Orange Alert for FHA Program? Who Will Buy HARP 2.0 Loans? Loan Amount Debate Winds Down

This has nothing to do with mortgage banking or real estate, but it is definitely worth 30 seconds for anyone who drives or has a pet.

In Sacramento, Sierra Pacific Mortgage is searching for a VP of Capital Markets. SPM originates loans nationwide, being licensed in 47 states, and has been in business 25 years. The candidate should have extensive experience in pipeline hedging, product development, daily price sheet maintenance, post-closing oversight and investor relations. This position will be an integral part of the Sierra Pacific Mortgage Senior Management leadership group as well as the Sierra Pacific Mortgage Credit Committee. Although it is headquartered in Northern California, SPM has regional fulfillment centers across the country (the position is located at the corporate office in Folsom, CA). Interested Cap Markets folks should send a resume to CFO Paul Hubbard at Paulh@spm1.com.

And for folks who'd like to work for a company headquartered in Southern California, there is more hiring. Carrington Mortgage Services, a retail and wholesale lender, is looking to staff up in order to handle its rapidly-growing wholesale lending business. Carrington is looking for operations personnel as well as sales managers and AE's in the 37 states in which it is licensed to do business. Interested parties should contact Carrington's recruiting department at RobCresponce@carringtonms.com.   And for those that don't know much about Carrington, it now includes more than 80 local real estate, mortgage lending and servicing, property management and property preservation offices nationwide. The Mortgage Services website is www.carringtonhomeloans.com.

When it comes to loan amounts, should the "average American support millionaires" as some claim? Here is the latest from DC.

The story above includes information on FHA loans, and there is a growing "stage orange alert" about FHA loans and about the entire FHA program. "...those loans with the highest likelihood of default are those in which down payment size, FICO, and DTI, are "layered," or present in combination. While the FHA has slightly tightened up on layering, the report claims it is still at risk. While the private sector has mitigated such risk by imposing stricter guide­lines for low down payment loans, FHA continues to qualify such borrowers for mortgage financing, putting it at risk of being selected against." This is included in a new report which can be seen here.

Another study shows that the FHA insurance program is materially undercapitalized and will require a capital infusion of $50 billion to $100 billion in the next few years - even if housing markets do not deteriorate any further. The study was written by Joseph Gyourko at the University of Pennsylvania Wharton School, and is titled "Is the FHA the Next Housing Bailout?" Describing the FHA present state as precarious, Gyourko says for the past two years the nation's 77-year old insurer has been in violation of its capital reserve regulation. The reserve is supposed to hold sufficient reserves against unexpected future losses on the insurance it has issued. To comply with this rule would require a $12 billion capital infusion in fiscal year 2010, his research found, and that presumes that future losses are not being underestimated by FHA.
And last year New York University and the New York Federal Reserve issued a paper warning of the growing likelihood the FHA would need a taxpayer bailout.

And just to prove that I obtain my news from sources other than People Magazine, when things get really slow, I check out the Middle East North Africa Financial Network's view of companies like Redwood Trust.

Deutsche Bank and Citigroup have agreed to pay the US National Credit Union Administration a combined $165 million to settle allegations the banks misled five failed credit unions over their purchase of mortgage bonds, which, per the WSJ, is the first federal recovery of mortgage-bond losses incurred by collapsed financial institutions. Deutsche will pony up $145 million, Citi $20.5 million. Neither Deutsche nor Citi admitted wrongdoing. "The five failed lenders, which served smaller credit unions by providing services such as check clearing, suffered about $30 billion in losses from poor mortgage investments, said Debbie Matz, NCUA chairman." "Our investigation indicated there was systemic disregard of underwriting standards," said John Ianno, NCUA's associate general counsel for enforcement and litigation, of Wall Street's mortgage practices.

U.S. Sen. Bob Corker (R-TN) has announced the introduction of the Residential Mortgage Market Privatization and Standardization Act to responsibly unwind Fannie & Freddie "and end dependence on the government for housing finance." The Act would gradually reduce the portfolio of mortgage-related assets guaranteed by Fannie Mae and Freddie Mac and take steps to bring uniformity and transparency to the housing market so that private capital can begin to replace the GSE's. Corker noted, "We are no closer to transitioning Fannie Mae and Freddie Mac off government life support than the day the firms were taken under direct government control in 2008."

First off, this is an introduction of a bill, and second, no one expects anything to happen before November 2012, but it is interesting to see the elements. For example, it reduces each year the percentage of newly issued MBS principal that is guaranteed by Fannie Mae and Freddie Mac. The percentage guaranteed must be reduced to zero within 10 years, at which point MBS will be wholly privatized. It creates an industry-financed database that makes uniform performance and origination data on mortgages available to the public through the FHFA. It initiates a process for creating deliverability rules and technology necessary for the "to-be-announced" (TBA) futures market with no government guarantee. It replaces the QRM and risk retention with a 5% minimum down payment and full documentation requirement. And it seeks to create a uniform pooling and servicing agreement (PSA) and a new electronic registration system (MERS 2) where all loans are transferred under one system regulated by the FHFA and instructs federal regulators to develop uniform practices and streamline mortgage regulations.

Today is scheduled to be a BIG DAY for the agencies, or at least the industry is hoping it is, with the release of HARP 2.0's details. And the industry hopes that the large investors out there tag along without too many restrictions and overlays, and that Freddie & Fannie reconcile their differences in rep & warranty requirements.

But would you buy a pool filled with HARP 2.0 loans? The Financial Times reports that, "Officials are considering three main options to support the new effort. Their first preference is for Fannie Mae and Freddie Mac, the US-controlled mortgage financiers, to package these mortgages into a new class of mortgage-backed securities for sale to private investors, if the pricing is reasonable. If this fails, Fannie and Freddie could acquire the loans and keep them on their balance sheets. A third idea mooted in Washington is for the Federal Reserve to act as a back-up buyer for these mortgage securities. Such a move is not under active consideration at the central bank. These loans will continue to be guaranteed by Fannie and Freddie - and by extension US taxpayers - so investors will not have any credit risk. But tax rules make it hard to put 125 per cent loan-to-value debt into regular mortgage-backed securities issued by the two agencies. If they are issued as a new class of MBS, investors may demand a higher yield to reflect the illiquidity of such a small pool of mortgages - and that cost would ultimately be passed on to homeowners, potentially negating the benefits of the program. Remember that severely underwater loans are not eligible to be put into Fannie and Freddie-backed collateralized mortgage obligations. Tax rules prohibit mortgages at more than 125% LTV from being placed into CMOs or real estate mortgage investment conduits.

Impac Mortgage Holdings reported third quarter 2011 net earnings of $3.1 million, up from less than $1 million of earnings for the third quarter of 2010. "During the third quarter of 2011, the Company continued to expand its mortgage lending activities increasing loan originations and loan sales. During the three and nine months ended September 30, 2011, the Company originated $256.6 million and $538.1 million and sold $250.3 million and $485.5 million of loans, respectively, as compared to $22.1 million of loans originated in the first nine months of 2010. Consistent with the Company's strategy, it also increased its servicing portfolio with an increase in sales of servicing retained loans to Fannie Mae and increases in Ginnie Mae issuances."

The markets pale in comparison to all this excitement. Yes, there is some hand-wringing by investors over potential prepayment fluctuations based on HARP 2.0; much of this is already priced into the market for premium coupons. There is also chatter about additional MBS purchases by the Fed. Yesterday the 10-yr barely budged, closing at 2.04%, and rate-sheet mortgage prices hardly moved either.

Things picked up today in the U.S for economic news, but rates have not moved. Besides, what differences does PPI coming in at -.3%, with the core rate unchanged, when entire nations in Europe are financially unstable. Nonetheless, we did have the PPI, and also Retail Sales (+.5%, ex-auto +.6%, slightly better than expected), and Empire Manufacturing (+.61% for November). After the news the 10-yr is nearly unchanged from Monday afternoon at 2.01% and MBS prices are up slightly.  View MBS Prices

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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 the impact of HARP 2.0 and the differences in the agency's programs. 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.