MBS Price Considerations Surrounding G-Fee Increase; PNC's Results Reflect Servicing Lawsuit Settlement?

Basketball fans know that all-stars Patrick Ewing, Charles Barkley, Dominique Wilkins, Elgin Baylor, Reggie Miller, Pete Maravich, Karl Malone, and John Stockton share something - none of them ever won an NBA championship. Like basketball, football is a team sport. OJ Simpson knows a thing or two about team sports - and now he knows about the foreclosure process, in which it is rumored that Chase reps could not locate him in spite of his well-publicized prison stay.

On the more constructive side of things, Franklin American Mortgage Company is currently searching for a VP of Wholesale Operations for a Regional Operations Center located in Concord, California. As most know, FAMC is one of the top 5 independent wholesale lenders in the country. The VP is responsible for overseeing day-to-day wholesale business operations for A-paper originations, including Jumbo, FHA and VA, process flow management, individual and regional production goals, corporate and state/federal regulatory compliance, employee and state HR requirements, loan quality, customer service and policy/procedure implementation and accountability. Prior wholesale operations management experience is highly preferred.  Please submit resumes to Bobby Frank at b.frank@franklinamerican.com.

Head-shaking continues regarding economic stimulus and recovery, the agency plans, and g-fee increases. A while back Steve T. with Primary Residential in Utah wrote and noted, "Let's say we both put $20 into a box. I sell you the box for $30. We both make $10. Repeat for infinite cash flow: economic problems solved. Last year 'in a bid to stem taxpayer losses for bad loans guaranteed by federal housing agencies Fannie Mae and Freddy Mac, Senator Bob Corker (R-Tenn.) proposed that borrowers be required to make a 5% down payment in order to qualify. His proposal was rejected 57-42 on a party-line vote because, as Senator Chris Dodd (D-Conn) explained, passage of such a requirement would restrict home ownership to only those who can afford it.' What are we missing here?"

And Lindsay Hill with Compass Analytics noted, "The congressionally-mandated g-fee increases, established in part to pay for extensions of the payroll tax cut and unemployment benefits, has created somewhat of a disconnect between MBS prices and lender rate sheet prices. It creates an interesting dynamic when the government is purchasing mortgage-backed securities to keep rates low and help fuel a recovery in housing, and yet the same government is increasing rates on the g-fee side, increases that will trickle directly down to the borrowers that are hoped will lead a housing recovery."

The g-fee "shall be determined by the FHFA Director to reflect the risk of loss, as well the cost of capital allocated to similar assets held by other fully private regulated financial institutions, but such amount shall not be less than an average increase of 10 basis points for each origination year above the average fees imposed in 2011 for such guarantees. The GSEs will be prohibited from offsetting the cost of the fee to originators, borrowers and investors by decreasing other charges, fee, or premiums, in any other manner. The director of the FHFA will determine appropriate g-fee to reflect the risk of loss, as well the cost of capital allocated to similar assets held by other fully private regulated financial institutions. FHFA can allow the increase in the g-fee charged by the GSEs to be phased-in gradually over a 2-year period from the enactment of the bill. The increase should be such that it provides uniform pricing among lenders, and takes into consideration the risk levels and conditions in the financial market."

Some Wall Street MBS analysts believe that it is likely that the g-fee needs to increase by another 15-45bp over the next two years (on top of the 10bp increase) if the FHFA changes g-fee level such that it reflects the risk of loss as well as the cost of capital allocated to similar assets by other fully private regulated financial institutions as required by H.R. 3630. The analysts note that conventional securities could be worth .375-.625 more because of g-fee increase's impact on current production, and older securities could be worth 1.5-2.0 points more since it will be more expensive to refinance, so fewer will do it, meaning that the securities are on the books longer.

MND's Matthew Graham shared similar thoughts earlier this month:  " Either way, mortgage borrowers end up footing the bill for the Tax Cut Extension.  Despite the April 1st implementation, the letter of the new law states that the average G-Fees in 2012 must be 10 basis points higher than those in 2011.   The bottom line is that rates must move higher on average and if lenders aren't building the fee increase into their rates now, they'll have to do so to a greater extent in the future to meet the "on average" guideline set forth by Congress."

The G-fee / MBS Markets disconnect has been discussed extensively in MND's MBS Commentary and Mortgage Rate Watch channels.  Follow these updates daily by subscribing to email alerts for these channels.

Yesterday the commentary mentioned some trouble that a lender was having ascertaining the FHA loans that had gone delinquent and that were impacting its compare ratio. I received a few notes on it. Ray W. wrote, "Rob, Potomac Partners in DC is a consulting group lead by Brian Chappelle (bjc@p2partners.com) and can likely give guidance to your reader."

Darryl R. from Illinois wrote, "Maybe if FHA would allow individuals who are currently at .50 on their monthly MI to refinance at .50 and also those at .80 to refinance at .80 and those at 1.15 to refi at 1.15 they wouldn't see as many delinquencies.  Does it take a brain surgeon to figure out that this makes sense? They put the 5% rule in place (which I do think is a good thing) but that should be enough.  If people who put down 20% are underwater today, what do they think about people who put down either 3 or 3.5%?  But remember the Dodd-Frank fiasco was put in place to help the people.  HUD is doing practically nothing to help people refinance and stay in their homes. The biggest thing that I don't understand is when the government prolongs the entire program but doesn't move the date for individuals to be eligible - haven't house values continued to decline since 2009?"

And while we're on suggestions, here's an idea for a new conventional program. Fannie and Freddie offer a 15-year fixed refinance based on today's value with the loan amount equal to appraised value. The balance of the deficiency is due at the end of the 15 year term. Equity is built faster.  In five years the borrower is 'back to even' if values stabilize. They could sell in five years and the deficiency would be paid in full. You could throw a term life policy on the borrower for the deficiency amount with the lender as the beneficiary just in case the borrower dies. The proposed payment to borrowers sitting at 5% with a reduced loan balance would be close to what they are paying now if the rate on the 15 year fixed is around 3%. The lenders get paid in full and our industry moves back to stabilization with borrowers building equity. A 125% 30 year loan for an underwater borrower does not solve anything for the housing industry: what is better for the housing industry - pools of 30-year fixed $500k loans on $400k properties at 4% or pools of $400k loans at 3% on $400k properties for 15 years with $100k balloons? You can't do a massive loan reduction because of fairness to those that have paid as agreed, but you can create a loan program that reduces the loan balance quicker." For comments write to Mark Weber at mweber89@cox.net.

The housing market continues to muddle along. U.S. home prices fell 0.4% in November from October, the fourth-straight monthly decline according to FNC's residential price index. The index is 4.6% lower than a year earlier, though FNC said year-over-year declines have stabilized in recent months. By the way, the co-founders of FNC (a real estate technology firm focused on appraisals and servicing) host a "radio" show on Monday's - check it out at http://www.fncmorningview.com.

PNC Financial knows something about housing. It is the nation's sixth largest bank, and announced that net income fell to $451 million in the 4^th quarter, down from $798 million a year ago. It set aside $240 million (contributing to a 40% drop in quarterly profits) because it and other big banks may be near a settlement of government allegations of mortgage and foreclosure abuse - "robo-signing." (U.S. Bancorp, #5, did something similar, reporting a $130 million "expense accrual related to mortgage servicing matters.")

The latest SEC lawsuit involves Florida's BankAtlantic Bancorp and its CEO Alan Levan. They allegedly misled investors on defaulting loans in its real estate development portfolio, and hid the "deteriorating state" of portions of its land acquisition and development business in 2007. The company and Levan then tried to minimize losses on the books, the SEC said, by committing accounting fraud and improperly recorded loans it tried to sell from the portfolio.

Complaints about interest rates continue to be non-existent, and yesterday was no exception. Yesterday, however, mortgage banker selling picked up, nearly doubling from recent levels. At the same time, unfortunately, investors in MBS's grew cautious given the refi numbers from the MBA's weekly survey: who wants to pay a premium above par for a loan if it is going to refinance relatively soon? The 10-yr T-note closed at a yield of 1.90% (easy to remember) and MBS prices were worse by about .125. For good news, the National Association of Home Builders Housing Market Index which increased four points in January to 25 - its highest level since June 2007 and its fourth monthly improvement in a row.

Today, given that things are pretty quiet in Europe, the focus is more on U.S news. We had weekly Jobless Claims which dropped 50k (after the big rise last week) to 352k - the lowest in almost four years. The 4-week moving average is -3,500. This certainly indicates some strength in the jobs market, even if one questions the precise numbers. The Consumer Price Index was unchanged and +.1% on the core rate - inflation is not an issue. Housing Starts came in slightly lower than expected, -4.1%, and Permits were -.1%. We'll also have the Philly Fed Survey for January, and at 8AM the Treasury announces details of next week's auctions of 2-, 5- and 7-year notes - estimated unchanged at $99 billion. Read "MBS and Treasuries Deceptively Weaker Following Economic Data" for an update on morning MBS Markets.

A man and woman were having a quiet, romantic dinner in a fine restaurant. They were gazing lovingly at each other and holding hands.
Their waitress, taking another order at a table a few steps away, suddenly noticed the man slowly sliding down his chair and under the table, but the woman acted unconcerned.
The waitress watched as the man slid all the way down his chair and out of sight under the table.
Still, the woman appeared calm and unruffled, apparently unaware her dining companion had disappeared.
The waitress went over to the table and said to the woman, "Pardon me, ma'am, but I think your husband just slid under the table."
The woman calmly looked up at her and said, "No, he didn't. He just walked in the door."

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 residential lending and mortgage programs around the world. 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.