The Latest on On-line Lending; Principal Forgiveness Cost; How HUD's Changes Will Impact Gov't Lenders

As red-blooded American males prepare for the advertising onslaught of Valentine's Day (2/14), we are reminded that the media is indeed powerful - just ask Sarah Palin. (Hey, whatever happened to her?) All this month the public has seen the OCC foreclosure ads. Supports Independent Foreclosure Review Program with Public Service Ads. On January 4, the Office of the Comptroller of the Currency (OCC) announced that it placed print and radio public service advertisements to inform mortgage borrowers of the Independent Foreclosure Review (IFR) program launched by the OCC in November 2011. The print feature explains that borrowers foreclosed upon between January 1, 2009 and December 31, 2010 are eligible to have their foreclosures independently reviewed to determine if the borrowers suffered financial injury as a result of any errors by certain large, federally regulated mortgage servicers. The ads will run in Spanish and English in 7,000 small newspapers and on 6,500 small radio stations. Here is a copy of the OCC announcement with links to the ads.

Hiring across the country continues for some companies. SecurityNational Mortgage's Crown Group is hiring retail loan consultants, retail producing managers, and branch managers for its Retail origination team, and wholesale AE's who can build their territory through wholesale, correspondent and retail branch originations. The company is staffing up in the following territories - Texas (DFW), Florida (Dade, Broward, Palm Beach and Duval counties), Missouri, Oklahoma, New Mexico, Arkansas and Colorado.  (SNMC is also hiring underwriters and processors in the Dallas area.) "SecurityNational Mortgage is a nationwide lender offering Conventional, FHA, VA and USDA loans thru its Retail, Wholesale and Correspondent business channels."  If you know anyone interested, please send inquiries/resumes to CrownGroup@Securitynational.com."

The other day someone told me that there were actually things on the internet other than dirty pictures. I was stunned. Seriously, although the article is a little slanted, here is some chatter on on-line lending.

The average LO probably doesn't care too much about the proposed settlement between the states and the servicers. But the large servicers, which are pretty much the large banks, care, and probably really want to "move on" from this, which in turn would help return the flow of business. At this point, supposedly state AG negotiators have reached the final terms on a settlement deal w/the country's biggest banks, and the preliminary pact is now being circulated among the 50 AGs. The price tag for the servicers is around $25 billion, depending on how many states sign on (California and NY remain on the fence). The tentative agreement still must be approved by all 50 state attorneys-general, and the states will be asked either to agree to proposals or decline to participate with Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial. Other banks, such as US Bancorp and PNC Financial Services, have set aside reserves for such an outcome. Stay tuned...and remember that the money has to come from somewhere...

Speaking of which, the FHFA noted that forgiving mortgage debt on Fannie Mae and Freddie Mac loans would cost F&F almost $100 billion. Freddie & Fannie guarantee nearly 3 million mortgages on single- family homes that are underwater, but almost 80% of these borrowers are still current. Principal forgiveness would increase the size of the government's bailout of the companies, which have cost taxpayers more than $153 billion since they were taken under government control in 2008. One can almost hear Mr. DeMarco thinking, "First you made us raise our g-fees, and now this...don't complain when we lose more money..."  - the letter.

And for more on government mortgage agencies, late last week HUD released its final rule to improve and expand the risk management activities of the FHA. It was pretty much as expected but a few things should be noted. First, HUD will seek to force indemnification for "serious and material" violations of FHA origination requirements. For those cases not involving fraud or misrepresentation, HUD will require indemnification within five years from the date of the mortgage insurance endorsement. Second, the proposed rule will also require delegated FHA lenders to continually maintain an acceptable claim and default rate, both to gain special lender status as well as to preserve it. HUD will require that the claim and default rate for a lender be at or below 150% of the average rate of all of the states in which it does business. Specifically for indemnifications, HUD says that lenders may need to buyback loans if they failed to verify and analyze the creditworthiness, income, and/or employment of the borrower, verify the source of assets brought by the borrower for payment of the required down payment and/or closing costs, address property deficiencies identified in the appraisal affecting the health and safety of the occupants or the structural integrity of the property, or ensure that the property appraisal satisfies FHA appraisal requirements. HUD may seek indemnification irrespective of whether the violation caused the mortgage default. Clearly, the rule change should result in more putbacks to lenders going forward.

What does this mean? Since HUD will be requiring a buyback only if the loan has seasoned less than 5-years (unless there is fraud), similar to GSE loans, this may lead to a reluctance from lenders to refinance existing FHA loans due to the fear of resetting the seasoning on the loan. Further, this impact is not restricted to loans that are seasoned more than 5-years as the seasoning is reset on all loans. Although this change points towards a general tightening in underwriting and a potential slowdown in prepays, experts are uncertain how putbacks will be implemented for loans that go through FHA streamline refinancings. For these loans, FHA does not require an appraisal or income/asset verification and hence it is not clear what criteria will be used for the putback. That said, most believe that lenders will be more careful in refinancing borrowers once this rule goes into effect. Since lenders will be assessed on the credit performance of their overall FHA book, this should also lead to lower delinquencies and defaults on newly originated FHA loans going forward.

And put another way, the FHA's rule makes it tougher to qualify for loans insured by the agency. To qualify for mortgage insurance, lenders must offer up evidence that their seriously delinquent and claim rates remain at or below 150 percent of aggregate rates in home states. And the rule authorizes more extensive examination for lenders in order to ensure that they are able to meet the FHA's new qualifications. It requires that certain lenders indemnify HUD in claims over loans. And let's not forget that many believe the FHA fund is insolvent - perhaps this will help.

The government has trouble not interfering with home lending in the U.S., and in fact HUD has come out saying it would like to see FHA lenders relax their credit score minimums allowing more borrowers to qualify for FHA loans.  But lenders are telling HUD officials the agency must first change FHA's lender/monitoring system ("Neighborhood Watch") so they aren't stigmatized for making loans to borrowers with lower credit scores. Neighborhood Watch ratios are used by everyone to measure performance in relation to other lenders in a certain geography, and a high default and claim rate can trigger audits by FHA or the HUD Inspector Generals, and these audits often lead to indemnification demands for actual and future losses. Because of the Neighborhood Watch "triggers", many lenders are only comfortable originating high credit score FHA loans. Other lenders are interested in venturing a little down the credit quality curve, and will often bring in outside help in making sure their originations, operations and quality control procedures can withstand the scrutiny of the HUD's Quality Assurance Division, Mortgagee Review Board and the Office of the Inspector General. The Collingwood Group LLC has been partnering with lenders in navigating these issues to unlock this valuable product development opportunity in ways that are responsible and defensible.  Inquiries should be directed to Brideen Gallagher at bgallagher@collingwoodllc.com. (And nope, this is not a paid ad.)

For news moving rates, the two-day FOMC meeting begins today and concludes with a news conference Wednesday.  It is expected that the Fed will maintain its rock-bottom policy rate, so the anticipation lies in the new decision to publish rate forecasts of each district bank out to 2015 to show greater transparency. Any hint of QE3 from the FOMC tomorrow "will send mortgages off to the races." And tonight's State of the Union Address has been known to move markets.

Yesterday MBS prices were nearly unchanged whereas the 10-yr T-note lost nearly .375 in price and closed at a yield of 2.07%. Today for excitement we have a $35 billion 2-yr note auction at 11AM MST. In the early going the 10-yr is down to 2.04% and MBS prices are a shade better.

(Parental discretion advised.)
A woman asks her husband, "Would you like some bacon and eggs? A slice of toast and maybe some grapefruit and coffee?" she asks.
He declines. "Thanks for asking, but I'm not hungry right now. It's this Viagra," he says. "It's really taken the edge off my appetite."
At lunchtime she asked if he would like something. "A bowl of soup, homemade muffins, or a cheese sandwich?"

He declines. "The Viagra," he says, "really trashes my desire for food."
Come dinnertime, she asks if he wants anything to eat. "Would you like a juicy porterhouse steak and scrumptious apple pie? Or maybe a rotisserie chicken or tasty stir fry?"
He declines again. "Naw, still not hungry."

"Well," she says, "would you mind letting me up? I'm starving."