Second Mortgage Holders to Lose How Many Billions? Appraisal Lawsuits; US Government Defines "Flood"

Sweet home, Chicago...Chicago's City Council published an ordinance that would require banks, mortgage servicers and institutional investors to maintain vacant properties before the homes have gone through foreclosure. It requires securitization trustees to assume liability for the maintenance, security, and upkeep of properties in their trusts within 30 days of a property becoming vacant. But Tom Deutsch, executive director of the American Securitization Forum, called the ordinance "illegal," because it does not require that a borrower be in default or foreclosure as a condition of vacancy. Rather, the banks, mortgage servicers and investors will now be responsible for determining if a property is vacant even if a borrower is not delinquent or has not been foreclosed upon, he said. ASF is a trade group that represents investors and servicers.

Of course this is a big deal with servicers: how would a servicer know when a home becomes vacant? Under the ordinance, the borrower could still be making payments, but if the property is vacant, then the servicer is on the hook for internal and external maintenance. There's always the nuclear option - to stop buying loans with homes that are secured with Chicago properties! No servicers that I know of are contemplating that, but it has been done in the past - when Georgia passed some compliance legislation with Assignee Liability. Once again - unintended consequences.

A mortgage banking conference is not simply a few thousand mostly male mostly Caucasian mostly dressed in suits mostly age 35-55 folks standing in the lobby. "A gathering of protesters from a variety of community groups congregated late Monday afternoon outside the Hyatt Regency in Chicago, where more than 2,100 people in the mortgage-banking field are attending their industry's annual convention this week. Protesters demanded relief for struggling homeowners, including loan-principal reduction for those underwater on their mortgages, said Tracy Van Slyke, co-director of New Bottom Line, a campaign that challenges big bank interests on behalf of struggling and middle-class communities. The group also thinks banks aren't paying their fair share of taxes and wants them to invest more in small businesses, she said. One estimate put the crowd at 250 people, many of them chanting, "Hey, hey, ho, ho, Wall Street bankers got to go." Some hoisted signs, including one that read, 'They get rich. We get foreclosed.'" It was all very exciting, and some of the folks in the biz glanced up from their Blackberries.

The third quarter is over, but word is in from the second quarter that the eight national banks and single federal savings association servicing the largest loan portfolios reported that first mortgage performance declined across all categories of delinquencies during the second quarter of 2011.  The information is part of the Office of Comptroller of the Currency (OCC) Mortgage Metrics Report which covers 63% of all outstanding first mortgages in the nation. According to the report, current and performing loans represented 88.6 percent of the banks' portfolios in the first quarter but declined to 88 percent by the end of the second quarter.  This is still an improvement from the second quarter of 2010 when 87.3 percent of the loans in the portfolios were current. But hey, why take my word for it? Seeing is believing.

REIT's continue to be in the news. Residential REIT's constitute a noticeable portion of the demand for MBS's, and their health is judged as important to loan originations. Losses over the past two days among certain REIT's, however, have been more than 11% in share price before rebounding yesterday. "While the repurchase-agreement, or repo, market for government- backed mortgage bonds that many REITS rely on for funding is in 'good' shape, it may face pressure if Europe's banks need to retrench," on executive noted. I know that the article is a little dated, but one can read more here.

A few years ago, a friend of mine bought a foreclosed-upon home "on the courthouse steps." He made quite a bit of money on the deal, much of from the 2nd lien holder, in this case a large money center bank, walking away from their $200,000 2nd in spite of there being plenty of equity. According to people who do this regularly, this is not uncommon ("there are just too many properties for banks to deal with out there"), and it made me wonder about the financial situation of any large holders of 2nd mortgages. These concerns have definitely become mainstream.

For appraisers who like to follow lawsuits, here is a good site passed along by Jason Oelrich in Washington (thank you!).

But appraisals determine values and owner's equity. And the Washington Post carried an article by Ken Harney addressing equity on a state level.

David C. writes, "I've been working in the AMC space on for about 2 years.  I feel like I drank a lot of cool-aid initially.  I really believed the national AMC's had the best interests of the industry in mind in the way they conducted their businesses.  Now having been closely involved I see many of them for what they are, a bunch of completely self-serving, poorly managed, liars. I know that sounds harsh but the goal in the business is to get the appraiser to do as much work as possible at the lowest possible cost. Who cares what the finished product looks like? I don't want to come across too commercial but I joined InHouse because they have an excellent platform at a fair price for the mortgage banker to self-manage. 8 out of 10 appraisals flow through the system with relatively few issues, there's no reason someone needs to take $150 to $200 for placing and order and getting it to the client.  AMC's should only be used for the hard to do outliers.  Let them earn the spread. I could go on for hours, but suffice to say, in a year most originators will be self-managed and the mortgage banking industry will be much better off."

What is a flood? I guess Webster's Dictionary isn't adequate, so the U.S. Government would like to tell you. I bring this up because much of our nation is subject to flooding, which directly impacts mortgage lending. And those who follow it know that what we have now only goes through November 18th, so it is subject to the typical last-minute whims of our government: http://www.fema.gov/business/nfip/.

Turning to investors, all of whom are whom are staying up late at the conference in Chicago, Bank of America issued a disaster update for New York.

SunTrust Mortgage revised its guidelines so that "we no longer include a monthly payment in the borrower's debt-to-income (DTI) when the credit report shows a zero balance. We are also providing additional relief to exclude a debt from the borrower's DTI when an account is paid and closed at closing. For credit reports that do not reflect a monthly payment but have a balance, we are aligning our non-AUS, DU and LP guidelines for best execution. In addition, we have revised the revolving account guidance for FHA and VA loans." SunTrust also revised its Homebuyer Education Provider guidelines to delete Private Mortgage Insurance (PMI) and Republic Mortgage Company as eligible providers for Homebuyer Education.

GMAC sent out a flurry of changes. Its correspondent clients learned of some changes to its Veros appraisal ordering platform. Among others, "Correspondent Clients will be able to choose an Appraisal Management Company (AMC) within the Veros application on Jumbo transactions. The AMCs are displayed on the Orders tab. Select from the four options available in the dropdown titled 'Distribution Rule'." And "The ability to place a Rush order is no longer available."

"GMAC Bank currently requires that loans sold to GMAC Bank must be underwritten and closed in the name of the Client and that Client must have delegated underwriting authority for the loans that it underwrites. We have added the following new representation and warranty to the Client Guide: On loans sold to Correspondent Funding, each loan was closed in Client's name. Each loan brokered to Client for underwriting and closing in the name of Client was underwritten by Client and Client had delegated underwriting authority for such loan."

GMAC also reminded us that there is a lapse in funding Rural Development loans ("GMACB will not fund or purchase any loans with Conditional Commitments "subject to" availability of funds") and that the VA Funding Fee changes have been temporarily delayed until November 18, 2011.

Ever wondered about the life of a loan? Mountain West Financial is putting on a 30 minute session tomorrow at 1PM PST about what happens: "Follow a loan's journey from submission to funding" (second only to the life a salmon): https://www2.gotomeeting.com/register/139425242.

A look at the markets shows that rates have crept up a little. We have the FOMC minutes today, Wednesday the MBA app numbers. Thursday things "hot up" a little with Jobless Claims and some trade balance numbers. Friday we have Retail Sales for September, import & export prices, and a University of Michigan Sentiment number. Really, aside from the FOMC minutes and Retail Sales, it is a pretty ho-hum week. The 10-yr is at 2.15% and MBS prices are slightly worse.

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.