Done Stressing Over Stress Tests; Eight Most Common Underwriting Mistakes; SEC and Thornburg

Happy Pi Day. (Remember high school geometry...)

As expected, the Fed did not make any policy changes at yesterday. Perhaps they most of their time debating whether the current positive trend in economic data is likely to be sustained, what conditions need to be present to warrant a QE3, and who ordered the ham on white bread. The statement was dissected for every little turn of a word or phrase, but it appears that the FOMC is more concerned with the downside of an economic slide than the upside of inflation being a concern. LO's are most focused on rates, and the Fed will maintain its "Operation Twist" tactic which should continue to serve to keep mortgage rates down by depressing the intermediate part of the yield curve while raising the short end. In addition, there was no change in the Fed's normal mortgage purchase program. But remember - the Fed doesn't set mortgage rates (not yet at least) but it does set overnight Fed Fund rates which have been near 0% for quite some time and will be through 2014, per the Fed.

Like the swallows returning to Capistrano, now every year we can look forward to the results of the Fed's stress tests on U.S. banks of a certain size - due to Dodd Frank. For the most part banks, which pretty much equate to investors and servicers, passed, and the Fed will allow JPMorgan Chase, Wells Fargo, U.S. Bancorp and others to raise dividends or buy back stock. (Chase increased its quarterly dividend and announced a $15 billion stock buyback plan.) Also joining the "pass" club are BofA, Bank of NY Mellon, Morgan Stanley, PNC, US Bancorp, and BB&T. CitiGroup, Ally, and SunTrust did not do so well; MetLife (the largest life insurer in the United States) failed the stress tests on the basis of its risk-based capital ratio, whereas top marks went to Bank of New York Mellon, State Street, and American Express. The Fed's latest stress test tried to determine whether the banks have enough capital to withstand another financial crisis, including a 13% jobless rate, a 50% drop in stock prices, a 21% decline in housing prices, and Maxine Waters becoming president.

Turning to company news, I freely admit that I am a fan of the old Thornburg Mortgage, in theory: make sense deals, almost regardless of loan amount, that filled the niche between agency paper and Alt-A, or subprime. So it was disappointing when the SEC said three Thornburg executives (ex-CEO Larry Goldstone, ex-CFO Clarence Simmons and ex-Chief Accounting Officer Jane Starrett) conspired to conceal disastrous conditions at the investor, and overstated Thornburg's income by more than $400 million in 2007. The SEC is seeking unspecified fines and restitution from them and wants them to be barred from serving as officers or directors of any public company. As we remember, Thornburg faced "a severe liquidity crisis" in early 2008 and its lenders were demanding payments the company wasn't able to meet.

Franklin American has put together a list of the eight most common underwriting errors it has observed in its monthly QA review findings.  Entering the right data into AUS seems to be a big problem.  For example, incomplete or incorrect data input, incorrect Social Security Numbers, and incorrect second lien information, all of which render the AUS invalid, are listed as the top three reasons.  Other mistakes include borrowers making additional loan applications before the closing of the subject loan without sufficient qualification, not entering the correct amount for gifts, incorrectly calculating income, improperly documenting the source of funds for large deposits, and DU Refi Plus-related errors.

Many think Seattle is a pretty cool place, regardless of the time of year. But if you're looking for an excuse to go later this month, The Federal Reserve Bank of San Francisco, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the U.S. Department of the Treasury's Community Development Financial Institutions Fund invite you to attend the 2012 National Interagency Community Reinvestment Conference - More info.

In Saturday's edition the commentary mentioned a Ballard Spahr webinar on how to implement an anti-money laundering program on Thursday, March 22nd.  The BEST place to find out more information or register is here.

In FHA-HUD news, the Valuation Protocol FAQ on the FHA Appraisal Roster website have been updated to clarify what constitutes an "acceptable conventional heating system."  See page 27 of the full FAQ. In light of all the housing counseling agency web-based education we've been seeing, HUD has acknowledged the interest in online learning as well as the fact that many clients prefer it for its convenience. HUD has officially decreed that third party internet education providers do not violate these terms of 24 CFR Part 214.103 so long as the housing counseling agency can prove that they were the ones imparting the knowledge. Just because this training is online, though, doesn't mean it's not required to comply with the HUD Housing Counseling Education requirements on content, file and reporting.

What housing counseling agencies providing internet-based education should keep the following in mind. The HUD file- and record-keeping requirements, which you can find in Chapter 5 of the handbook, still apply. Individual counseling must also be available for any topic in which an agency offers training, be it in-the-flesh or web-based. Agencies must offer in-person along with internet education, as some clients do prefer the former. If an agency offers online education, it must update its work plan accordingly and send a revised copy to HUD. All education activity must be reported in section 6a of form HUD-9902, and agencies should demonstrate that they created the web-based program, made it available via webcast or Skype, and entered into a third-party agreement with an internet education provider with the intention of educating their clients. HUD Housing Counseling grant reimbursement is available for the costs of web-based learning not offset by consumer fees or other funding sources. Fees charged to clients must comply with the rules set forth in sections 7 and 6 in the handbook. Third party programs (lenders, SHFAs, HUD's Neighborhood Stabilization Program) may not accept online education, and as they're independent of HUD, agencies will have to comply with their rules. Those interested in more information can see the full handbook, housing counseling regulations, and the site for National Industry Standards.

Yesterday a good chunk of e-mails concerned investors worsening their prices. Traders were "excited" about the 10-yr's yield "stretching" the range it has been in since Halloween. One thing to note is that the last time that 10-yr T-note closed at this level, Fannie 3.5% securities (containing 3.75-4.125% mortgages) were at roughly 101.875, but Tuesday's was a point higher/better at 102.875. "That's comforting in that it underscores the solid demand driving the mortgage sector" as Paul Jacob from Banc of Manhattan pointed out.

But yesterday mortgage originators were big sellers, to the tune of $2.5 billion, helping to drive prices down and rates higher. The Fed's $1.5 billion a day in average purchases was just not enough. The Treasury sold its final MBS holdings which consisted of $248 billion low loan balance pools. This removes one source of supply to the market. MBS prices closed lower/worse by about .5 but our T-note was worse by almost .75 and closed near 2.11%.

I am off to New Jersey for the conference too early to know much about the market, but suffice it to say there is not much in the way of scheduled economic news here in the U.S. But in the very early going the 10-yr is up to 2.14%, so we've burst out of the rate range on the upside. We'll have the MBA's applications, followed at 5:30AM PST with Import & Export Prices - usually not big market movers - and at 10AM PST the Treasury concludes its latest round of auctions with $13 billion 30-year bonds.


(Parental discretion advised.)
Aer Lingus Flight 101 was flying from Heathrow to Dublin one night, with Paddy the Pilot, and Seamus the co-pilot. As they approached Dublin airport, they looked out the front window.
"B'jeesus" said Paddy "Will ye look at how fookin short dat runway is."
"You're not fookin kiddin, Paddy" replied Seamus.
"Dis is gonna be one a' de trickiest landings you're ever gonna see" said Paddy.
"You're not fookin kiddin, Paddy" replied Seamus.
"Right Seamus. When I give de signal, you put de engines in reverse" said Paddy.
"Right, I'll be doing dat" replied Seamus.
"And den ye put de flaps down straight away" said Paddy.
"Right, I'll be doing dat" replied Seamus.
"And den ye stamp on dem brakes as hard as ye can" said Paddy.
"Right, I'll be doing dat" replied Seamus.
"And den ye pray to de Mother Mary with all a' your soul" said Paddy.
"I be doing dat already" replied Seamus.
So they approached the runway with Paddy and Seamus full of nerves and sweaty palms. As soon as the wheels hit the ground, Seamus put the engines in reverse, put the flaps down, stamped on the brakes and prayed to Mother Mary with all of his soul. Amidst roaring engines, squealing of tires and lots of smoke, the plane screeched to a halt inches from the end of the runway, much to the relief of
Paddy and Seamus and everyone on board.
As they sat in the cockpit regaining their composure, Paddy looked out the front window and said to Seamus "Dat has gotta be de shortest fookin runway I have EVER seen in me whole life."
Seamus looked out the side window and replied "Yeah Paddy, but look how fookin wide it is".