Dealing with REO Inventory; Another AARP Lawsuit; Loan Limit Cutoff Dates; LO Comp Feedback

Last night my wife met me at the front door. She was wearing a sexy negligee. The only trouble was, she was coming home.

The correct perspective is important. For example, are property values in Phoenix rebounding, or still mired down in quicksand? And what could Phoenix tell us about cities in the rest of the US? Sales are moving higher, but certainly at lower prices than a year ago: They point to strong existing home sales in June, up 22% according to the NAR. It was the second consecutive month of strong sales, with the June figure the strongest recorded since December 2006. But while sales may be up, prices are not. The NAR report says the median price of a home sold in the Phoenix area in June was down 13% from the same month in 2010, and many expect expects prices to remain weak because distressed properties are accounting for 64% of sales: ADryHeat.

Phoenix's "fun with numbers" reminds us that it is easy to be confused, or misled, with seemingly simple numbers. For example, imagine you are saving for your child's college costs, expected to amount to $100,000, and that you are 80 percent of the way there with $80,000 in your account. The next year, the value of your investment account drops 25 percent, to $60,000. The year after that, it bounces back 25 percent. Are you back to where you started? No, because now you have $75,000 in your account. Next, assume college costs are rising 8 percent per year. Now how close to paying for college are you? The answer: 64 percent, because you have $75,000 toward $117,000 of costs. Even though your investments rose the same percentage as they fell, you're further from your goal than before. This is the same situation faced by pension funds.

I've lost track - is this the week that the government wants out of mortgage banking, and to dissolve Freddie & Fannie, or is this the week when they want to continue to control securitization, underwriting, and servicing? I guess it is the latter: The Obama administration, through FHFA, Treasury, and HUD, will seek investors' ideas for turning thousands of foreclosed properties owned by government-backed entities into rental homes, thus, in theory, helping values and lowering inventories (?). Heck, Fannie Mae and Freddie Mac sold a record 100,000 homes during the second quarter - I bet they're becoming adept at it. Fannie + Freddie + FHA = 250,000 homes at the end of June, or around half of all unsold, repossessed properties. According to the WSJ, there are another 830,000 homes through the three agencies in the foreclosure pipeline - and they will all pass through the same 12 Realtors nationwide. (Just kidding.) Owners of non-owner occupied properties across the nation are protesting the move. (Just kidding again.) Seriously, anything is better than a vacant, deteriorating property, and given many ex-owners' credit reports, their only choice is to rent. For more: Where'sMySecurityDeposit?

More on the LO comp issue, Kevin Iverson with Reed Mortgage Corporation wrote, "Regarding the recent posts about LO Compensation and renegotiations - actually the new LO compensation rules should help with maintaining pipeline and reducing fallout. Previously, prior to the new LO comp rules, if rates dropped a mortgage broker LO could increase their compensation by simply pulling the loan from locked lender and placing with another lender - maybe give the borrower better pricing and at the same time increase his/her compensation. Now, assuming everybody is following the rules (which might be a leap of faith), the LO is going to get paid the same regardless of where loan is placed. Thus the LO has no incentive to pull loan and place with some other lender, especially if a lot has already been done on the loan (who wants to do more work?). And HVCC (or whatever they call it these days) makes it problematic to place a loan with a new different lender, as many lenders are not taking transferred appraisals."

I received this note from a much respected attorney who specializes in mortgage banking. "I am seeing some companies allowing an 'overage' account for marketing expenses while others are not. And there is the perception that an 'overage' account is illegal. The terms 'overage account,' 'points bank,' and 'bonus account' are all non-specific, non-legal terms.  Accordingly, whether any one is 'legal' or, more precisely, whether any one is permissible under the Truth in Lending Act's new Loan Originator Compensation Rule and other applicable state and federal laws, depends of course on the individual situation.  However, as a general statement, it is certainly possible to set up such an account in a manner which is fully compliant with all applicable laws, including the new LO Comp Rule.  If properly set up and implemented, it is also possible, within limits and subject to certain restrictions, to use funds in that account for certain bona fide business expenses of the affected LO."

Don't forget that effective July 29, 2011, depository institutions were required to become registered in NMLS under the SAFE Act. According to the Board of Governors, the S.A.F.E. Act imposes additional requirements upon MLOs who are not employees of agency-regulated institutions, including state licensure and testing requirements and character and fitness standards. In this regard, employees of bank holding companies and their non-bank subsidiaries who act as MLOs are subject to state licensure and associated state regulation. CanISeeYourLicense?

The National Reverse Mortgage Lenders Association has announced its 2011 Annual Meeting & Expo which will focus on the role reverse mortgages can play in retirement planning and the emerging opportunities for realignment of the industry following the departure of such entities as Bank of America and Wells Fargo. "As some companies exit the sector, it creates room for others to enter and grow," says Peter Bell, NRMLA president and CEO. The gathering will be held October 24-26 in Boston. Additional information can be found at www.nrmlaonline.org or by contacting Marty Bell of NRMLA at mbell@dworbell.com.

While we're on reverse mortgages, the AARP filed another suit: AARPSuit. According to Reverse Mortgage Daily, AARP filed a class action lawsuit against Wells Fargo Bank and Fannie Mae on behalf of reverse mortgage borrowers and their survivors who have faced foreclosure and eviction - that Wells Fargo has illegally foreclosed upon reverse mortgage borrowers who were not notified and were not given the opportunity to purchase the property for 95% of its appraised value after the loan becomes due and payable. The lawsuit is the second suit filed by AARP this year concerning reverse mortgage borrowers and their heirs. The original suit was dismissed by the court in July.

Rock on...Farmer Mac? Federal Agricultural Mortgage Corp. (AGM), commonly known as Farmer Mac, around since 1988, reported second-quarter earnings more than doubled on higher interest income. Credit quality continued to improve: 90-day delinquencies were 1.27% of its portfolio, improving from 1.3% a year earlier, and new program business volume was $608.1 million, though it added $1 billion in the first quarter.

What happened to Option One? It became Sand Canyon, and it announced a resolution of claims of unfair and discriminatory lending practices by modifying thousands of Massachusetts homeowners' loans and making a significant payment to the Commonwealth of Massachusetts as part of a settlement valued at $125 million. It requires the mortgage originator, a subsidiary of H&R Block Inc., to pay $9.8 million to the Commonwealth and to direct American Home Mortgage Servicing Inc. (AHMSI), the current servicer of approximately 5,500 Option One loans in Massachusetts, to institute an aggressive loan modification program that will provide an estimated $115 million in additional relief. The suit alleged that the risk-layered loans were unfair because they posed an excessive risk of default and foreclosure, and that Option One knew that loans with such risk characteristics were doomed to fail but that it originated them nonetheless in order to sell them to the secondary market and realize a profit.

I have a clarification regarding Wells Fargo's wholesale cut off dates for locks, given the impending loan limit changes. "Temporary loan limits scheduled to expire Sept. 30, 2011: Deadline for 45-day locks is Aug. 16.The deadlines for locking loans using the temporary loan limits is: For 45-day locks: Tuesday, Aug. 16, 2011 For 30-day locks: Wednesday, Aug. 31, 2011 For 15-day locks: Thursday, Sept. 15, 2011.  Reminder: Only the temporary loan limits are expiring - permanent limits remain available after Oct. 1. Therefore, transactions not impacted by the expiration of the temporary loan limits may be locked at any time."

Just so we're clear here: Fannie 3.5% securities (which generally contain 3.75-4.125% loans) are now above 101 (a 1 point premium). Add some servicing (this is clean, low coupon stuff!) and suddenly a 4% conventional mortgage is earning the seller 102 (2 point premium) in the MBS market. What is passed on, through originator rate sheets, is up to the lender. There are profit margin, overhead, hedge costs, and so on that must be accounted for - but still, these are record mortgage price levels.

Today is a new day, with more potential volatility. Given the comments I am seeing, folks would be happy with a quiet summer Thursday & Friday heading into the weekend. Yesterday prices quickly gained as EU fears related to French banks and their exposure to Greek debt sent investors to the safety of the AA+ rated US (as opposed to AAA-rated France!). We had a solid 10-yr note auction in the US, and yield hit a low of 2.10%. But things worsened slightly, and we closed around as the stock market plummeted (again). Mortgage banker selling has been much muted - almost as if companies are afraid to sell their new locks, instead using them to fill older unfilled positions with investors and Wall Street.

Today we've had Jobless Claims, and some trade numbers, and will have a $16 billion 30-yr T-bond auction. New U.S. claims for unemployment benefits dropped to a four-month low last week, a rare dose of good news - initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 395,000 from 402k the week before. MBS prices are worse by 0.125 to 0.25.

(Parental discretion advised!! Don't read it and then write to grouse about it.)
From a teacher -- short and to the point.

"In the world of hi-tech gadgetry, I've noticed that more and more people who send text messages and emails have long forgotten the art of capitalization. For those of you who fall into this category, please take note of the following statement:

'Capitalization is the difference between helping your Uncle Jack off a horse and helping
your uncle jack off a horse.' Is everybody clear on that?"

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 the recent U.S. credit downgrade by S&P, and whether it really matters. 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.