Volker Rule's Impact on Hedging Rate Locks; Potential HARP 2.0 Borrower Pool Defined

Money is money, right? If Congress can place a "mortgage tax" in the form of higher g-fees, and use the money to help cover a payroll tax waiver extension, can the states use the mortgage servicer settlement money to pay for chalk in classrooms? 

How much is $1 trillion?  One thousand million is a billion, and one thousand billion is a trillion.  According to Business Week, outstanding student debt in the United States is approaching $1 trillion-that is $3,333 per head for our population of about 300,000,000.  Is this an example of living beyond one's means?  The Federal Reserve noted in a White Paper last month that the current mortgage lending standards are holding back younger first-time homebuyers.  Student debt has, for the first time in the US, surpassed credit card debt, with recent university graduates carrying an average load of over $25,000.  Even if recent graduates are able to secure a high-paying job (no small feat in a time when unemployment for 29-34s is at 9%), a number like that makes getting a loan difficult.  A young medical professional, for example, may make upwards of $125,000 a year, but there's a good chance he or she will also be carrying over $100,000 of student debt.

The article points to the trend that the student debt issue is yet another reason that record-low interest rates aren't invigorating the housing market.  First-time buyers make up a good proportion of demand, but they've been disproportionately affected by tightening credit and mortgage conditions.  The percentage of 29-34's who obtained first-time mortgages between 2009-11 was 9%, just about half of what it was a decade previously.

My parrot broke his leg today so I made him a little splint out of a couple of wooden matches, and his little face lit up when he tried to walk. Unfortunately, I forgot to remove the sandpaper from the bottom of his cage. Speaking of unintended consequences...As if mortgage bankers and depositories don't have enough to worry about, the Volker Rule should not escape notice. Will rate locks be a thing of the past with the Volker Rule? In the broadest sense it prohibits banks using MBS to hedge production. In an interview on CNBC last week, John Stumpf noted that the way the rules are coming down, they are "very broad in their prohibitions and very narrow in their permissions. Let me give you one example. When we make someone a mortgage, we give them a free rate lock for 60 or 90 days, and if rates go up, even if only by .250%, that's thousands of dollars over the life of a loan. If (The Volker Rule) gets implemented the wrong way we might not be able to do that - we hedge that, we swap that, and we'd have to have such a gigantic group of consultants, accountants, attorneys making sure that doesn't (go against the rules). Here is more.

And how about contemplating the consequences of having AMC contracts declared null and void? Last week, the commentary noted that NAIHP issued a press release regarding appraisal management companies. NAIHP discovered many AMC's were operating without authority in numerous states and failed to pay state income tax. Most states won't issue a taxpayer I.D. number unless a business is registered. And as we all know, all businesses are required to register with the appropriate authority in any state (usually the Secretary of State), prior to conducting business - often displayed in the lobby. I was contacted by an industry veteran who advised me that, "Any business that fails to register in any state may find contracts they signed in the normal course of business to be null and void. In the specific case of an AMC, any monies collected from consumers while operating without authority, would in all likelihood need to be refunded." This could be a huge quagmire for AMC's, many of which are lender-owned.

What is the potential HARP 2.0 borrower pool? "First, as to the size of the market: From our HARP 2 workshops, although there are 6.7 million HARP eligible loans based on the May 31, 2009 cutoff date and Fannie/Freddie requirement, when payment history and LTV requirements are overlaid, the number of eligible loans drops to around 2.3 million. And, as the interest rate distribution indicates, a meaningful proportion of these loans are already at low or fairly low interest rates. So, assuming that 2 million loans are refinanced under HARP 2, and average $150,000, HARP 2 represents about $300 billion in incremental production over 2012-2013, about a 15% increase in overall projected volume. Equally important, is that the profit margins available to lenders for HARP 2 loans could be 2-3 times what the normally realize, because of lower cost streamline processing and, in the case of existing services, a captive base of borrowers. Thus, HARP 2 represents a big opportunity for the big aggregators but may not trickle down to the smaller originators. So the comment that 'smaller originators will be ideally positioned to pick up market share' is questionable unless the large aggregators agree to purchase HARP 2 loans from smaller correspondents.  While we think they will, they may limit such purchases to only their largest correspondents and possibly only those correspondents with a direct to consumer channel." Thanks to STRATMOR, Tranzact Information Services, and Financial Literacy Systems (run by Garth Graham) for this input.

Originators know that appraisals, equity, and underwriting/documentation are keeping a lid on lending. But could mortgage rates go even lower? I doubt it, but then there's this story in the Wall Street Journal...Mortgage rates should be even lower - the differential between the average MBS rate and the mortgage rates quoted by banks is nearly 1%, much higher than normal.  If the normal relationship between the two rates held, 30yr mortgage yields would be about 3.4% versus the 3.9% now being quoted! Check out the story.

Jobs and housing, housing and jobs - both are key indicators for the health of an economy. Yesterday we learned that Existing Home Sales rose 4.3%. The increase in sales has reduced the number of homes on the market to its lowest level since April 2006. The median price fell 4.6 per cent in the month to $154,700, down 2 per cent from the same month last year. Existing Home Sales numbers have shown an impressive run recently, increasing in four out of five months. On a year-ago basis, existing home sales are up 3.6% - but before the celebration starts, remember that we're seeing a lot of contract failures, and a good portion of transactions continue to be distressed with all-cash sales making up 31% of total sales. Many investors are buying discounted properties in select markets and renting them out, which certainly helps unsold inventory numbers: total housing inventory fell 9.2 percent to 2.38 million, which represents a 6.2-month supply.

Housing affordability as measured by the National Association of Realtors Housing Affordability Index (HAI) rose during the last quarter of 2011 as housing prices continued to decline and interest rates stayed at record lows. The national HAI reached a record high of 184.5 where the base of 100 is defined as the point at which a median-income household has enough income to qualify for a median-priced existing home with 20% down and 25% of the income devoted to mortgage payments. This index shows that prices are down about 4% from a year ago - attributed in part to foreclosures and short sales. Better affordability is certainly a good thing.

Yesterday rates improved during the day, resulting in many intra-day price changes - and we haven't seen too much of that lately. We had a good old-fashioned "flight to quality bid" that was related to Greece. The 10-yr closed at about 2.00% and MBS prices tagged along for the ride by improving about .250 in price.

For today's excitement we have Initial Jobless Claims and the FHFA House Price Index for December at 10AM EST, along with a $29 billion 7-yr T-note auction - the last Treasury auction for a few weeks. Applications for jobless benefits were unchanged in the week ended Feb. 18 at 351,000, the fewest since March 2008, per the Labor Department. The number of people on unemployment benefit rolls dropped to the lowest level since August 2008 - is everyone giving up the search? Rates have moved slightly higher on the news, as one would expect.

An Englishman, a Scotsman, an Irishman, a Welshman, a Latvian, a Turk, a German, an Indian, several Americans (including a southerner, a New Englander, and a Californian, an Argentinean, a Dane, an Australian, a Slovakian, an Egyptian, a Japanese, a Moroccan, a Frenchman, a New Zealander, a Spaniard, a Russian, a Guatemalan, a Colombian, a Pakistani, a Malaysian, a Croatian, a Uzbek, a Cypriot, a Pole, a Lithuanian, a Chinese, a Sri Lankan, a Lebanese, a Cayman Islander, a Ugandan, a Vietnamese, a Korean, a Uruguayan, a Czech, an Icelander, a  Mexican, a Finn, a Honduran, a Panamanian, an Andorran, an Israeli, a Venezuelan, a Fijian, a Peruvian, an Estonian, a Brazilian, a Portuguese, a Liechtensteiner, a Mongolian, a Hungarian, a Canadian, a Moldovan, a Haitian, a Norfolk Islander, a Macedonian, a Bolivian, a Cook Islander, a Tajikistani, a Samoan, an Armenian, a Aruban, an Albanian, a Greenlander, a Micronesian, a Virgin Islander, a Georgian, a Bahaman, a Belarusian, a Cuban, a Tongan, a Cambodian, a Qatari, an  Azerbaijani, a Romanian, a Chilean, a Kyrgyzstani, a Jamaican, a  Filipino, a Ukrainian, a Dutchman, a Ecuadorian, a Costa  Rican, a Swede, a Bulgarian, a Serb, a Swiss, a Greek, a Belgian, a Singaporean, an Italian, a Norwegian and 47 Africans walk into a fine restaurant....
 
"I'm sorry," says the maître d', scrutinizing the group one by one and barring their entrance, "you can't come in here without a Thai."

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, part 2. 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.