Freddie Mac Eliminates Streamline Refi Product; Wells Fargo & U.S. Bank Earnings Recap; Plan B for 2011; Lender Bulletins

Terrorists are now planting bombs in cans of alphabet soup. If one of them explodes it could spell disaster!

Of course, everyone in mortgage banking is hoping that 2011 is not a disaster. Remember - borrowers still borrowed money even when rates were in the high teens. That being said, not only did Freddie Mac recently lower its production estimates for 2011, but the Mortgage Bankers Association (of America) came out with its forecast for 2011: 30yr conforming conventional fixed rates at 5.5% by year end, and $966 billion total single family originations in 2011. WHAT'S YOUR PLAN B?

Regarding production volumes, this morning we learned from the MBA what many lock desks could tell us: that apps picked up by 5% last week, with refinancing applications up almost 8%. Purchases dropped about 2%.

Will any mortgage with an LTV of 70% or less avoid the future 5% risk retention situation for issuers? That LTV level, which continues to pop up in the press, could be the new basic level for a "safe mortgage" - check out THIS STORY in the Wall Street Journal.

In February, from the 10th through the 12th, one has the "2011 Midwinter Housing Finance Conference" in Utah. The annual event geared to the top executives in the mortgage finance industry who ski, along with key regulators who ski, economists who ski, and those that serve the business who ski. In all seriousness....CHECK IT OUT....if you ski.

FHFA, which obviously has a great interest in the future of Freddie & Fannie, announced a "joint initiative" between the two and HUD for "Alternatives for a New Mortgage Servicing Compensation Structure." "(It) will consider alternatives to the traditional servicing compensation structure. The goals are to improve service for borrowers, reduce financial risk to servicers, and provide flexibility for guarantors to better manage non-performing loans, while promoting continued liquidity in the To Be Announced mortgage securities market. Alternatives for consideration may include a fee for service compensation structure for non-performing loans as well as the possibility of reducing or eliminating the minimum mortgage servicing fee for performing loans, or other structures. Many of these issues have been the subject of discussion within the mortgage industry for years." Before servicing employees begin wringing their hands, nothing expected until the summer of 2012.

Paul Jacob with Banc of Manhattan believes that what will result will include "Greatly reduced minimum servicing. This has long been on the wish list of servicers. Based on the press release, it looks to us as if a change from %  to set $-per-loan is also on the table. Servicers will tell you that the cost structure of basic servicing is more per loan than per $ of current face; a $400k loan doesn't cost 4 times as much to service as a $100k loan. What's notable is that the press release explicitly questions the wisdom of "the creation of a mortgage servicing right asset, which is difficult to manage and separate from a servicer's core competency".  Don't forget that Basel III makes servicing a less attractive asset for banks to own.  On the other hand:  MBS investors have reacted very negatively every time this has been raised in the past, and they're unlikely to be any happier about the prospect now." And the current system incents servicers to foreclose, rather than engage in other loss mitigation, so look for compensation for servicing delinquent loans to possible change.

Fraud - in Washington state? Don't do the crime if you can't do the time.

Freddie Mac turned some heads yesterday by announcing that it is "revising certain refinance mortgage eligibility and underwriting requirements, and announcing the elimination of Freddie Mac-owned streamlined refinance mortgages."

After May 1 Freddie is, "Requiring verification of funds for all refinance mortgages. This requirement will apply to all refinance transactions except for certain Relief Refinance Mortgages - Same Servicer. The elimination of Freddie Mac-owned streamlined refinance mortgages and requiring that a purchase money mortgage be seasoned for 120 days in order to be refinanced as a "no cash-out" refinance mortgage.  If the new mortgage is refinancing a purchase money transaction, the note date of the original mortgage must be at least 120 days prior to the note date of the "no cash-out" refinance mortgage." For all the details and more including news on PACE obligations: HERE IS THE FREDDIE BULLETIN

Bank of America correspondents were reminded that "In accordance with GSE data point of delivery requirements, effective on all loans delivered for purchase on or after January 28, 2011: Rental income and bedroom count for the subject property must be captured on all non-owner occupied one- to four-unit properties and all owner-occupied two- to four-unit properties, whether or not the rental income is used to qualify the borrower and regardless of the Automated Underwriting System (AUS) decision." Also, for appraisal documentation, "for conforming loans, regardless of AUS: The Operating Income Statement (Form 216) is not required: If rental income from the subject property is not used in qualifying the borrower (borrower qualifies with the full PITIA) or for refinance transactions where the borrower has owned the subject property for at least one year and reports the income on Schedule E. In addition, the Single Family Comparable Rent Schedule (Form 1007) is required for single family investment properties when income from the subject property is used to qualify the borrower."

Wells Fargo alerted its broker clients about changes required escrow holdback accounts starting Monday. "Escrows for completion will only be allowed for minor items that do not affect the safety, livability, marketability, or accessibility of the subject property. Escrows are not allowed on condominiums if the incomplete items are common elements or property."

Fannie Mae came out with a couple of servicing bulletins, one addressing an increase in foreclosure attorney fees in Maryland, and another providing "additional guidance on servicer responsibilities in connection with mortgage loans owned or guaranteed by Fannie Mae and the Hardest-Hit Fund (HHF) Unemployment and Reinstatement Programs." https://www.efanniemae.com/sf/guides/ssg/2011annlenltr.jsp

PHH's clients learned of several "clarifications and reminders" in its policies and procedures. PHH provided information on the Home Affordable Refinance (HASP) product, including the description and addressing subordinate financing (new subordinate financing is not permitted). The company repeated recent Fannie DU Refi Plus and Freddie Mac Relief Refinance Open Access changes, listing at length the underwriting "tweaks" and refinements. It also reminded clients of risk-based pricing notice disclosure requirements ("Industry practice is to provide the notice within 3 business days of pulling credit and is still the expectation of PHH. However, PHH recognizes that this may not always be possible. Therefore, the decision has been made to allow up to 10 business days from credit pull date for the notice to be provided. This timeframe is reasonably practicable and any notice received dated beyond 10 days of the credit pull date will require a written explanation of the delay to be reviewed by PHH.") and for recovery periods after bankruptcies, foreclosures, and deed-in-lieu actions.

Although the supply of MBS's is sliding, and the demand is still decent, yesterday "rate sheet" mortgage-backed security prices finished off Tuesday worse by about .250 after beginning the day better by .250. Tradeweb reported that volumes averaged 87% of the 30-day average, up from a daily average last week of 73%. Our 10-year Treasury notes closed worse by .250 in price and at a yield of 3.37%. "Lower and wider didn't draw in significant buying as many real money types held closer to the sidelines waiting for stabilization in the market and volatility, said sources" per one trader.

For news, we did have some information yesterday on home builder confidence, which was unchanged for the third straight month in January at "16" - whatever "16 means. This time around the chairman of the NAHB noted that the difficulty in obtaining financing and obtaining accurate appraisals continues to plague the industry.

Today, however, we have a little more to chew on....

Wells Fargo's earnings came out as expected at $3.2 billion (61 cents per share). Initial reads show that Wells' loan growth was better than expected. Credit quality improved dramatically, allowing Wells to release some $850 million in reserves which is about 10 cents per share.

Goldman Sachs also came out slightly better than expected at $3.79 per share versus $3.76 per share, although revenue came in lower than expected. Goldman did not have a monumental quarter, as some were hoping.

US Bank reported its earnings at 49 cents per share, slightly better than the 46 cents per share expected. The bank also reported a provision for credit losses lower than net charge-offs by $25 million and net securities losses of $14 million, which increased earnings per common share by three cents in the fourth quarter.

We also had Housing Starts and Building Permits for December; starts were expected to decline and permits pick up. Starts were indeed down 4.3%, possibly with some influence from weather, and permits were up 16.7%. Regardless, housing is slow, and continues to grapple with a foreclosure overhang. After the news the 10-yr yield is chopping around 3.34% and MBS prices are a shade better.

The teacher asked the class to use the word "fascinate' in a sentence.

Molly put up her hand and said, "My family went to my granddad's farm, and we all saw his pet sheep. It was fascinating."

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Little Johnny raised his hand. The teacher hesitated because she had been burned by Little Johnny before.

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Johnny said, "My aunt Gina has a sweater with ten buttons, but her chest is so big she can only 'fasten-eight!"