BofA vs. U.S. Government; Big Banks Becoming Bigger; How Will Ed DeMarco Cast his Ballot?

This short video isn't funny in the least, but should not be missed for anyone in the financial services sector, IT, or anyone else for that matter interested in privacy issues.

Remember a few years back when Countrywide, and Bank of America, would flex their muscles in front of their clients? Like, "We'll give you a great price, but we demand 50% of your volume be sold to us." And then there was, "We'll give you a warehouse line, but for our product only." That whole karma thing might just be for real. Looking at the big bank deals over the last 3-5 years, some worked out better than others, putting some banks at a disadvantage. An analysis by the WSJ finds Countrywide has cost Bank of America about $40 billion since the deal was closed. (Chase/WAMU and Wells/Wachovia did not go quite so badly, obviously.) And now Bank of America is being sued in Federal Court for civil mortgage fraud in a complaint seeking civil penalties as well as treble damages and penalties. The suit alleges that Fannie Mae and Freddie Mac lost over $1 billion because of defaulted loans fraudulently sold them by Countrywide Mortgage and BOA. The suit alleges the from at least 2007 through 2009 implemented a new loan origination process called the "Hustle," which was intentionally designed to process loans at high speed and without quality checkpoints, and which generated thousands of fraudulent and otherwise defective residential mortgage loans sold to Fannie Mae and Freddie Mac (the GSEs) that later defaulted.  The Hustle continued under the ownership of BofA. Ah, fate...

Many folks wonder if U.S. banks are going to suffer a different fate due to Basel III. European Union banks may get an unfair advantage over global rivals because of the bloc's failure to apply international capital rules properly. The Basel Committee on Banking Supervision said in an unusually blunt report that EU rules for implementing the committee's Basel III bank capital accord being phased in from January are "materially non-compliant" in two crucial respects. Banks could end up holding too little capital against exposures to risky assets like low-rated government debt, or their buffers may not be of high enough quality to absorb losses in a crisis, the committee said. Although the news isn't "fresh off the ticker," it still holds true.

A month or so ago I had dinner with some executives from Scott Valley Bank in San Francisco, and we were talking about bank concentration. I was told that currently the top 10 banks in the U.S. hold 85% of the assets! (In a separate conversation about banking with Phil Hudson of Aspen Consulting, I learned that the top 10% of depositors generally account for 70% of the deposits while the bottom 50% of depositors usually account for about 2% of the deposits - which are often the most unprofitable due to pricing.) Sure enough, large banks have absorbed so much in total industry assets that those over $10 billion now control 80% of all assets and the top 660 banks control 90% of all assets. "That means the remaining 6,586 community banks are fighting tooth and nail for the remaining 10% of assets. Clearly the largest banks control the assets in the industry, but more concerns surface when you consider community banks are so reliant on net interest income to drive performance. Banks with $1B or less in assets derive 80% of total revenues from net interest income. That is tough when you consider the very largest bank competitors out there have just reported 3Q net interest margin (NIM) levels at the lowest levels in more than a decade. Such tight NIM is driving fierce competition for loans, so the sooner banks take action to try to stabilize the loan portfolio, the better" per Pacific Coast Bankers' Bancshares.

I guess Ed DeMarco won't be voting for President Obama. "If Mr. Obama wins re-election, Mr. DeMarco's days may be numbered, with senior White House officials quietly telling housing industry activists in recent weeks that he will be replaced." Ed's been there since 2009. Here you go.

It's time for a little recent MI, bank M&A, and investor news. These relatively recent tidbits will give you a flavor for what's happening.

Radian was a big presence at the Chicago MBA conference, spreading the news that it expects to make a profit in 2013. Excellent! National MI was certainly a big presence as well. As folks may be aware, the company is being sued by Arizona, with the lawsuit centered on PMI and its employees. But here is some fresher news on National MI.

The bank M&A news continues - grow, shrink, or merge! (Watch for this to pick up in mortgage banking in the next few years.) Washington's Sterling Financial will buy California's American Heritage Holdings (holding company of Borrego Springs Bank). Pennsylvania's F.N.B. Corp. ($11.6 billion in assets) will buy Annapolis Bancorp ($437mm) for $51mm in stock. BBCN Bancorp ($5.1B, CA) will buy Pacific International Bancorp ($209mm, WA) in an all-stock transaction valued at about $8.2 million. With all that in mind, and just in the last week, SNL Financial reports the 175 bank and thrift mergers announced through 3Q have gone at a multiple of 114% of tangible book vs. 101% in 2011.

Fannie Mae has plans to adjust the required interest rate for standard modifications with pre-modification mark-to-market LTVs of 80% and over.  The new interest rate must be implemented for Trial Period Plans effective on or after December 1st; servicers, however, are encouraged to implement the revised rate for Trial Period Plans effective on or after November 1st.  See www.efanniemae.com for the updated required interest rate and note that modifications approved at the prior rate may not be resubmitted for approval at the new one.

Effective October 13th, Fannie updated eligibility requirements such that existing loans with investor-paid mortgage insurance sufficient to meet the credit enhancement requirements for loans with LTV ratios over 80% can qualify for DU Refi Plus.  This is provided that the policy can be converted to borrower- or lender-paid coverage; if the insurance can't be converted, the loan remains ineligible.  Certain loans covered by investor-paid policies with Triad Guaranty Insurance Company will also remain ineligible.  This doesn't change anything for existing Refi Plus loans whose investor-paid insurance satisfies the credit enhancements for LTVs over 80%, but Fannie encourages servicers to keep an eye out for changes.

As part of the recently announced HARP 2.0 enhancements, Fannie has updated the list of eligible employment, base pay, overtime, bonus, commission, self-employment, alimony, child support, rental, retirement, pension, Social Security, and temporary leave income documentation methods for DU Refi Plus II Same Servicer, Other Servicer, and Value Plus loans.  The required documentation for verification of retirement accounts; trust accounts; secured borrowed funds and gifts; stocks, bonds, and mutual funds; and checking, savings, certificate of deposit, and money market accounts has been revised as well.  The enhancements also state that proof of asset liquidation is not necessary even if borrowers must pay closing costs and that borrowers who are being removed through refinance transactions are no longer required to be removed from the property deed or title.

Wells Fargo has updated its Market Classification List, the latest version of which is available via the Wells Fargo Funding website.  The updates affect all Best Effort registrations, Best Effort locks, and mandatory commitments dated October 15th and after.

As a result of the GMAC Market Portal changes at the beginning of October, Florida and Nevada are now eligible for the Maximum Market upgrade of 10% LTV/CLTV permitted for D Markets.  Arizona and Michigan have also been upgraded to the C Market; existing credit guidelines still apply.

With the implementation of DU Version 9.0, Franklin American updated its guidelines on maximum LTV/CLTV/HCLTVs for ARMs, appraisal documentation recommendations, property inspection waivers, minimum employment and income documentation requirements, minimum documentation on LP loans, disputed trade lines, conversion properties, and the Funds section in the Underwriting Analysis Report for all relevant loans.  The FAMC pricing engine will be updated accordingly, as will the FAMC online manual, which had the changes on October 19th.

Affiliated Mortgage has added several names to its Unacceptable Appraiser List, which is effective for all loans with underwriting decisions dated October 11th and after regardless of lock date.  The updated list is accessible here.

Pinnacle Capital reminded clients that all automated findings should be included in submission packages; packages without findings will be considered incomplete and held at the registration stage.  PCM will run LP separately, but findings should be included for informational purposes, and if using DO, clients should authorize the findings to be released to PCM.  PCM Platinum may also be used to run automated findings.  In addition, clients are reminded that all borrowers whose names are listed on the Note should be presented with Anti-Steering Loan Options Disclosures as per Regulation Z.

The Pinnacle appraisal pricing matrix has been updated.  The updated fees are effective for all loans originated on or after October 8th.

As expected, the Fed did not make any major policy changes as yesterday's 2-day traditional meeting wrapped up. The policy statement was largely unchanged with word choice still slanted towards concerns over slow growth, no change to a 0% overnight rate into 2015, no change with the $40 billion/month MBS purchase program serving to keep mortgage rates down and supporting real estate loans, and "Operation Twist" continues through year-end.

So LO's and mortgage companies continue to count their blessings that the Fed will be buying this much in residential mortgage-backed securities indefinitely until the employment market "improves substantially". But what's a bank to do? QE3 has served to drive down the yield on mortgage backed securities significantly, and with MBS a major holding in most bank investment portfolios, finding new purchases to replace cash flows is proving challenging. Every loan officer knows that they're refinancing borrowers from 2011 and earlier this year, and as a result prepayment speeds have increased. But for most community banks, loan growth is difficult and margin compression has become a major concern. Banks should be working on plans to address this low rate environment for a few more years.

Meanwhile, over in the housing market, yesterday we learned that New Home Sales were up 5.7% in September, much stronger than "the experts" expected and hitting a 2-year high. The median sales price of new houses sold in September 2012 was $242,400; the average sales price was $292,400. The seasonally adjusted estimate of new houses for sale at the end of September was 145,000, about a 4.5 month's supply at the current sales rate.

Residential agency MBS prices were lower/worse a shade, by the end of the day, and the 10-yr closed at 1.77%. No volatility is better than rates sliding higher. Maybe we'll muddle around here until next Friday's unemployment data. I did hear something about an election coming up ("vote early, vote often!")

Fixed income markets took a beating overnight as, as one trader put it, "real money was good sellers/payers of 5 to 10s. The recent strength of the yen and the overnight break of the 200-day moving average on 10- T-notes have prompted some real money accounts to liquidate US rate products." Not helping was today's fun & games with Durable Goods for September (+9.9%, higher than expected) and Jobless Claims at 369k, down from a revised 392k, so down 23k! At 7AM PST the cavalcade of housing numbers continues with the National Association of Realtor's Pending Home Sales Index, and later we'll have a $29 billion 7-year note auction. The 10-yr is up to 1.83% and MBS prices are worse about .250.

(I have a short joke today to give you time to watch that video mentioned in the first paragraph.)
Two brooms were hanging in the closet and after a while they got to know each other so well, they decided to get married.
One broom was, of course, the bride broom, the other the groom broom.
The bride broom looked very beautiful in her white dress. The groom broom was handsome and suave in his tuxedo. The wedding was lovely.
After the wedding, at the wedding dinner, the bride-broom leaned over and said to the groom-broom, "I think I am going to have a little whisk broom!"
"IMPOSSIBLE!" said the groom broom. "WE HAVEN'T EVEN SWEPT TOGETHER!"

(Sounds to me like she was sweeping around.)