Old Rating Agency Model Becoming Extinct? Independent Mortgage Banks Able to do HARP 2.0 Loans?

The world has been watching the ship incident in the Mediterranean, and the fact that the captain was seen on an island during the event. His quote, "I slipped and fell into the life boat" was the headline of the story I saw yesterday. (I actually thought about using that as the joke today.) It makes one wonder if "accountability" is a dying concept.

Moving on, retail mortgage banker Spectra Home Loans is expanding and is seeking qualified branch managers and LO's throughout both the Mid-Atlantic seaboard and California. "Spectra offers a wide variety of loan products, and is 'on the fast track' to becoming a Fannie, Freddie and Ginnie direct seller/servicer. Founded by industry veterans on the premise of being a leader in the mortgage banking industry, Jim Cassidy, former National Production Manager of SunTrust Mortgage, is now President and Chief Financial Officer of Spectra Home Loans." Please contact Ted Smith at tsmith@spectraloans.com for opportunities throughout California or Jay DeCarlo at jdecarlo@spectraloans.com for opportunities in the Mid-Atlantic region, or visit its website at www.spectraloans.com, and click on "Join Spectra Today" at the top for more information.

Although the industry is waiting for more details on HARP 2.0, there is some serious thinking going on about how the program will work. More specifically, warehouse lending. Jim Cameron from the STRATMOR Group wrote, "We are hearing that there is questionable enthusiasm for HARP 2.0 amongst the warehouse lenders.  There are a few exceptions, but at this time most lenders will only finance up to 100% of the value of the property. As everyone knows, if a non-depository mortgage banker cannot borrow from their warehouse lines to fund these loans, the program will have mostly confined to depository institutions. This won't help independent mortgage bankers unless alternative funding sources are arranged. And while a Fannie direct seller can sell to the ASAP window, this may cause execution to be less than optimal.  If HARP 2.0 volume is significant, most independents would not have enough liquidity to self-fund even with a relatively quick funding by the investor.  The good news is that where there is a will, there is a way.  If the market opportunity is big enough, warehouse lenders will figure out a way to price the risk." This makes a lot of sense.

(By the way, STRATMOR is offering HARP 2.0 sessions around the country.  While the Las Vegas and Chicago sessions have sold out, there are still available seats for the Washington, D.C. meeting scheduled for next Thursday, January 26, and there is talk of adding a session. If you'd like more information, contact Jim at Jim.cameron@Stratmorgroup.com.)

Earlier this week the commentary discussed the Maiden Lane sale and its expected impact on subprime MBS pricing. "The Federal Reserve Bank of New York announced that it has sold $7.014 billion in face amount of assets from its Maiden Lane II LLC (ML II) portfolio through a competitive process to Credit Suisse Securities (USA) LLC." So it is done, without much fanfare.

What have received fanfare over the last week are the bank earnings reports, and especially for this commentary how they report mortgage banking activities. Bank of America reported net income that met expectations - consumer real estate had a loss of $1.46 billion, mortgage related litigation expenses reached $1.5 billion (in the 4^th quarter!), but loan loss provisions fell 43%. BB&T reported profit of 55 cents per share vs. 30 cents for the prior year on a slight increase in revenue - credit conditions strengthened and reserves fell 58.9%, and noninterest expense climbed 13.9% (mostly due to 114% increase in write-downs and losses on foreclosed real estate). (By the way, Wells Fargo has branches in the most states, 40, followed by BofA in 36 states, U.S. Bank in 25 states, and JP Morgan Chase in 24 states - impacting retail origination potential.)

The recent headlines blared, "Foreclosure filings and repossessions fell to their lowest level since 2007 last year." RealtyTrac noted that, "Total filings of default notices, scheduled auctions and bank repossessions were down 33% for the year to 2.7 million. Last year one in every 69 homes had at least one foreclosure filing during the year, much better than 2010's one in every 45 homes. Folks in the biz, however, know that much of the drop in filings was due to processing delays caused by fall-out from the "robo-signing" scandal that broke in late 2010 which created a backlog as banks spent more time making sure paperwork was legal and proper. In fact the average time it took to process a foreclosure climbed to 348 days during the fourth quarter, up from 305 days a year earlier.

When it comes to foreclosures and the housing market's recovery, everyone has a different answer, and no one seems sure of where things are headed. Part of the confusion is due to the wildly divergent foreclosure timeline across the country, and their impact on regional markets and recoveries. According to Lender Processing Services (LPS), the national average 'time to foreclosure' is currently 674 days, up from 253 just a few years ago. However, that number belies the sharp contrast between states that process foreclosures through the judicial system, and those that don't. Want a quick, but potentially volatile recovery? States utilizing the non-judicial format (most of the western states) are able to process much quicker (less than 200 days in Arizona, Oregon, Washington), but have seen deeper drops in home values over the past year due to the increased supply. For instance, Nevada saw a near-20% drop in home values this past year. On the other hand, Florida, which takes an average of 1,027 days to foreclose (remember: that's an average of 3 years) experienced just a 2.8% dip in values in 2011. However, their recovery, as will other states under a judicial system, will most likely take much longer to materialize as homes will be kept off the market while undergoing the foreclosure process. The bottom line number to keep an eye on is "foreclosure inventory" - the rate in non-judicial states was more than 6%, while the judicial states saw a rate of less than 3%.

For jobs in the mortgage arena, Hammerhouse LLC released the results from its Second Annual Survey of Originator Opinions.  This 14 question survey was completed by a statistically significant sample of approximately 400 active mortgage loan originators and asked originators for their opinions on critical issues facing the mortgage industry and impacting their job performance.

There is plenty of blame to go around in the credit crisis in mortgage origination, much of it resting with the rating agencies. They belong to NRSRO (Nationally Recognized Statistical Rating Organization), an organization going back over a hundred years to Mr. Moody and Mr. Poor were some of the first to provide detailed analysis of the risks associated with individual railroad companies and their bond obligations. In 1936, the newly created SEC introduced a set of laws prohibiting banks from investing "speculative grade securities as determined by recognized rating manuals". State insurance regulators then followed suit. The NRSROs instantly become a critical part of the risk management process for the post-depression era financial system. By the 1970s the proprietary information created by the NRSROs was being compromised, largely due to the advent of cheap photocopiers, so they made a very significant change in the business model - a move away from investor fees towards issuer fees. Investors were still the end user, but the issuers paid the bills. This change in the payment structure redefined the entire business model and of course the incentive structure, so although investors hoped the rating agencies gave out unbiased information for investors, the fact that the issuers were/are paying the bills creates issues. But looking ahead, one of the impacts of Dodd Frank's immense girth is that the rating agencies will lose their coveted US Federal blessing: the latest Federal press release on the new US capital standards can be seen at http://www.federalreserve.gov/newsevents/press/bcreg/20111207a.htm.

What exactly happens next for US bank capital regulations, and eventually insurance company and pension funds, remains highly uncertain - but there is virtually no chance the NRSROs will have any meaningful role. And over in Europe the story is exactly the same. The ECB has all but abandoned NRSRO credit ratings for collateral eligibility. Naturally these changes have not been lost on the NRSROs and they are trying to salvage a broken business model. They are trying to make a big splash by returning to a more conservative and unbiased business model, and create publicity by downgrading U.S. banks, and nations around the world - but it is rare that anyone should be surprised by a rating move, as the agencies are using information that other analysts already are aware of. One quote I saw said, "It's a way to try to be relevant as the regulators of the world put them out of business."

Turning to interest rates, they have been creeping higher this week. Yesterday we saw a few intraday rate sheet price changes. Although the Fed continues to buy about $1.2 billion a day of MBS's, originator selling has picked up - I guess lock desks are busy. Yesterday's strong Jobless Claims started things off (reminding us that a growing economy tends to push rates higher),single-family housing starts are picking up, homebuilder sentiment is improving, and by the end of the day 10-yr T-notes were worse by almost .75 in price (1.97%) and current coupon mortgage security prices were worse .250.

It was quiet overnight in Asia and Europe, and the only news out today in the U.S. is Existing Home Sales (Dec) at 9AM CST, and which is projected higher to 4.65 million from 4.42 million. Rates have edged higher, and the 10-yr is at 1.99% and MBS prices are a shade worse.

I just got off the phone with a friend living in North Dakota near the Canadian border.

She said that since early this morning the snow has been nearly waist high and is still falling. The temperature is dropping way below zero and the north wind is increasing to near gale force. Her husband has done nothing but look through the kitchen window and just stare.

She says that if it gets much worse, she may have to let him in.