Is Underwriting Too Tight?; MBA's Stance on Current Industry Topics; Agency Downgrade?

The IRS said that taxpayers will have until April 17 to file their 2011 returns, thanks to two quirks of the calendar this year: April 15 falls on a Sunday, and the following day is Emancipation Day, which is observed in the District of Columbia. By federal law, District of Columbia holidays affect tax deadlines the same way federal holidays do, giving taxpayers an extra day - thank you District of Columbia.

Across the nation, First Mortgage, a long standing mortgage banker of nearly 40 years, is seeking a Loan Servicing Manger for its Ontario, California headquarters. "Applicants must possess a thorough understanding of mortgage banking administration and excellent understanding of FHA, VA, FNMA, and FHLMC servicing guidelines; good working knowledge of LSAM or strong information processing skills pertaining to IBM or other mortgage servicing systems; and of reporting, escrow analysis, payment coupons, loan set up, and MI payments."  Please send all correspondence to Tammy Russ at truss@firstmortgage.com.

And next-door in Arizona, Scottsdale-based On Q Financial is looking for a Chief Financial Officer.  Founded in 2005, On Q is a fast growing independent retailer that closed over $1 billion in 2011. The company currently has retail branches in six states:  AZ, CA, CO, NC, TX, and WA.  Please direct all inquiries CFO to John Bergman, CEO, at john.bergman@onqfinancial.com.

"Fannie Mae and Freddie Mac will need to raise guarantee fees over the next two years to fulfill the requirements of the recently-passed tax cut extension bill. We think that this increases the risk of a rating agency downgrade and so continue to prefer debt of other GSEs, such as Federal Home Loan Banks and Federal Farm Credit Banks, over Fannie and Freddie." So stated a research piece from Bank of America Merrill Lynch, suggesting that the risk on both agencies debt will increase. "There is a possibility that S&P and Moody's decide to lower the credit ratings of Fannie Mae and Freddie Mac based on the fact that we have now entered the final year of unlimited capital availability and no plan has been put in place to make sure that these two GSEs have enough capital to weather a moderately bad economic scenario beyond 2012. Since the conservatorship of Fannie and Freddie started in 2008, no progress has been made on the future of these companies, whose combined balance sheet is nearly half the size of the entire US banking system combined (5.4tn vs. 12.5tn)."

There is a refinement to some information published last week by the commentary regarding phasing in the guarantee fee increase. Fannie notes that, "FHFA's directive to us does not permit us to phase in the increase.  Our announcement on December 30 says that we will implement the increase for loans in MBS pools issued on or after April 1, 2012."

I don't know if this falls under the category of late-breaking news, and there are plenty in the industry who will disagree, but "The National Association of Home Builders (NAHB) concurs with a finding by the Federal Reserve Board (FRB) that excessively tight mortgage lending standards are hampering a housing and economic recovery. 'The Federal Reserve's report to Congress confirms what we have been saying for some time: That extraordinarily tight credit conditions are preventing creditworthy borrowers from obtaining home loans and this is harming the housing market and the broader economy,' said NAHB Chairman Bob Nielsen, a home builder from Reno, Nevada." Nielsen feels that the lack of credit extends to housing construction loans as well, which is crippling the housing industry and preventing construction of new homes in markets that need and want them.

We all know Nevada, and I was in Reno last week, much of which looks like a ghost town. Of course every foreclosure article one reads lists that state near or at the top of the problem states, and of course there is the little nagging problem of the "shadow inventory" that plagues us. In its last report CoreLogic noted that the current residential shadow inventory as of October 2011 remained at 1.6 million units, representing a supply of 5 months. This was down from October 2010, when shadow inventory stood at 1.9 million units, or 7-months' supply, but approximately the same level as reported in July 2011.

But the NAHB was basically responding to comments made by Federal Reserve Board Governor Elizabeth Duke, who noted that tighter underwriting in the lending space is stalling a meaningful housing recovery and impeding overall economic growth. Duke says creditworthy borrowers are unable to secure mortgages at a time when interest rates are low and falling home prices are doing little to stimulate demand. "Some of this tightening is appropriate, as mortgage lending standards were lax, at best, in the years before the peak in house prices," Duke said. "However, the extraordinarily tight standards that currently prevail reflect, in part, new obstacles that inhibit lending even to creditworthy borrowers. These tight standards can take many forms, including stricter underwriting, higher fees and interest rates, more stringent documentation requirements, larger required down payments, stricter appraisal standards, and fewer available mortgage products." Duke says low or negative equity in homes is another barrier to refinancing, making it impossible for creditworthy borrowers to obtain traditional refinancing.

(I think that a world would certainly be an interesting place if builders, politicians, Realtors, and Federal Reserve Board presidents underwrote home loans, serviced their loans, and had their own capital at stake after the loans were approved. Just sayin'...)

Coming back to reality, recently the Mortgage Bankers Association and four other industry trade groups sent a letter to the FHFA, which, among other things, runs Freddie & Fannie, urging it to drop consideration of a "fee-for-service" alternative to potential mortgage servicing compensation proposals. FHFA in September sent out an Alternative Mortgage Servicing Compensation Discussion Paper (http://www.fhfa.gov/webfiles/22663/ServicingCompDiscussionPaperFinal092711.pdf), a proposal to overhaul the mortgage servicing compensation system that has the potential to dramatically change residential servicing, origination and secondary market operations. In December, MBA filed a comment letter (http://www.mortgagebankers.org/files/News/InternalResource/78989_MBACommentLettertoFHFAonServicerCompensation.pdf) with FHFA stating that MBA does not believe a change needs to be made to the servicers' compensation model at this time. (The four other trade groups are the Clearing House Association, the Community Mortgage Banking Project, the Housing Policy Council, and the Securities Industry and Financial Markets Association.) Put simply, a fee-for-service approach would have negative consequences for the industry and for its customers.

"While some of the drawbacks are more apparent--for example, reducing the incentive to invest in the necessary infrastructure as well as the servicer's 'skin in the game'--others are inherently unknown: for example, the impact on industry structure and competition," the letter said. "Nevertheless, each of our organizations believes that the potential costs of adopting such an approach far outweigh the potential benefits." In the event that FHFA does move forward with changes to the compensation model, MBA recommends a "cash reserve structure," which calls for deferring part of the existing servicing fees as a cash reserve to cover servicing costs for catastrophic economic and default situations. The cash reserve model was developed by MBA and its members and can be found at MBA's Residential Mortgage Servicing for the 21st Century Resource Center: http://www.mortgagebankers.org/IndustryResources/ResourceCenters/Servicing21.htm.

The MBA also responded to the white paper submitted to Congress by the Federal Reserve titled, "The U.S. Housing Market:  Current Conditions and Policy Considerations." Dave Stevens, President and CEO of MBA, issued a statement on behalf of the Association which said, in part, "The Fed's white paper is a thoughtful document that raises a number of very interesting issues that policymakers ought to consider as they seek to solve the ongoing ills of the housing market.  The Fed staff's comments validate much of what we have been saying, as it relates to the balance between credit availability and consumer protection, as well as the role that Fannie Mae and Freddie Mac could play in stabilizing and revitalizing the mortgage market."

Reverse Mortgage Daily reported that New York Life (the mutual life insurance) plans to enter the reverse mortgage business this year. The company is searching for an executive to manage all financial reporting and business planning elements of its Home Equity Income Solutions business line, which New York Life describes as a "proprietary approach to the reverse mortgage market." The company has relationships with AARP to offer life insurance and lifetime income products to its members and plans to do the same with reverse mortgages - seems like a decent fit.

GMAC's correspondent group reminded its clients that Monday the 16th is Martin Luther King Day, and is a federal holiday. (It is also Robert E. Lee Day in several states, but that issue is beyond the scope of this commentary.) No banks or post office activity, and the day cannot be included in the rescission period for refinances.

Turning to the markets, there is very little scheduled economic news early in the week, and the 10-yr is nearly unchanged at 1.98% and agency MBS prices are also unchanged. Wednesday afternoon we'll have the Fed's Beige Book. Thursday is Jobless Claims and Retail Sales; Friday is the trade balance and import & export pricing. But there are still a few things to watch. Will S&P issue its update on Europe's AAA securities? Merkel held talks with France's Sarkozy today and will on Wednesday with Italy's Monti on Wednesday. Don't look for any major news, but one never knows...And the first ECB meeting of 2012 takes place on Thursday. The market overall has been pleased with the ECB's actions over the last few weeks. Here in the States banks have to submit their stress tests to the Fed by today and the Fed will respond back by 3/15. And the political situation drones on with the New Hampshire Primary tomorrow.

A general noticed one of his soldiers behaving oddly. The soldier would pick up any piece of paper he found, frown and say: "That's not it" and put it down again.
This went on for some time, until the general arranged to have the soldier psychologically tested. The psychologist concluded that the soldier was deranged, and wrote out his discharge from the army.

The soldier picked it up, smiled and said: "That's it."

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog discusses the time frames for borrowers returning to A-paper status after a short sale or foreclosure. 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.