HARP 2.0 Comments; Allied Suspended; Lessons in Branding for MetLife's Future Purchaser; PHH Earnings

Following the tragic death of the Human Cannonball at the Springfield Autumn Fair, a spokesman said "We'll struggle to get another man of the same caliber." (Such a classic line.) But HUD will not be struggling to find a company of the same caliber to replace Allied Home Mortgage after HUD and Ginnie Mae suspended Allied Home Mortgage. At this point Allied (Houston, TX) can't underwrite new mortgage insured by the FHA or issue Ginnie Mae securities. The suspensions include by name the company's president and CEO, James C. Hodge, and its EVP and CCO Jeanne L. Stell. Allied is accused of engaging in fraudulent lending practices that have cost the government more than $834 million in FHA insurance claims.  The suit said that the lenders had engaged "in reckless mortgage lending, flouting the requirements of the FHA mortgage insurance program, and repeatedly lying about its compliance."

Reader input continues on the prospective HARP 2.0 program, with firm agency guidelines due in 13 days. One wrote, "Your readers should be aware that Fannie allows most credit enhancements unless there is something in the charter of the pool policy that prohibits it. Fannie allows different types of borrower paid and non-borrower paid MI, but readers should know that Fannie's program in a few weeks may have certain restrictions that address pool policy requirements for charter compliance."

There was a response to the comments about a large number of a lender's HARP loans being kicked out. (The original note read, "The one item that seems to be obviously missing from the recent discussion of "improvements" is addressing loans currently owned by Fannie or Freddie that otherwise would be eligible but are not eligible because the loan being refinanced was sold to Fannie or Freddie under some type of 'credit enhancement feature.' My experience is that at least 50% of the recent refinances I have attempted are not eligible under HARP because of this.") A person "in the know" wrote, "Loans that were under captive reinsurance agreements are eligible for HARP. Loans under "certain types of credit enhancement" agreements that would not be eligible would be very rare. If a lender is seeing 50% of his loan submissions kicked out, it would be best to contact his Fannie Mae account team and they could investigate to see why he is seeing such a high fallout rate - it could be a simple and easy error to correct."

PHH Inc. reported a net loss of $148 million in the third quarter, much worse than last year's loss of $8 million. A chunk of the losses are due to a negative fair value adjustment of PHH's mortgage servicing rights. The mortgage-production segment of PHH, however, had third-quarter income of $95 million, while the servicing segment lost $368 million for a combined loss in the mortgage-services unit of $273 million. Total mortgage closing volume was $12.7 billion of which 67% was retail and 33% was wholesale/correspondent. This volume represents a 1% increase over the third quarter of 2010. Annaly Capital Management, the nation's largest mortgage investing REIT, posted a $922 million net loss in the third quarter, citing a flattening yield curve and faster prepayment speeds. But Radian Group (#3 in MI) posted strong third quarter earnings of $183.6 million, but attributed those gains to changes in the "fair value" of "derivatives and other financial instruments." And lastly, for corporate news, BB&T will acquire BankAtlantic for approximately a $301 million premium, or 2x book. (Some banks are indeed expanding, although the seven largest banks based on asset size during the 2nd quarter (BofA, Chase, Citi, Wells, Goldman, Morgan Stanely, and MetLife) accounted for well over 50% of total bank assets: $10.3 trillion.)

(PHH, by the way, just released new 10-yr and 20-yr Fannie Mae HARP product terms starting on Friday. The 10 year and 20 year product terms will follow the same product guidelines as DU Refi Plus, with the maximum LTV's based on maturity and whether or not PHH is currently servicing the borrower's loan.)

MetLife is "in play," and PNC seems to be one of the potential purchasers. There are even marketing pieces about it: http://www.reveredata.com/reports/store/report/mna/239103_8171. Many banks and mortgage companies are searching for merger or acquisition candidates. But what is the best branding strategy in a merger? In any merger, there are 5 choices on what to do about the brand: 1) The acquirer maintains its name and disregards the acquiree's name (most common; like Bank of America and Fleet), 2) Both brands are kept separate (2nd most common), 3) Both brands are kept in a fusion that maintains certain elements of both (3rd most common, similar to JP Morgan Chase), 4) Create a new brand from the combined entity (rare, similar to Virginia Financial Group and First National Bank forming "Stellar One), or 5) the acquirer drops its name and takes the name of the acquiree (rare, like when Norwest bought Wells Fargo but kept the Wells name).

A study was done by IE Business School in Madrid and the University of North Carolina, with the research looking at 216 US companies formed by merger between 1997 and 2006. Most mergers during that time period underperformed the market by about 18%. Mergers that maintain the acquirer's brand and disregard the weaker one underperformed the marked by an average of 15%. In similar fashion, mergers that kept the brands separate underperformed the market by a whopping 25%. However, in cases where brands are fused together, the new brand ends up outperforming the market by 3%. Performance is one thing; we do see how management treats the brand as a sympathetic response that likely highlights a general attitude about cultural, process and infrastructure assimilation.

The method of discarding the acquisition brand likely points out that while some cost savings are achieved, valuable talent and processes were also likely jettisoned (thereby hurting performance). Likewise, keeping brands separate is most likely also a sign that overlapping cost structures were maintained and internal cultural silos kept. Keeping brands completely separate likely kept the organization from reaching its full potential. Because a merger's success relies in part on the successful integration of two cultures into a powerful new entity, a branding strategy that explicitly underscores the best of both worlds is likely worth considering for increasing value. While bank mergers are good at valuing property, loans, deposits and other assets; management teams usually treat what to do about the name as an afterthought. Since a bank's intangible or brand value may compose a material amount of performance, considering this question pre-decision is highly recommended as a way to capture more merger value. Using a fusion strategy to send reassuring signals to customers, employees, other stakeholders and most importantly, investors, may increase the level of success.

A company named Bella Homes is receiving some attention. "Rob, I've had this crazy home I-don't-know-what-to-call-it program touted to me by a Realtor who is now a "qualified representative" and a network marketer.  How could this be possible?  Wouldn't this need to be regulated?  It seems to me they are trying to sell it like Amway: http://www.gethelp.whybellahomes.com/index.html. The parts I don't understand are how do they "purchase their house from them for the amount of the first mortgage and second mortgage and other liens..." and then "purchase the mortgages at a discounted rate".  The order of operations here is rather muddy. And would the transfers of property and rights be out of compliance with regulatory consumer protection requirements? It seems like anyone is encouraged to participate in being a rep and bring in clients.  So what of Section 8 restrictions on referral fees?"

For the markets, Europe news continues to move things. Of course, in this country, it didn't help that the ISM Purchasing Managers Index decreased to 50.8%, down from 51.6% in September, (but still, there is expansion in the manufacturing sector for the 27th consecutive month.) But Construction Spending rose 0.2% in September as private projects outpaced a drop in government outlays, and followed a 1.6% jump in August. Regardless, the markets are focused on Europe: global equities tumbled with the Dow off 2.5% while 10-year T-notes improved 1.5 in price down to a yield of 2.00%. But on the mortgage side, as with any large rate improvement, mortgages lagged somewhat. MBS prices improved by about .625.

For today we can chew on continued jawboning about whether or not sometime in the near future the Greek people will vote to place austerity measures on themselves (hmmmm, let me think about that one), but we'll also have the release of the FOMC statement, expected at 12:30, with a press conference following at 14:15. Most economists are not expecting any major policy changes. Also for news we have the MBA's weekly report on mortgage application activity and the ADP Employment report.

(Parental discretion advised.)
Betty and Barney have a dog named Tuffy that snores. Annoyed because she can't sleep, Betty goes to the vet to see if he can help. The vet tells Betty to tie a ribbon around the dog's testicles and he will stop snoring. "Yeah, right!" she says.
A few minutes after going to bed, the dog begins snoring as usual. She tosses and turns unable to sleep. Muttering to herself, Betty goes to the closet and grabs a piece of ribbon and ties it carefully around the dog's testicles.
Sure enough the dog stops snoring. Betty is amazed!
Later that night, Barney returns home drunk from being out with his buddies. He climbs into bed, falls asleep, and begins snoring loudly.
Betty thinks maybe a ribbon will work on him, so she goes to the closet again, grabs a piece of ribbon, and ties it around her husband's.
Amazingly, it also works on him! Betty sleeps soundly.
A few hours later Barney awakes from a drunken stupor and stumbles into the bathroom. As he stands in front of the toilet, he glances in the mirror and sees a blue ribbon attached to his privates.
He is very confused, and as he walks back into the bedroom, he sees a red ribbon attached to Tuffy's.
He shakes his head and looks at Tuffy and says, "I don't know where we were or what we did, but, by God, we got First and Second place!"


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.