Rating Agencies' Thoughts on Servicing Changes; More on Treasury and GSE's

Per the Mayans, we have four more months to live. But just in case the sun comes up on December 22nd, it's good to have some retirement money stashed. The largest 401(k) administrator in the U.S., Fidelity Investments, said the average balance of its 12 million accountholders was $72,800 at the end of June or 2.4% less than the end of March. USA Today reports 35% of unemployed people have pulled money from retirement savings in 2012. Meanwhile, analysis from 24/7 Wall St. finds things are ugly in some states for those aged 20 to 24 year old, where the states with the highest unemployment rates for this group in order are MS (22.2%); AL (20.2%); SC (19.9%); NC (19.6%) and TN (18.3%). I mention this because as the finance business has evolved, it seems that successful LO's, lenders, and Realtors are much more aware of their clients' needs, finances, and circumstances - and things can be pretty rough out there.

LoanSifter, a rapidly expanding pricing vendor, is yet again looking to fill another position, this time in their Underwriting department. Candidates for the Senior Product & Underwriting Specialist position should have secondary/underwriting experience in a multi-investor or multi-channel platform within the last year and have comprehensive knowledge across all product types. Candidates must be effective at working and communicating from a remote office. The link to its careers page is loansifter.com/careers.aspx for the full job description, and other opportunities within LoanSifter. Resumes can be sent to resumes@loansifter .com.

In Texas, the First National Bank of Trenton (FNBT) is seeking processors, funders, underwriters, closers and, loan coordinators/loan setup to support its continued growth. FNBT (fnbtrenton.com) is a National Bank that was founded in 1901.  The bank is primarily family owned and operated.   FNBT provides a Retail, Correspondent, and Wholesale Mortgage Lending program targeting established brokers, bankers and community/regional banks. It currently has an "all-star cast" and is looking for top candidates to add to its team. Interested parties should send resumes to careers@fnbtrenton .com.  All inquiries are confidential.

A quick, common sense, note on the proposed CFPB appraisal changes from an industry vet in Reno. "Why on earth does it make sense to have an additional appraisal just because you have a high interest rate loan? If someone has poor credit and pays a higher interest because of the credit issue, why would a second appraisal be beneficial or add any value to the file?  Am I missing something here?"

Moving over to servicing, and speaking of the Consumer Financial Protection Bureau, Moody's Investors Service released a report that linked a tide of new rules from the credit bureau to "costly" and "challenging" new costs for small to midsize servicers. According to Moody's, these servicers will likely encounter "significant hurdles" in moves to adopt the single point of contact strategy. Analysts William Fricke, Gene Berman, and Linda Stesney stated, "Many small servicers will find the cost of implementing the rules prohibitive, because the rules require them to change borrower notices, implement new contact strategies, update compliance procedures and make core system changes." Larger servicers will probably see little impact, especially as federal consent orders from 2011 take effect with the $25 billion settlement from earlier this year. A few changes may come down the pipeline for these servicers. Changes to billing statements, adjustment notices for adjustable-rate mortgages, and evaluations for forced-placed insurance policies, for example. But none of the changes will likely near the problems of cost for small to midsize servicers. "The cost pressure would be another factor supporting the ongoing consolidation in the mortgage servicing industry as well as the increase in the transfer of servicing to specialty servicers that are more equipped to handle loans in a 'high-touch' fashion," according to Fricke, Berman, and Stesney. This is similar to a report in April from Fitch which forecasted "increased operational, compliance, and reporting expenses" for servicers.

But once again, from a PR perspective, the CFPB has the consumer's interests in mind, and firmly stands firm behind the decision to roll out proposals for new servicing rules. Bureau Chief Richard Cordray said in a statement last week that the "rules would offer consumers basic protections and put the 'service' back into mortgage servicing."

Smarter minds than mine have had some time to ruminate on the Treasury's changes for the way it handles Fannie and Freddie. Initial headlines blared the words "wind down" but it is important to keep in mind that over the years, Freddie and Fannie developed dual traits: to guarantee mortgages, and to have mortgages in their portfolios. Arguably two separate functions, the changes target the portfolio and cash flow aspect, and it may be a good thing for mortgage originators, homebuilders and Treasury bonds as it delays reform of the two giant government-seized firms. Why would those smarter minds say that? Because F&F still may be around to guarantee mortgages, and set industry standards for documents, appraisal requirements, data requirements, and so on - which is a very good thing and something that investors need in the secondary markets.

First, Freddie has already been reducing its retained portfolio at an annualized rate of 22% since the beginning of the year and its current portfolio size is only $23 billion more than the $558 billion cap as of December 2013. The decline in Freddie's non-agency MBS and mortgage loan portfolios should be more than sufficient to meet its portfolio cap requirements. However, Fannie is likely to be forced reduce its agency MBS holdings at a faster pace than before. For a base case, some estimate that Fannie needs to reduce its agency MBS holdings by $70-$80 billion in 2013 while Freddie will have the option of keeping its agency MBS holdings unchanged.

Second, a few investors are concerned that Fannie or Freddie may be forced to sell non-agency MBS. On the other hand, there might not be any meaningful selling of non-agency by the GSEs considering that Freddie has a significantly larger holding of non-agency mortgage backed securities among the two GSEs but its retained portfolio size is such that it doesn't have to sell anything actively since current pay-downs are enough to meet its retained portfolio cap in December 2013. And third, any selling of agency MBS by Fannie is likely to be focused in higher coupon MBS (this is what they own) rather than in production coupons but this selling is unlikely to occur before year-end 2012.
 
The second important component of the announcement is that the 10 percent dividend payments made to Treasury on its preferred stock investments in Fannie Mae and Freddie Mac will be replaced with a quarterly sweep of every dollar of profit that each firm earns going forward. We view this step as indicating a stronger government support to the GSEs than before (Essentially, this change takes us a step closer to explicit government guarantee on GSE securities).

Yes, the Treasury Department announced a set of steps to change its financial backing of Fannie and Freddie - the new arrangement is where all profits from the firms make will be provided to the Treasury. This replaces the current system, where Fannie and Freddie pay 10% quarterly dividend payments to Treasury and must borrow from the government every time they don't have a large profitable quarter. We'll see what happens, but no one in our business wants to see either, and the roles they play, disappear entirely. The industry, however, can expect to see guarantor/guarantee (g-fee) hikes soon impacting all lenders, and these higher costs will indeed be passed on to borrowers. And the industry also wonders how these changes will impact the agencies' views on counterparty risk, and caps on sales volumes based on net worth. Stay tuned!

Here are some recent investor/lender/agency updates to give you a sense of where things are going. As always, it is best to read the actual bulletin, and yes, I am a little behind in some instances.

But in the last week brokers in at least one region received this informal note from their Stearns AE: "Effective Monday August 20, 2012 we are changing our policy on GFE reviews. We have been under a CFPB audit for the last 7 weeks and we were notified today that we are no longer able to accept files with non-compliant GFE's.  Please spend more time reviewing the GFE's (RESPA DOCS) BEFORE submitting to us.  We don't want to have to reject the file for non-compliance.  There will be no more emails asking you to correct certain items. GFE Common Errors: HUD requires all boxes to be completed (no blank boxes- please enter -0- or N/A). We see a lot of errors in IMPORTANT DATES:  Box #2 - 10 business days from date of initial GFE.  Box #3 - If not locked then N/A.  If locked, then term of lock.  Box #4 - If not locked then # of days.  If locked, then n/a. Fees- Do not under- disclose.  All loan programs are $850.00.  Streamlines are $595.00. Make sure your fee sheet matches your GFE. I hope everyone has tried the Initial Disclosure Portal which is now in your SNAP pipeline.  It is quick and seamless and we see a lot less errors on the GFE's when the Disclosure Portal is used. A few tips... If you lock after submitting your loan, and we haven't disclosed yet, you need to have two GFE's in your submission.  The original GFE, and the locked GFE, along with a COC for float to lock. Once we disclose, we will prepare all subsequent GFE's.

Old National Bancorp ($8.4B, IN) has announced it will sell 9 and close 18 of its 183 branches, as it looks to cut costs and further reduce it efficiency ratio (69.2% as of 2Q). The move follows 24 branch closures last year.

The FHA TOTAL Mortgage Scorecard User Guide has updated to reflect the recent changes and is now accessible. 

The Reference Guide article on "Unique properties" has been updated as well; the full revision may be viewed here.

FEMA has announced that disaster aid has been made available in Atlantic, Cumberland, and Salem Counties in New Jersey in the wake of the severe storms and straight-line winds that occurred in late June.

Freddie Mac has issued guidance that loans that qualify for the Relief Refinance Mortgage program using Home Value Explorer in place of a full appraisal must close prior to the expiry of the HVE value.  Should a loan fail to close before the HVE expires, it will require a new HVE value or full appraisal with a value that supports the transaction.

Freddie is now permitting cash-out refinance transactions within the six months following the purchase transaction provided that the transaction meets the delayed financing guidelines.  In order to qualify, the new loan amount must be less than the actual documented amount of the borrower's preliminary investment in purchasing the property; the purchase must have been an arms-length transaction and documented by the HUD-1, recorded Trustee's Deed, or recorded Sheriff's Deed confirming that no mortgage financing was used to obtain the property; and the source of funds must be documented through bank statements, personal loan paperwork, or HELOC on another property.

In training and events news:

Plaza Mortgage is presenting a webinar on Streamline 203(k) basics on August 21st.  More information and registration links can be found here.

For those interested in learning more about the FHA's Energy Efficient Mortgage program, webinars will be offered on August 22nd and September 13th.  The training, which is aimed at loan originators, processors, underwriters, brokers, and agents, will cover the program features and requirements as well as the Home Energy Rating System energy reporting protocol.  Registration: August Webinar or September Webinar
 
On the heels of the CFPB's recent activity, law firm Ballard Spahr has announced that it will be hosting a webinar discussing the Bureau's proposed mortgage servicing rules on September 6th.  The program will cover the scope of the rules; the proposed early intervention, continuity of contact, information management, billing statement, and new adjustment notice requirements; and the CFPB's larger plans for the mortgage servicing industry.  Register

The markets took a breather Monday, and trading volume was thin. And rather than waste your time, let's just say rates were a shade better on not much news with the 10-yr T-note closing at 1.81%. For this morning the U.S. 10-yr is sitting around 1.83% and in the early going agency MBS prices are down 4/32'nds or 11bps.

 
Good visual communication means not letting your message get lost in translation. Below are some translated messages that didn't quite hit the mark (part 2 of 2).
Moscow hotel - You are welcome to visit the cemetery where famous Russian and Soviet composers, artists and writers are buried daily except Thursday.
Swiss menu - Our wines leave you nothing to hope for.
Hong Kong advertisement - Teeth extracted by the latest Methodists.
Copenhagen airline - We take your bags and send them in all directions.
Acapulco hotel - The manager has personally passed all the water served here.