Changes in Correspondent Lending Landscape; Stats Show Very Slow Return of Borrowers that Default

With our without the storm damage, here in the U.S. there are 41 million potential trick-or-treaters (children age 5 to 14; see joke at bottom) across the United States. And they can be ringing doorbells or throwing toilet paper rolls at 115 million occupied housing units across the nation in 2011 - thanks to the Census Bureau for those numbers.

My wife said, "I think we should do something really scary for the kids this Halloween." I said, "We could take them to your mother's." Some think the future of our industry is scary - but it isn't. Our industry continues to evolve. Companies are certainly interested in moving into the void left by Wells wholesale, Bank of America, and MetLife. We can look for Nationstar, which some call "Wells-lite" due to the hiring of ex-Wells wholesale employees, to be a presence in the correspondent channel in 2013. And not the onesy-twosy best efforts business model, but an entire new correspondent lending channel with 100% mandatory and AOT execution with a goal (from what I've heard) of $24-30 billion in the first year. Redwood Trust has signaled its intention to move into the agency channel in addition to its success in jumbo securitization. And don't expect the existing correspondent lenders to continue to watch their best clients divert their pipelines to the agencies while doing nothing. We've already seen Wells beef up their operations centers. We can expect 9 of the top 10 correspondents (in the 2nd quarter: Wells Fargo, Chase, U.S. Bank Home Mortgage, Flagstar Bank, BB&T, Franklin American, Ally/ResCap (GMAC), SunTrust, CitiMortgage, and PHH) to lower their margins, remind clients about sales caps, pay attention to rumors of Fannie raising its minimum net worth to $5 million, increase operational efficiencies, and watch clients retaining servicing to grapple with capital issues. Are we having fun yet?

Housing advocates Bob Gnaizda and John Hope Bryant first made names back for themselves in 2005 when they warned of the impending housing crisis, but they've done something of a 180 and are now in Washington, D.C. and Wall Street voicing their support of a return to subprime lending. Granted, the prototype they're promoting is billed as "a responsible, alternative mortgage for less-than-prime borrowers," but it's the same general idea. Unsurprisingly, the backlash against the word "subprime" has been powerful, but the current regulatory climate has effectively redlined low- and moderate-income borrowers, many of whom are minorities.  Data from 2011 shows that black and Hispanic borrowers were not only more likely to be denied than white or Asian borrowers, they were also more likely to receive pricier loans.

Enter Dignity Mortgage, which would provide an option for "non-prime" borrowers who completed financial literacy training. Borrowers would also have to have incomes at least 120% below the regional poverty level and be looking to buy homes at 95% or less than the median price in the area.  The product would provide lenders with built-in protection by allowing them to charge 1.25% above the lowest prime for a 30-year fixed-rate mortgage, and, if borrowers were to make timely payments for the next five years, lower the rate and apply that premium to reduce the principal.  All loans that met those terms would be purchased by Fannie or Freddie with limited or no recourse against the bank. Stay tuned!

"Uh, Eddie, watcha doin' this weekend?" "Nothing much, boss, why, what's up?" "Well, could you send out these 10,000 refund checks to borrowers?" I doubt if that exact conversation took place in the bowels of one of Wells Fargo's operations sites, but Wells Fargo has issued thousands of refund checks to home loan customers who paid unnecessary mortgage fees, according to a report from the Los Angeles Times. The refunds have to do with FHA mortgages originated from 2009 through 2011. Bank officials told the Los Angeles Times that borrowers who would have been able to get a conventional loan were instead directed toward FHA loans that require higher insurance payments. Apparently the issues were discovered after an internal review of loans originated by Wells Fargo Financial and brokers in the wholesale channel of Wells Fargo Home Mortgage. Here is the story.

Uh oh... you mean that borrowers who defaulted aren't all beating down the door trying to obtain financing and another house right away? Borrowers who default on mortgages return to the mortgage market at extremely slow rates: only about 10% of borrowers with a prior serious delinquency regain access to the mortgage market within 10 years of their default. Borrowers who terminate mortgages for reasons other than default return to the market about two-and-a-half times faster than those who default. Renewed access to credit takes even longer for subprime borrowers with a serious delinquency on their record. "Evidence suggests that the process of regaining creditworthiness is lengthy. Borrowers who terminated their mortgages for reasons other than default returned to the market about two-and-a-half times faster than those who defaulted. This has important implications for the housing recovery. The improvement in the housing market is often assumed to reflect significant pent-up demand. But an estimated 4 million foreclosures have taken place since 2007. The consumers who went through those foreclosures will return to homeownership only gradually, suggesting that mortgage supply will also be a factor in the housing recovery." Here you go, straight from the SF Fed.

In case you haven't heard during the last 3 years, we have an election coming up next week. What difference does it make? Although the prospects of eliminating the CFPB are close to zero, changes to its leadership structure are likely if Mitt Romney wins the White House. Unfortunately the Republicans refused to confirm an agency head until reforms were made, and so they may face gridlock from obstinate Democrats - "payback's a b----"as they say. The agency's director, Richard Cordray, may stick around through the end of his 2013 term and then run for higher office in his home state of Ohio. And the CFPB is not even the top priority: there are a large number of slots at the Treasury Department, Federal Deposit Insurance Corp. and Securities and Exchange Commission.

Switching topics to FHA Compare Ratios, Chrystal H. writes, "Personally I think the compare ratio should only include loans that had a deficiency in underwriting.  If we met all guidelines and the transaction appeared to be a good credit risk (per FHA standards) why should we be penalized or our numbers look bad if it was something out of our control that resulted in the delinquency/default. Too bad this thought process isn't used when determining the compare ratio." (I have heard that from many.)

And regarding Freddie & Fannie making profits, Brian B. from NJ wrote: "On your comment about F&F trying to post a 'profit' is the term many have a dispute. I guess the misconceptions in the one fostered by the FHFA. Is F&F an independent corporation in a state of bankruptcy, or was/is it an independent corporation that was nationalized by the government. Yes there are arguments for both sides. However, the weight for the second concept is the FHFA's ability to continually utilize the Treasury at will is the public perception that causes confusion. To further throw a wrench in the works is the 'Independent Agency' shell that FHFA operates under. The FHFA seems to allow F&F to continually jump from government agency to independent company as the winds of Sandy blow - whatever seems politically expedient."

On to some agency & investor news, some from today and some within the last few weeks. As always, it is best to read the actual bulletin for complete details.

Last week I told my two cats that I was exploring "strategic alternatives" for them - the SPCA is only a short drive away if they didn't start paying attention to my commands. As has happened countless times before, they didn't seem to care and went back to napping. But it carries a lot more weight when Ally Bank announced it has launched a "process to explore strategic alternatives for its agency mortgage servicing rights (MSR) portfolio and its business lending operations."

Every investor and lender has reminded clients of their disaster policies, and those policies are usually based on FEMA announcements. FEMA issued Major Disaster Declarations for New Jersey and New York along with the Emergency Declarations for New Hampshire, Virginia, West Virginia, Delaware, Rhode Island, Pennsylvania, Connecticut, D.C., and Massachusetts that were published on the 28th and 29th.  See the FEMA website for the full releases (http://www.fema.gov/disasters).  No one yet knows what happened to the tens of millions of rats living in the now-flooded New York subway system, but they most likely survived.

As an example, Plaza Home Mortgage spread the word to clients that "Due to Hurricane Sandy, all loan funding and purchasing will be temporarily suspended in the following states: CT, DC, MD, MA, ME, NH, NJ, NY, PA, RI, VA, and VT.

Appraisal professionals, take note: Comergence is launching its new Eagle Eye due diligence and surveillance service, which can be used to conduct and maintain background checks for appraisers.  The program employs the same format as Comergence's third party originator compliance service and lets lenders and AMCs keep their approved appraisers in a central repository.  Appraisers, for their part, can use it to apply to lenders and AMCs and to keep their profile information current.

In Oregon Pacific Continental ($1.3 billion) will acquire Century Bank ($87mm) for $13.4mm or about 1.09x tangible book. And Talmer Bancorp, backed by W.L. Ross ($2.2 billion) will buy Ohio's First Place Bank ($2.8 billion!) for $45mm. Talmer will recapitalize First Place with $200mm in capital, after First Place exits bankruptcy.

Congrats to Genworth Financial as it posted a third-quarter profit, compared with a loss a year earlier. The net operating loss at Genworth's U.S. mortgage insurance unit more than halved to $38 million. New flow delinquencies -- a measure of how many new loans were in default -- fell 19 percent. For the company net income for the quarter ended September 30 was $34 million, or 7 cents per share, compared with a loss of $16 million, or 3 cents per share, a year earlier.

Going to the markets and economic news, there is continued good news about home prices from the S&P/Case-Shiller Home Price Indices. Remember that there is a two month lag in the numbers, but both the 10-City and the 20-City Composites increased 0.9 percent in August compared to the previous month.  Nineteen of the 20 cities also increased month-over-month.  Seventeen of the 20 cities posted positive annual returns.

But this morning the industry learned what lock desks everywhere knew: applications for home mortgages fell last week as demand for refinancing tumbled for the fourth week in a row, an industry group said on Wednesday. Apps fell last week almost 5%, with refi's down 6% and purchases up .5%. The refinance share of total mortgage activity slipped to 80% of applications from 81%. Conventional refi's were down 6.1% and GNMA refi's were down 5.5%.

The good news for today is that the markets are back trading, and it appears in the early going that rates are pretty much unchanged from Friday's close/early Monday. Last week ADP announced a change to its methodology although its release is delayed due to the storm. In the early going the 10-yr is at 1.74% and MBS prices are roughly unchanged.

You know you are too old to Trick or Treat when:

10. You keep knocking on your own front door.
9. You remove your false teeth to change your appearance.
8. You ask for soft high fiber candy only.
7. When someone drops a candy bar in your bag and you lose your balance and fall over.
6. People say, "Great Boris Karloff Mask." And you're not wearing a mask.
5. When the door opens you yell, "Trick or..." and you can't remember the rest.
4. By the end of the night, you have a bag full of restraining orders.
3. You have to carefully choose a costume that doesn't dislodge your hairpiece.
2. You're the only Power Ranger in the neighborhood with a walker.
And the number one reason Seniors should not go Trick or Treating...
1. You keep having to go home to piddle.