Possible HARP Changes; MERS Holding It's Own; Loan Limits Extension

Don't forget that we're one week away from "Talk Like a Pirate Day." Of course, to err is human; to arr is pirate.

The next time you're thinking about outsourcing your underwriting to another nation, think twice:  Video

A few weeks back the mortgage-backed security markets were roiled with rumors of a massive government sponsored refinance program. Investors who owned any securities at 5% or above, containing 30-yr loans with rates of 5.25% or above, were wringing their hands, worried that suddenly their holdings would either evaporate or they would be earning 4% instead of 5% every year. The market chewed on this possibility for a few weeks, until the end of last week when President Obama, in a speech about jobs, noted his intention to help "responsible homeowners refinance their mortgages at interest rates that are now near than 4 percent."

This is certainly less extreme than some of the rumors that had been circulating in recent weeks, but it is still something to ponder. The focus is on HARP loans, and in turn on FHFA, who oversees Freddie and Fannie, and then again on FHFA Director Edward Demarco. He pretty much said that any restructuring of HARP would have to strike a balance between benefiting homeowners and preserving current levels of credit risk for Fannie and Freddie. "FHFA is carefully reviewing the mechanics of the HARP program to identify possible enhancements that would reduce barriers for borrowers already otherwise eligible to refinance using HARP. If there are frictions associated with the origination of HARP loans that can be eased while still achieving the program's intent of assisting borrowers and reducing credit risk for the Enterprises, we will seek to do so." Perhaps Loan Level Pricing Adjustments would be tweaked, perhaps the current 125% LTV limit would be raised, perhaps... well, you can see the release for yourself.

MERS is certainly holding its own. It won a U.S. appeals-court ruling upholding dismissal of claims by Arizona borrowers challenging their lending and foreclosure procedures. The federal court in San Francisco ruled last week that a district court properly threw out a lawsuit filed by three borrowers alleging conspiracy and fraud. In addition to MERS, defendants included Bank of America and JPMorgan Chase. "The plaintiffs' claims that focus on the operation of the MERS system ultimately fail because the plaintiffs have not shown that the alleged illegalities associated with the MERS system injured them or violated state law," the three-judge appeals panel said.

In a somewhat related matter, HUD came out with a Mortgagee Letter announcing that "FHA approved Holders and Servicers are subject to sanctions for failure to report Mortgage Record Changes (MRC) for mortgage sales, transfers and terminations of mortgage insurance. Mortgagees who fail to comply may be subject to referral to the Mortgagee Review Board (MRB) for administrative actions including but not limited to civil money penalties.  Read more more here.

And what is new with the temporary loan limits, set to expire in about 2 1/2 weeks? Congress, which recently never seems to do much preemptively lately, is being hit up by mortgage and real estate trade groups. The latest is a push to take action on a bill that would extend the maximum mortgage loan limits through 2013. A bipartisan bill introduced about a month ago (don't forget - they were on vacation) would allow the FHA, VA, and Fannie & Freddie to continue insuring homes up to the higher levels for another two years. Watch for news on The Homeownership Affordability Act of 2011. Few politicians want to be seen as hindering any recovery in housing, of course and in a joint letter to Congress several industry organizations warned that failing to extend the limits would delay the housing recovery and make it more difficult for consumers to secure affordable financing. "With tight underwriting already constraining mortgage availability, lowering the loan limits will only further restrict liquidity," the letter reads in part. "Private lending remains wary of returning to the market with all the current uncertainty. Extending the existing limits at levels appropriate for all parts of the country will provide homeowners and home buyers with safe, affordable financing and help stabilize local housing markets." On Thursday, a bipartisan group of 37 lawmakers sent a letter to the House Appropriations committee recommending a short-term extension of the current conforming limits. The lawmakers urged the committee to attach the provision to a temporary government funding bill.

But don't look for anything to sail through. Opponents of retaining the loan limits claim there's an appetite in private markets for jumbo loans. This brings up two major issues. The first is the recent news out of the SEC that it could close the exemption status real estate investment trusts (REIT's) have from the Investment Company Act (ICA) when pooling and selling mortgage-backed securities. The SEC said "the mortgage markets have evolved and expanded, and the provision has been used by a wide variety of types of pooled vehicles and other companies unforeseen at the time of enactment," which include certain MBS issuers and REIT's. We now are able to comment on it - but the price of REIT's dropped significantly. There are a lot of clever minds in the REIT business, and alternatives may be found that preserve tax benefits and thus continue their demand for mortgage products. But it should remind everyone in the mortgage business that we cannot rely on the REIT's demand for MBS's to save our industry.

The second issue is, of course, the fact that major banks, which are pretty much the same thing as major mortgage originators, investors, and servicers, are now staring down the gun of the Federal Government who is suing them. It will take some very good minds to come up with plans in the future to motivate private investment in mortgages while at the same time convincing these banks to loosen up their purse strings and invest in production. Oh, and at the same time let's eliminate Fannie and Freddie! Seventeen banks, dozens of their subsidiaries and over one hundred bank officers were named as defendants in a lawsuit filed by the Federal Housing Finance Agency (FHFA), conservator of the GSE's.  The civil suits allege violations of federal securities laws and common law in the sale of residential private-label mortgage-backed securities to the GSE's.

But wasn't the FHFA, and other large investors, smart enough to analyze the securities and evaluate the risks? That is the argument, of course, and one - Ally - was quick to bring that to everyone's attention. "Ally believes that FHFA's claims are meritless, and the company intends to defend its position aggressively.  Freddie Mac is a sophisticated investor and elected to take certain risks with respect to purchasing securities.  The losses Freddie may have sustained related to those securities are a result of market forces, not any alleged errors or omissions by Ally in connection with the securities."

Speaking of lawsuits with big banks, US banks are in talks with state prosecutors to settle claims of improper mortgage practices. They have been offered a deal that is proposed to limit part of their legal liability in return for a multibillion dollar payment. This focuses on the "robosigner", workers who signed off on foreclosure documents en masse without reviewing the paperwork. Apparently state prosecutors have proposed effectively releasing the companies from legal liability for allegedly wrongful securitization practices.

Small and regional banks have been busy. Out in California, First PacTrust Bancorp will acquire Beach Business Bank, following another recent deal to buy Gateway Business Bank. (After the acquisitions, First PacTrust will have about $1.3B in total assets and 18 branches.) Up in Ohio, Croghan Bancshares will buy 4 branches with $111.7mm in deposits from the parent company of The Home Savings and Loan, as Home Savings is selling the branches to raise capital. Over in the Carolinas, Bank of North Carolina will buy Regent Bank in South Carolina, and up in Washington AmericanWest Bank will buy the parent company of Viking Bank. The First National Bank of Florida was closed by the OCC, and with the help of the FDIC found CharterBank of Georgia to assume all of the deposits. In Georgia, Georgia Commerce Bank acquired the banking operations, including all the deposits, of Patriot Bank of Georgia and CreekSide Bank. (The two were closed by the Georgia Department of Banking and Finance.)

Bank of America will reportedly announce 40k job cuts or 14% of its workforce. The cuts are expected to be largely centered on retail operations. While BofA has already shuttered 63 of its 750 planned branch closures (13%), these cuts would likely mean more are on the way.

While last week was a fairly light week for economic data, speeches by President Barack Obama and Fed Chairman Ben Bernanke dominated headlines. Bernanke's speech offered nothing new. The president outlined a plan that calls for payroll tax cuts and spending initiatives, and although the proposal could boost growth somewhat most do not believe it fully addresses the core issues of weak consumer demand and structural unemployment. The president called for payroll tax cuts, which accounted for more than half of the plan, extension of emergency unemployment compensation, infrastructure spending, aid to state and local governments, programs to subside the issue of long-term unemployment and mortgage-refinancing assistance.

The $447 billion package is equivalent to nearly 3 percent of GDP, and it could provide a boost to economic growth next year. However, the proposal still needs to be passed by Congress. There is likely to be substantial politicking in Congress over next few weeks, given the varying possibilities for the proposal to be adopted. How could it impact interest rates in the US? The rates market implications of any fiscal stimulus occur through 2 channels: 1) boost to growth, and 2) worsening deficit. So far stocks thinks very little of the plan, and rates seem to be heading lower, suggesting that the markets do not believe that it will help the economy much.

We have quite a week of scheduled news ahead of us, in addition to whatever might unexpectedly come along from overseas. The fun kicks off tomorrow with some import & export prices and continues Wednesday with the Producer Price Index and Retail Sales. (Few care about inflation at this point, but many hope to see a pickup in Retail Sales.) Thursday is Jobless Claims and the Consumer Price Index, along with Industrial Production and Capacity Utilization. So far this morning the 10-yr is at 1.92%.  View Current Prices Here

Take heed......
When you drink Vodka over ice, it can give you kidney failure.
When you drink Rum over ice, it can give you liver failure.
When you drink Whiskey over ice, it can give you heart problems.
When you drink Gin over ice, it can give you brain problems.
Apparently, ice is really bad for you!
Warn all your friends.