Wells' Lobbying and Lawsuit; M&A and Layoffs Continue in the Name of Efficiency; U.S. Debt Levels Declining

Here is one growth industry - lobbying on behalf of Wells Fargo. But lobbyists probably won't be able to help Wells, which prides itself on, among other things, having never ventured too far down the credit curve while other big-name lenders did and by doing everything by the book, with headlines like "U.S. Government Sues Wells Fargo." "The U.S. government sued Wells Fargo over claims that the bank made reckless home mortgage loans for a decade. In a lawsuit filed yesterday, the government accused Wells Fargo 'reckless underwriting' and fraudulently approving thousands of home loans that caused large-scale losses for the government's FHA DE program.

Wouldn't it be fascinating to have Wells pull up its stakes, as it did with its wholesale operation, and let everyone else do FHA DE-related home loans? That's just what our government, and housing market, needs! (Hah!) Seriously, here is the story. The smart money has Wells fighting it, right after it takes the time and resources to train regulators and investigators what DTI, DE, LTV, and CLTV stand for, whether or not alimony should be included in the income calculation, and what "delegated" entails.

Yes, there are advantages to being a bank, and being a big bank. But there are some possible disadvantages - like that darned stress testing. The Federal Deposit Insurance Corporation (FDIC) announced publication of its final rule regarding company-run stress testing required by the Dodd-Frank. The rule applies to covered institutions with total consolidated assets greater than $10 billion which, as of June 30, there were 108 institutions. Here are 42 pages that you should acquaint yourself with.

Yesterday the commentary discussed banks, Basel III, and capital required to hold servicing. I received this note: "Rob, don't forget that there is a 10% haircut on MSR capital before you apply the risk weightings.  So under Basel III and before tripping the 10% tier one capital limit, banks will have to hold 28% capital against MSR's: 10% + (250% x 8% x 90%) = 28%.  Seems like the private equity guys now want a piece of the gain on sale economics in addition to cheap IO asset." Thank you very much for the observation!

I showed my cat Myrtle the FHFA Strategic Plan for 2013-2017. Before she sniffed disdainfully, she demanded to know if the strategic plan from when Freddie and Fannie were placed into conservatorship 4 year ago had any relation whatsoever to where things stand today, and then wondered if anyone's strategic plan from 5 or 10 years ago had any relevance to current conditions. I didn't have an answer for her, so she went off in search of slow, dim-witted mice. Myrtle's opinions aside, here is the plan through 2017.

Seriously, it is hard to form a long-term plan when every regulator, class-action lawyer, public interest group, Congress, and the financial markets are looking at your every move, and your fate is being determined by some of them. The FHFA must identify and respond to the agency's risks and take timely and appropriate supervisory actions to improve their conditions. One can argue that the FHFA does this through annual on-site examinations of each of the housing GSEs, off-site monitoring, targeted examinations of particular business operations, and focused program reviews. One can also argue that they might not be in the shape they're in had similar plans been formulated 10 years ago, and not by Congress or investors searching for yield and market share. And for private enterprise to have the uncertainty and dependence on actions taken by the Administration and Congress is "a tough row to hoe." So until things settle out, at least the FHFA is "the man with the plan."

But in a related story, last week officials ran into an unexpected roadblock as they try to bring private money back to a U.S. mortgage market. Fannie & Freddie were supposed to have issued a new class of mortgage securities by Sunday, according to plans set by their regulator, but they missed this goal partly because it became clear that new regulations under the Dodd-Frank Act were complicating the debt offering. The new securities, known as risk-sharing bonds, would offer a higher yield than standard mortgage bonds in return for bearing losses when loans go bad. For private investors, that would increase the risk but also the reward from the current system, in which F&F guarantee investors receive payments even when borrowers default. The Wall Street Journal reports that the plans have been delayed as regulators work to interpret part of the Dodd-Frank legislation that was meant to make interest-rate swaps and other derivatives used in many debt securities safer in the wake of the financial crisis. The last I'd heard, the plan may rest with the Commodity Futures Trading Commission. If debt securities tied to a derivative fall under the oversight of the CFTC--because Dodd-Frank gave the regulator broad new powers to police swaps trading--they could face additional compliance responsibilities and costs. Unintended consequences...

Turning to the U.S. economy, I often tell groups that whatever they're doing with their household finances is probably what the majority of Americans are doing. And word came out yesterday that U.S. debt has shrunk to a six-year low relative to the size of the economy as homeowners, cities, and companies cut borrowing. According to a story in Bloomberg, "total indebtedness including that of federal and state governments and consumers has fallen to 3.29 times gross domestic product, the least since 2006, from a peak of 3.59 four years ago. Private- sector borrowing is down by $4 trillion to $40.2 trillion. Reduced borrowing means there is less competition for the U.S. Treasury Department as it sells debt to fund spending programs."

Certainly borrowers are lowering debt loads. In the MBA's weekly figures, mortgage apps were down 1.2% last week with refi's off by 2%. (And wouldn't we expect a bit of a breather after the week before's 20% jump?) Investors are particularly interested in the metrics such as refi loan sizes (down to $222.8k), conventional refi's (-1.8%) and GNMA refi's (-2.9%). But over the last month conventional refinances are up by 23%. Watch those prepayments!

How 'bout some relatively recent news on the M&A front, investors, and vendors? These will give you a sense of recent trends, but for full details read the actual bulletin.

In Kentucky, the Bank of Henderson ($78mm of assets) will buy Harrison Bancorp (with "only" $50mm of assets) for an undisclosed sum. And in states that start with "a", the Bank of the Ozarks ($3.8B, AR) will buy Genala Banc ($170mm, AL) for $27.3mm ($13.9mm in stock and $13.4mm in cash). The moves toward consolidation continue - why pay two attorneys or compliance staffs when one will do? And speaking of efficiency...

Tennessee's First Horizon National ($25.5 billion of assets) is offering 400 employees (about 9% of its staff) up to one year's pay and benefits to voluntarily leave. The company is seeking to cut overhead and improve efficiencies as it consolidates business lines and locations. First Horizon is the parent company of First Tennessee Bank.

Plaza Mortgage reminded clients that they are required to present borrowers with the Anti-Steering Loan Options Disclosure in situations where "safe harbor" protection as defined by Federal Reserve Board regulations applies. The Disclosure must list the loan with the lowest interest rate, the loan with the lowest interest rate without "negative features" (negative amortization, prepayment penalty, et cetera), and the loan with the lowest dollar amount for origination points or fees and discount points.  Borrowers should be presented with the Disclosure as soon as the originator has enough information to complete the form, which should be signed by all borrowers listed on the Note at least one business day before closing.  Loans that do not comply are not eligible for purchase by Plaza.

In response to the recent assessment of the risk associated with higher LTV/CLTV loans, Mountain West Financial instituted a 95% LTV/CLTV cap for fixed-rate DU Refi Plus transactions.  Loans with LTV/CLTVs greater than 95% will be ineligible for lock extensions past October 12th. And MWF reminds lenders that, when assessing a borrower's creditworthiness, it is necessary to explain all collections and judgments in writing.  If an FHA loan is approved through the FHA Scorecard and the findings don't require collections to be paid, MWF will not require the collections to be paid provided that they do not affect title or the borrower's ability to make mortgage payments.  This also applies to conventional loans that are approved through DU or LP where the findings do not require the collections to be paid.

PHH Mortgage has clarified that Verbal Verifications of Employment for salaried borrowers completed using the Work Number must show that the information provided is less than 35 days old as of the Note date. Effective for Tier 3, 6, and 7 PHH conventional loans, life estate ownership is no longer considered an eligible form of ownership.

M&T Bank has made a number of changes to its government products, the first being the discontinuation of the Correspondent Fannie Mae HomeStyle program.  For FHA Streamline refinances, the annual mortgage insurance premium should not be included in the Streamline Refinance Maximum Mortgage Calculation, and loans with terms other than 15 or 30 years will require approval prior to being locked. Guidance on condo eligibility for FHA Streamline refinances has been updated to state that non-M&T-to-M&T transactions where the project appears on the FHA list as rejected, pended, withdrawn, et cetera will not be allowed; however, such transactions where the project appears on the list as "expired" will be allowed.  All FHA loans are subject to the FHA's updated policy on eligible Social Security income.  As per the VA's recent announcement about Federal Collection Policy Notices, M&T no longer requires this document.

Effective for all loans, M&T has established a $500 Maximum Principal Curtailment at closing.  Curtailments over $500 will result in the loan being returned to underwriting, where the loan amount must be decreased or the loan must receive a reissue of the TIL and a Changed Circumstance GFE as necessary.

EverBank, which previously announced that it would cease to accept new Freddie loans eligible for the Refinance Open Access Program, has extended the closing deadline.  All existing Freddie ROA loans that were locked on or before July 20th and delivered through the Loan Document Center by August 17th now have until October 31st to close.

With no substantive U.S. or world economic news Tuesday, rates pretty much wallowed around. The 10-yr closed around 1.72% (versus Friday's higher level) but agency MBS prices were worse about .125 by the end of the day. For excitement today we'll have the 1PM EST Treasury auction of $21 billion 10-yr T-notes and the 2PM EST release on the Fed's Beige Book. Currently the 10-yr is sitting at 1.74% and look for mortgage rate sheets to be perhaps a shade worse than Tuesday's.

Indian Wanting Coffee:
An Indian walks into a cafe with a shotgun in one hand and pulling a male buffalo with the other. He says to the waiter, "Want coffee."
The waiter says, "Sure Chief. Coming right up."
He gets the Indian a tall mug of coffee.
The Indian drinks the coffee down in one gulp, turns and blasts the buffalo with the shotgun, causing parts of the animal to splatter everywhere and then just walks out.
The next morning the Indian returns.
He has his shotgun in one hand, pulling another male buffalo with the other.
He walks up to the counter and says to the waiter, "Want coffee."
The waiter says, "Whoa, Tonto! We're still cleaning up your mess from yesterday. What was all that about, anyway?"
The Indian smiles and proudly says, "Training for position in United States Congress. Come in, drink coffee, shoot the bull, leave mess for others to clean up, disappear for rest of day."

VOTE IN NOVEMBER!