LO Comp & The CFPB; FHA & Seller Contributions; Redwood Trust, ewarehouse Chatter

What is more fun to talk about, the latest CFPB power grab, an investor changing its appraisal review process, or the 42-state Mega Millions lottery? Apparently the previous $360 million wasn't enough to grab nationwide attention - but now we're at a record $500 million. The Federal, state, and local governments are all licking their chops, as is everyone who bought a ticket not knowing that a lottery is a tax on people who don't know math. Expected winnings have actually decreased since the last play (when no one won) due to the sheer number of people that are now entered, and the odds of winning the grand prize are less than 175 million to 1. Folks should know which of the 56 balls have come up most often (11, 14, 18, 33 & 48), what numbers are most often played (numbers less than 30 due to birthdays), and so forth if they want an edge.

What is "election uncertainty"? Election uncertainty is the buzz-term that economists around the world are talking about. If you take the world's GDP, and which countries make up the lion's share of that gross domestic product total, you'll find that the majority of them have elections this year and next. And these elections, whether they're in France, Egypt, Iceland, Japan, Palau, or the United States, can easily move markets. So no matter how exciting the NCAA men's games are tomorrow, be sure to blurt out, "This isn't half as interesting as election uncertainty!"

Bailout? "No Way!" says the FHA. Well, at least "Unlikely!" Straight from the horse's mouth...

Bailout or not, there are indeed things going on, or that might go on, with the FHA program that are causing concern. For example, the proposed reduction in seller contributions. When a seller sells, they can't always afford to pay a Realtor and throw 6 points at the deal. Banks and homebuilders can, and do, pay those points, but with a cap, that can't happen anymore. It will level the field a bit for private sellers of homes versus say homebuilders or banks (read more HERE).  And yesterday the commentary mentioned the new collection policy. Any lender with a portion of its business in the sub 660 FICO region is quick to point out that this change targets the traditional "low to moderate income" borrowers.  How much of the borrower population will be impacted is anyone's guess, but of greater concern/question is, "Have economics caused the FHA's mission to change, and by how much?"

Yesterday the commentary mentioned, "Over at Freddie Mac, it has expanded its policy on HASP Open Access such that HVEs are now permitted for one or two-unit properties only and must not be more than 120 days old at the Note date.  HVE values are calculated by the initial LP Feedback Certificate, and subsequent HVE values will have to be determined, if it has expired, by running the property through CoreLogic, or, if it hasn't expired, by pulling an additional HVE using CoreLogic." I received this clarification: "For Freddie, lenders are not limited to CoreLogic.  They can obtain HVE valuations for free through LP or our look-up tool.  But, in addition to CoreLogic, they can also obtain HVE values (for the first time or to replace an expired valuation) through CBC Innovis, Equifax, Dataquick, and LPS." Thank you very much.

With the industry seeming to pin its non-agency hopes, for better or worse, on Redwood Trust, which lost its CFO several months ago, another CFO wrote yesterday, "It is good to see another deal put out by Redwood. But it might be useful if you raised a red flag regarding their taxable income versus their dividends. Specifically http://www.redwoodtrust.com/, Investor Information, Redwood Review, Page 4 of the last report. Compare taxable income to dividends...over 9 quarters they are down a total of ($0.53) per share for taxable income but paid dividends of $2.25. If one multiplies $2.25 by 78 million shares you find $175 million of capital returned to shareholders on top of the reported losses. One can't help but wonder if this is a sustainable business model. Given so much weight and attention are given to their deals, shining a light on this appears to be relevant." (On Page 8 management notes, "We believe we can generate the capital needed for the vast majority of these new investments and dividends through cash from operations, principal payments from our investments, asset sales, and obtaining debt financing on our commercial portfolio.")

The Consumer Financial Protection Bureau plans on taking a close look at the Federal Reserve's controversial loan officer compensation rule and will issue a new proposal "soon." CFPB acting assistant director Peter Carroll recently stated that the agency is particularly interested in transactions where the consumer pays discount points and "how that affects creditor-paid transactions," he said. As we know all too well, the Fed rule prohibits dual compensation and restricts LOs at mortgage brokerage firms from being compensated by the consumer and the wholesale lender in the same transaction, and bans LOs from making less money on a deal and passing that savings onto the borrower. The Dodd-Frank Act transferred the Fed's jurisdiction for the LO compensation rule to the new consumer bureau in July 2011. "We are re-visiting some of the issues around that rulemaking as well as other items that were given to us in the Dodd-Frank Act," Carroll said. Carroll heads the CFPB's "Office of Mortgage Markets" which monitors the residential finance industry. His group is responsible for how rules impact both consumers and lenders, per reporter Brian Collins. It is interesting, if this indeed came from the CFPB since there is open disagreement about its exact role, how to accomplish it, where to draw the lines, and how to examine for it.

I can't ignore the clamoring about ewarehouse - comments are really testing the "Any publicity is good publicity" motto. I received this note from the owner of a mortgage bank in the western U.S.: "I also suspect ewarehouse is a scam. The rep who came to visit us is someone we have known for many years. We stroked a $1,000 check. Oh well. They came back to us with a massive list of requests. We had decided to give them nothing until they were able to give us some references. Their response was that at this time all their clients who are actually funding are on the East Coast. We said, "Fine. Who are they?" - Stone silence. I checked on who owns the ewarehouseone web site, and tried to find any affiliations. It is impossible. Something about the site and its ownership is not passing the 'smell test'."

Comments also continue about Fannie & Freddie doing principle reductions, especially with the comments from Treasury Secretary Geithner this week. But what the proponents of principal reductions at Fannie and Freddie don't talk about is what a transfer of wealth from taxpayers (again) to large banks such a program would represent. As of last September, only 2.5% of Fannie and Freddie mortgages were seriously delinquent, versus about 7% for banks' mortgages. But Fannie and Freddie write-downs are an easy thing to suggest, even though they would constitute a direct and sizable gift from taxpayers to the largest banks.

As any LO who has been around for a while will tell you, many banks hold second liens on the same properties for which Fannie and Freddie either own the first mortgage or have guaranteed. If principal amounts on these first mortgages are reduced while leaving the second liens intact, those seconds become much more likely to be paid off over time. With no principal reduction, the banks would have to write off many of those second liens. As such, principal write-downs would help our banks - which is a whole 'nother debate.

Through all of this, at least mortgage rates remain relatively stable. Yes, they've gone up some, but have come back down a little. Although Europe has been quiet for many weeks, if the issues there begin to increase look for another flight to safety in our market, which tends to push rates down. Greece may have to restructure their debt again. On top of that, Portuguese yields have reversed their recent tightening - the WSJ suggests their day of reckoning is coming.

Today is week-end, month-end, quarter-end, and Japan begins a new fiscal year on Monday. After a relatively quiet overnight, and this morning's Personal Income (+.2%) and Personal Consumption (+.8%), we find the 10-yr down to 2.15% and MBS prices pretty much unchanged. Recently mortgage prices have done very well, given the pick-up in supply (which could be reflected in next week's MBA numbers). Will the Fed do QE3? Will Asia Buy once quarter end is over? Will Louisville beat Kentucky? "Would you come back to work if you won Mega Millions?"

An elderly man in Florida had owned a large farm for several years. He had a large pond in the back, fixed up nicely: picnic tables, horseshoe courts, a volleyball court, and some apple and peach trees. The pond was properly shaped and fixed up for swimming.
One evening the old farmer decided to go down to the pond and look it over, as he hadn't been there in a while. He grabbed a five-gallon bucket to bring back some fruit. As he neared the pond, he heard voices shouting and laughing. As he came closer, he saw it was a bunch of young women skinny-dipping in his pond. He made the women aware of his presence and they all went to the deep end.
One of the women shouted to him, "We're not coming out until you leave!"
The old man frowned, "I didn't come down here to watch you ladies swim naked or make you get out of the pond naked."
Holding the bucket up he said, "I'm here to feed the alligator."
Old men can still think fast.