Effective Risk Management Program Primer; UBS vs. FHFA; CFPB and the Insurance Industry?

Let's see the local appraiser tackle this one.

Here's one case that the mortgage industry, is watching: UBS is striving to block a lawsuit by the Federal Housing Finance Agency (conservator of Freddie & Fannie) over claims of losses on $6.4 billion in mortgage bonds sold to Fannie Mae and Freddie Mac. The case hinges on whether the 2008 law establishing the FHFA also gave the government more time to file claims against lenders. Here are more details.

Yesterday's CFPB comments inspired some interesting notes. "I'd like to know when the CFPB is going to turns its gaze to the insurance business. The catch word lately is "disparate" and I believe the insurance industry, particularly medical insurance is totally disparate. If you work for the government, or a large corporation, you have employer provided insurance coverage, either paid by the employer totally or partially. If you work for a small company, or are self-employed, you must find individual insurance coverage. The difference in identical coverage is HUGE! Employer-based coverage is 1/3 the cost of individual provided coverage.  That is disparate. If you leave your employer, then your insurance is canceled.  If you transfer to COBRA and keep the coverage, your premium will increase 3 times, minimum, for the exact same coverage you had.  That is disparate. Someone should point this out to the CFPB. There are areas in Consumerville that are far worse than mortgage lending when it comes to disparate transactions."

Mike L. from California writes, "Maybe the question we SHOULD be asking all these lawyers writing the new regs is if they would be happy if they were all required to charge the same hourly rate, regardless of the type of law they practice or how long they've been a lawyer?  It seems fair to me to apply the same rules to the Regulators as to the Regulated."

Speaking of things to think about, the Fed has identified four key things every bank should have in order to have an effective risk management program. (And mortgage companies may-as-well have them also.) The first component identified is to have active board and senior management oversight. They should question where revenues are coming from, expenses are going, and why things change from period to period. Determine the biggest risks in the bank; generate reports to measure, monitor and manage them; and raise awareness and education to help get more smart people around the organization to help.

Another area regulators focus on is whether or not the bank has adequate policies, procedures and limits. Our parents told us that too much of any one thing can be a bad thing, and banks and mortgage companies are no different. All your loans coming from FHA streamlines? All your overhead in payroll? The need for diversification is one key lesson from the credit crisis, and policies, procedures and limits exist for a reason and trouble can appear quickly and unexpectedly when they are not followed. When exceptions appear, ask why, focus on the primary reasons driving the exceptions and determine an appropriate course of action.

A third area of focus is on whether the bank has an adequate risk-measurement, monitoring and management information systems. You can't improve what you can't measure! Technology continues to change and more than ever, regulators now expect to see board and management reports with a decent amount of useful detail. You must be able to monitor concentrations, understand funding sources and have some way to perform forward-looking analyses.

Finally, Pacific Coast Bankers Bank notes to make sure the bank (or mortgage company) has comprehensive internal controls. Here, regulators will test to see how well the internal controls are keeping pace with changes in its risk profile and growth in relation to the external risk landscape. Challenging budgetary assumptions as industry conditions change, closely reviewing examination and audit reports and understanding how and where issues may arise in general as a result of industry changes are good places to start. All internal control functions including internal audit, risk management and compliance should be reviewed on a regular and ongoing basis to stay on top of areas that may need improvement.

Things are actually relatively quiet out there. Sure, the commentary could talk about FHA problems, lawsuits, interest rates, and so on, but we're a behind on investor, agency, investor, and MI news. So here's a chunk to give you an idea for trends out there.

National MI announced the receipt of its state license from the California Insurance Department to write mortgage insurance.

Freddie updated its FEMA assistance eligibility requirements for borrowers whose personal property or workplace is in an area affected by a natural disaster.  The revisions expand seasoning requirements for documentation and property valuation, require servicers and law firms to temporarily suspend foreclosure sales and evictions, expedite the release of insurance funds to affected borrowers, allow short-term forbearance for a period of up to three months without a written agreement, and permit servicers to extend short-term forbearance based on verbal agreements.  The forbearance requirements for HAMP and Standard Modification Trial Period Plans have also been updated.

Hurricane Sandy has influenced gfee activity as well: to make things a bit easier for borrowers, Freddie is delaying the gfee increase originally scheduled for December 1st for mortgages sold through the Guarantor and MultiLender Swap programs.  In order to be eligible, properties must be located in designated disaster areas and have settlement dates no later than March 31, 2013.

As another part of the FHFA's Servicing Alignment Initiative, Freddie's Deed-in-Lieu initiative has been updated to improve the options available to borrowers facing foreclosure.  For servicers, that means increased incentive ($1000, up from the previous $275) and expanded authority to approve Deeds-in-Lieu.  The guideline changes also require servicers to conduct an interior inspection no more than two days before the Deed-in-Lieu is executed and have their performance measured against their state's Freddie foreclosure timeline.  The Borrower Response Package, eligible hardship verification, and borrower contribution requirements for borrowers with FICOs of less than 620 who are delinquent 90 days or more have been removed.  In certain cases where the subject property is the borrower's primary residence and they aren't required to make a financial contribution towards the debt, relocation assistance of up to $3,000 has been made available.

In compliance with Washington state law, Wells Fargo correspondent is permitting sellers to submit a title company Trust Certification in place of an Attorney's Opinion letter and copies of trust documents for transactions that involve living inter vivos trusts.

Wells has updated its non-conforming fixed-rate and ARM price adjusters, which will apply to all Best Effort registration and Best Effort locks on and after November 19th. The changes don't affect other non-conforming adjusters.

The document formerly known as the Tax Information Sheet (Form 16) has been incorporated into the Wells Loan Submission Summary; as such, sellers will no longer need to fill out a separate Form 16.

Citi has identified Verbal Verifications of Employment to be one of the most common sources of pre-purchase suspense items and post-purchase defects.  As such, clients are reminded that the VVOE must be carried out no more than 10 days before closing for wage earners and that verification sources, if necessary, should be updated as soon as possible to make sure that they're accurate.

For properties located in counties designated as having been impacted by Hurricane Sandy, Flagstar is requiring that same servicer HARP loans insured by MGIC, Radian, or RMIC be re-inspected.  This includes properties in Orange, Putnam, Sullivan, and Ulster Counties in New York, the four of which were recently added to Flagstar's list of disaster-affected areas.

Flagstar Jumbo loans that are currently being processed are also subject to new hurricane-related guidance.  All properties with an appraisal effective date of October 26, 2012 or before will require an internal and external inspection that includes photographs, a map, and a narrative description of any damage inflicted, as well as commentary on the condition of neighboring properties as it pertains to the subject property's marketability.  Those properties with an appraisal effective date after October 26th won't require a full re-inspection, but an appraiser must note any damage, necessary repairs, and the general condition of the neighborhood.

Several changes to the Flagstar Jumbo program went into effect with loans submitted this last week, including a requirement that program refinances must have the appraisal included at the time of submission.  For properties valued at $1 million and higher, appraisers are required to have a Certified General License, while properties valued at less can be appraised by either a Certified Residential or Certified General appraiser.  Brokers should consult the list of approved AMCs in the Flagstar Sellers Guide, while correspondents should choose between PCV, Murcor, StreetLinks, and iMortgage for their Jumbo appraisals.

Everbank has revised its policy for pricing re-locks that are less than 60 days expired.  In cases where the current market is worse than on the original lock effective date, worst case pricing applies for a one-time re-lock, while loans are eligible to re-lock for 25bps for a maximum of 30 days if the current market conditions have improved.  Clients are reminded that loans must be "Approved with Conditions" status or beyond in order to re-lock and that they are allowed one re-lock at a maximum of 30 days.  Extension requirements remain unchanged.

Yesterday was another quiet day in the markets, and so far today is shaping up to be the same. Much of it comes down to, as it always does, supply and demand: on the supply side, mortgage banker selling was below $2.0 billion, and on the demand side, the Fed's daily average appetite is over $3 billion. Those folks on Wall Street who think about these things expect the Fed to buy through QE3, $500 billion in MBS outright with another $250 to $300 billion through paydowns received from its Agency MBS and debenture holdings while organic net issuance is predicted to be negative to modestly positive. Sounds like paradise for LO's and mortgage companies for most of 2013!

Oh, but wait, we still have the fiscal cliff, once again demonstrating why the public's opinion of Congress is so low, and headlines from Europe. But overnight we saw that Euro-zone finance ministers and the International Monetary Fund have broken deadlock over how to reduce Greece's long-term debt to a level that the country can pay it back. Major creditors agreed to a long list of measures that could reduce Greek debt to 124% of gross domestic product by 2020.

Turning to rates, yesterday the U.S. 10-yr improved by .250 in price and closed at 1.67%, and MBS prices were also better by .250. How much of that made it onto rate sheets remains to be seen, given higher overhead costs and setting aside reserves for future liabilities.

Today we've had the volatile Durable Goods number (October). It was expected at -.1% from +9.8% last month but came in at unchanged with a revision to last month to +9.2%. Later we have the S&P/Case-Shiller Home Price Index (expected higher, with its two month lag), Consumer Confidence (also expected higher), and the FHFA's House Price Index (also expected higher). We also have a $35 billion 2-yr note auction today. In the early going the 10-yr is unchanged at 1.67% and MBS prices are as well.

Let's go to the way back machine for this TV clip. "Well you see, Norm, it's like this...A herd of buffalo can only move as fast as the slowest buffalo. And when the herd is hunted, it is the slowest and weakest ones at the back that are killed first. This natural selection is good for the herd as a whole, because the general speed and health of the whole group keeps improving by the regular killing of the weakest members. In much the same way, the human brain can only operate as fast as the slowest brain cells. Now, as we know, excessive intake of alcohol kills brain cells. But naturally, it attacks the slowest and weakest brain cells first. In this way, regular consumption of beer eliminates the weaker brain cells, making the brain a faster and more efficient machine. And that, Norm, is why you always feel smarter after a few beers."