A Brave New World in the Secondary Markets? Non-agency Chatter; More M&A in Mortgage Banking; Flagstar Changes its Broker Comp

When I am bored, I dream about designing an entirely new secondary market for loans. And then I think about designing an entirely new medical insurance process & program, airline ticketing scheme, and postal service pension plan. Seriously, getting back to designing a new secondary market, the FHFA is asking for our help.

The market for non-agency loans continues to shrink - it is now at an 8-year low. There must be some opportunity there for someone, right? Here is the story. Those who follow this market know that clean, seasoned, prime non-agencies are now trading near par after a dive to about 50 in November 2008. That is a great return in the last four years. But at par they don't produce much yield, and leverage is not easy to obtain - perhaps the price rally will continue and they will begin trading above par in a yield deprived world. And remember supply and demand: the non‐agency market size is now 1.6% smaller at $970.4 billion as of September remittance period, down from $985.8 billion in August and $1.001 trillion in July 2012. The market size has declined by an average of 1.4% per month over the last year.

A while back John Wilen from Debtwire wrote me, "People need to keep in mind that non-agency RMBS backed by jumbo mortgages are completely different than RMBS backed by subprime mortgages. Jumbos were typically backed by mortgages to prime-quality borrowers who wanted to borrow more than agency limits will allow (as opposed to Alt-A or subprime borrowers). Jumbos have traded at high prices throughout the crisis; some trade at or near par. Subprime RMBS, on the other hand, trade much lower. For instance, in their latest report, Barclays analysts have Jumbo non-agencies trading at average prices of 96 cents on the dollar (fixed) and 83 (hybrid fixed-floating). Subprime AAA's, in contrast, trade at an average 62 price. We have dealer talk on an Alt-A/Subprime BWIC out today at 20 cents-70 cents, depending on the bond. People are buying these subprime and alt-A bonds because they think they're priced at levels that are significantly over-estimating the losses the underlying mortgages will actually take, particularly given that housing prices have stabilized and are now improving in many areas."

"Rob, I can see potential trouble ahead from Blackstone and others buying up all these properties. I am not sure there is a great alternative, but my concern is that say they buy X number of homes in Anytown, USA.  This purchase represents a large percentage of homes within a 5-mile radius. When they go to sell, and all the comps are previously Blackstone-owned properties, might lenders not be squeamish about lending on these because Blackstone could be setting artificial prices?  If the loan goes into default, how would a lender know that the appraised value will hold once the new buyers are no longer BS, rather an open, public market?"

Speaking of appraisals, anyone who thinks that there are no trends in the appraisal biz should listen up. Mike Ousley with Direct Valuation Solutions (DVS), a new firm offering a cloud-based lender platform for appraisal ordering and fulfillment, writes "Rob - it's been a few years since HVCC burst onto the scene and literally hundreds of AMCs entered the market.  Our interviews with lenders has indicated that while AIR-compliance was addressed, many other issues arose; like the issues of accountability to the lender by the appraiser, getting further from the appraisal solution and seemingly playing the old game of telephone where going through so many intermediaries complicates the communication between the underwriter and appraiser.  In the end, everyone has more frustration - from the appraiser getting paid less and given less time to complete their assignments due to the delays inherent in the assignment process, to the lenders feeling left out of the transaction and not being heard because they have to communicate through a third party to get conditions met or questions answered.  The answer might be utilizing technology platforms such as DVS' to bring these functions back to the lender and accomplish AIR-compliance without the middleman."  (If you'd like to find out more about DVS, visit www.directvaluationsolutions.com.)

Wednesday's Old Republic release, basically saying it would police itself, prompted this response from Andrew Liput, president and CEO of Secure Settlements. "Secure Settlements passed the 3,500 mark for agent application activity this week.  We also now are working with four warehouse lenders and more than 75 mortgage banks that are outsourcing closing agent risk management to our firm.  The implementation of the process has already provided evidence that vetting works at weeding out bad actors.  When we beta tested approved agent data for major banks and warehouse lenders, we knocked out 23% of their agents for high risk issues such as unlicensed status, active fraud litigation, and expired or non-existing insurance or bond coverage.  However now that the process is in place the knock out rate has dropped to 3%.  To me this means that agents with serious background issues are not applying, aware that a comprehensive risk management evaluation and monitoring of their identity and credentials would bring serious issues to light.  In addition, we have the ability to monitor progress in each application and have noticed a significant number of applicants who abandoned their efforts after reaching questions regarding past bad acts."

We'll turn now to some recent M&A, lender, and investor news, which never stops. These recent events should give you a flavor for what is going on - for specifics view the actual bulletin.

Florida based residential mortgage, lender FBC Mortgage announced that it has signed a definitive agreement to merge with a subsidiary of Sterne Agee Group. FBC is headquartered in Orlando and has over 200 employees throughout Florida and another 15 in Denver. It is licensed in 15 states with 4 additional states pending, and originates loans both through retail and wholesale lending channels with an estimated 2012 volume of $1 billion. Sterne Agee, on the other hand, was founded in 1901 and is one of the nation's largest and oldest privately-owned financial service companies. Combined the two entities will have 1,500 full time employees in 65 offices throughout the United States. "We are very excited to be able to offer our services to Sterne Agee's 500 community bank clients."

Flagstar Bank changed its Loan Originator Compensation policy. For borrower paid transactions, "Borrower-Paid compensation cannot exceed the Flagstar-Paid total compensation amount, effective with locks on or after October 8, 2012. For those customers that only choose borrower-paid and do not have a compensation schedule entered into our system, you will be required to enter a compensation schedule." And for Flagstar paid compensation, "Effective with locks on or after October 8, 2012, Flagstar will be limiting the Flagstar-Paid compensation schedule to 325 basis points plus a reasonable Flat Fee (optional). Customers that currently have a Flagstar-Paid compensation schedule that exceeds 325 basis points will be required to input a new compensation schedule." "Customers choosing to utilize the Flat fee feature in addition to % of the Loan Amount in Basis Points may be required to provide an explanation and/or supporting documentation for the flat fee amount. Customers that have entered in a compensation schedule only utilizing the Flat Fee will not be required to submit an explanation and/or supporting documents." And "Customers that choose to only enter in a Flat Fee amount (no bps) will also need to consider the loan size amounts originated to submit a compensation schedule within 325 basis points.  An explanation and/or supporting documentation will not be required when utilizing the Flat Fee without a % of the Loan Amount in Basis Points. Any transaction that is not in compliance with these requirements will not be permitted to fund."

Carrington Mortgage announced that it will be revising its pricing structures for conventional conforming products in response to the g-fee increases and that the new fee will be built into the base pricing for all locks by October 1st.  Any Fannie or Freddie products locked before September 16th that require an extension to fund after October 16, 2012 will be subject to a 50 bps price adjustment, and all other extension costs for loans locked on or after October 1st will be subject to the existing fees listed on the Carrington rate sheet. As of Monday, September 17th, Carrington required an AVM on all FHA Streamline loans for borrowers with FICO scores under 640.  This will be ordered by a Carrington underwriter and included in the file at the time of underwriting.  It should be noted that the LTV of FHA Streamline loans without appraisals may not be more than 115% of the value disclosed on the AVM.

MERSCORP Holdings, Inc. is sending trainers and regional directors on the road during the next few months for workshops on quality assurance, compliance, and general company information. These half-day workshops are open only to active members of the MERS System, MERS Commercial and the MERS eRegistry. The MERS Western Regional Workshop will be held in Concord (San Francisco), Calif. on Tuesday, Oct. 16, and will be followed by the MERS South/Central Regional Workshop in Grapevine (Dallas), Tex. on Thursday, Nov. 8.  For more information and to register to attend, members can log in to https://members.mersinc.org using their MERS OnLine credentials, then go to "Events."

Want to do FHA & VA loans? Lenders looking to renew their FHA approval will be subject to increased net worth requirements, which will go into effect for all lender fiscal years ending after May 20, 2013.  Depending on their level of participation in FHA loan programs, lenders will be required to have an adjusted net worth of at least $1-2.5 million. The VA has announced that a Federal Collection Policy Notice (Form 26-0503) is no longer necessary when Form 1003and the HUD/VA Addendum have been used.

What securities are the Fed buying? The loans, and interest rates on those loans, certainly translate into what is happening in the secondary markets. Originators are making a vast majority in 3%'s now (3.25-3.625% loans) while the Fed has materially shifted their purchases down to 3% (with a touch of 2.5%) and traders report that "real money" accounts are following suit as well. And at this point there is little reason for home loan rates to move higher - so investors shouldn't "fight the Fed." Fed purchases for the week ending October 3 were about $19 billion, or about $4 billion a day. In total transparency, the Fed increased its gross purchases of 30-yr conventional 3's to 50% of the total compared to 43% the prior week. This was accompanied with a decline in 3.5's to 9% from 24%. The overall share of 30yr conventional securities (Fannie & Freddie) declined to 59% from 67% the week before. For the first time, the Fed also purchased $100 million in Fannie 2.5's. The purchase share of Ginnie (FHA & VA) 30-yr 3's also increased to 13% from 10% the week before, while 3.5's remained at 6-7%. The Fed did not purchase any Ginnie 15-yr securities.

Yesterday we had a spate of price changes in the afternoon and mortgage banker selling picked up as Treasuries sold off with the 10-year note marked down .375 in price, closing at 1.67%. Given the low mortgage rates, prepayments/early pay-offs of recently originated loans (2011 and 2012) are expected to increase, and this is reflected in the recent refinance business. Thomson Reuters shows that MBS prices closed lower/worse on current coupon (impacting rate sheets) between .250-.375.

Remember that the markets are closed on Monday for an early Columbus Day holiday. And today we had the September employment report, which could easily help determine the direction of the election. Nonfarm Payrolls had a call of +115k with the unemployment rate ticking up one-tenth to 8.2%. They came out +114k, and the Unemployment Rate dropped to 7.8%! July and August numbers were revised higher by nearly 80k. How did we get to 7.8%, a level below where Obama took office? Many already believe the number was tweaked, based on the household telephone survey... regardless, it will give Democrats something to hang their hats on. In the meantime, the 10-yr is up to 1.72% and MBS prices are worse.

An 80 year old woman was arrested for shop lifting.
When she went before the judge in Cincinnati he asked her, "What did you steal?"
She replied, "A can of peaches."
The judge then asked her why she had stolen the can of peaches, and she replied that she was hungry.
The judge then asked her how many peaches were in the can.
She replied, "6."
The judge said, "Then I will give you 6 days in jail."
Before the judge could conclude the trial, the woman's husband spoke up and asked the judge if he could say something.
The judge said, "What is it?"
The husband said, "She also stole a can of peas."