Fraud Trends; Lenders One Weighs in on G-fees; HARP & Servicing Comments; Where Does Impound Income Go?

Baseball fans will know the answer to this one: What's the difference between a hot dog at Fenway Park and a hot dog at Yankee Stadium? Answer: You can get a hot dog at Yankee Stadium in October.

Servicing values directly impact mortgage pricing. If you'd like to add your two cents on servicing, you can write to Servicing_Comp_Public_Comments@fhfa.gov.  FHFA is requesting public comments on two alternative mortgage servicing compensation structures.  The proposed structures are the result of work done under a Joint Initiative involving Freddie Mac and Fannie Mae (the GSEs), FHFA, HUD, FHA, and Ginnie Mae. FHFA's goals are to improve service for borrowers, reduce servicers' risk, and provide flexibility for guarantors to better manage non-performing loans (NPLs) while promoting continued liquidity in the To Be Announced (TBA) mortgage securities market. But the Joint Initiative also seeks to develop options for compensating servicers that will enhance competition and can be replicated in any future housing finance structures that emerge under GSE reform. Mortgage News Daily notes that, "Servicer compensation (Mortgage Servicing Right or MSR) is currently decided by the originator setting the mortgage rate offered to borrowers in terms of the spread above the par TBA price net of the guarantee fee that, when combined with the other income derived from origination and servicing (late fees, interest on escrow and payment floats) provides the servicer with an acceptable risk adjusted return on capital.  The spread charged in the mortgage rate for origination and servicing is based on competition, expected costs, and the expected returns of originator and servicer and should cover the expected costs of servicing including servicing NPLs." But perhaps servicing companies make too much on loans where there are no delinquency issues, and not enough on loans where there are.

Freddie and Fannie, and the FHFA, have a lot going on. (How do you like that for an understatement?) Not only are servicing values in play, but guarantee fees are as well, along with revamping an ineffective HARP. The FHFA is trying to conserve the assets of the GSEs and make them solvent, support a "stable and liquid mortgage market," and provide maximum assistance to homeowners and minimize foreclosures, "considering net present value to the taxpayer." One doesn't do that over lunch one afternoon. For a more in-depth angle, you can check it out.

"Dear Miss Manners: Regarding loan servicing, doesn't the interest earned on California impounds go to the borrower?  I thought it did.  But then why do some (most) lenders still charge a .25 fee for no impounds?" Answer from a servicing expert: "That's a great point.  States that require the servicer to pay interest on escrows to the borrower will have a lower base SRP in general. One could argue that if the interest paid to the borrower equals the interest earned on escrows, those loans with or without escrows would cash-flow equally.  The rate earned on escrows is obviously dependent on the servicer's business model and the interest paid is dictated by state law... So a slight spread is potentially available.  Also, most lenders apply an aggregate level fee as the true value of escrows ranges anywhere from .05 to .45 depending on state.  A rough guess is that the average value of escrows in California is about .10 while the value of escrows in a state like Texas is about .45."

Lenders One is calling for the FHFA to end volume discounts on Fannie Mae and Freddie Mac's guarantee fees, which Lenders One believes puts small and medium sized lenders at a competitive disadvantage versus "The Big Boys." G-fees have been in place for decades, and "in the old days" we'd stand around at conferences and compare them, with the largest, most financially sound lenders having the lowest and the riskier lenders having higher g-fees, similar to riskier drivers paying more for car insurance. Currently the ten largest customers of Fannie and Freddie paid an average g-fee of 23 basis points in 2010, but seller/servicers ranked 11 through 90 paid 27 basis points.

This week the commentary discussed HARP, and I received input. "This issue with HARP could be that it will literally take an act of Congress to make the necessary changes.  The acts of Congress which created the charters of Fannie and Freddie require the enterprises to buy 'investment quality' mortgages.  That has always meant that the loans must be made to borrowers with sound credit and (not or) secured by collateral sufficient to repay the debt should the borrowers default.  This is also why MI is required for LTVs greater than 80%.   Do you recall the legal and political wrangling that occurred when Fannie and Freddie rolled out their affordable products to 100% LTV and 103% CLTV?  There were a lot of lawyers inside and outside the GSE's, and their regulators, creating broad opinions of the charters that allowed the expansion of risk to occur.  The same thing happened when HARP was originally rolled out.  Now we are clamoring for LTVs up to 150%?  That's fine, but can you really argue that a 150% LTV loan is backed by collateral sufficient to repay the debt?  That's why Fannie and Freddie can't just wave their magic wands to change the program.  It seems that any expansion of HARP may have to be resolved when the Congress addresses the fate of the GSE's, and we all know what a political football that is."

CoreLogic has announced the availability of its 2011 Mortgage Fraud Trends Report: a look at over 10 million loan applications from the first quarter of 2005 through the first quarter of 2011. It is hardly the golden era for mortgage lending. CoreLogic fraud experts predict that fraud-related U.S. residential mortgage originations will total $7.4 billion in 2011, down from the estimated $12 billion in mortgage fraud-related originations experienced by the industry in 2010. (And yes, there are trends, so for example property fraud is up 262% - flipping and flopping - but identity fraud is down 45%.) The dollar drop is nice, but it is primarily due to lower mortgage origination volume in 2011. And it isn't time to let down your guard, as "new fraud schemes are constantly evolving to infiltrate weaknesses and vulnerabilities in lenders' fraud prevention programs," said a CoreLogic exec. Per the firm, the five riskiest areas of the country for fraud-related originations based on the first three digits of the ZIP code are Chicago, Ill. (606); Washington, D.C. (201); Brooklyn, N.Y. (112); Atlanta, Ga.(303) and Jamaica, N.Y. (114). (Jamaica? Nah, she wanted to...)

LO comp plans do indeed change. Bank of Internet sent out word to their clients: "Effective October 1st 2011 Bank of Internet will be adopting a flat Lender Paid Compensation model. All fourth quarter Wholesale Lender Paid Compensation plans will be moving to this new pricing structure and will affect loans registered on or after the above date. Bank of Internet will continue to offer the Borrower Paid Compensation model with no changes or modifications at this time. All loans registered prior to October 1st will be processed under the Lender Paid Compensation plan previously selected. As a result of this change no further action is required on your behalf relative to your organizations Lender Paid Compensation selection."

Wells Fargo told its brokers that, "Areas designated as a disaster by FEMA, or areas where Wells Fargo has required that disaster policy be followed, require the appropriate appraisal documentation (such as, but not limited to, Hurricane Irene and Texas wildfires) such as a full interior/exterior appraisal. The Fannie Mae Property Inspection Waiver (PIW) and Freddie Mac's Property Inspection Alternative (PIA), 2070/2075, and 2055/1075 are no longer accepted appraisal products. Wells' wholesale also updated its Four Wells Fargo Home Equity (WFHE) policies: Declining markets, Undue influence regarding reasonable and customary appraiser fees, Unacceptable source of income and Maximum acreage eligible for WFHE financing. Check the bulletin for specifics.

Thursday was pretty quiet in the bond markets, some of which was attributed to a number of participants being out for the Jewish holiday. Mortgage banker selling was on the lighter side at between an estimated $1.5 and $2.0 billion - maybe they sold everything earlier in the week. But the demand was there, and MBS prices were up nearly .375 as the 10-yr T-note also improved .375 and dropped back to 1.96% near the close.

Today, the last day to fund some of the high balance and Streamline locks, we've already had some numbers. Personal Income was -.1% and Personal Spending was +.2%. The PCE Price Index was +.2%. But the focus was on the personal savings rate, which is 4.5% - the lowest rate since 2009. Later we have the Chicago PMI (Sep) and final September Michigan Sentiment. It is easy to make the point that US debt issues and European issues should carry more weight in moving the markets than these lesser numbers. Regardless, in the early going the 10-yr is down to 1.94% and MBS prices are about .125 better.

A man returns home a day early from a business trip. It's after midnight. While en route home he asks the cab driver if he would be a witness, since the man suspects his wife is having an affair and he wants to catch her in the act. For $100, the cab driver agrees.
Quietly arriving home, the husband and cab driver tiptoe into the bedroom. The husband switches on the lights, yanks the blanket back, And there is his wife in bed with another man!
The husband puts a gun to the naked man's head.
The wife shouts, "Don't do it! I lied when I told you I inherited money.
HE paid for the Corvette I gave you.
HE paid for our new cabin cruiser.
HE paid for your Pittsburgh Steelers season tickets.
HE paid for our house at the lake.
HE paid for our country club membership, and HE even pays the monthly dues!"
Shaking his head from side-to-side, the husband lowers the gun.
He looks over at the cab driver and says, "What would you do?"
The cab driver replies, "I'd cover his 'rump' with that blanket before he catches cold."

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 Fannie & Freddie & the FHFA, and the changes they have in the hopper. 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.