A Note on The Implications Of Flat Fee Pricing; Lender Updates Continue; Ready For Another Refi Wave?

Facebook...Facebook...Facebook...I guess the financial press is tired of discussing things like Europe's woes. (Even today's closing paragraph at the bottom is about Facebook.) Say what you want, but it is influencing real estate down in San Francisco.

To help keep things in perspective, I received this note about small improvements in the price of real estate in various markets: "If I reduce your wages by $1,000 a month for 5 years but finally, in one month, give you a raise of 0.2% in February ... would you really consider that positive overall? It does not address the overreach of price declines that the banks fire sales have caused. That little problem will take decades to resolve at 0.2% a month increase." I agree, and good point. We'd all agree, however, that at least the .2% improvement is better than another drop.

Certainly this drop in mortgage rates is causing a nice rally in mortgage-backed security prices (or vice versa). The March TIC (Treasury International Capital) data showed that overseas investor holdings of agency MBS declined by $9 billion in March bringing the cumulative decline in the first quarter to $24 billion. This is a continuation of the trend seen over the past 3 years - In 2011 alone, overseas investors were net sellers of $64 billion agency MBS.  Similar to the prior two months, overseas investors continued grow their Treasury holdings but reduced exposure to agency and corporate bonds. (Agency bond holdings - agency debt + agency MBS - of foreign official institutions declined by $13 billion while their Treasury holdings increased by $32 billion in March.) Investors from Luxembourg, Ireland and Cayman Islands were net sellers of agency bonds, and China appears to be continuing to reduce exposure to agency MBS by not reinvesting paydowns which is more than offsetting positive net demand from Japan, Korea, Malaysia and Taiwan.

The talk about flat fee pricing continues; here is one example of a note sent to mortgageloanorigination@cfpb.gov: "This proposal will harm those seeking lower mortgage amounts.  Currently if a company's profit margin is one point in origination it is true that the applicant for a $400,000 pays more in costs than the applicant for a $150,000 mortgage. The market, however, has prevailed that the cost of mortgages is based upon percentages of the loan amount, i.e. points, and not flat fees, and consumers by and large in my experience consider this a 'fair' practice. In initiating a flat fee for the origination of a mortgage the 'fairness' factor still comes into play.  If a flat fee is instituted companies will base their flat fee upon their average loan amount and price off a percentage of that loan amount.  Taking our company in Southern California our average loan amount is somewhere around $375,000.  If we are required to institute a flat fee and we use one and a quarter points (1.25% of loan amount) to cover origination costs, processing, credit report fees, and our profit margin, that is a flat fee of $4687.50, we'll round down to $4500 for simplicity."

The note continues: "Now the $400,000 applicant will be paying 1.125% in origination fees, the $500,000 applicant will be paying 0.9% and the $150,000 applicant purchasing a condominium as their first home will be paying 3%. All markets across the country have a wide range of applicants. Mortgage companies by and large will price their flat fee origination costs to the middle of the market thereby benefiting high mortgage borrowers and harming borrowers with smaller mortgages. What will result is a lack of competition at the lower end of the market as originators will price their fees to be attractive to the middle to upper end of the market leaving the lower end of the mortgage market to either pay higher fees or be limited to competitive pricing models of companies more interested in volume than service and fulfilling client needs and abilities....Since the originator is getting paid the same no matter where the loan is placed, whether it is locked for 15 days just before closing or 60 days at application there is little incentive to communicate with the client to insure the right decision regarding locking in a loan. The real estate industry has always used percentages of sales price or mortgage amount for costs to consumers.  If the CFPB feels that it is unfair for mortgage applicants to pay different dollar amounts for mortgages based on origination fees determined by percentage of loan amounts how is that different from real estate brokers basing their fees as a percentage of the sales price? In some markets agents will not take lower price listings or buyers in that range, based on the lower compensation, leaving the clients with reduced competition for their business.  Should a flat origination fee model be instituted a similar result will occur in the mortgage industry in every market nationwide."

How do Ops and compliance folks keep up with things? Here are some somewhat recent lender/investor/MI updates. As always, it is best to read the actual bulletin, but this will give one a flavor for what is happening out there. In no particular order...

Provided that they're located in HUD- or DE lender-approved projects, units in projects that are absent from Flagstar Bank's denied list and listed as approved in the FHA's Condominium Search Engine are eligible for financing by the FHA.  Be aware that Flagstar neither participates in DELRAP nor submits projects for HRAP and will only review the project to have it taken off the denied list.  The requirements for VA financing are similar; the condo must be absent from Flagstar Bank's denied list and be part of a VA-approved project. Flagstar has revised its base pricing on Jumbo ARMs and Jumbo Fixed Rate products, which will affect certain Jumbo price adjustments.  These changes took effect on May 14th. Other Flagstar goings-on include the updated 90-day pricing on fixed rate government loans in Loantrac and Price Quote and the suspension of DO Sponsorship requests for the next two weeks or so.

Wholesale clients of Mountain West Financial are now able to finance HUD REOs with a repair escrow.  Under the FHA's Minimum Property Requirements, properties requiring less than $5,000 worth of repairs as determined by an appraiser may be marketed for sale "as-is" with FHA mortgage insurance available.  In such cases the purchaser must establish cash escrow to ensure that any required repairs are carried out and may include a cost equal to 110% of the estimated repair costs to their mortgage.  For properties that are in need of repairs totaling more than $5,000, the proceeds from escrow holdbacks will be held in a MWF escrow account until the repairs are completed. Should the repair estimates be less than $1,000, the amount listed on the HUD contract is acceptable as the amount of financeable repairs, while a licensed contractor's bid is required for estimates between $1,000 and $2,000.  Estimates between $2,000 and $5,000 require two bids. For the full details on termite/pest inspections, utility issues, appraisals over 120 days old, release of the appraisal to the lender or purchaser, appraisal requirements for marketing, sales contract requirements, and case number processing, speak to a MWF account executive.

Plaza Mortgage rolled out an Elite Jumbo product that will allow consumers to take out loans of up to $2,500,000 with LTVs of up to 80%.  Single and double units, PUDs, and condos are all eligible, and borrowers are offered purchase, rate/term, and cash out options.  Elite Jumbo loans will be available to borrowers with credit scores over 700 and are subject to a 6% limit on interested party contributions as well as a requirement that they be manually underwritten.

The lower BPMI pricing and other rate changes announced by Radian Guaranty last month are officially in effect.  Updated rate cards are available here, though properties in New York will continue to be priced using the rates effective from November 11, 2011.  New York properties will be priced at the new rates upon receipt of regulatory approval.

How 'bout these mortgage rates? Are they making a difference? Well, maybe not for the folks who couldn't refinance in the last 9 months, but for anyone who did, you may just see recent borrowers coming back into the market - lured by 3.75% 30-yr mortgages that will probably go into 3% MBS's. Investors in mortgage-backed securities are justifiably concerned. And companies that booked servicing recently may be watching their portfolio run off, hopefully supported by income from new originations. Lenders are reporting that daily lock activity has been fairly steady over the past couple of days, but in line with the elevated volumes that were coming in the door at the end of last week.

Yesterday's news helped to support the "more slow economy, more lower rate" scenario. The Philadelphia Fed Business Outlook current activity index fell to -5.8 in May, the Conference Board Leading Economic Indicators declined 0.1% in April, and Jobless Claims were about unchanged. But as one leading Wall Street firm noted, "Today's move can be attributed to a few reasons with large curve unwinds, large long end receiving, lessening global inflation, the escalating crisis in Europe, and higher chance of QE 3 being announced the most notables. Our 10-yr note rallied over .5 in price, closing at 1.70%, and with the new lows in Treasury yields came new record highs on MBS's like 30-year FNMA 3.0%, 3.5% and 4.0% coupons.

There is nothing exciting scheduled today for economic news, and the 10-yr is currently at 1.72% and MBS prices are worse by about .125. Next week might be slow ahead of Memorial Day, and the focus seems to be on the Facebook IPO. With that in mind...

A Hypothetical Letter from Mark Zuckerberg On the eve of Facebook's IPO:

Dear Potential Investor:
For years, you've wasted your time on Facebook.  Now here's your chance to waste your money on it, too. Tomorrow is Facebook's IPO, and I know what some of you are thinking. "How will Facebook be any different from the dot-com bubble of the early 2000's?"
For one thing, those bad dot-com stocks were all speculation and hype, and weren't based on real businesses.  Facebook, on the other hand, is based on a solid foundation of angry birds and imaginary sheep. Second, Facebook is the most successful social network in the world, enabling millions to share information of no interest with people they barely know.
Third, every time someone clicks on a Facebook ad, Facebook makes money.  And while no one has ever done this on purpose, millions have done it by mistake while drunk.  We totally stole this idea from iTunes.
Finally, if you invest in Facebook, you'll be far from alone. As a result of using Facebook for the past few years, over 900 million people in the world have suffered mild to moderate brain damage, impairing their ability to make reasoned judgments. These will be your fellow Facebook investors.
With your help, if all goes as planned tomorrow, Facebook's IPO will net $100 billion. To put that number in context, it would take JP Morgan four or five trades to lose that much money.
One last thing: what will, I, Mark Zuckerberg, do with the $16 billion I'm expected to earn from Facebook's IPO?  Well, I'm considering buying Greece, but that would still leave me with $16 billion.  LOL.
Friend me,
Mark