Lenders Prepare for Lower Loan Limits; FHLBs Launch Salvo Against BofA; Several Investor Bulletins

A loan agent sent me a joke yesterday: "What's the difference between the US government and a subprime borrower? None - they borrow money that they can't pay back in hopes that some inflated value will bail them out in the end." But given our low rates, one analyst asked, "Has US government debt become a safe haven for its own downgrade?"

One thing for sure is that US banks are holding on to more cash and locking in longer-term financing as they brace themselves for the consequences of a potential downgrade of the US's triple A credit rating. The Financial Times notes that if US government bonds lose their AAA rating, banks using them as collateral may have to endure higher "haircuts" on the collateral, potentially sparking a credit crunch especially in the $3 trillion repurchase, or "repo", market, on which large institutions rely for short-term funding.

Bank of America is not out of the woods yet. Recently six Federal Home Loan banks have "launched a salvo" against Bank of America's proposed $8.5 billion mortgage bondholder settlement, suggesting the payout may need to be triple that amount. "Research reports used to determine the settlement figure were too favorable to B of A, used faulty estimates from the Charlotte, N.C., bank and 'raise more questions than they answer.'" This reminds us that the FHLB's don't all have to act together in matters such as this, and the six (Boston, Chicago, Indianapolis, Pittsburgh, San Francisco and Seattle) have filed a separate claim. Others, such as the Federal Home Loan Bank of Atlanta were part of the June settlement along with PIMCO and BlackRock.

Flagstar is not out of the woods yet, either. The holding company for Flagstar Bank reported a 2nd quarter net loss of almost $75 million, following a first quarter 2011 net loss of almost $32 million, and a second quarter 2010 net loss of $97 million. The loss is attributed primarily attributed to "legacy balance sheet" issues. Flagstar has ramped up its commercial lending this year, which has helped, along with selling $68 million in non-performing commercial real estate assets. In the 2nd quarter "Mortgage rate-lock commitments increased $0.9 billion, or 16.8 percent, from prior quarter."

Moving from Michigan to Iowa, Wells Fargo will be undergoing some mortgage-related changes in management. Cara Heiden, co-president of the mortgage business, will be following Mark Oman (who runs mortgage and consumer finance) into retirement. Mike Heid will become the sole president of Wells Fargo Home Mortgage, and Avid Modjtabai will head up the Consumer Lending Division (which includes mortgage, home equity, and student loans). Promoting from within...

Anyone in compliance or quality control may want to participate in the next monthly conference call/webinar of the California Mortgage Bankers Association's Mortgage Quality and Compliance Committee (MQAC). Several speakers will be discussing the "Impact of New Fair Lending Oversight Initiatives," and it's free tomorrow (Thursday) at 11AM PST. Contact Dustin Hobbs for webinar login information at dustin@cmba.com although the teleconference portion can be heard by dialing 1-800-351-6802 with verbal passcode 437841.

Regardless of whether you are in favor or not of extending the temporary loan limits, investors from the top down are preparing for 10/1 when they are scheduled to be scaled back in many areas. (Freddie's page can be found at FreddieLoanLimits.) For Freddie, the expiration of the temporary maximum loan limits will impact the sale of super conforming mortgages with note dates on or after 10/1. "Super conforming mortgages will be subject to the limits determined according to the Housing and Economic Recovery Act of 2008 (HERA). Mortgages with note dates on or after October 1, 2011 must have an original loan amount equal to or less than the 2011 HERA limit for that county/#units combination. The maximum allowable limit for a 1-unit property in the highest cost counties (exclusive of those in AK, HI, GU and VI) will be $625,500, with 2-4 units being higher." Freddie also reminded us that "Congress might act on loan limit legislation again before October 1, 2011. Should that occur we will provide you with further guidance."

This obviously trickles down. U.S. Bank told its brokers that, "The Super Conforming Loan Limits for FHLMC/FNMA/FHA are due to expire on September 30. From all indications, it is likely that the current limits will not be extended and the new limits will be reduced not only to the absolute limit (reduced from $729,250 to $625,500) but individual county limits as well. Exact limits will not be known until sometime around the first week of September..." USBHMWD will be taking several steps ahead of that, such as putting a 9/30 deadline in place for any closings, disbursements, and file deliveries. USB notes that for VA loans, however, "the maximum loan amounts available through USBHM will not change however, the Veterans maximum eligibility/entitlement available in Super Conforming counties is subject to change." Check with USB for details.

And it trickles down further. Out in California, for example, Mountain West Financial told brokers of instituting funding cut off dates for Conventional, FHA and VA maximum loan limits. "MWF will require that these loans (under the temporary loan limit) fund by September 23. For mortgage loans with note dates after September 30th, revised limits will apply. The maximum limit is $625,500 for a 1-unit Property in the continental United States. General Loan Limits for 2011 will remain unchanged from the 2010 general loan limits. MWF will require that FHA and VA loans under the current high cost limits to fund by August 31. FHA loan limits would likely decline in 669 of the 3,334 counties or county equivalents that are eligible for FHA insurance."

Recently the commentary noted that Chase referenced a HUD bulletin concerning the annual MIP change. As it turns out, the change in MIP was not announced via a Mortgagee Letter but instead the change was made directly to HUD TOTAL Scorecard and CHUMS. I received a note, "Regarding the HUD/FHA MIP change, in HUD's defense they did let the industry know during a 6/2 MBA industry conference call that the changes were coming." An astute reader noted, "We identified the change via a difference between our LOS and FHA TOTAL Scorecard annual MIP values. Loans with a loan terms <15 years and LTV's <78% now reflect 0.00 in the Annual MIP returned from TOTAL Scorecard. Additionally if the Correspondent checks the FHAConnection Case Query screen, they will see a 0.0 factor for this segment of loans. The Correspondent would use the TOTAL Scorecard findings and the FHAConnection Case Query screen as their documentation. The Mortgagee Letter is still pending from HUD."

Another wrote, "Regarding ML 2011-22: FHA's Mortgagee Letter 2011-22 Condominium Approval Process for Single Family Housing was released 6/30/11, also affects Quality Control and Record Retention requirements for some Lenders. Lenders who perform FHA Condo Project submissions under the Direct Endorsement Lender Review and Approval Process (DELRAP) option will need to implement a new addition to their FHA Quality Control Review Procedures and Record Retention requirements. This ML requires a QC review minimum of 10 percent of all project approval reviews and a 3 year record retention period of all legal documents and other supporting & associated documentation in connection with a DELRAP participant's review and approval or denial of the condo project submission after the date of the last action taken: HUDML.

Bank of America recently notified its correspondent clients of a change in the way they can view Residency Status and Documentation Requirements for Conforming, FHA and VA loan programs (all in one section now) and its Rural Housing guidelines now include that the borrower may be a Qualified Alien. Clients should refer to USDA Rural Housing Policy for eligibility.

GMAC continued to make pricing adjustments. This time correspondent clients learned that, starting last Thursday, GMAC will be adding two rate adjustments to the LPMI products: +.250 rate adjustment on FICO >=700 and loan amounts >$417,000 and <= $625,500, and +.500 rate adjustment on FICO >=700 and loan amounts >$625,500 and <= $729,750.

SunTrust revised their tradeline underwriting policy. ("SunTrust Mortgage considers borrowers who have too few reported tradelines or insufficient trade histories on a case-by-case basis.  Strong compensating factors must exist.  We require a second tier review by a SunTrust Mortgage Underwriting Team Lead or Underwriting Manager.") It also refined its appraisal policy ("SunTrust Mortgage, Inc. revised the Appraisal Guidelines to specify review appraisals as field review appraisals.  We do not allow the use of desk review appraisals.") and published additional guidance regarding permanent resident alien green card expiration dates and acceptable documentation for clients with a green card expiring within six months after closing.

ING reminded brokers that, "pursuant to your company's executed Broker Agreement, in the event that the Broker solicits the refinance of a Loan previously funded by ING within one hundred eighty (180) days of the funding date by ING, Broker shall repay ING, within (30) days, any premium or similar amounts paid to broker by ING at the time of original purchase and/or funding of the Loan." To avoid recapture do not submit a refinance of a loan previously funded by ING Mortgage within 180 days of the funded date."

Yesterday we had the S&P/Case-Shiller numbers: down from a year ago, up from the previous month. The index for 20 cities fell 4.5% from May 2010.  Nineteen of the 20 cities in the index showed a year-over- year decline, led by a 12% plunge in Minneapolis. Washington showed the only increase, up 1.3% from May 2010. Month over month, the 10- and 20-City Composites were up 1.1% and 1.0%, respectively, in May over April. New Home Sales decreased 1% to a 312,000 annual pace in June, but the median sales price increased 7.2% to $235,200 from June 2010, and the average sales price was $269,000. (We have about a 6.3 month supply at the current sales rate.) Lastly, the Conference Board Consumer Confidence Index improved slightly in July to 59.5, up from 57.6 in June.

What did all that do to rates? Not much, really - the debt issue is impacting the stock and bond markets more than weekly or monthly economic news. European problems gave us a flight to quality bid, and now we have speculation that a continued deadlock on the U.S. debt limit will slow economic growth. The 10-yr closed at 2.95%, and MBS prices gained between .125-.250, depending on coupon. "Meanwhile, mortgage banker supply was uneventful at around $1 billion."

This morning we learned that mortgage apps dropped last week by 5%, with refi's down 5.5% and purchases down almost 4%. Refi's still account for almost 70% of new business. We also found out that Durable Goods were -2.1% for June (a volatile number) and although there are several ways to slice it the Durable Goods number continues to point to a slow economy. Later we have the Fed's Beige Book (2pm eastern) and a $35 billion 5-yr note auction. 

Some humor for the kids:

Two peanuts walk into a bar. One was asalted.

A jumper cable walks into a bar. The barman says "I'll serve you, but don't start anything."

A sandwich walks into a bar. The barman says, "Sorry we don't serve food here."

A dyslexic man walks into a bra.

A man walks into a bar with a slab of asphalt under his arm and says: "A beer please, and one for the road."

Two aerials meet on a roof, fall in love and get married. The ceremony wasn't much but the reception was great.

Two cannibals are eating a clown. One says to the other: "Does this taste funny to you?"

A guy walks into the psychiatrist wearing only Glad Wrap shorts. The shrink says, "Well, I can clearly see you're nuts."

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com . The current blog takes a look at early actions taken by the new CFPB and the political situation affecting it. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers