Insight from Mortgage Trader Lingo; CFPB to Sharpen Claws on PHH? Chatter on Goals for GSEs

Did you know that dolphins are so smart that within 2 weeks of being in captivity they can train a human to stand on the edge of a pool and give them fish? There are a lot of smart mortgage traders working at the broker-dealers. Here is a very interesting piece on how Wall Street MBS traders and analysts think. I included nearly the entire research write-up here, leaving the firm off of it, as it touches on many subjects that originators, Realtors, whoever, don't think about very often, but this type of quantitative analysis directly impacts rate sheet pricing:

"Although dollar prices of Fannie 3.0's (these securities would include 3.25% and higher mortgages) have skyrocketed over the past few days, there has been very limited originator selling of this coupon. Below we try to estimate at what price spread level of Fannie 3.5s/3.0s swap, originators should have an economic incentive to move new issuance into Fannie 3.0s from Fannie 3.5s. Let us say that a lender has originated $100 mortgages at 3.9% mortgage rate and is deciding between securitizing them in FN 3.0s or FN 3.5s. He has got two options. A) Create $100 FN 3.0s and retain 90bp servicing spread, B) Create $100 FN 3.5s and retain 40bp servicing spread. At Friday's closing price levels, in Option A, he gets $101 cash and retains 90bp servicing spread. In Option B, he gets $103.1 cash and retains 40bp servicing spread. Which one of these options is better for him? Right now, 2010 FN 3.5s IOS is trading at 17-02. Since the 2011 IOS should trade somewhat better than 2010 IOS, let us assume that the 2011 3.5s IOS is worth $19 and also that the servicing asset trades at about 15% discount to IOS (fairly realistic assumptions). In this case, the 50bp additional servicing in Option A versus Option B is worth: (0.5/3.5)*(19*0.85) = $2.31. Thus, the originator gains $103.31 ($101+$2.31) by following Option A versus $103.1 by following Option B in a completely liquid market with no barriers to trading. In other words, as long as the FN 3.5s/3.0s swap is below $2.31 (2-10), the originator should create FN 3.0s instead of FN 3.5s (from a purely economic perspective) while this swap was trading at about 2-04 at Friday's closes. Of course, originators need to set aside capital if they retain excess servicing - so they may need some premium over what is indicated by economics to move into FN 3.0s instead of FN 3.5s. And the Basel III constraints on the contribution of MSRs to bank capital are also possibly making originators reluctant to keep excess servicing spread on their balance sheets at the moment."

MetLife's announcement impacting 4,300 employees has roiled the lending biz. But there are those that continue to hire. In the retail arena, mortgage banker iServe Residential Lending is continuing to expand its national branching platform which is now in 20 states. The company is a direct lender providing loan servicing, mortgage origination, and real estate under one roof.  iServe is expanding its network of retail branches, and is looking for NMLS licensed LO's, branch managers, and branches in order to establish a "local branch presence, leveraging established mortgage broker and loan officer relationships." Interested parties can visit http://www.iservelending.com/ or for more information on the Western US, contact Allen Friedman at afriedman@iservelending.com, and in the Eastern US contact Ken Michael at kmichael@iservelending.com.

As mentioned yesterday, with BofA and MetLife exiting correspondent lending, concern in growing about PHH. S&P cut its credit rating in recent months ("negative outlook"), and now the industry is watching its liquidity crunch, hopefully alleviated by the 8K financial information recently released, but perhaps more importantly the investigation by the CFPB's investigation into whether it failed to comply with the Real Estate Settlement Procedures Act. A filing with the SEC said that the bureau had opened an investigation to learn whether the company's mortgage insurance policies, particularly those involving reinsurance services in exchange for premiums, met obligations under law. PHH said in the filing that there "can be no assurance whether or not this investigation will result in the imposition of any penalties and fines against the Company or its subsidiaries." My opinion is that the industry would rather not have another top investor wave the white flag.

Now that the CFPB has a director, it can officially begin to exercise the full authorities granted to it under the Dodd-Frank Act. The agency announced the formal launch of its nonbank supervision program, and will start supervising nonbanks that until now "have largely escaped any meaningful federal oversight," including: residential mortgage brokers, lenders, and servicers, payday lenders, and private student lenders regardless of size. Expect their powers to reach into debt collection, consumer reporting, consumer lending and related activities, money transmitting, check cashing, and related activities, prepaid cards, and debt relief services. In addition, the CFPB will supervise any other nonbank covered person that it determines is posing risks to consumers with regard to the offering or provision of consumer financial products or services.

Under FHFA's guidance, Fannie Mae is introducing an Unemployment Forbearance program that provides servicers the flexibility to assist borrowers who have a financial hardship due to unemployment. Read all about them.

Fannie also sent out an update on the maximum allowable pre-foreclosure mediation fees for which attorneys in Florida may be reimbursed as well as the maximum allowable attorney and trustee foreclosure fees in a number of other states. The Attorney and Trustee Foreclosure Fees exhibit on eFannieMae.com has also been updated.

Fannie & Freddie, who are not expected to have much done to/with them prior to the election, which puts things out to 2013, continue to be a focus of conversation. "Rob - according to a 2009 keynote address by James Lockhart, at that time the director of the Federal Housing Finance Agency (FHFA), where he discussed the housing crisis, secondary markets, and regulatory oversight, he said the FHFA's four stabilization strategies are to: 1. Ensure Fannie Mae, Freddie Mac, and the Federal Home Loan Banks provide liquidity, stability, and affordability to the housing market in a safe and sound manner; 2. Work with government partners to reduce mortgage rates; 3. Work with the government-sponsored enterprises (GSEs) to set best practices for the mortgage market; 4. Prevent foreclosures through affordable modifications and refinancings. It seems to me that the government itself is flying in the face of their own strategy - specifically items 1 and 2 - by burdening borrowers' note rates via .10% increases in g-fees to fund the Payroll Tax Holiday extension." How things change.

Have your filed your own lawsuit yet? You'd better hurry - time is running out. The Patton Boggs Mortgage Litigation Index reached a four-year high, indicating a number of mortgage-related lawsuits. "The increase in MBS litigation is partly driven by statutes of limitations on investors' claims," said Patrick McManemin, a partner at Patton Boggs. "State claims against originators for alleged mishandling of portfolios, inadequate underwriting practices and misrepresentations regarding loan quality on the part of private and GSE litigants can only be preserved by filing lawsuits before claims expire."

Do mortgage fraud suspects have the patent on hiding $70k in their cowboy boots? He probably won't be putting that money to work in the markets, which have been pretty quiet. Wednesday there wasn't much news to drive rates, but they dropped nonetheless with the 10-yr moving down to 1.90% and rate-sheet MBS prices improving by .125. The Fed's Beige Book provided another reminder of poor state of housing market: unlike other sectors of the economy that are showing some improvement, "activity stayed sluggish in residential real estate markets". The report went on to say that "extensive inventories of distressed properties were reported to be a source of price restraint" in 1/3 of the Districts; and "lending standards were largely unchanged across all lending categories."

Overnight, though, Spain and Italy had some good news for the euro zone markets with successful debt auctions at sharply lower borrowing costs in 2012's first real test of appetite for debt from the euro zone's bruised periphery. European stock markets rallied, as did the euro. But something is not right this morning: stock futures are higher, gold and silver are higher, copper is higher, oil is higher, and corn & wheat prices are higher. This morning we've had Jobless Claims and Retail Sales, which moved from 375k to 399k, up 24k, and up +.1%, respectively. Later, at noon CST, we'll have the final leg of this week's auctions with $13 billion in 30-year bonds. With these cross currents, the 10-yr and MBS prices are nearly unchanged.


A man was walking down the street when he was accosted by a particularly dirty and shabby-looking homeless man who asked him for a couple of dollars for dinner.
The man took out his wallet, extracted ten dollars and asked, "If I give you this money, will you buy some beer with it instead of dinner?"
"No, I had to stop drinking years ago," the homeless man replied.
"Will you use it to go fishing instead of buying food?" the man asked.
"No, I don't waste time fishing," the homeless man said. "I need to spend all my time trying to stay alive."
"Will you spend this on greens' fees at a golf course instead of food?" the man asked.
"Are you NUTS!" replied the homeless man. "I haven't played golf in 20 years!"
"Will you spend the money on a woman in the red light district instead of food?" the man asked.
"What disease would I get for ten lousy bucks?" exclaimed the homeless man.
"Well," said the man, "I'm not going to give you the money. Instead, I'm going to take you home for a terrific dinner cooked by my wife."
The homeless man was astounded. "Won't your wife be furious with you for doing that? I know I'm dirty and I probably smell pretty disgusting."
The man replied, "That's okay. It's important for her to see what a man looks like after he has given up beer, fishing, golf, and sex."


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.