Overestimated Strategic Default Rates; New Home vs. Foreclosure; Option ARM Worst-Case Assumptions; Flagstar Releases Compensation Guidance

This is kind of exciting: a new website. It was created by home builder Lennar, showing how/why buying a new home is better than buying a foreclosure. I don't know if it answers the question about what to do with those new over-built Central Valley communities in California filled with "For Sale" signs. Lennar

In the last several weeks Option ARM securities have been discussed by analysts. For example, Banc of Manhattan's Paul Jacob noted that, " Virtually all of the Class of 2005 has passed the 5-year mandatory recast -- yet we saw almost no uptick in delinquencies in this study group of WAMU 2005 Option ARMs.  The reasons: (1) Borrowers who have hung on this long have already absorbed 4 payment annual increases of 7.5% each.  (2) The increase in payments at the recast isn't very large; only 12.5% for a typical loan of this vintage.  (3) Because rates are so low, borrowers making the minimum payment have been reducing principal for two years.  We believe this is critical to borrower psychology; you're more likely to stick it out if you see that you're making some progress...Because if the recasts aren't a major issue, the sector's priced attractively."

Price action on debt securities backed by Option ARM's has come under pressure lately. A story in Bloomberg recently noted that the price of the debt, which hit a low of 33 cents on the dollar in 2009, dropped slightly from recent highs and is now in the low 60 cent range. Generally investors have "reduced worst-case assumptions for the size of losses on defaulted mortgages such as option ARMs, a change that helped boost values of the bonds linked to those loans."

Defaults are obviously a concern to any investor holding mortgages. In a recent study Barclays noted that, "Most popular studies overestimate the level of strategic mortgage defaults. We think that the strongest cases of active strategic defaults are less than 1% of total defaults. These borrowers are clearly capable of making mortgage payments, always remain current on all non-mortgage debts and actively take out a new mortgage on a new home before defaulting on the existing mortgage." Barclays goes on to define "passive strategic defaulters" as those who have not experienced income or payment shocks and remain current on all non-mortgage debt outstanding. Another segment of the population defaults on their mortgage obligations while continuing to service other debt, but display clear signs of income or payment shocks. (These are ideal candidates for modifications.)

Barclays notes that, "The only characteristic that seems to matter is the borrower FICO at origination. Borrowers with high FICO scores at origination have a higher share of strategic defaults in total defaults. Higher loan balance and limited documentation borrowers display a higher share of strategic defaults but that merely reflects high-FICO concentration in those loans."

Fraud in Connecticut? No way... but the longtime registrar at Quinnipiac Law School faces sentencing for conspiracy stemming from a mortgage fraud scheme and filing false tax returns. LawSchoolRegistrar

Kinecta Federal Credit Union is expanding its broker business in the Central and Western US, and is looking for seasoned Wholesale AE's in the California (Sacramento and San Diego), Washington, Illinois, Kansas, Missouri, Nebraska, Ohio, Utah, Idaho, and Wisconsin markets.  Kinecta has over $3.5 billion in assets and is serving over 220,000 member-owners across the country. According to the release, "Kinecta offers a competitive compensation and benefits package in addition to a dynamic culture - AE's will develop and maintain relationships with wholesale and correspondent mortgage loan clients to gain loan business." For more information, visit the company website: www.kinecta.org.  If you are interested or know someone who might be, send a resume to Erika Schlarmann at eschlarmann@kinecta.org.

They're coming fast and furious now. And I don't mean refi's. Even with the lawsuit against the LO comp implementation that I mentioned yesterday, filed by the NAIHP, compensation plans continue to be fleshed out by originators. Especially since there are only about 3 weeks left!

Flagstar released more details on its comp plans, and told clients it allows rates to be locked with pricing exceeding the lender-paid comp fixed amount, with the excess being a borrower credit. "Prior to April 1, broker owners need to consider the level of compensation they need their company to receive on Flagstar-Paid transactions to meet their business needs; you should be mindful to assess the trade-off between receiving enough compensation to cover expenses versus remaining competitive in your marketplace. To assist with this exercise, we offer reports showing the historical fee revenue received by your company on Flagstar loans over the prior 24 months." "The Flagstar-Paid Compensation Schedule is required to be completed for each broker ID and will determine the amount of compensation paid to your company when a transaction is designated as Flagstar-Paid. The schedules are designed to allow much flexibility to meet your needs...Schedules can be initially updated every 30 days until July 1, at which time they can be updated every 90 days thereafter. Regardless of which broker compensation option is used (Borrower-Paid or Flagstar-Paid), you are still able to pay third-party costs for borrowers by utilizing premium pricing. When selecting an above-par interest rate, the premium is credited to the borrower in Block 2 (GFE) / Line 802 (HUD-1) according to RESPA. Borrower-Paid - Credit can be used to cover third-party costs only. Flagstar-Paid - Credit must be used to cover broker compensation per schedule and can also be used to cover third-party costs."

Home Savings of America announced two training sessions. For brokers on the West Coast it will be this Thursday, 11:30-1PM PST. To register for this meeting go to HSOAWest. For East Coast brokers the session is this Friday, 11:30-1PM EST, and to register go to HSOAEast.

U.S. Mortgage Partnersarranged for a live web presentation on compensation. It will take place on Thursday the 17th, 2PM EST. "Please join us as attorneys from the Board of Governors' Division of Consumer and Community Affairs provide updated information and answer questions about the new regulatory requirements for loan originator compensation. Written questions can be submitted via email in advance of the event, or may be submitted during the event using online chat. To register for this free event go to: USMP.

Analytics firm Interthinx plans to launch the Equifax undisclosed debt monitoring system as part of its service. "The debt monitor detects new debts issued to borrowers during the critical 30-to-45 day quiet period of the loan application cycle. From the time a loan application is filed to its closing, underwriters are generally unable to detect new debts issued to the applicant during the extended quiet phase." The plans are for Interthinx's FraudGUARD to incorporate the Equifax undisclosed debt monitor so that Interthinx's clients can obtain instantaneous updates on every new debt listed under a loan applicant's name.

MCT Trading, known as a hedging and risk management firm, and MountainView Capital Holdings, an advisor to participants in the mortgage and fixed income capital markets, announced a strategic relationship in which MCT will introduce select clients to MountainView's services in an effort to address more of its clients' needs. Per the press release it will give MCT's clients "a more robust suite of services, including mortgage servicing retained versus released execution analysis, mortgage servicing rights valuation and hedging, whole loan sales advice, and potential whole loan purchases by MountainView's funds." 

A new cooperative has sprung up for folks out in California. CMC (California Mortgage Cooperative) is actively seeking small mortgage banks who wish to share a centralized back office platform and use their size and numbers to negotiate better pricing and warehouse line terms. It "came together as a small group of mortgage bankers and originators who formed a strategic alliance aimed at growing their business in the face of mounting government restrictions and increased net worth requirements imposed by FHA." Here you go: CMC.

CitiMortgage, besides the usual credit overlays that the company sends out (the last update was a few weeks ago - remember that practically every investor has overlays over and above the underwriting requirements of the agencies, since they don't feel that those risk parameters match their own) recently sent out a series of credit policy updates. These focused on a wide range of topics, including verification of assets & funds to close requirements, seasoning requirements for R/T refi's, FHA Streamline Refinances, and other FHA-related changes. Citi also tweaked its Fannie Refi Plus appraisal requirements, adjusted appraisal fee handling & the settlement agent approval process.

In ten days Citi will be "implementing security enhancements on the Correspondent Website; these enhancements will require users to select additional security questions and provide answers upon their initial login." Clients will see an "Update Profile" page as correspondents log into the site.

Home Savings of America  reduced its High Balance adjustment for the Conforming 5/1 LIBOR ARM to 1.00 in fee from 1.25, and told clients it will now allow current market relocks 30 days after expiration, cancellation, or denial on fixed products. (ARM products will still require a 60 day window to relock at current market.)

NYCB, who allows 30 day jumbo locks, told brokers that now, for jumbo fixed loans, escrow waivers will be permitted. A .125 price adjustment factor for an escrow waiver will apply unless prohibited by state regulation.

Mortgage Services III rolled out changes such as an MSI overlay to the FHA Streamline Refi program, clarified verbiage on trusts and POA's, revised reserve requirements, corrected the effective date for the AVM requirement for FHA Streamlines, clarified MSI reserve requirements for investment properties, etc. As always, it is best to read the actual bulletin for specifics.

Turning to the markets, there is no scheduled market-moving news until later in the week. The Treasury is scheduled to auction $32 billion of 3-yr notes today at 1pm, $21 billion of 10-yr notes on Wednesday, and $13 billion of 30-yr bonds on Thursday. Yesterday 10-year Treasury notes were nearly unchanged at a yield of 3.50% as we watched equities being hit by higher oil prices, tension in the Middle East, and worries over Europe. MBS prices finished the day worse by about .125. 

After his examination, the doctor said to the elderly man: 'You appear to be in good health. Do you have any medical concerns you would like to ask me about?'  

'In fact, I do.' said the old man. "After we make love, I am usually cold and chilly; and then, after we make love with her the second time, I am usually hot and sweaty."

After examining his elderly wife, the doctor said: "Everything appears to be fine. Do you have any medical concerns that you would like to discuss with me?'  The lady replied that she had no questions or concerns.

The doctor then said to her: 'Your husband had an unusual concern. He claims that he is usually cold and chilly after having sex with you the first time; and then hot and sweaty after the second time. Do you know why?'

"Oh, that stupid old geezer'' she replied.  'That's because the first time is usually in January, and the second time is in August."