Explaining Wider Primary/Secondary Loan Pricing Spreads; CFPB Update; Radian vs. Quicken; RMIC Done

RMIC threw in the proverbial towel Wednesday afternoon. "We wish to inform you that Republic Mortgage Insurance Company ("RMIC") will discontinue writing new commitments for insurance effective August 31, 2011. RMIC has been operating pursuant to a waiver of minimum state risk to capital ratio requirements which expire at the end of August... As stated in our parent company's (Old Republic) July 28th press release, our objective is to move production of new business to a separately capitalized and held mortgage guaranty insurance subsidiary. To date we have not been able to secure the GSEs' concurrence with this objective. We intend to pursue these discussions as a solution to the long term continuity of the mortgage insurance business." RMIC's announcement goes into detail on the process it will go through, and its continuing business lines, including "RMIC will continue to maintain all systems, processes, and contact points for policy servicing, loss mitigation, and claims operations just as we do today."

Mortgage rates have seen some big improvements over the last week. This has resulted in two issues, the first highlighted by this note: "It seems like there is a lot of rebate being kept by someone. Am I alone in thinking that someone is grabbing a lot of margin? If Fannie 4.5%'s are priced at 105-16 and the lender is currently paying the LO 2.67 that leaves 2.49. Are the Fannie price adjusters and SRP really adding up to the remaining 2.49 or am missing something?"

First, on rate sheets, lenders may not completely follow a market improvement. Mortgage News Daily writes, "If you include the extra cushion that's been baked into loan pricing recently, there's still room for rebate improvements. The reason we point this out is to remind users of the impact volatility can have on rate sheets. Anytime the MBS market moves as sharply as it has over the past 4 sessions, lenders are left with extra hedging costs. These additional costs, which include fewer loans as deals fallout due to lower rates as well as losses incurred on MBS short positions (that is how lock desks hedge against interest rate risk, by selling MBS which they have to buy back at a later data), must be recovered. That can happen either by adding new loan production to the pipeline or by an MBS sell-off, which grants lock desks an opportunity to buy back their MBS hedges at cheaper prices. The speed and size of the recent rally was too big and too quick, secondary didn't have a chance to adjust their hedging strategies before rates dropped. And now they're playing catch up and loan pricing is suffering as a result. There is another variable in the mix. We did a little more digging and discovered that a few lenders have been adjusting their servicing models and reducing SRP values. That further explains the extra margin in your rate sheets. It's not all a factor of extra margin; it's a loss of income!"

The second major issue is from the investor side: what about all the underwater whole loan and security commitments that are owed investors? Said another way, if ABC Mortgage sold Chase $10 million in mortgages two weeks ago, and now the market is 2 points better, that commitment is now $200,000 "under water." And if the mortgage company has limited capital, investors are nervous. The same thing is happening with Wall Street firms who mark-to-market, on a nightly basis, trade positions. A lender with $50 or $100 million on in trades is now millions under water, and if their capital base is limited, investment banks can play hardball.

A trader wrote, "Anecdotally I am hearing that lock volumes are up 30%-50% from last week's average but this has not translated into a 50% increase in supply yet. Why?  The existing loans in the pipeline (rule of thumb: pipeline is 45x the size of daily volume) are at a high probability of falling out or renegotiating. Primary/secondary spreads widening pretty substantially from mid-70s to the 90 area. This is not a capacity event, but more of a widening to capture increased hedge cost in sharp rally."

LoanSifter, a rapidly growing loan pricing engine among other things, is looking for experienced sales and service professionals in response to the strong demand for its Banker PPE platform.  "LoanSifter's understanding of originator and secondary needs, intuitive and user-friendly interfaces, along with its deep integrations with leading solutions such as Compass Analytics and DelMar DataTrac, has contributed to the company's strong foothold in the banker space.  Extensive experience working with secondary managers and understanding diverse business models/workflows is required for both remote positions." If you are interested, please send your resume to Ric Stelter at ric@loansifter.com.

Look out - the MI companies are starting to proactively go after their clients when those clients have the temerity of stopping doing business with them. (Companies should, of course, carefully choose counterparties.) This story at Law360 came out: "Radian Seeks to Nix Quicken Loan Insurance Claims. Radian Guaranty Inc. sued Quicken Loans Inc. seeking to rescind 140 certificates for mortgage insurance coverage on loans Quicken bought or originated, alleging Quicken failed to comply with the standard of care required by policy documents for the loans. Quicken has asserted mortgage insurance claims against Radian for losses it claims to have sustained as a result of defaults by borrowers on the mortgage loans in question. However, Quicken "made materially false warranties and representations to Radian in the underwriting process," according to the complaint. "Quicken ran a high-pressure sales organization, with incentives for quick, high profit production at the expense of conforming to applicable guidelines," the complaint said. "Quicken encouraged its loan officers and/or originators to use high-pressure sales tactics and to push high-risk loans through the underwriting process without regard to prudent industry underwriting standards...Quicken's abandonment and/or failure to adhere to underwriting standards and its submission of materially false information proximately caused the losses claimed by Quicken and/or materially increased the risks associated with the certificates," the complaint added. Quicken countered, "Radian ran, and continues to run, an organization completely devoid of intelligent risk management standards and practice," Quicken said in a statement. "When their ill-conceived strategy to write mountains of pool insurance against subprime and second lien loans imploded on them, they turned to the morally bankrupt strategy of last resort - they simply began trumping up fraudulent reasons to rescind the payment of proper claims. This company and its senior leadership are the poster boys for all that went bad in the entire mortgage industry. The incredible thing is that they keep making the same kinds of appalling and unscrupulous decisions that has put their company in the unenviable position of having lost nearly 95 percent of its value in just a few short years." Law360QuickenRadian

The CFPB published two new prototypes for the disclosure that will combine the Good Faith Estimate and initial Truth in Lending disclosure, neither of which contains drivel about tolerances, as the current focus is on design. Round 3 of design presents forms issued by the fictional Azalea Savings bank and Camellia Savings Bank. TheTwoForms 

What else is new with the Consumer Financial Protection Bureau? Richard Cordray needs to go through the confirmation process, which begins today before the Senate Banking Committee. Senate Republicans vow to block Cordray's nomination until a board of directors is established for the CFPB. Cordray himself is known as a consumer advocate when he served as Ohio Attorney General, and was publicized last year as being "highly dissatisfied" with the current state of mortgage servicing.

Remember that the CFPB started functioning on 7/22 with an interim final rule which preserved the ability of state housing creditors to make alternative mortgage transactions notwithstanding state law prohibitions. However, the rule incorporates amendments to the Alternative Mortgage Transaction Parity Act (AMTPA), required by the Dodd Frank Act and implemented in Regulation D, which significantly change aspects of the alternative mortgage transaction landscape. These changes include a revised definition of an "alternative mortgage transaction" as well as the narrowing of the scope of AMTPA's preemption provisions. Without pushing too far into the details here, all state housing creditors making such transactions must comply with any state law applicable to that transaction. A transaction qualifies as an "alternative mortgage transaction" if the loan, credit sale or account is: (1) secured by an interest in a residential structure containing one-four units, if it is used as a residence; (2) made primarily for personal, family, or housed purposes; and (3) a transaction in which the interest rate or finance charge may be adjusted or renegotiated. These could, and apparently do, include ARM's, shared equity and shared appreciation mortgages, and fixed-rate balloon loans, and also HELOCs and subordinate lien mortgages.

Roll-on you rates - how low can they go? Bond and stock markets remained worried not only about global slowing, but possibly a recession. Wednesday the 10-yr sank to 2.60%, but even with the lower rates mortgage bankers remain hesitant to sell much - they are too busy renegotiating locks (although volumes have been increasing slightly). MBS prices were higher by .125-.250 or better in price.

A maritime man from Schenectady,
Surveying the seascape dejectedly,
Said: "A fifth of home loans
Are, like Davy Jones,
Underwater, with negative equity."

"When my debt service proved but a fiction,
The bank didn't press for eviction,
As experience showed
That an empty abode
Would only invite dereliction."

"From one's mortgage," said Mr. DeLay,
"One cannot in good faith walk away;
When I got in a jam,
I stayed where I am,
And just discontinued to pay."