SunTrust's Buybacks; Citi's Lay-offs; HARP 2.0 & Refinancing Speeds; MISMO Back in Action

Pearl Harbor Day is here and the holiday party season is nearly upon us, and it is always good for mortgage bankers and Realtors to have some fodder with which to defend themselves at cocktail parties - especially when the "Occupiers" are at the same party. P.J. O'Rourke points out, "Occupiers believe in the Zero Sum Fallacy -- the idea that there is a fixed amount of the good things in life. Anything I get, I'm taking from you. If I have too many slices of pizza, you have to eat the Dominos box. The Zero Sum Fallacy is a bad idea -- dangerous to economics, politics, and world peace. It means any time we want good things we have to fight with each other to get them. We don't. We can make more good things. We can make more pizza -- or more tofu, windmills and solar panels, if you like. The Zero Sum Fallacy is just that, a fallacy. Economic history since the Industrial Revolution proves -- be the rich however stinking rich -- we ordinary people can make more of the good things in life. But we have to make them ourselves, with our knowledge, skills and hard work. Government can't give us good things. Government doesn't make things, it just redistributes them. This brings us back to fighting with each other."

He continues, "The good things in life are remarkably expandable, but it's ordinary people who expand them. Look at China, look at India. Yes, it's upsetting that some people have so much while other people have so little. It isn't fair. But I accept this unfairness. Indeed, I treasure it. That's because I have a 13-year-old daughter. And that's all I hear, "That's not fair," she says. "That's not fair! That's not fair!" And one day I snapped, and I said, "Honey, you're cute, that's not fair. Your family is pretty well off, that's not fair. You were born in America, that's not fair. Darling, you had better get down on your knees and pray that things don't start getting fair for you." Here is the entire write up.

Those being laid off usually don't view things as fair either. Citigroup is eliminating 4,500 jobs in its latest effort to cut costs and will take a $400-500 million charge in the fourth quarter as a result. The cuts represent about 1.5% of its global workforce of 267,000. Pandit said the cuts would be made over the next few quarters. It joins other banks doing the same thing: UBS cutting 2,000 by 2016 and Bank of America cutting 30,000 over the next few years. In fact, "Citi joins other banks worldwide that have cut more than 120,000 jobs as regulations have imposed tighter industry rules and the economy remains weak."

And continuing with banking news, SunTrust Banks' top officer said mortgage repurchase costs in the fourth quarter could be "well above" those reported in prior quarters.

This trader's blurb is worth noting: "UIC ("Up in coupon," meaning the price difference between various rates) ripped tighter into the early bear 'steepener' yet continued to outperform as the market read headlines of a Democratic bill increasing Fannie and Freddie fees to offset payroll tax extensions as slower prepayments.  We think the UIC move is unfounded as the bill negates other administration efforts to stabilizing the housing market." This refers to proposed legislation to end the impasse over continuing payroll tax cuts that have been in place since the first of this year. Among other changes, it resurrects a fee for Fannie Mae and Freddie Mac mortgage guarantees that was defeated in another context last month - in other words it would increase the fees that Fannie Mae and Freddie Mac charge mortgage lenders to guarantee repayment of new mortgage loans. The final amount will be determined by the FHFA but shall not be less than an average increase of 12.5 basis points for each origination year or book year above the average fee imposed in 2011 for a guarantee. It would raise over $30 billion, and I am sure that the costs would be passed on to borrowers.

All investors are interested in prepayment speeds, and originators should be interested also since the speeds at which old loans pay off directly impact the price at which investors will buy new loans. New prepayment speeds have been released, prompting analysts to suggest that, until HARP 2.0 kicks in, early pay-offs have pretty much leveled off. Statisticians slice and dice the pool information based on the age of the loans, the coupons, the servicer ("speeds by servicer remained extremely divergent") and so on. "A seasonal low in housing turnover and a reduced number of work days due to the holidays are also likely to suppress overall speeds in the coming months...The first effects of HARP 2.0 could be seen as early as in the February report (January prepayments). However, the full effect probably will not be manifest until at least the July report."

Barclays reported that, "We do not believe HUD has any plan yet to decrease or increase the FHA insurance premiums (except for a small subset of borrowers such as jumbo loans)...We estimate that GNMA mortgage rates are now 15-20bp lower than conventionals, a divergence from historical norms. This could lead to 3-4 CPR faster-than-expected speeds on GN cuspy coupons."

But originators know that some aggregators are better at mining (refinancing) their servicing portfolios than others, and this in turn impacts pricing. For example, if Bank of America steps up refinancings, prepays on Fannie are likely to increase more than on Freddie's but if other lenders step up refinancings, the opposite may happen. In HARP 2.0, both rep and warranty relief and a loosening in delinquency history requirement took place for Freddie Mac but not for Fannie Mae. In fact, if anything, the delinquency history requirement for Fannie was made a little stricter than before. The only change in Freddie space that will make it more difficult to refinance was the restriction that loans with LTV less than 80% not have a combined LTV of greater than 105% - which probably doesn't include a huge number of loans.

On an aggregate level in spite of reps and warrants differences, and difference in delinquency criteria, the prepays on Fannie & Freddie loans are fairly similar. It is possible that lenders have been making their decisions to refinance a borrower primarily on the basis of the likelihood that the borrower will default - since the rep and warrant risk mostly gets triggered upon a default. They are not really differentiating between the nuances of Fannie versus Freddie guidelines on the reps and warranties issue in itself. Similarly, for credit history, servicers are likely to require that the borrower not have missed any payments over the last 12 months, which in turn would give them more surety that they will not default going forward. The consistent underwriting criteria between the two GSEs may be leading to the similar prepays. Extrapolating this trend, it is possible that even though Freddie has provided relief on reps and warrants, and delinquencies, speeds on their loans vis-à-vis Fannie loans don't really increase because the criteria for qualifying a borrower for refinancing will stay the same across the two agencies.

Speaking of refinancing, the MBA's weekly application index showed that last week apps shot up almost 13% versus the week before. Refi's were up about 15% and purchases were up about 8%. Michael Fratantoni, MBA's vice president of research and economics, noted, "In particular, refinance applications increased sharply, with some lenders seeing refinance volume double. Despite this surge, aggregate refinance activity is still below levels reported two weeks ago." The refinance share moved up to 76% of all applications.

In September the MBA announced it would be resuming the support of the Mortgage Industry Standards Maintenance Organization, Inc. (MISMO). Per the MBA, this is now complete, and MISMO will now focus efforts on regulatory implementation and advocating for broader adoption of data standards throughout the industry. As Mr. Dave Stevens put it, "Standardization and transparency are critical to the return of investor confidence and liquidity in the mortgage marketplace, and MISMO has a crucial role to play.  I would recommend that MBA members become MISMO subscribers in order to help guide this effort."

For investor & originator news, lenders such as Pinnacle Capital and Plaza Home Mortgage reminded their clients, "The USDA upfront guarantee for refinances increased to 1.5%. Effective with new Conditional Commitments issued on or after December 7, 2011, USDA has increased the up-front guarantee fee on refinance transactions from 1% to 1.5%." (Pinnacle also reminded brokers, "Effective immediately, PCM will lock and fund USDA refinance transactions with "Subject-To" Conditional Commitments.")

GMAC Bank Correspondent Funding (GMACB) Approved Correspondent Clients learned that VA 7/1 Hybrid ARMs have been discontinued.

Taking a look at what is moving interest rates, it seems that the Federal Reserve is ruminating on ordering additional purchases of mortgage-backed securities to boost growth. Many LO's would suggest that lending, documentation, and appraisal issues are more to blame for the lack of mortgage activity, but economists not that, "More purchases could help by driving long-term interest rates - especially mortgage rates - even lower, pushing stock prices higher and the dollar down. That could drive spending, investment and exports." As one senior Wall Street mortgage salesman noted, "Will our political class ever learn that when financial institutions allocate credit based on politics rather than profit, the consequences are just not good? Competition and education make for better consumer protection than does the conceit of our anointed IMO."

Given a lack of news here, the markets remain very much tied to headlines out of Europe. Over here mortgage buying by the Fed continues along, helping MBS prices relative to Treasury prices. The 10-yr closed around 2.09%, and while this was worse in price by about .375, MBS prices were roughly unchanged. In the early going rates are unchanged from Tuesday's close, with the 10-yr at 2.10%. - Current MBS Prices

This doesn't really fall into the "joke" category, but given the holiday flying season is coming up, it is very interesting: http://www.youtube.com/watch_popup?v=tE_5eiYn0D0#t=109

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com . The current blog reminds everyone about how government intervention in the housing market is nothing new. If we forget history, we are doomed to repeat it, and it is important to know the last 15 years of the history of the agencies. 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.