Remember "Tangible Net Benefit"? Nationstar's IPO; Fannie Update

By: Rob Chrisman •

Here's a walk down Memory Lane. "From my point of view, if 80% of the sub-prime borrowers are managing to make ends meet and make the mortgage payments on time, then, shouldn't we as a Nation, be justifiably proud that we are dramatically increasing homeownership opportunities for those who have been traditionally left behind." Excerpt from Angelo Mozilo, "The American Dream of Homeownership: From Cliché to Mission." (John T. Dunlop Lecture sponsored by Harvard's Joint Center for Housing Studies, Washington, DC, February 4, 2003) Ah, the good ol' days.

Let's move a few things out of the way from the start. First, several readers noted that the streamline changes, with the MIP cutoff date of May 31, 2009 are for the endorsement of an FHA loan, not the origination. Endorsements take several days if not weeks to take place after an origination. (One note I received said, "Case in point, I have a friend and past client who I closed on his purchase loan on May 29, 2009, however his loan was not endorsed for several days or weeks afterwards, and I cannot therefore take advantage of this MIP drop for him.  This really stinks.")

Second, anyone who has raised children know that there are certain cut-off dates, whether they are for entering first grade, or little league, or whatever. Some seem more arbitrary than others. I have not seen an iron-clad reason on the cut-off dates, and the same question was asked about the HARP program. Many homes purchased before this date, and those that still have mortgages are underwater. As mentioned yesterday, the FHA has backed a sizeable share of mortgages since then, and those borrowers won't be able to take advantage of the reduced fees, which will limit the reach of this program, and many have lower rates anyway. According to estimates from CSFB, about two thirds of all FHA-backed 30-year mortgages were originated after the cutoff date and therefore wouldn't be able to benefit from the reduced premium.

(Speaking of the HARP, Wells Fargo's wholesale channel announced that on Monday, March 12th it is rolling out Freddie's HARP 2.0 and on the 19th it is rolling out Fannie's HARP 2.0. Both will offer the "unlimited" LTV/CLTV feature.)

Sometimes it is important to remember what a streamline refinance is, from an underwriting perspective. The FHA streamline refinance program has been around for quite a while and is designed to allow borrowers who are current on their loans to "roll-down" their interest rate with little effort. According to the HUD website, the basic requirements are that it must be an existing FHA loan, the mortgage must be current (one time 30-days late, if last three payments made on time), the refinance must result in a lower monthly P&I, and there is no cash back. In the majority of cases government guidelines say that no new appraisal required (the original loan price is used), no new credit review is required, no verification of employment or income is required, and no cash back is allowed. LO's everywhere, however, know that most lenders, and especially those actually servicing these loans, have overlays in place.

The "Tangible Net Benefit" requirement states that for fixed-to-fixed streamline refinances, a borrower must realize at least a 5% reduction in monthly payments - that's P&I and the mortgage insurance premium (MIP). In December, the annual charges on loans with terms longer than 15-years were increased by 10 basis points (.1%) to 120-125 basis points which made the Tangible Net Benefit requirement even harder to accomplish. The planned reduction in both the upfront and annual MIP requirements for borrowers that received a loan prior to June 2009 should certainly help. (The upfront premium on eligible loans is .01% and the annual premium is 0.55%.)

There has been a lot of HUD & FHA news, but the agencies have not been quiet. In Fannie news, in an effort to relieve financial pressure on homeowners and taxpayers, Fannie Mae will be modifying its Lender-Placed Insurance requirements.  Barriers for borrowers wishing to cure their delinquencies will be lowered, which should also increase transparency and encourage competition in the LPI market. LPI comes into play if homeowners with Fannie-mortgaged properties can't provide proof of the necessary hazard insurance. In these cases servicers will secure coverage, the catch being that this costs far more than the kinds of policies borrowers secure for themselves. Expensive LPI can really throw a "spanner" in the works when it comes to delinquent borrowers who want to avoid foreclosure, which requires reimbursing the servicer for the full cost of the LPI policy.  If a borrower isn't able to do that and defaults on their mortgage payments, the financial burden falls on Fannie.  By inviting private insurance companies to compete for Fannie LPI business, Fannie is looking to reduce these incidences by increasing competition, which would lead to lower costs across the board.

This June will see some changes to its grids. Lenders will be required to employ three new buyup and buydown grids with specific rations covering 15- and 30-year high LTV Refi Plus deliveries, and the Refi Plus grid known as "30 YR RP GT 105" will become "30 YR RP GT 105 LTE," which translates to greater than 105% LTV/less than or equal to 125% LTV.  On fixed-rate and hybrid ARM products, maximum guaranty fee buy-up will jump from 20 to 25 bps.

There are a couple of new offerings on the Fannie website, one of which is the March UMDP Yardstick newsletter, which contains information about the fast-approaching transition to the UCDP and ULDD transition deadline of March 19th.  An updated version of PoolTalk disclosure tool for MBS is also available; MBS disclosures have now been consolidated into one application for greater ease of use. Clarification on Hardest-Hit Fund programs is available here and Fannie has designed a new job aid called "Fannie Mae Modifications: Calculating the Monthly Housing Expense-to-Income Ratio," which should be somewhat self-explanatory.

Nationstar Mortgage is in the news this week. First, its IPO price came in lower than most had hoped (16.6 million shares at $14 each versus the $17-19 expected). Still, the IPO raised about $233 million, much of which goes to its owner Fortress Investment Group. The company is servicing over 645,000 residential mortgage loans worth $106.6 billion. Which leads to the next news item: Nationstar and affiliate company Newcastle Investment Corp agreed to acquire $63 billion in residential mortgage servicing assets from Lehman Brothers subsidiary Aurora Bank FSB - link.

Turning to the markets, investors had something to chew on - namely the release of the recent prepayment (early pay-off) speeds from existing pools of mortgages. Prepayment "speeds" increased more than expected, mostly due to low mortgage rates (although this is starting to wear off a little) and the HARP. We're also seeing the beginning of a rush by servicers to close loans before the April 1 increase in guaranty-fees, as well as, spare capacity at mortgage bankers as activity slowed into the year-end holidays which allowed them to focus on the credit impaired borrowers that take longer to process. By the end of the day prices on 30-year MBS ended lower/worse by about .125 and the U.S. 10-yr worsened about .250 in price to a yield of 1.97%.

At 8:30 am, Initial Claims were released and projected unchanged at 351k but unemployment benefits actually rose to 362,000 last week from an upwardly revised 354,000 the week prior. That about does it for new, and in the early going the 10-yr is at 2.00% and MBS prices are worse by about .125


Abbott and Costello
COSTELLO:  I want to talk about the unemployment rate in America.
ABBOTT:  Good Subject.  Terrible times.  It's 9%.
COSTELLO: That many people are out of work?
ABBOTT: No, that's 16%.
COSTELLO:  You just said 9%.
ABBOTT:  9% Unemployed.
COSTELLO:  Right 9% out of work.
ABBOTT:  No, that's 16%.
COSTELLO: Okay, so it's 16% unemployed.
ABBOTT: No, that's 9%...
COSTELLO:  Wait a minute.  Is it 9% or 16%?
ABBOTT: 9% are unemployed. 16% are out of work.
COSTELLO:  IF you are out of work you are unemployed.
ABBOTT:  No, you can't count the "Out of Work" as the unemployed.  You have to look for work to be unemployed.
COSTELLO:  BUT THEY ARE OUT OF WORK!
ABBOTT:  No, you miss my point.
COSTELLO:  What point?
ABBOTT:  Someone who doesn't look for work can't be counted with those who look for work.  It wouldn't be fair.
COSTELLO:  To whom?
ABBOTT:  The unemployed.
COSTELLO:  But they are ALL out of work.
ABBOTT:  No, the unemployed are actively looking for work.  Those who are out of work stopped looking.  They gave up.  And, if you give up, you are no longer in the ranks of the unemployed.
COSTELLO:  So if you're off the unemployment rolls that would count as less unemployment?
ABBOTT:  Unemployment would go down.  Absolutely!
COSTELLO:  The unemployment just goes down because you don't look for work?
ABBOTT:  Absolutely it goes down.  That's how you get to 9%.  Otherwise it would be 16%.  You don't want to read about 16% unemployment do ya?
COSTELLO:  That would be frightening.
ABBOTT:  Absolutely.
COSTELLO:  Wait, I got a question for you.  That means there are two ways to bring down the unemployment number?
ABBOTT:  Two ways is correct.
COSTELLO:  Unemployment can go down if someone gets a job?
ABBOTT:  Correct.
COSTELLO:  And unemployment can also go down if you stop looking for a job?
ABBOTT:  Bingo.
COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to just stop looking for work.
ABBOTT:  Now you're thinking like an economist.
COSTELLO:  I don't even know what the heck I just said!
And now you know why the Administration's employment figures are improving!