note this story reflects no political bias on my part - it can be adjusted & used for either party.)

I asked a friend's daughter what she wanted to be when she grows up. She said she wanted to be President someday.

Both her parents, Democrat supporters, were standing there, so I asked her, "If you were President what would be the first thing you would do?"

She replied, "I'd give food and houses to all the homeless people."

Her parents beamed, and said, "Welcome to the Democratic Party!"

"Wow...what a worthy goal!" I told her. "But you don't have to wait until you're President to do that. You can come over to my house, mow the lawn, pull weeds, sweep my drive and I'll pay you $25.  Then I'll take you over to the shop where the homeless guy sits outside and you can give him the $25 to use toward food."

She thought that over for a few seconds, then she looked me straight in the eye and asked, "Why doesn't the homeless guy come over and do the work and you can just pay him the $25?"

I smiled and said, "Welcome to the Republican Party."