MI Companies Watching for the FHA MIP Increase; BofA and Fannie - Does it Matter?

"First wash all the cars, then wax."
"Why do I have to..."
"Remember deal. No questions."
"Yeah, but..."
"Wax on right hand. Wax off left hand. Wax on, wax off. Breathe in through nose, out through mouth. Wax on, wax off. Don't forget to breathe. Very important."

Wax on, wax off, risk on, risk off. Fixed income traders here in the U.S. love to talk about the "risk on, risk off" trade. What does that mean? Traditionally, whenever there is risk, the majority of investors will put their money into a safe place. And for bond folks, this is usually the U.S. fixed-income markets. So when things are going awry overseas, money tends to come into the U.S debt markets, which includes mortgage-backed securities, pushing prices higher and rates lower.

That doesn't necessarily mean every LO should be rooting for civil unrest and the collapse of Greece, however. But just look at some of the things that have happened out there: Chinese manufacturing contracted for the 4th straight month. Iran refused to let inspectors into certain nuclear sites, Euro manufacturing  came in lower than expected, Fitch downgraded Greece, the Bank of England minutes came out more dovish than expected, oil prices are above $108 per barrel...the list goes on and on. Meanwhile, our rates and currency remain relatively stable, and our markets relatively liquid: a safe haven - and this is helping our mortgage rates.

There is plenty of blame to go around for the mess we're in: borrowers, brokers, lenders, investors, appraisers, rating agencies, investment banks, and so on. The rating agencies have begun to come under more scrutiny, since their role ties together many of these parties. Credit rating agencies have been widely criticized in recent years for the poor performance of their ratings on mortgage-backed securities (MBS) and other structured-finance bonds. In response to the concerns of investors and other market participants, the 2010 Dodd-Frank Act incorporates a range of reforms likely to significantly reshape the rating industry. Too lengthy to mention in this commentary, more details can be found at www.stratmorgroup.com where the current blog discusses the role of rating agencies in the current environment.

Can't the mortgage industry go through a week without some piece of big news breaking? Bank of America "is cutting off Fannie Mae from loans starting this month, except for modifications and some refinancings (Making Home Affordable Program), because of Fannie's stance on repurchases, Bank of America said yesterday in a filing. The firms are in talks to end the disagreement, the bank said." Bank of America is in plenty of lawsuits, and spending $1.5 billion a quarter on legal fees, including some against MI companies, many of whom contract with Fannie Mae after the fact to resolve loan issues long after what some would assume is a "reasonable" amount of time.  In November, BofA said it refused to cooperate with what it deemed a new Fannie Mae policy that required loan repurchases if an insurer drops coverage. Should we care? Maybe, maybe not - after all, since Fannie & Freddie are both controlled by the FHFA and the U.S. government, loans are still destined for the same basic place. Here is the complete story.

Anyone can sign up for the CFPB Junior Rangers Program. (I made that up - the program doesn't actually exist.) But if you'd like to have input, and something nifty for that resume, the CFPB is looking for experts for its Consumer Advisory Board. "If you know anyone with innovative ideas and a keen perspective on how consumer finance markets affect American consumers, we want to hear from you! Learn how you can submit a nomination for our Consumer Advisory Board." Check it out here.

Wednesday I noted some NMLS statistics from another publication. It turns out that they were somewhat misleading, some would say incorrect, but fortunately an official from the Conference of State Bank Supervisors wrote to me all the way from Washington DC to set the record straight - thank you. Here are the most up-to-date, accurate numbers for licensing.

And looking into the numbers, Joel Brenner, Compliance and QC Manager with imortgage, wrote, "Rob, regarding the NMLS statistics showing growth in the branch and License LO areas, we have to remember that with banks going out of business, or LO's who previously worked for exempt organizations now joining the ranks of mortgage banking many LO's who previously didn't need a license will have to obtain one. It's possible for the licensure statistics to rise even with continuing consolidation in the jobs arena for LO's."

I love stories like, "In response to a Financial Times report indicating that the five biggest U.S. mortgage servicers can credit actions under the Home Affordable Modification Program toward their obligations to the $25 billion national foreclosure settlement, HUD insists that the deal will not be subsidized by taxpayers. Agency officials clarify, "For HAMP modifications that do include principal reduction, servicers only receive credit for the portion of the principal reduction that they themselves pay for, not for the portion covered by incentives in the program." There's an old saying, "The government can't give what it doesn't take from someone else first," and whether it is the taxpayers, or from banks' depositors, the money has to come from somewhere.

While we're on HUD, many believe that FHA is a "ticking time bomb." HUD's certainly working on a different timeline than Fannie & Freddie: the GSEs' problems are mainly from the weak credits of 2005-2008, but FHA/VA wasn't insuring any loans in the bubble years. Their volumes have been surging since 2009.  And even though the 2009-2012 FHA/VA vintages are "better" loans, they're still FHA/VA loans, and many believe that future defaults will be significant.  So in volume terms, Ginnies will be facing peak default and buyouts over the next 2-4 years. What this means for investors and lenders is more buyouts, more modifications, and ongoing pressure on the FHA insurance fund, which makes HUD much more likely to raise MIPs than to drop them. FHA Commissioner Galante recently said that the FHA would announce additional premium changes to new mortgage business and streamline refi loans in the coming days.

Although changes to FHA premiums are widely expected, she was quoted as saying that "we will be making changes to the streamline refinance program structure of premiums soon to achieve greater use of the program". The language suggests that she may be referring to the possibility of grandfathering in FHA premiums for streamline refi loans or capping their fee to the existing 110 basis points even if fee for non-streamline refi's were to increase further. She also mentioned that the changes would affect loans written prior to May 2009, "when the insurance premium structure was very different from what it is today." The May 2009 date creates some confusion as FHA premiums were first increased in October 2010. Co-incidentally, May 2009 is the current cut-off date for the HARP program which makes it even more confusing. Regardless, MI companies are very pleased with the news.

Although there is still a fair amount of uncertainty on this issue, if the comments are accurately quoted, the likelihood of grandfathering premiums for FHA loans in the case of streamline refinancings is definitely much higher. If this were to happen, 2009-2010 Ginnie 4.5 prepayments could increase dramatically. And what investor wants to own mortgages that are expected to pay off soon?

IMMAAG has issued a "Call to Action" after meeting with members of Congress and with D.C.-based mortgage industry associations "who share similar even if not totally congruent concerns about the direction recent legislative and regulatory actions have taken and the absence of justification for such initiatives." The action focuses on the LO compensation guidelines - yes, they're still an issue, especially with the CFPB issuing its "Notice of Streamlining Project, Request for Information", a five page request in the Federal Register for the public to share its concerns and identify its highest priorities for regulatory streamlining by March 5, 2012. "Document your specific (but unidentified) examples of consumer harm associated with the April 2011 Loan Originator Compensation Rule and what makes it harmful and a direct result of changes required by the rule. Send that as quickly as possible to admin@immaag.com and your example will be aggregated with all those received and will be sent directly to Mr. Carroll in response to his request." Statements can also be sent to that address on appraiser independence (required by the Dodd Frank Act), the Red Flags Rule and any other regulation.

Housing and jobs, jobs and housing. The FHFA's index, focused on property values for Freddie and Fannie radar screen, showed that house prices fell modestly in the fourth quarter of 2011: -.1%. Over the past year, seasonally adjusted prices fell 2.4% from the fourth quarter of 2010 to the fourth quarter of 2011.

No one can really complain about mortgage rates, and Thursday saw several intra-day price changes. Originator volume was lower than average, easily soaked up by the Fed's daily purchases (what happens when that goes away?) and other investors buying production. MBS pricing improved by about .250 in price, and our 10-yr closed around 1.98%. And there is not much news moving our markets, at least in this country - the only thing we have is Consumer Sentiment for February and New Home Sales. Rates are pretty much unchanged from Thursday's close, with the 10-yr at 1.98% and MBS prices are up.

(Parental guidance suggested.)
Sometimes it is good to look at the "flip side" of things - in this case 3 minutes on dating. 

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 role of rating agencies in the current environment. 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.