HARP's Impact on Prepayment Speeds; Watch for Property Deed Scams

Happy Good Friday to everyone! Corruption is the stuff of Tammany Hall and Tea Pot Dome, right? Wrong. (Look 'em up, youngsters.) There is still corruption, and unfortunately much of it has to do with state government.

Last week the California Department of Real Estate (DRE) issued a warning about property deed scams, which are apparently on the rise thanks to the depressed economic climate.  The Consumer Alert that DRE released notified homeowners of a number of red flags that indicate fraud: changes made to a recorded document after signing ("Is that my signature?"), recorded documents signed by a deceased person ("Look - Marilyn Monroe's autograph!"), documents indicating that the a portion of the property was sold without the homeowner's knowledge ("Who's living in our front yard?"), receipt of documents for a mysterious loan or transaction ("We owe how much to who?"), or receipt of a Notice of Default or Trustee's Sale when the property is owned outright ("What happened on the courthouse steps?") are all tip-offs. Seriously, the California DRE encourages homeowners that experience any of the above to notify the County Recorder's Office and their insurance company if their title policy covers forged deeds.  It's also worth contacting local law enforcement, as the District Attorney offices in several counties now have real estate fraud divisions, and, if the real estate broker or salesperson is the likely culprit, filing a complaint with DRE itself.  Employing an attorney familiar with real estate law is advisable, as they can help with annulling or voiding bogus deeds.

Mortgage rates are determined primarily by supply and demand. If there is no demand, prices drop, and rates need to go higher to attract investors. Since demand is determined by investors such as insurance companies, pension funds, and money managers, what they watch is important to the business. And they always watch prepayments - who wants to pay 106 for a pool of 5% loans if they're going to pay off at 100 (par) in 3 months? An increase in LLPA's (loan level price adjustments) a few months ago resulted in an increase in prepayments as originators pushed loans through prior to the increase. And an increase in HARP loans is of particular interest: the volume of HARP loans sold to the Fannie & Freddie more than doubled in January vs. December, but MBS holders did not see a gigantic increase in prepayment speeds for pools with current LTV greater than 80% in January, nor did they see a drop in prepayments that the lower HARP volume in December would have implied - puzzling.

For more on prepayment speeds read: Effects of Cash Flows on Mortgage Servicing

There are many analysts who believe that this decoupling is related to the LLPA reduction that took place as part of HARP 2.0. Basically, the GSEs reduced the LLPA cap on HARP loans from 2% to 75 basis points starting 1/1. This reduction in LLPAs was based on when the loans were sold to the GSEs. It is possible that even though the rate of HARP loan closings was roughly the same in December and January (as reflected by the prepayments on pools with current LTV greater than 80% which stayed more or less unchanged in the two months), lenders held on to a large portion of these loans in December and sold them to the GSEs in January once the lower LLPAs became effective. In other words, the HARP loan closings remained unchanged between January and December but the volume of loans sold to the GSEs was artificially lower for the month of December and higher for the month of January. For example, any HARP borrower with an LTV>97% was being charged an LLPA of 1% or higher by Fannie and Freddie till January 1st, 2012. If the lender would have held on to this loan in their portfolio and sold it after January 1st, 2012, they would have had to pay the GSEs an LLPA of no more than 75 basis points and numbers indicate that 40-50% of HARP loans had an LTV greater than 97% as 2011 ended. Overall, estimates are that 50-60% of HARP loans were impacted by the reduction in LLPAs as part of HARP 2.0. This would explain the 35-37% drop in HARP volumes in December and the sharp reversal in January.

(As a big side-note, folks are still cogitating on the servicer agreement, announced a while back and filed in court several weeks later. As a reminder, it is between the US Department of Justice, HUD, and 49 state attorneys general, and Bank of America, JPMorgan, Wells Fargo, Citibank, and Ally. Servicers will receive credits for every completed modification as well for other activities such as facilitating short sales. The banks are required to meet 75% of their prescribed modification targets within two years and 100% of their targets within three years or face monetary penalties. Wells Fargo, Citigroup, and Ally have indicated that, at least for now, they will not be applying servicer settlement modifications to non-agency loans, i.e., private-label securities, like for jumbo loans.

But Bank of America entered into a side agreement with federal officials that requires it to proactively offer more aggressive modifications to all loans that they hold on balance sheet and in Countrywide securitizations that meet certain eligibility criteria - perhaps upwards of 200,000 loans receiving an average debt forgiveness of $100,000! Last week, with all the jawboning about principal forgiveness, this has certainly caught investor's interest: if such a mass modification program were to occur - either because modifications on delinquent loans have been postponed pending the finalization of the servicer settlement or because of a change to the NPV model - the price of these securities would plunge.)

If you've never seen the chart of prepayment speeds, here you go. The April report is the third month reflecting HARP 2.0 changes, and the numbers are telling us a few things. First, prepayment speeds are not consistent, probably due to timing differences in HARP 2.0 implementation across servicers. And we should remember that GSE HARP 2.0 guidelines will not be fully implemented until June securities. And HARP 2.0 favors better credit borrowers, just like the first HARP did. Any LO can tell you that payment history requirements, verification of income source, and additional underwriting required for certain riskier loans all impede these borrowers, and they typically have the higher coupon mortgages. And some lenders are facing capacity constraints (again).

For lenders and investors, it has been interesting to see how investors with correspondent channels have handled the same-servicer versus different-servicer question. Wells, for example, isn't even taking locks until 4/23. Others are fully engaged through wholesale and correspondent channels while still others haven't rolled anything out yet. With the update to DU/LP, cross-servicer refinances with HARP 2.0 enhancements are now a reality. The update includes the removal of the 125% LTV cap and the expansion of automated appraisals to more borrowers. Previously, these changes were available only for same-servicer refinances. Even with the change, however, "experts" believe cross-servicer activity is unlikely to increase meaningfully from HARP 1.0 levels.

Barclays reports that "lenders have little incentive to take on the servicing of a poor credit loan, even with HARP 2.0 changes. While servicing a performing loan is relatively simple, servicing a delinquent loan is much costlier and requires significant expertise. In addition, servicers are subject to specific procedures and timelines for handling delinquent loans. Any breach of these rules could trigger a servicing rep and warranty. All of these factors suggest that lenders will only refinance another lender's loan when they are comfortable with the credit risk. This suggests that cross-servicer refinances should undergo a full re-underwriting."

At this time it appears that Wells' cross-servicer refinances will be subject to a 105% LTV cap for all HARP 2.0 refinances. This is more stringent than HARP 2.0 guidelines where there is no LTV cap. Chase cross-servicer refinances are subject to much stricter guidelines than same-servicer refinances. This includes more stringent FICO, LTV, documentation, debt-to-income (DTI), and payment history requirements. And when investors throw in some state-specific guidelines, it indicates that investors are carefully managing their credit exposure - is that a surprise?

And even when a lender opts to join the HARP 2.0 wave, regardless of servicer, how is it obtaining leads? For large banks who are servicing the loans, and who have the payment histories, it can be relatively straightforward. For these same-servicer refinances, loan tapes can be mined to identify, target, and even pre-qualify HARP candidates. Certain lenders are very good at this, as we all know. But for cross-servicer refinances, things can be difficult. Borrower loan tapes may not be as readily available, leading to a significant information gap. Smaller originators could receive HARP 2.0 applications directly from borrowers who are shopping around - but are the borrowers likely to do this the ones who are having trouble with their current servicer? Buyers beware - and watch the pull through!

Lastly, there is more HARP-talk from the originator trenches: "The lender-specific overlays really muddle the picture. The Freddie HARP loans that I'm a refinancing are currently held in the bank's servicing portfolio.   We manually underwrite the loan and allow the value to be set by Freddie's HVE, unlimited LTV (when new payment dropping or increasing <20%), unlimited DTI, and stated income & assets (except for "passive" income which must be verified by award letters or most recent Sch. E.). I just closed a Freddie HARP2.0 refinance of a N/O/O SFR where the LTV was 214%.  The rate was 4.750% at 1 point - no appraisal required - stated income with no asset verification required. Manna from Heaven."

Regardless of what the market did yesterday, which wasn't much, today we had the unemployment numbers ahead of an early close in the bond market. (Stock markets are closed today.) March's Non-Farm Payroll number came out +120k, with some minor revisions to January and February. This was well below expectations - perhaps the economy is not as strong as many thought! The Unemployment Rate came in at 8.2%, and Hourly Earnings were +.2%. After this news the U.S. 10-yr T-note, which closed yesterday at 2.17%, went from 2.20% down to 2.05%. For anyone looking to lock today, MBS prices are considerably better.


Golf: An Ethical Question
What if you were playing in the club championship tournament finals and the match was halved at the end of 17 holes?

You had the honor and hit your ball a modest two hundred fifty yards to the middle of the fairway, leaving a simple six iron to the pin.
Your opponent then hits his ball, lofting it deep into the woods to the right of the fairway.

Being the golfing gentleman that you are, you help your opponent look for his ball.
Just before the permitted five minute search period ends, your opponent says: "Go ahead and hit your second shot and if I don't find it in time, I'll concede the match."
You hit your ball, landing it on the green, stopping about ten feet from the pin.
About the time your ball comes to rest, you hear your opponent exclaim from deep in the woods: "I found it!"
The second sound you hear is a click, the sound of a club striking a ball, and the ball comes sailing out of the woods and lands on the green stopping no more than six inches from the hole.
Now here is the ethical dilemma:
Do you pull the cheating jerk's ball out of your pocket and confront him with it, or do you keep your mouth shut?