Rating Agency Fees Going Up; HARP 2.0 Dissected & Dissected Further

One week until Thanksgiving - time flies. What's in a name? Plenty. For example, the name of the Athletic Director at the University of Texas is DeLoss Dodds. (That first name would be tough to overcome.) And occasionally I am asked, "Where did the name 'OCWEN' come from?" OCWEN is New Co. spelled backwards. Newt Gingrich has a pretty odd name also, but that didn't stop him from reportedly earning $1.6 million from Freddie Mac, and in fact probably helped.

The F&M Bank & Trust Company is searching for LO's in the Central Region (Tulsa, Oklahoma City, and Dallas) and a Sales Manager for its Dallas Branch. And in case you haven't heard of it, F&M Bank & Trust has been in business for 65 years, and is a "locally owned" $2 billion bank founded in Tulsa in 1946 (www.fmbanktulsa.com). The bank itself has been primarily a commercial bank but its growing mortgage operation has offices in both Oklahoma and Texas. It is a correspondent lender selling 100% of its production, and "prides itself on professionalism, high touch service, creative solutions and competitive pricing. We avoided the sub-prime mess and stayed more main stream with our product offering." If you know someone who might be interested, they should contact the president Mark Revard at MRevard@fmbanktulsa.com.

In addition, earlier this week I noted that Southern California's Carrington Mortgage Services, a retail and wholesale lender in 37 states, is looking to staff up. The contact e-mail address is indeed RobCresponce@carringtonms.com.

Many believe that, as of yet, the rating agencies have been pretty much left out of the blame game for the financial crisis in the mortgage sector. ("Why did they rate those lousy bonds AAA, who paid them to do it, and did they continue tracking the performance after they were issued?") But their fees seem to be increasing.

The recent HARP 2.0 announcement was largely in line with expectations, though perhaps the biggest surprise was Freddie's maintaining of reps and warrants on the original loan file for <80% LTV loans. But the press has been pointing out issues with the overall program.

Common to both Fannie and Freddie are several elements. It eliminates the 125% LTV cap for HARP - this increases the universe by 3%, and 10-15% for high coupon 2006-08 vintages. It extends HARP through December 31, 2013 - this should make servicers more willing to invest in HARP because it is no longer simply a one-year program. Both programs will become effective on December 1 (although LP won't be ready until early next year, and many companies are running into problems not being able to manually underwrite conventional conforming loans - see notes below). It allows up to one delinquency in the prior 12 months, as long as it was not within the last six months - this increases the number of borrowers eligible for Freddie HARP by 3-5%, no change for Fannie. HARP 2.0 caps LLPAs on >80 LTV 30-year fixed rates at 75bp (previously, high LTV mortgages were capped at 2 points) - this reduces costs for high LTV borrowers, though they were already deep-in-the-money. For low LTV 30-year mortgages, the cap will continue to be at 2 points - this is unchanged. And it eased rep and warrant language, although this is still Fannie and Freddie specific.

There is apparently Fannie Mae specific language. For example, for DU Refi Plus (Fannie's desktop underwriting system, used mainly for cross-servicer refis) the lender is not held responsible for any of the reps on the original loan. HARP 2.0 clarified exactly which reps remain on the old loan file under Refi Plus (the more streamlined approach, used mainly for same-servicer refis), the lender must rep to basic standard reps on the original loan such as: 1) it doesn't violate Fannie's charter (e.g. it's not a condo hotel which would be a commercial property); 2) it doesn't violate the law; and 3) there is no collusion among borrowers to commit fraud. Solicitation may be done on >80% LTV loans as long as it is done across both Fannie and Freddie, and cannot target only loans that the lender doesn't own. Pooling for the highest LTV loans (>125%) will be in a new CV prefix beginning June 2012. These will be non-TBA eligible. And it is expected that the AVM coverage for Fannie Mae will go from about 30% currently to as high as 80% to match Freddie, though this is not specifically outlined in Fannie's announcement.

There is also still Freddie Mac specific policy. For loans >80% LTV, Freddie will no longer hold the lender responsible for the original loan file. For loans <80% LTV, the lender will actually still hold the original reps and warrants. (This won't help refinancing low LTV Freddie pools.) Lastly, if the borrower is under 80% LTV on the first lien, there is a cap on the total first plus second lien of 105% LTV.

As always, it is best to consult the actual announcements from Fannie & Freddie, as it is with other investors!

What impact is this expected to have on existing pools - something near and dear to MBS investors? Servicers may have an incentive for Fannie MBS and for high LTV (>80%) Freddie loans to refi into the easier reps relative to the old loan. Second, a greater AVM coverage by Fannie will allow servicers to target more than twice as many borrowers as before. Third, HARP 2.0, in combination with more AVMs, will give servicers the confidence to refi high LTV borrowers, since there is no fear of accidentally exceeding a 125% LTV cap. And to encourage high LTV refinancing, the GSE's are lifting existing restrictions on borrower solicitation for >80% LTV loans which should increase volumes.

And for other miscellaneous observations that I have read...for loans being processed through Refi plus (manual underwriting), the lender will represent and warrant that the original loan being refinanced by a Refi Plus mortgage loan was not originated or sold pursuant to any scheme or pattern of fraud that involved two or more mortgages and two or more perpetrators acting in common effort with respect to such mortgages. Also, the lender must represent that the loan being refinanced was eligible for sale in accordance with Fannie Mae's charter. Apart from loan size restrictions that may vary based on the units in a home, this restriction can potentially apply to loans that were falsely reported to have an LTV less than 80%. Per the charter, these loans would have required MI. The Fannie Mae release made no mention of automated appraisals. However, it did state that the lender is responsible for reps and warrants on the new loan if an appraisal is obtained. Aside from the reps and warrants relief due to the likely increase in the usage of automated appraisals, the release did not provide any reps and warrants relief on appraisals. According to one analyst, about 80% of Freddie HARP refinancings are already using automated appraisal whereas the number is only 30% of Fannie HARP refinancings. The general market perception was that as HARP 2.0 is rolled out, Fannie Mae will allow lenders to use automated appraisals on a much larger percentage of HARP loans. Since the automated appraisal is provided by the GSEs, this would reduce the appraisal related reps and warrants risk on the new loan.

But Fannie Mae will only allow automated appraisal for DU Refi Plus. For Refi plus (manual) - which is much more common for same servicer refinancings since the loan does not need to be re-underwritten - the lender can either use the original appraisal (if they can represent and warrant that the property value is not less than the original appraised value) or use a new appraisal or exterior-only inspection. In other words, automated appraisals cannot be used for Refi plus (manual). This would mean that originators would need to use DU Refi plus but in this case they would need to re-underwrite the loan by gathering the income/liabilities/asset information.

Through this all mortgage rates continue to be relatively stable, and in fact seem to be trending down slightly. Wednesday MBS prices were up/better by .125-.250, and the 10-yr T-note closed at 2.02%. Homebuilder confidence, as represented by the NAHB Housing Market Index, unexpectedly rose in October by 3 points to 20 and is at its highest level since May 2010. The markets will be moved by European news and scheduled & unexpected economic news - as usual. This morning we've had Initial Jobless Claims. Expected to remain below 400k, it dropped to 388k from a revised 393k. Housing Starts for October were -.3%, and Building Permits were +10.9% at 653k. After the news rates are nearly unchanged with the 10-yr at 1.99% and MBS prices perhaps better by .125. - MBS Prices

Part 2 of Men Teaching Classes for Women at THE ADULT LEARNING CENTER
REGISTRATION MUST BE COMPLETED By Sun, April 30, 2012 (Part 1 yesterday)

NOTE: DUE TO THE COMPLEXITY AND DIFFICULTY LEVEL
OF THEIR CONTENTS, CLASS SIZES WILL BE LIMITED TO 8 PARTICIPANTS MAXIMUM.

Class 7
Can a Bath Be Taken Without 14 Different Kinds of Soaps and Shampoos?
Open Forum...
Monday at 8:00 PM, 2 hours.
Class 8
Health Watch--They Make Medicine for PMS - USE IT!
Three nights; Monday, Wednesday, Friday at 7:00 PM for 2 hours.
Class 9
I Was Wrong and He Was Right!--Real Life Testimonials.
Tuesdays at 6:00 PM Location to be determined.
Class 10
How to Parallel Park in Less Than 20 Minutes Without an Insurance Claim.
Driving Simulations.
4 weeks, Saturday's noon, 2 hours.
Class 11
Learning to Live--How to Apply Brakes Without Throwing Passengers Through the Windshield.
Tuesdays at 7:00 PM, location to be determined
Class 12
How to Shop by Yourself.
Meets 4 weeks, Tuesday and Thursday for 2 hours beginning at 7:00 PM.


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.