The Importance of IT; Fed Notices Lousy Rate Sheet Pricing; "High Cost" Clarification

As many lenders think back on record-breaking Novembers, and I head to Pennsylvania for the rest of the week, here is a quick bit of trivia. James Pierpont was the author of "One Horse Open Sleigh" which was first published in 1857. In 1859, he reissued the song under a new name: "Jingle Bells." It was a "sleighing song" which was a popular topic of the time and had nothing to do with Christmas, or for that matter, Thanksgiving. Why do I mention this? Well, if you recognize the name "Pierpont" that's a hint. James Pierpont was the uncle of financier J.P. Morgan, who founded Bank of America. (Okay, just kidding on that last one.) And 1857 was the year that JP Morgan (born in 1837) went into banking at his father's London branch. So JP Morgan's uncle wrote "Jingle Bells."

As I overhead at a recent mortgage technology conference: "It used to be on LSD...now it's DSL." The next time you check into a hotel, and they provide you with that credit-card style key, think of this. While we're on technology, I will confess my ignorance: I don't know the difference between broad band and cable, wonder if "the cloud" is really that useful for most of us, and wonder if "megabytes" is still a relevant term. But a survey in the November issue of ICBA magazine reported that the 5 top IT concerns of community bankers were, in order, complying with regulation, protecting data and infrastructure, systems availability and recovery, and a tie for detecting and mitigating fraud and managing the pace of technological change.

Regulators expect banks to proactively manage technology governance since it is as an integral part of enterprise risk management and a critical element that supports bank strategic plans and objectives. Bankers need to understand how technology can impact risk, where the bank is reliant on third parties, how and where the bank connects externally, where confidential information is stored and accessed, how data integrity is assured, and many other factors. A bank president saying, "Uh, we keep that on our floppy drive system, don't we?" is not a good answer to any of those.

Technology in the regulatory world falls under operational risk management. The Pacific Coast Bankers Banc reminds us that, "technology is embedded in operations of the bank and it can impact such risks as credit, compliance, strategic, reputation and market, to name a few. As such, technology management must take a holistic, bank-wide view. It should be incorporated into the strategic planning process and be aligned with the business goals."

Now the "IT guy" is usually a part of senior management, and often gives reports to the board of directors. The role of the Chief Information Officer (CIO) is primarily is to make sure technology systems meet the needs of the bank, risks are mitigated, and policies & procedures are followed. The CIO is generally responsible for key technology initiatives, deals with strategic technology issues, handles bank technology architecture, and supports the technology needs for each line of business. The CIO also heads up the IT steering committee. There may also be a Chief Technology Officer (CTO) for the development of new technologies.

Speaking of risk and computers, Digital Risk is being acquired by a company owned by Hewlett Packard. DR's release says it is "the nation's largest independent provider of mortgage risk, compliance, and transaction management solutions" and is being bought by MphasiS, a $1 billion global services and technology provider, and really tough to type. Supposedly nothing changes day-to-day at Digital Risk: at this point all executives remain in place, the company will retain its brand and continue expansion efforts in Florida and in other states. (It's been a big year for Digital Risk: it has grown to over 1500 employees, opened four operational centers in 2012, issued Veritas, snagged the number 11 spot on the Inc. 500, number 122 overall, and was named Top Financial Services Company by the Association for Corporate Growth.)

PHH Mortgage announced it will move forward with a $35 million expansion plan in Amherst, Erie County (NY) that will retain 400 jobs that were in jeopardy of being lost after HSBC Bank announced major job reductions last year. To help facilitate the job retention and expansion, New York State will provide up to $3 million in incentives through Empire State Development, tied to both the retention of the 400 HSBC jobs as well as the creation of up to an additional 400 jobs at PHH Mortgage's Western New York facility. As part of the agreement between HSBC Bank USA, N.A. ("HSBC") and PHH Mortgage, HSBC will outsource its mortgage processing and servicing business to PHH, and transfer 400 former HSBC employees to PHH Mortgage.

And for more big news, MGIC Investment Corporation announced it will be transferring $100 million to its subsidiary Mortgage Guaranty Insurance Corporation (MGIC) and that all other conditions required by Freddie Mac to continue Freddie Mac's approval of MGIC's subsidiary, MGIC Indemnity Corporation (MIC), as a limited mortgage insurer through December 31, 2013 have been satisfied. MIC is also an approved mortgage insurer for Fannie Mae. Curt Culver, Chairman and CEO of MGIC Investment Corporation and MGIC, said "I am very pleased that the implementation of our plan, designed over three years ago, to write new business through a combination of MGIC and MIC, can continue to be implemented. I want to express my thanks to our business partners at Freddie Mac and Fannie Mae, to the FHFA, and to MGIC's principal regulator, the Wisconsin OCI, for its efforts in concluding this matter." MGIC, Freddie Mac and the Federal Housing Finance Agency (FHFA)'s agreement settles the pool insurance dispute between MGIC and Freddie Mac/FHFA, and MGIC is to pay Freddie Mac a total of $267.5 million in satisfaction of all obligations under the policies at issue. Of the total, $100 million will be paid by December 11, 2012 and the remaining $167.5 million will be paid in 48 equal installments beginning on January 2, 2013.

Once again, the industry is watching the possibility of the government dipping into gfee income. The commentary mentioned Dave Stevens' reaction yesterday. And Marc Savitt, the president of the National Association of Independent Housing Professionals, wrote yesterday, "In my opinion, if Congress decides to once again raise G-Fees to pay for these non-mortgage related expenses, it should be labeled exactly what it is...A tax on home ownership. The housing market has recently shown positive signs of turning around. Increasing the costs for home ownership would adversely impact low and moderate income borrowers."  [READ: Bill Raising G-Fees Faces Tough Battle]

And this one from the origination trenches: "If the Consumer Finance PROTECTION Bureau is going to protect consumers, why doesn't it back efforts to stop consumer's gfees from increasing to pay for something totally unrelated to housing?"

Yesterday the commentary mentioned some high cost loan criteria that need some clarification. "Note in the initial paragraph that it is not being 1.5% above the 'Prime Rate' that triggers a High Cost Loan but rather 1.5% above 'average prime offer rate.' Per FDIC, 'The average prime offer rate' is an APR derived from average interest rates, points, and other loan pricing terms offered to consumers by a representative sample of creditors for mortgage transactions with low-risk pricing characteristics." Of course, FHA is dangerously close now and with a hike we're still likely to hit that level." And Amy Crews Cutts, the chief economist of Equifax, writes, "The prime rate noted in the commentary is not THE prime rate, set at 3.25% percent currently, but the average rate quoted in the Freddie Mac weekly survey (the rate on prime, conventional, conforming loans).  Your issues are still valid, but you're using the wrong base rate. Here you go." Thank you for the input helping to educate me and hopefully other folks.

Think back to economics, and supply and demand. With the Fed buying billions of dollars of agency MBS and Treasuries, and expected to buy over $80 billion per month through 2013, the net supply to the private sector will be about zero as the central bank effectively soaks up about 90 percent of new issuance of those assets. In other words, by printing money to buy these securities, issued by the same U.S. government, prices will continue high and rates low. What LO can complain about that? Here's more.

But as this commentary has been saying for a long time, Capital Markets people know, and now the Fed sees it, high agency MBS prices don't always show up on the rate sheets seen by borrowers. Is that a surprise, given loan level price adjustments, high gfees, low servicing values, increased costs of compliance, staffing for regulatory changes, reserving for future lawsuits and liabilities, etc.? The difference in price & rate ("primary-secondary spread") has attracted the attention of the Fed, or at least Fed Governor Dudley, who spoke about it yesterday.  [READ: Fed Attempts To Quantify Why Mortgage Rates Lag MBS Improvements]

Massachusetts has enacted a Predatory Home Loan Practices, which among other things requires that lenders making "high-cost" mortgage loans must both obtain a certification that the borrower has received counseling and reasonably believe that the borrower has the ability to make the scheduled loan payments, otherwise the loan is unenforceable.  Home mortgage loans where the total points and fees are more than the greater of $400 or 5% of the loan amount are considered "high cost loans. Loans not in compliance are unenforceable, while loans not in compliance with HOEPA are subject to rescission under the Truth in Lending Act.  Thus, today federal lenders need to be more concerned about local regulatory schemes since some of them may no longer be preempted by HOLA. The debtor's attempts to declare the loan unenforceable were based entirely on state law, and did not rely on "strong-arm" powers or other rights given under the Bankruptcy Code. 

For some brief agency news, Freddie and Fannie both spread the word that they will be suspending evictions nationwide between December 17, 2012 and January 2, 2013 on foreclosed occupied single family homes, and 2-4 unit properties, that had Freddie or Fannie mortgages. (This is in addition to the previous announcement suspending evictions in eligible major disaster areas caused by Hurricane Sandy.)  Freddie's announcement, which mirrors Fannie's, states, "The two week holiday suspension will only apply to eviction lockouts on Freddie Mac-owned REO homes and will not affect other pre- or post-foreclosure processes. Although no evictions will take place, firms handling local evictions for Freddie Mac will continue to file documentation in preparation for evictions, scheduled after January 2, 2013. Today's announcement is separate from the 90-day eviction suspensions in eligible Hurricane Sandy disaster areas, which continue through February 2013."  [READ: Fannie and Freddie Halt Holiday Evictions]

We did have some economic news Monday: Construction Spending increased 1.5% in October to a 3 year high, with private residential construction hitting its highest level since November 2008, and was up 20.8% from a year ago. Multifamily building increased 6.2% from a month earlier, while construction of single-family homes was up 3.6%. But the ISM Manufacturing Report on Business decreased 2.2% to 49.5% in November, the lowest level since July 2009.

But if there is much going on in the fixed-income/bond markets, I'm not seeing it. There was a little intra-day volatility, but by the end of Monday prices were virtually unchanged from Friday's close. And for scheduled economic news today, there is none. Monday MBS prices closed roughly unchanged, and the U.S. T-note at a yield of 1.63% - and that is exactly where we find the markets today (the same as Friday's close.)


(Very heavy parental discretion advised.)
Hugh Hefner and Crystal Harris are reportedly headed down the aisle once again - though technically they'd be hitting it for the first time, after she pulled the runaway-bride thing on him five days before their planned wedding in June 2011. The 86-year-old and the 26-year-old are allegedly engaged again and aiming to say their vows on New Year's Eve, sources told TMZ over the weekend. Apparently time apart from Hef taught Harris to be more independent, something she thought she needed, the sources said. (Yes, that's today's joke.)