HUD Offers Originator Comp Guidance; Wells Fargo on Flipping; EPOs Segregated by Servicer; 30 vs. 15-Year Loan Payoff Speeds

Well, it seems like the market has grown a little jaded about watching the turmoil in the Middle East, the European debt crisis, and the Japanese nuclear & tsunami havoc. What to do?

The U.S. Treasury announced that it will begin an "orderly wind down" of its $142 billion MBS portfolio over about 1 year by selling roughly $10 billion agency MBS's per month. In this case, "agency" means Freddie and Fannie securities, as the Treasury does not have any Ginnie securities in this group, which started at $300 billion but has since been paid down by borrowers.) It is part of continuing wind down of emergency programs put in place in 2008 and 2009, which also include TARP, Citi stock, AIG, etc. The Treasury expects to make about $15 billion in profits. It does not impact the FOMC's position (they bought $1.25 trillion, which is now down to about $950 billion.) MBS

Suddenly Wall Street firms and investors were scrambling to find out the current holdings of the Treasury. The bulk of its holdings (purchased between 10/08-12/09) are in Freddie & Fannie 4.5 & 5.0% securities, which contain 4.75-5.75% 30-yr mortgages, but the MBS pass-through rates range from 4%-6.5%, and include 15-yr MBS's.

Keep in mind that monthly MBS pay-downs have slowed over the last 6 months (due to higher rates and fees), and, relatedly, daily origination has slowed to about $1.25 billion. Sterne Agee noted that in the context of the overall MBS market, $10 billion is slightly more than 1/3rd of the recent 3 month average net issuance of the total MBS market.  Prior to December, net issuance had not totaled over $3.3 billion/month in any single month for 10 consecutive months, dating back to the initiation of GSE delinquency buyouts. There is no indication that the Federal Reserve will begin systematically selling its $950 billion MBS portfolio.  However, the Treasury's announcement makes one wonder...

Just when you thought your head was about to explode from comp "stuff," HUD weighed in. "(HUD)...issues the following additional guidance on how mortgage loan originators  comply with the RESPA, in light of the FRB LO Compensation rule...This guidance seeks to clarify RESPA requirements related to proper disclosure on the GFE and HUD-1 settlement statement. This guidance does not address substantive issues related to restrictions on mortgage loan originator compensation that are within the jurisdiction of the FRB." HUDRegZ.

Barclays Capital released a study focused on the early pay-offs segregated based on servicer. Barclays noted that Ocwen, Saxon, Wells, ALS, RFC and Indymac (remember those names?) have among the fastest processing speeds, e.g., these servicers are able to make modification/foreclosure decisions quickest and move borrowers out of the 60+day bucket fastest. "At the other end of this spectrum are Countrywide, legacy JPM and Carrington, which are extremely slow in 60+ processing and allow the pipelines to build up to considerably higher than average levels. Servicers such as Option One, HLS, Ameriquest and EMC/WAMU form the middle of the pack." Barclays notes that these differences will diminish if various components of the proposed servicing agreement go through.

Sterne Agee, on the other hand, stratified prepayment speeds by servicer for conventional 30-yr and 15-yr MBS's. "We conclude that the business practices of any given servicer can have a meaningful impact on the prepayment speeds of MBS. Furthermore, market prices do not fully reflect the differences in speeds among servicers presenting investors with opportunities to enhance prepayment protection." MBS investors, of course, are particularly interested in rates and their impact on early payoffs (refinancing), but should also note the company servicing the loan.

Sterne Agee suggests that "investors consider pools that are not explicitly prepayment protected pools, but have a relatively high concentration of attributes that can be associated with slower prepayment speeds. In addition to a relatively low WAC (low rate) and a relatively low average loan size, we favor pools that have a relatively high LTV ratio, low FICO score, high % of non-owner occupied property, low % of third-party origination (TPO), high % of purchase loans, low % of refi loans, low % of delinquent loans, favorable 'geographics', and favorable servicers."

The analysis indicates "that more than half of the UPB of 30yr and 15yr MBS is serviced by one of the four big banks: Wells Fargo, Bank of America, Chase and Citi. The next eleven servicers by UPB make up about 21% of the collateral within each product. Remaining servicers and small servicers are defined as those whose portion is less than 1% in a given pool." Sterne attempted to identify which servicers had collateral that prepaid noticeably faster or noticeably slower than average during a refi wave - servicers that exhibit faster speeds during a refi wave are likely to be relatively more aggressive at soliciting refi applications from their existing clients. Different servicers showed a different performance based on the coupons of the pools relative to where the market was, but "Wells Fargo and Provident Funding had the fastest speeds at +25, +50 and +75bps of incentive. Chase had the fastest speeds at +100 and +125bps of incentive, suggesting that it became more aggressive at soliciting refi business when loans moved deeper in the money. Citi also had above average speeds at deep in the money incentives. On the other hand, Bank of America and PNC-NatCity had consistently slower than average speeds across the spectrum of refi incentives. Branch Banking and Trust (BB&T) and PHH Mortgage had the slowest speeds at +50bps of incentive and were also consistently slower than the average across all incentives. U.S. Bank speeds were slightly slower than average at moderate incentives and slightly faster than average at deep in the money incentives."

The pool stats, S-curves, loan attribute list, maturity differential, and rate differentials are beyond the length of this commentary. But one observation from Sterne Agee stood out. "We identified Provident Funding as the single most aggressive servicer in the MBS market. Our sources indicate that Provident's business model aims to originate loans to extremely high quality borrowers that produce little or no underwriting friction and that can close relatively fast, allowing Provident to maintain a lean operation. When primary mortgage rates fell to historical lows last fall, Provident Funding was extremely aggressive at soliciting refi business from their existing client base and new customers."

Wells Fargo's correspondent clients received some good news on flipping. Wells came off its "maximum 120% appreciation in 90 days" rule on FHA flip properties. Clients can now sell these loans to Wells provided that the correspondent meet the guidelines that FHA put out in their waiver ("exemption from compliance with FHA's regulation on property flipping"), and provide an additional appraisal, ordered from RELS. "Wells Fargo Funding requires a second full FHA appraisal for FHA transactions when the subject property is being resold within 90 days of the previous acquisition and the sales price of the subject property is 20 percent or more above the seller's acquisition cost. The second full FHA appraisal must verify the property seller has completed sufficient legitimate renovation, repair and rehabilitation work on the subject property to substantiate the increase in value or, in cases where no such work is performed, the appraiser must provide appropriate explanation of the increase in property value since the prior title transfer." There are important notes and restrictions that Wells' clients are advised to read.

Rates began Monday slightly worse than Friday's close, but by the end of the day were worse by .375-.5, depending on coupon and security. Who cared about the Existing Home Sales number after the Treasury's announcement (noted at the top) that it would commence selling its holdings of MBS's at $10 billion per month. 10-yr Treasuries tagged along for the ride somewhat, but rallied back after a knee-jerk reaction and finished down about .375 to 3.32%.

The supply outlook has shifted with an extra $10 billion per month that must be absorbed by other investors. BNP Paribas believes that banks, money managers and REITs should be able to manage it. Analysts also noted that CMO issuance has been robust and that the specified paper should be absorbed readily by CMOs.

Oh, and Existing Home Sales declined more than expected, dropping almost 10%. Lawrence Yun, NAR chief economist, dusted off previous months' speech and reiterated that home sales remain constrained by tight credit and appraisal issues. First time home buyers purchased 34% of homes, up from 29% in January, but down from 42% in February 2010 which had the benefit of the homebuyers tax credit. Other statistics reported by the NAR were that all-cash sales were a record 33%, up from 32% in the prior month, the national median existing-home price was $156.1k, and down 5.2% from a year ago. Impacting home prices are distressed home sales which represented 39% of the market. READ MORE. SEE CHARTS

And yes, here's the "joke". Is a borrower in Washington D.C. really better off?

Sometimes I wonder how Ops folks can keep from tearing their hair out, regardless of company. A few weeks ago PHH noted that, "The District of Columbia enacted the Mortgage Disclosure Amendment Act of 2007 that established a new mortgage disclosure requirement, effective February 28, 2008, on "non-conventional" mortgage loans in the District of Columbia. This act requires a one-page, double sided disclosure form regarding loan terms and payment amounts.

The disclosure is required to be provided to the borrower within 3 business days of the broker's application date (originators date), in either electronic or physical form, on all "non-conventional" loans in DC. Under the Act, a "non-conventional" mortgage loan is defined as any mortgage loan that is not a fixed rate mortgage loan with an amortization period of 30 years or less.

Examples of "Non-Conventional" loans: Adjustable Rate Mortgage (ARM) Fixed Rate with an amortization greater than 30 years Fixed Rate with Interest Only Period. If the disclosure is provided to the borrower on a physical piece of paper, it must be printed on RED PAPER measuring 8.5 inches by 11 inches, on one page front and back. Under the law, borrowers have up to 5 business days after receiving the DC Mortgage Disclosure form to cancel the loan application with no loss of any security deposit or any other funds applied to guarantee an interest rate, not including reasonable fees incurred to process the application."