Fannie and Freddie Short Sale Change; LO-Realtor Comments; Specified Pool Primer - How to Pick Up an Extra Point or Two

This is a frightening statistic, probably one of the most worrisome in recent years: 25% of mortgage bankers and Realtors in the country are on medication for mental illness. That is scary - it means that 75% are running around untreated.

Statistics can be useful, sometimes not. On the "useful" side, the MBA will release its weekly mortgage applications index for the prior week. But how many of those retail applications actually close? It turns out that the MBA informally polls its members regularly on this question. Over the past 12 months, about 70% of purchase apps and 60% of refi apps pull through.  The purchase number has been steady, but the refi number is up from about 50% 2 years ago. But loan origination software vendor Ellie Mae, which processes over two million applications per year (around 20% of all American originations) reports that of a sampling of 33% of those originations, it was found that, from June to July, the overall percentage of applications that closed dropped from 46.2 to 45.8%. Not a big deal, but something to note nonetheless. The closing rate of purchase loans, however, rose for the third consecutive month to 58.7%, which suggests that more borrowers are in a position to buy property.

Freddie and Fannie (and the FHFA, of course) announced short sale changes scheduled for later this year. [READ: GSEs to Allow Short Sales for Borrowers Who Are Current on Mortgage] Starting November 1, measures will be put in place to make short sales of underwater homes easier for homeowners, including extending help to people who have financial difficulties but haven't missed mortgage payments. F&F are revising their short sale guidelines and delegating authority to their mortgage servicers to approve short sales as of November 1.  The new procedures are part of the Servicing Alignment Initiative which the Federal Housing Finance Agency has directed the GSEs to develop. It is hoped that the streamlined program rules will enable lenders and servicers to quickly and easily qualify borrowers, who do not have to be delinquent on their mortgages, to qualify for short sales.  As a further step to facilitate speedy sales, both of the GSEs have authorized a payment of up to $6,000 to incentivize second lien holders to allow the short sales to proceed. (Here is Freddie's bulletin.)

Every lender and Realtor out there knows that short sales can drag on for months, although they are not as difficult or lengthy as they were in previous years. This is in part due to a short sale needing both the holders of first and second mortgages, such as home-equity loans if they exist, must sign off on the deal because they are accepting less than the outstanding mortgage balance. Short sales typically sell for a 10% discount to ordinary homes, compared with a 30% discount for foreclosures, said Sam Khater of CoreLogic Inc. One part of the plan is for Fannie and Freddie to place a $6,000 cap (will it be enough?) on the amount of money holders of second mortgages can receive when the sale is completed, as a way to prevent the mortgage holders from haggling over their slice of the home-sale proceeds. Those second-lien holders would still be able to reject the sales if they saw fit.

Let's take a quick look at some related numbers. About 4.6 million borrowers with loans backed by Fannie or Freddie are underwater, with 80% of those homeowners having missed no mortgage payments. The biggest holders of second mortgages in the U.S. are Bank of America, Wells Fargo, JPMorgan Chase, and Citigroup. Short sales have been growing as a percentage of home sales. They made up 8.8% of home sales in May, up from 7.6% a year earlier and 6.5% in 2010, according to CoreLogic Inc.

"The National Association of Realtors applauds the Federal Housing Finance Agency for working with Fannie Mae and Freddie Mac to issue new guidelines that expand eligibility criteria and streamline the short sale process. The new guidelines would offer a more streamlined short sale approach for homeowners most in need, as well as enable lenders to quickly and easily qualify certain homeowners for a short sale who are current on their mortgage payments, yet suffer from specific hardships such as job relocation, increase in housing expenses, unemployment and disability. The FHFA guidelines will also consolidate existing short sales programs into a single uniform process and provide lenders and homeowners clarity on processing a short sale when a foreclosure sale is pending."

While we're on NAR, a while back the commentary discussed some LO - Realtor issues and comparisons. Two last notes on the topic. "Each profession has its problems and rewards.  Comparing the difficulties of each in an attempt to justify earnings is a meaningless exercise.  Each makes its contribution to a complete transaction (don't leave out the title companies, appraisers and all other involved vendors) and is compensated according to what the market will allow.  Well, at least this was the way it worked until compensation limits were imposed by the government on the mortgage industry in an attempt to protect the poor consumer...With all of our new disclosures including the three loan comparisons, my customers just sigh and sign the 28 forms attendant to each application, and they're no more informed than when they walked in the door unless they actually read and questioned the content of some of the documents (the most FAQ is why is the APR higher than my interest rate?).  With the regulations on this industry and risks of financial penalties increasing by orders of magnitude on a regular basis, it's amazing how many are willing to stay in it. We should all quit playing the "I work harder than you do" game and work to lessen government involvement in our industries."

And Martin L. from iServe writes, "I started in the Real Estate Industry at the age of 19 and it's almost all I know; 13 years as a producing Realtor, and the last 14 years I have been a successful LO. The debate over who works harder is at best a moot point. It has us watch the ball and not the powers that swing the ball. If we are to thrive and grow and I'm on the side looking to thrive, we must work together and become stronger using our collective resources - spending energy debating issues as unimportant as reality TV. Our focus and attention need to change from fear based to abundant and proactive thinking. So, let's join teams with Realtors, Lenders, Title, Insurance, Escrow and build a voice that addresses the foundation of our economy "Real Estate."

My cat Myrtle knows nothing about "specified pools." (And she doesn't seem overly interested in CNBC or Bloomberg Radio in the mornings when I am polishing up the day's commentary, either.) One would suggest that much of the origination side of the biz knows nothing about them either. A trader's note caught my eye last week. "In specifieds the story of the day was in Midget 3's, which saw the bid pop from 1-04 to 1-08 as there is finally deep real money sponsorship.  Midget payups are about 1-00 off their highs from Q1 and have lagged the payup increase on all other new production stories." Huh?

I also received this note on small loan sizes: "Since your email about the loan amounts below $85K I have been prospecting around to find lenders or brokers who specialize in smaller loan amounts. All I am finding is the opposite. In fact, it seems like a lot of lenders are downright punitive when it comes to smaller loan amounts. Many charge regressive add-ons that increase as the loan amount decreases. If there is such a premium on the secondary market for these loans why are they being charged up so heavily? Would you say this is indeed another victim of Dodd-Frank? Here in the lead aggregation world we see almost a third of our inquiries from borrowers below $100K and below 80% LTV. These are people who could be helped, but they are getting priced out by usurious lenders who don't think 108 on the back and a point up front is enough. It feels like there is a serious disconnect here! Don't get me wrong, I know a few lenders who can make this work, but by and large I have a better chance of selling bovine suppositories to a lender than leads for loan amounts below $100K." So observed Paul F. with Ybrant Interactive Media.

So what happens to loans that aren't average loans? What do the aggregators do with small loans, or high LTV loans? They, and the agencies, package them and sell them in separate pools. It turns out that investors will often pay higher prices, 2-3 points in some cases, for loans that will be on their books, and being serviced, for a longer period of time. The secondary market segregates pools into Ginnie, Fannie, or Freddie securities, and then, if an originator or aggregator has enough volume with certain attributes and interest rates, pools will be created filled with those loans. Small loan amounts (less than $175k), high LTV insured product, low FICO agency loans in some states, 20 or 10 year maturities are usually in the highest demand.

And some middle-market firms make an active market in these, often sharing the pay-up with the originator. For example, Tad Dahlke, Senior Managing Director with Banc of Manhattan Capital and who I met with recently, wrote, "Pay-ups continue to be on a one-way road higher, with the strongest gains coming in 30-year conventional 3.0s and high-LTV HARP-type paper. With the recent sell-off, payups have changed. 30-year Fannie 3.5s went from a high price of 106.25 in late-July to 104.75 today.  Weakness has been concentrated in 30-year conventional 3.5s, partly due to higher rates/lower prices and partly due to heavy supply in specified pools in this coupon.  Also, the 100% Refi 80-90 LTV sector has been struggling across coupons.  The spec pool market remains fluid, and payups are likely to bounce around some until the bond market finds a new range." If you'd like a current pricing grid from Tad, or more information on how specified pools work, write to him at tad@bomcapital .com.

Tuesday - another day, another set of chatter about Europe (the same problems and possible solutions that have been discussed for many months, and will be for many more months). But maybe the U.S. economy isn't doing so poorly after all. Or maybe most of the folks who can't make their payments have already stopped making them. Default rates for most types of consumer loans continued to ease during July according to the S&P/Experian Consumer Credit Default Indices released on Tuesday.  Only second mortgages increased from June levels and those were up only marginally from .73 percent to .75 percent.  First mortgage defaults were unchanged from June at 1.41 percent which is their recent low.

On the trading side, there wasn't much volatility. Maybe we're following Europe's lead and taking August off. Sources reported total originator selling around $2 billion, and hedging consisted of 60% in 30-yr 3.5%. The U.S. 10-year notes finished better by about .125 and closed with a yield of 1.80% while MBS prices were unchanged. Today we'll have, but not until 1PM CST, the minutes from the July 31-August 1 FOMC meeting are released. What investors will be focused most particularly on is any discussion related to additional quantitative easing, including the various policy tools available. We also have Existing Home Sales for July due out. In post-fed trading the 10-yr is nearly unchanged at 1.73%, and MBS prices are better.

Why the English Language is hard to learn:
The bandage was wound around the wound.
The farm was used to produce produce.
The dump was so full that it had to refuse more refuse.
We must polish the Polish furniture.
He could lead if he could get the lead out.
The soldier decided to desert his dessert in the desert.
Since there is no time like the present, he thought it was time to present the present.
The bass was painted on the head of the bass drum.
When shot at, the dove dove into the bushes.
I did not object to the object.
The insurance was invalid for the invalid.
There was a row among the oarsman about how to row.
They were too close to the door to close it.
The buck does certain things when does are present.