Why the Industry Cares About this Eminent Domain Thing; Investor Updates

Earlier this week I was in Ontario, visiting the headquarters of a well-run mortgage shop, so this note was very relevant: "Rob, what are you hearing with this eminent domain thing? I am a two-person broker in Iowa - why should I care about what happens up 'the mortgage food chain' in California - the land of fruits and nuts?" Remember, the architects of this thing were smart enough to know that they couldn't pick on the Agencies or GNMA, so they have only picked a fight with SIFMA and left the Goliaths to warily watch and wait from the sidelines.  I anticipate that if it goes into effect in San Bernardino, and Ontario and Fontana, then SIFMA would either come out with disclosure requirements around loans in certain geographic areas within pools, or around requiring certain areas to be put in specified and separate pools, or perhaps the rating agencies would take care of it by torpedoing the ratings, or better yet, not rendering a rating on such a pool. So then the loan market dries up because there's no bid, and then we know what happens next: investors pull out and the borrower pays the price. And one has to ask, "Where is the money coming from to fund this effort?" And what non-agency servicer is going to tell this group that a borrower is behind?

But the use of eminent domain to seize, and then restructure, underwater private-label mortgages would result in more than just losses to private investors. Fannie Mae, Freddie Mac and the Federal Home Loan Banks are also major investors in private-label securities and they too would suffer if the county took over what is estimated to be 150,000 underwater mortgages. It's a very bad precedent - just try coordinating that with supposed long-term plans to reduce the government's role in housing by turning as much as possible over to the private sector. And does it put the county in charge of FHFA? I don't think the staff would care for that very much. (The Housing and Economic Recovery Act of 2008 stipulates that while acting as conservator, FHFA "is not subject to the supervision or direction of any other agency.") San Bernardino County caused a ruckus with bond investors when it created a Joint Exercise Powers Authority last month in agreement with the cities of Fontana and Ontario to devise a Homeownership Protection Plan. San Francisco venture capital firm Mortgage Resolution Partners, led by CEO Graham Williams, is backing the plan after (per American Banker) it had "pitched the eminent domain proposal to several California cities, singled out performing but underwater loans in private-label securities, in which the borrower is still paying their mortgage but owes more than the home is worth."

AB's article goes on, "Pimco's Scott Simon says the venture capital firm targeted private-label securities, which make up just 9% of the total market for first lien mortgages, because trustees of the securities typically take a passive role and would be less likely to take legal action. 'What they did that was smart in going private label because if they went after the GSEs or bank loans, lawyers would go after them instantaneously,' says Simon. 'The structural disadvantage is it's harder to sue, and the trustees don't care and they aren't paid enough to do anything.' Graham Williams says his firm singled out private-label securitizations 'because the owners of those other loans have the ability to execute this program on their own, while securitized trusts are prohibited from executing this program on current loans.'" And you can bet borrowers will see their costs go up.

Lastly, as Bank of America/Merrill Lynch's Chris Flanagan points out in a well-done research piece, "From a game theory political perspective, we think San Bernardino has strong incentives to use eminent domain as a tool - and therefore, we believe will likely do so. If the County is successful and the program works, it will be a major achievement for the elected officials who choose to use it. If they fail, they can say "we fought the good fight and lost to the entrenched powers that be," a scenario that in our view probably does not have much downside for an elected official...Once attempted, we would anticipate extensive litigation over the use of eminent domain (given the statements of interested parties) and that the key issue would likely be the determination of fair value of the mortgages. We think there could be as much as a 30-50 point bid-offer on what constitutes fair value for the mortgages, and it will be up to the courts to settle the difference." Just what our industry needs...more time in court.

Here, as is nearly becoming standard, are some relatively recent updates from investors. As I warn folks, these will give you a flavor for current trends but for exact details read the bulletin.

In the rumor mill, SunTrust's Correspondent Division supposedly laid off a sizeable number of its correspondent sales force. I will repeat that this is a rumor only, but would not be good news for a variety of reasons, and seems somewhat counterintuitive given current volume levels and profit margins.

Speaking of SunTrust, the SunTrust Mortgage Limited Project Review Condominium Questionnaire (COR 0212LTD) in the Correspondent Seller Guide has been revised. The revised questionnaire maximizes the ability to approve condominium projects submitted under this review method for conventional mortgage loans.

SunTrust announced that HUD is rescinding their new derogatory and disputed account guidelines that they previously announced. Fannie Mae changes the terminology for one- and two-time closings to single- and two-closings. Fannie Mae also adds a requirement to single-closings where documents are over four months old that borrowers must have a 700 credit score to avoid requalification. Single-closing, renovation and tear-down loans are ineligible as cash-out transactions. As a result, borrowers cannot include demolition costs or expenses paid by the borrower during the renovation in the loan amount. SunTrust Mortgage, Inc. removed the requirement to confirm fidelity insurance coverage for condominium projects under the DU Refi Plus loan program.

SunTrust has clarified that, as part of its 60-day lock special, it will be matching the 45-day pricing after the 5th business day after the loan was locked, provided that the appraisal has been ordered and the file has been uploaded to Trio.  Loans will not qualify for the pricing incentive if the appraisal has not been ordered or the file uploaded by this deadline.

Chase made changes to the following: Price adjustment for government loans for all pricing types with credit scores 660 to 679, price adjustments for FHA High Balance commingled with other loan types in AOT and Direct Trade commitments, and order of appearance of government price adjustments by credit score on daily Rate Sheet. Also, Freddie Mac issued Bulletin 2012-11 outlining requirements for Sellers when initial loan disclosures are signed by the borrowers using electronic-signature technology. Due to these changes and Chase's preference to maintain an Agency-fungible pipeline, the policies defined by Freddie Mac will impact all conventional loans sold to Chase.

Nearly three weeks ago Chase, effective with Best Efforts loans, had revisions to the Chase Non-Agency Distressed Market table: increasing the maximum LTV/CLTV 5% for non-condo properties in 28 counties in Arizona, California, Florida, Michigan, New Jersey, Nevada and South Carolina. The investor also removed 34 counties from the distressed market list in Idaho, Illinois, Indiana, Michigan, Mississippi, North Carolina, South Carolina, Texas and Washington. It added Pueblo, Colorado to the distressed market list.

Effective with loans delivered for purchase review on or after July 11, 2012, Chase Compliance policy no longer requires rescission to be re-opened due to a finance charge violation.

Chase announced changes and clarifications to their foreign borrower policies and guidelines, including: Temporary resident documentation requirements and new policy and process for submitting documentation to Chase for review, when required. The Federal Housing Finance Agency (FHFA) announced the winning bidders have been chosen in a real estate owned (REO) pilot initiative. FHFA undertook this initiative to help stabilize communities and home values in areas hard-hit by the foreclosure crisis. As conservator of Fannie Mae and Freddie Mac, this pilot program will assist in achieving FHFA's objectives and help to maximize the benefit to taxpayers. The transactions are expected to close early in the third quarter. FHFA launched the pilot program in late February, and market response has been robust with strong qualified bidder interest on the purchases of approximately 2,500 single-family Fannie Mae foreclosed properties in the second quarter. The initiative was begun after review of more than 4,000 responses to a "Request for Information" on how to sell REO properties of Fannie Mae, Freddie Mac and the Federal Housing Administration.

CitiMortgage reminded customers that, when completing a Verification of Mortgage, they should ensure that documentation of mortgage or rental payment history included in the loan file is dated no more than 120 days from the note date, that the mortgage data and documentation provided matches the information on the borrower's credit report, that the payoff statement is included in the file, that the borrower has made no more than two late payments in the past year, and that the loan file includes HELOC documentation where necessary.  Such errors result in post-purchase loan manufacturing defects.  Clients are also reminded that Citi will not purchase or refinance a loan whose restructuring has resulted in forgiveness of a portion of the debt or the application of a principal curtailment unless the new refinance loan meets all the DU Refi Plus requirements.

Citibank has amended several of its credit policies, one of which will permit co-op share loans secured by units in New York and New Jersey co-op projects requiring the payment of a "flip tax" provided that the project's legal documents permit such a tax.  This goes into effect for registrations dated August 1st or after.  Policy has also been updated such that all conventional and government loans registered on or after July 21st, bar DU Refi Plus and LP Open Access, are subject to Citi's updated exposure limits and mortgage loans that have previously been restructured are considered eligible provided that the new refinance loan meets all DU Refi Plus requirements.

With regards to appraisals, Citi has clarified that the same AMC may be used to complete a subsequent appraisal or field review in cases where there is a concern with the original report; however, the same appraiser or appraisal firm may not be used.

Folks are waiting for Fifth Third to "go west," i.e., show some interest in some new states. But in the meantime, Fifth Third has generated a new FHA Case Number Assignment form that includes a date field; all older versions of the form should be disregarded.

The Fifth Third rate sheet was updated.  The changes affect conforming, agency, and government transactions for loan amounts between $225,000-$300,000 and loan amounts over $300,000, along with conforming/agency products with LTV of 60% or less, conforming/agency investment property transactions, and conforming/agency transactions where the borrower's FICO score is less than 680.

Fifth Third has revised its Correspondent Selling Guide, condensing it into one comprehensive guide titled the Correspondent Seller Processing Guide and a separate section of underwriting guidelines.  The Correspondent Underwriting Guideline Manual, which includes information on borrower eligibility, income and employment, and credit, is now available on the Product Manual page of the Fifth Third website.

RETIRE WHERE?   Here are some of your choices - I keep receiving them from readers, and here is part 5 of 7.
You can retire to the Midwest where...
1. You've never met any celebrities, but the mayor knows your name.
2. Your idea of a traffic jam is ten cars waiting to pass a tractor.
3. You have had to switch from "heat" to "A/C" on the same day.
4. You end sentences with a preposition: "Where's my coat at?"
5. When asked how your trip was to any exotic place, you say, "It was different!"