BofA Settlement in Question; NMLS's Interesting Originator Stats; Impact of GNMA's Mod Rule

Realtors and mortgage professionals know that divorce can often lead to the formation of a new household. According to the Census Bureau, the national divorce rate was 9.2 for men and 9.7 for women per 1,000. Men and women in the South had higher rates of divorce in 2009 than in other regions of the country, 10.2 per 1,000 for men and 11.1 per 1,000 for women (versus the lowest region - the Northeast - with 7.2 and 7.5 respectively). But there is an explanation: "Divorce rates tend to be higher in the South because marriage rates are also higher in the South," said Diana Elliott, a family demographer at the Census Bureau. "In contrast, in the Northeast, first marriages tend to be delayed and the marriage rates are lower, meaning there are also fewer divorces." But marriage rates, which often lead to the consolidation of households, were higher: 19.1 for men and 17.6 for women.

Remember that proposed $8.5 billion Bank of America settlement with investors back in June? "Not so fast," said the FDIC. The settlement still requires a judge's approval, and the FDIC filed an objection in federal court in Manhattan as an investor rather than as a regulator of the Bank of America. It said it owns securities that would be covered by the settlement because it took over banks that failed during the financial crisis. "The reason for the FDIC's objection is that it does not have enough information to evaluate the Settlement," it said in the notice. According to the Financial Times, "Several investors have requested to intervene in the settlement. Earlier this month, AIG sued Bank of America to recover more than $10 billion it lost on mortgage investments, and also objected to the proposed $8.5 billion settlement, and another potential settlement, with state law enforcers, still looms."

On the other side of the balance sheet, Bank of America has struck a deal to sell about half of its stake in China Construction Bank to a group of investors for $8.3 billion and thus making a profit of $3.3 billion. In the mortgage world, rumors abound concerning Bank of America exiting correspondent lending, given the defection of top individuals in recent months, its exit from wholesale late last year, the easing of mortgage pricing in recent months, and the focus on taking care of problems with older loans. BofA's shares have tumbled more than 40% this year, much of it due to issues in the mortgage business, and headlines were made again late last week with Warren Buffett's Berkshire Hathaway buying $5 billion of preferred stock.

The Nationwide Mortgage Licensing System and Registry (NMLS) has released information on licensed entities as of the first quarter of 2011 and a limited update on licensees at the end of the second quarter. It is the first set of reports after four years of operation, and definitely has some insights into the mortgage biz. The numbers moved up from the first quarter, and by the end of the second quarter there were 16,153 companies holding 30,945 licenses, 17,387 branches holding 267,211 licenses, and 106,881 individuals with 201,469 licenses.  Multiple licenses are held where states require separate licenses for DBAs or for different authorities such as lender and broker. The NMLS report gives us insight into who many licensees are originating 1^st or 2^nd mortgages, VA, FHA, reverse mortgages, operate across state lines or even nationwide, numbers of branches, and so on. Check it out here.

Ginnie Mae recently announced that it is expanding the parameters regarding loans eligible for repurchase from Ginnie Mae MBS's. "Under the new policy, any modified loan may be repurchased after successfully completing a three-month trial payment period, if a trial period is required. This change aligns Ginnie Mae's repurchase policy for the FHA non-Home Affordable Modification Program (HAMP) high-risk loans with the current policy for FHA-HAMP loans." The memo goes on to say, "The FHA policy now requires that high-risk non-HAMP loans complete a three-month trial period before a modification becomes permanent. Loans that have completed the required three-month trial payment program will be eligible to be repurchased from Ginnie Mae pools. Additionally, the newly-modified loan can be re-pooled into MBS by Issuers." It seems that FHA loan performance data shows that many modified borrowers are at risk of a re-default, and undergoing a trial payment period may help avoid this. FHA loan data shows that modified high-risk borrowers were responsible for more than half of re-defaults in 2010, with the majority occurring within three months on modified loans without a trial payment period.

To sum that up, effective October 1, most FHA loans will need to complete a 3-4-month trial modification before a permanent modification is granted. The news turned some investor and servicer heads, but does it really matter? Probably not. In the past, GNMA servicers could buy out a delinquent loan at par, perform quick modifications and immediately deliver it back into GNMA TBA. In many cases, the modification simply recapitalized the delinquent amount (principal, interest, insurance, tax, and late fees etc.) while leaving other terms of loan almost unchanged, resulting in little relief to the struggling borrower. Although these modifications let servicers quickly re-coup their advances on the delinquent loan and sometimes make a profit at the delivery, they also led to extraordinarily high re-default rates. As a result, in September 2009, the FHA started requiring that the note rate on the modified loan could not be more than 50 basis points above the Freddie Mac Survey rate, and the new loan must re-amortize for 30 years. This, combined with other policing initiatives by the FHA and overall improved microeconomics, has contributed to the drastic decline in GNMA default / buyout rates over the last couple of years.

 A key consideration is that for as long as the loan is in the pool, the servicer is obligated to advance the full principal and interest due MBS holders. Therefore, under the previous rule the servicer needs to advance three months of full P&I before having the option to buy the loan out, while under the new rule the servicer receives the trial payments which reduce the amount of P&I advanced. Because FHA only reimburses the principal portion but not the interest part of the advances in cases where the loan eventually goes into foreclosure (the debenture interest reimbursement by FHA is not related to advances), the new rule should reduce the total costs associated with modifications for servicers. The steps suggest that servicers will be more likely to execute modifications only when appropriate, the total amount of modifications and buyouts should remain roughly unchanged for GNMA pools, and loss mitigation loans redelivered into new-issue GNMA pools should have significantly lower re-default rate due to the requirement of a trial period. This should alleviate investor concerns.

Huh? Now mortgage-related law firms are engaging in fraud? "An extensive mortgage-fraud ring led by the law firm Kramer and Kaslow has been stopped in its tracks." The California Department of Justice (DOJ) and the State Bar of California is going after Kramer and Kaslow, headquartered in Calabasas (Countrywide's old stomping grounds).

Don't do the crime if you can't do the time. In the Chicago area, a man who directed a mortgage fraud scheme that cost lenders about $16 million for properties will spend more than 17 years in prison. The scam involved 120 residences...$16 million in mortgage loans not repaid or recovered through foreclosure sales...guilty on nine counts of wire fraud, four counts of bank fraud and three counts of mail fraud. It was the usual story that the public hears about now in the newspapers, where he orchestrated the fraudulent purchase and resale of dozens of residences, pocketed undisclosed payments and kickbacks from each transaction and also controlled about $3.1 million in post-closing funds over the course of the scheme, according to court records.

Turning to the markets, we did have a smattering of economic news yesterday which included Pending Home Sales. NAR announced that this number fell for July, after being up for two months, and versus a year ago the index is over 14% higher. (The number comes from sales of existing homes where a contract has been signed but the transaction has not closed.) Lawrence Yun, NAR chief economist, said, "The market can easily move into a healthy expansion if mortgage underwriting standards return to normalcy." Mr. Yun - please! That aside, Personal Income was higher than expected, Hurricane Irene caused less damage than anticipated, stocks bounced, and the 10-yr T-note dropped .75 in price and moved up to a yield of 2.27%. MBS prices ranged from worse about .5 on 30-year 3.5's to roughly unchanged on 5.5's.

Today it expected that trading volumes will pick up a little as schedules return to normal in the Northeast and we see month-end flows. Today we have the release of Consumer Confidence, the Case-Shiller Index, and the release of the 8/9 FOMC minutes. In the early going stocks are pointing lower, gold is up almost 2%, the 10-yr T-note is sitting at 2.19%, and MBS prices are about .250 better.

(From 9/1 through 9/9 I will be out of the country - Peru, if you must know. My access to e-mail will be sporadic at best, and my ability to send out commentaries will be diminished. I have lined up several very knowledgeable "guest writers" of varying mortgage backgrounds who will be taking my place every day. So while I am dodging llama spit readers will receive a different take on the industry from different perspectives: contract negotiation, insurance, compliance, risk management, and so forth.)

During a recent company password audit, it was found that a blonde secretary was using the following password: "MickeyMinniePlutoHueyLouieDeweyDonaldGoofySacramento."
When asked why she had such a long password, she said she was told that her password had to be at least 8 characters long and include at least one capital.

(Editor's note: What is even funnier is the thought of a company doing a "password audit"... they wouldn't have liked some of mine over the years.)