MBA's Secondary Marketing Committee; Primer on Inverse Floaters; Lender Updates

I have heard that there are some places on the outskirts of Detroit that are becoming farms. That is pretty weird. But even weirder are some of these places around the world. (The photos are pretty haunting, even of Centralia, Pennsylvania.)

Remember that ordinance, in place in Chicago since mid-November and then Las Vegas, that requires mortgage holders to pay a one-time fee of $500 to register a vacant building with the city's building department 30 days after it becomes vacant or 60 days after the mortgage goes into default, whichever is later? Questions about the legality and the "How do I know if it is vacant?" questions, Fannie & the servicers are quietly protesting it.

Old CEO's don't die, they just join other boards. Former Morgan Stanley Chief Executive John Mack has joined the board of LendingClub as the "peer-to-peer lending startup" works to attract more investor money and expand its consumer loan offerings.

Here's something that might appeal to some folks: the MBA's Secondary Marketing Committee. It, along with the other MBA committees, is a good way to have your voice heard. The Committee reports up to the Residential Board of Governors within the MBA, and its goal is to foster safe, sound, and prudent practices within our industry. "The Secondary & Capital Markets Committee monitors secondary market activity and issues and serves as an information resource and a policy formation advisory group for MBA. Issues of interest to the committee range from securities disclosure and GSE mission boundaries to development of more competition in the secondary market through the FHLB programs or revitalization of FHA and Ginnie Mae." Members, who cannot work for the agencies, need to be either MBA members, or work for member firms. For more information about the group, or about joining, visit this link.

(Now, if only the MBA can revisit its membership dues, which, as I have heard from more than one party, seem to penalize companies that are expanding.)

Perhaps one of the discussion topics for the MBA's committee will be Ally, which is shutting down its Broker Dealer desk. And talk on the street is that Ally is requiring all its customers to pair off trades this week. Folks say this is unprecedented - even Lehman wound it down over a 3 month period to allow normal settlements. (And I remember when Drexel Burnham went under, the MBS trading process we had to go through.) The Ally issue is not a crisis, but it is a pain in the rump for hedging companies and secondary staffs with positions.

While we're talking about mortgage-backed securities, about 90% of mortgage originations are backed by the agencies. Good time for a quick lesson on one component of MBS's: inverse floaters. F&F create a security (MBS) backed by mortgages it guarantees which are often divided into two parts. The larger portion, backed by principal, is viewed as a fairly low risk, paid a low return and traditionally has been sold to investors. The smaller portion, backed by interest payments on the mortgages, was riskier, and paid a higher return determined by the interest rates on the underlying loans.  This portion, called an "inverse floater," is retained by Freddie Mac. But remember several months ago when Freddie was accused of betting on declining values?

In 2010 and 2011 Freddie Mac's purchase (retention) of these inverse floaters rose dramatically, from a total of 12 purchased in 2008 and 2009 to 29.  Most of the mortgages backing these floaters had interest rates of 6.5-7%. In structuring these transactions, Freddie Mac sells off most of the value of the MBS but does not reduce its risk because it still guarantees the underlying mortgages and must pay the entire value in the case of default.  The floaters, stripped of the real value of the underlying principal, are also now harder and possibly more expensive to sell, and as Freddie is paid the difference between the interest rates on the loans and the current interest rate, if rates rise, the value of the floaters falls.

While Freddie, under its agreement with the Treasury Department, has reduced the size of its portfolio by 6 percent between 2010 and 2011, "that $43 billion drop in the portfolio overstates the risk reduction because the company retained risk through the inverse floaters." Since the real value of the floater is the high rate of interest being paid by the mortgagee, if large numbers pay off their loans, the floater loses value. So did Freddie deter prospective refinancers by tightening its underwriting guidelines and raising fees, or was it only market influences?

In the end, the story died down, and it was generally viewed as unlikely that Freddie purposely tried to dampen refinancing. The FHFA knew about the inverse floater trades, as I recall, but it was unknown whether the FHFA knew about them as Freddie was conducting them or whether the FHFA had explicitly approved them. The FHFA statement said that Freddie Mac has historically used CMOs as a tool to manage its retained portfolio and to address issues associated with security performance, and that for several reasons Freddie's retention of inverse floaters ended in 2011 and only $5 billion is held in the company's $650 billion retained portfolio.  And supposedly none of this impacted HARP turning into HARP 2.0.

How about some investor/lender updates from the last few weeks? As always, it is best to read the actual investor bulletins - information provided here is meant to show trends rather than timely detailed specifics.

Flagstar issued a memo regarding which loans must close in Flagstar's name and which FHA loans may close in the originating lenders name. Beginning with loans locked last Friday, the three Expanded Approval Risk Class price adjustments for applicable Flagstar serviced HARP programs will be consolidated into one price adjustment (-.250).

GMAC spread the word to clients that transferred, modified or replacement certificates will be permitted and utilize the MI coverage requirements on the original loan as messaged by DU. Standard coverage requirements by LTV do not apply. Coverage may be waived if permitted by DU.

SunTrust Mortgage updated the FHA product description to include the new annual and upfront mortgage insurance premiums (UFMIP). Additionally it removed references to the FHA MIA program because HUD suspended that program.

U.S. Bank Wholesale reminded brokers of its "First Time Home Buyers Program": borrowers can borrow up to 80% of the purchase price, the remaining 20% of the purchase price can be gift funds from family, customer reserves, or borrowed against other assets, seller concessions up to 3% allowed, and maximum loan sizes up to $1,000,000. (Quite a first time home buyer amount!)

I don't know which large national bank agreed to pay, or if the fees they agreed to pay were previously paid to the Appraisal Loft group, as noted below. But Joan Kirby with United States Appraisals wrote, "Lender accepts responsibility for unpaid appraisal fees. Last week precedence was set as a large national bank agreed to pay significant unpaid appraisal fees resulting from the failure of an appraisal management company, Appraiser Loft. Estimates are the AMC left over $3,000,000 in unpaid appraisal fees across multiple lenders. The Interagency Appraisal and Valuation Guidelines further support this position by placing full responsibility of 3rd party vendors, including AMC's, solely with the lender. What should lenders do to avoid a similar situation? United States Appraisals pays appraisers every two weeks and provides a monthly reconciliation report that details the actual fee paid, date paid, and ACH transaction detail. Full financial disclosure should be provided by an AMC on a consistent schedule."

In her marketing piece Ms. Kirby continues, "How can lenders ensure appraisers are paid customary & reasonable fees? Local appraisers actively engaged in appraisal production are the most accurate source of information. Prior to accepting a specific assignment, an appraiser should certify:  'By accepting and completing this assignment, the appraiser agrees that the compensation offered was established by the appraiser based upon market competitive rates for similar assignments within the subject property's local market, and therefore, constitutes a reasonable and customary fee under presumption one of the Interim Final Rules.' What is the cost of C&R violations under the Dodd Frank? A civil penalty of not more than $10,000 per day and $20,000 for each subsequent violation." (Joan Kirby can be reached at joank@UnitedStatesAppraisals.com.)

West Coast wholesaler Pinnacle Capital's underwriting guidelines on conforming loans have been modified, with changes regarding Property Fieldwork Waiver eligibility, the waiting period calculation for short sales, separated borrowers without legal separation agreements, and insurance requirements for attached PUDs.  Enhanced DU Refi Plus products now feature an LTV cap of 125% with unlimited CLTV.  The condo matrix has been modified to include the DU Refi Plus updates, Combined Conventional and FHA HO-6 requirements and clarification on coverage amounts.

Some LO's around the nation thank the U.S. Government every day for buying MBS's, and for good reason: the NY Fed is buying about $1.4 billion per day, soaking up about 70% of what originators are issuing. One can argue the merits of this strategy, but there is no doubt that it is keeping agency mortgage rates low. And when this is added on to the typical demand by money managers, REIT's, insurance companies, and so on, the demand for mortgages is pretty darned good.

The Fed's Beige Book, literally beige, showed concerns from many sectors of the economy about increased energy prices which would seem to make the case for keeping it in reserve if the economy has a setback, and economists inferred that any chatter about QE3 should be saved for a dramatic adverse change in the economy. By the end of the day MBS prices ended lower by over 1/4 point on 30-year 3.0% coupons (3.25-3.625% mortgages), and the new 10-year note closed at 2.03%.

Overnight there was little of consequence, and U.S. Treasury debt hovered around the NY closing levels for most of the London session. This morning we learned here in the States that the Trade Deficit shrank. The Producer Price Index was unchanged, much lower than expected, but the core rate was higher than expected at +.3%. And lastly Jobless Claims are up to 380,000, up 23k from a revised 357k the prior week. We still have a $13 billion 30-yr bond auction to get through at 1PM PST, but in the early going the 10-yr is nearly unchanged at 2.02% and MBS prices are about where they were at the end of Wednesday.

Paradoxical "Quote of The Day" from Ben Stein, sure to, unfortunately, garner me plenty of e-mails: "Fathom the hypocrisy of a government that requires every citizen to prove they are insured... but not everyone must prove they are a citizen."