Freddie and Fannie Can Earn a Profit, Right? And their Double-secret "High Risk" Watch List of 300 lenders

"Rob, I'm a new LO in Connecticut. What's the scoop on this news about loans in my state being more expensive than others for home loans?" Under the FHFA's proposal, Fannie & Freddie would hike fees between 15 and 30 basis points on lenders in Connecticut, Florida, Illinois, New Jersey, and New York. During a foreclosure those states apparently have considerably longer time frames to obtain marketable title than the national average as well as costs that range between 9 and 18 percentage points above the national average.

State specific pricing, especially for aggregator's servicing released premiums, have been around a long time. (In fact, it is not hard to remember the days when newspapers would publish the average rates in different areas of the U.S., rather than a national average.) And it is no secret that the agencies are out to make profits, just like the rest of the industry, and rumored that many segments of their businesses have a goal to be self-sufficient in case they're eventually peeled off. Here is the link to FHFA press release. And here is the link to the actual notice.

But don't stop there! The FHFA's report on the "High Risk" Watch List at Freddie and Fannie is worth a gander. The report made a case study out of TBW, but provides information about how to stay off the list (wherever the list is - ask your rep). Go to http://www.fhfaoig.gov/ and look under "Current Activities" for "FHFA's Oversight of the Enterprises' Management of High-Risk Seller/Servicers".

Recently Edward DeMarco, Acting Director of the Federal Housing Finance Agency (FHFA) and thought to be a good guy by most accounts with whom I've spoken, sketched in a broad outline of the agency's vision for the future of the mortgage finance markets in the coming years. That future, of course, may or may not include Fannie or Freddie. It seems that the FHFA has three goals for its conservatorship: build a new infrastructure for the secondary mortgage market, gradually contract the GSEs' dominant presence in the marketplace while simplifying and shrinking their operations, and maintain foreclosure prevention activities and credit availability for both new and refinanced mortgages.

Any lender issuing Fannie securities is quick to notice that a new securitization platform for the secondary market is a key to this vision, but will also notice that a single, common securitization platform is not the same as a single security. The FHFA plans that this platform would be a utility that would outlast the GSE's.  DeMarco said he strongly believes in competitive markets and, as a utility, the platform should enhance liquidity, standardization, and transparency, all of which should foster that competition.   Whatever the structure of the secondary market of the future, certain key functions will need to be performed and in many cases, like developing data reporting standards, the standardization of such functions will benefit the overall market.

And taking an even further step back, the last FHFA semi-annual report to Congress included a section detailing, in financial terms, the fall of Freddie and Fannie. Are we being reminded that anyone who doesn't know history is doomed to repeat it? The GSEs' mission was to provide liquidity to the housing finance system. They did this primarily by supporting the secondary mortgage market through the purchase of residential mortgages from originators who then used the proceeds to originate more loans, either holding the mortgages in investment portfolios or packaging them into mortgage-backed securities (MBS). These MBS were then sold to investors, and with a fee, the GSEs guaranteed the performance of the MBS they sold.  The operations were financed through MBS sales and through funds borrowed from large individual, institutional, and foreign investors. The GSEs hold they maintained special accounts or reserves to which they made regular contributions called provisions for loan losses, as there will inevitably be defaults from some homebuyers. The fees they charged for their guarantees were intended to cover the small subset of loans that were expected to default and reserves were established for those losses - see where the gfees come in?

Upon default, loan servicers may commence foreclosure and take possession of the collateral property.  Upon completion of this process, the GSE erases or charges off the unpaid mortgage balance, debiting the corresponding loss reserves.  If the collateral property is subsequently sold the proceeds will offset losses.  When the housing market collapsed, losses on loans and guarantees vastly exceeded that loss-covering capacity. The GSEs had grown rapidly with only a thin capital cushion to provide protection against losses, and the capital they were required to hold met regulatory standards but fell well below the capital levels maintained by many large financial institutions (private money), eventually evidenced by rates of seriously delinquent mortgages they either owned or guaranteed exceeded any levels of the previous decade. And as we all know, since conservatorship the private sector has almost abandoned the secondary market and the GSEs and Ginnie Mae have stepped up to fill the void.

Of course, wanting to earn a profit leads to business decisions that aren't always popular in the industry - no surprise. I received this note: "Rob, there is a lot of informal chatter about sales caps. Some say that a policy exists, others say it is being formulated, still others say that it won't happen given the agencies supposedly wanting to cultivate more clients and the government not wanting to dampen any housing rebound. And I have heard that the MBA has had policy discussions with Fannie Mae. At our shop we think that the agencies will have to consider how selling servicing fits into this. More precisely, as best we can tell from the rumors, the sale of servicing doesn't currently provide relief from the potential cap. I understand the counterparty concerns that Fannie has, but this aspect of the new policy makes no sense.  Sale of the servicing transfers the sellers' reps & warrants to the servicer, so that reduces Fannie's exposure to the original seller. Hopefully any agency putting a cap in place during the next year considers this. Ironically, under the Bifurcated Co-Issue program, the seller's reps don't transfer to the servicer, so Fannie requires a significantly higher net worth for a seller to participate.  I guess they feel like they can have it both ways?"

But this note on the gfee increase: "I'm amazed at how many comments I've heard and read from the mortgage industry about the guarantee fees hurting the customers, borrowers, and consumers.  I'd like to know the last time 10 bps made a deal fall out or cause the borrower to not qualify.  Even if the lender has to increase rates by 1/8th to cover the cost, it's hard to say that a consumer getting a 3.625% 30 year fixed instead of a 3.5% rate is getting taken by the government.  Let's remember the government is the reason the rates are this low to begin with. Our industry can't have it both ways.  We can't have the government pressuring and keeping rates low while at the same time not expecting them to 'attempt' to be sustainable."

Turning to recent agency and investor updates and event announcements, I am very excited because Lindsay Lohan and Amanda Bynes have decided, as part of their work release program, to help with the investor updates. It turns out that, deep down inside, both of them feel very deeply about documentation, DTI changes, mortgage conferences, and program rollouts.

Washington State mortgage professionals - mark your calendars - the Washington Association of Mortgage Professionals (WAMP) 2012 Business and Humanitarian Leadership Awards (annual industry celebration) is being held at the Seattle Renaissance Hotel, Thursday, October 4th. Per the organizer, last year's event was very well attended and everyone had a great time, this year's event promises to be even more spectacular.  For additional information, and to register for the event, please visit www.myWAMP.org.

Many LO's are pleased about an alternative to documenting income for Refi Plus loans where payment increases will be under 20 percent.  Rather than requiring that at least one of the borrowers has a documented source of income, Fannie Mae will now accept verification of liquid financial reserves equal to at least 12 months of the new mortgage payment (PITIA). Documentation can be through one or more recent statement of liquid reserves in bank accounts, money markets, stock accounts, retirement savings accounts, or certificates of deposit.  Fannie Mae is also providing streamlined documentation requirements for other underwriting criteria for these loans: https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2012/sel1209.pdf.

Not to belabor the point, but Fannie relaxed HARP reps and warrants. Specifically, "the lender is not required to make any representation and warranty as to the value, marketability, or condition of the subject property." Documentation and borrower qualification regs were also loosened. One LO wrote to me, "Take that NAR!"

Citibank has revised its loan registration policy for large deposits.  In cases where an account was opened within 90 days of the loan application or the sum of unexplained deposits on the borrower's account statements over a 30-day period exceeds 25% of the total monthly qualifying income, the source of the funds must be fully documented and explained.  This will affect loans registered on and after September 22nd.

In compliance with recent Freddie policy changes, Citi has updated its eligibility requirements for condo projects, which now apply to all project review types.  The new requirements state that all projects currently embroiled in litigation concerning their soundness, safety, habitability, or functionality are ineligible. Litigation involving non-monetary neighbor disputes about rights of quiet enjoyment, for example, would not render a project ineligible.  Lawsuits where the litigation amount is known and the insurance provider has agreed to both cover this amount and provide defense are also acceptable.  As part of Citi's alignment with Freddie policy, all budget and legal document reviews for condo projects will be subject to the scrutiny of additional details.

Citi has clarified that a verification of mortgage must be obtained for each mortgage liability where the borrower is presently an obligor on the note secured by real estate and the mortgage is not disclosed on the credit report.  The mortgage must also be verified if borrowers are obligated on an undisclosed mortgage and their personal tax returns include mortgage interest deductions or payments.

The Citi requirements for tax-exempt income documentation have been updated to state that borrowers with tax-exempt and/or non-taxable income are to be evaluated using the same protocol as for borrowers with higher gross taxable income.  No additional documentation is necessary for borrowers who indicate that they did not file a tax return provided that the 4506T transcript backs this up.

Lastly, Citi reminded correspondents that it will accept Life of Loan flood certifications from Core Logic Flood Services at no charge, while loans submitted for purchase with life of Loan Certification from other determination services are subject to a $10 fee.

Well, the markets grind on. It is hard to be excited about economic news when we know the Fed is going to keep overnight rates near 0% for 2-3 more years, and are in buying billions of MBS every day soaking up the supply. But yesterday after the early going we learned that the Conference Board's index of leading economic indicators fell 0.1% in August, following an increase in July and a decline in June. "The U.S. LEI has declined in three of the last six months. While its six-month growth rate has slowed substantially, it still remains in growth territory due to positive contributions from the financial components including stock prices, yield spread and the Leading Credit Index." And the Philadelphia Federal Reserve Bank's general economic index improved to minus 1.9, higher than forecast, from minus 7.1 in August.

The weak news led to agency MBS prices being "higher and tighter" (to Treasury yields), and setting more price records. Hey, what's to stop more of that if originator supply is $2 billion per day and the Fed is buying $4 billion? MBS prices improved by about .250 - whether that was passed on to rate sheets remains to be seen - while the lowly 10-yr Treasury was basically unchanged at 1.78%. And in the early going today, with no scheduled news, we're unchanged from Thursday afternoon.

Perks of reaching 50, or being over 60 and heading towards 70 (part 1 of 2):

1. Kidnappers are not very interested in you.
2. In a hostage situation you are likely to be released first.
3. No one expects you to run. Anywhere.
4. People call at 9 PM and ask, "Did I wake you?"
5. People no longer view you as a hypochondriac.
6. There is nothing left to learn the hard way.
7. Things you buy now won't wear out.
8. You can eat supper at 5PM.
9. You can live without sex but not your glasses.