Are Non-agency Loan Mods Coming? Treasury Initiative Rumored; FHA Letter Threatens Standard Reverse Mortgages

Well, here is some interesting news for taxpayers, as if we don't have enough: Fannie & Freddie may have lost $3 billion due to LIBOR fixing by banks? Quick, bring in the lawyers!

In the meantime, I have been retained by a "Top 5" non-depository correspondent lender in the Northeast seeking an experienced senior account executive to manage the Southeast territory of multiple states containing 80 approved correspondent accounts. The candidate preferably will live within that region and manage their accounts execution to deliver both delegated and non-delegated best efforts delivery. If you, or someone you know, are interested, please send a confidential resume to me at rchrisman@robchrisman .com.

The Chief Risk Officer of an entirely different well known lender wrote me to say, "I think some brokers and lenders need to wake up to today's regulatory reality. It is more of a Fair Lending issue, not Reg. Z. Pricing disparities lead to disparate treatment and/or disparate impact under Fair Lending Regs. Pricing needs to be uniform across the company, on a state basis at a minimum. It is a safe bet that varying pricing at branch or loan officer level will probably lead to regulatory & legal issues down the road. Company owners and officers need to manage for the long-term, not focus on short term profit maximization."

"Rob, is there really a difference between a mortgage and a note? Sure there is, but rather than me drone on about it, here is a decent update on the question from earlier this year.

"Not enough can be said about the importance of silence!" But there is no silence on rumors that the Treasury Department might try to push through a new initiative, referred to as the "Market Rate Modification Program," which will allow underwater borrowers with non-agency mortgages to refinance to today's low interest rates. That's right, anyone with an Alt-A, subprime, option ARM, jumbo, etc., should pay attention. As one lender wrote to me, "Katy bar the door!" This group has definitely been left out of all the fun, although the Treasury Department, and plenty of major servicers, has determined that borrowers with current LTV's north of 125% who have such loans are more likely to default, despite being current on payments. It is believed that what will be suggested is if a borrower is one of those "Significantly Underwater Borrowers" that is current on mortgage payments, they'll need to do is provide a hardship affidavit with the loan application which is meant to prove a "reasonably foreseeable default" under mortgage securitization rules. And this would supposedly satisfy investors who might otherwise prefer their higher original yield. Each month during the five years after the modification took place, the Treasury would pay loan servicers the difference in interest between the borrower's old rate and new. After the five years are up, the Treasury would stop compensating servicers, regardless of whether said loans were above water or not, and the borrower's interest rate would remain at the lower rate.

On to some very recent lender, agency, bank, and investor news!

Stearns Lending (retail, wholesale, and correspondent) announced the appointment of Uday Devalla to the role of Chief Information Officer.  Mr. Devalla was a former Senior Technology Exec at Bank of America.  Prior to joining Stearns, Mr. Devalla was SVP of Technology for Bank of America Home Loans and EVP - Technology Executive, for Countrywide Home Loans.

Carol Galante, Acting Assistant Secretary for Housing / FHA Commissioner, sure turned some heads when a letter was sent to Senator Bob Corker announcing several new policies that FHA is working on to help strengthen the FHA's risk profile and facilitate the return of private capital to the mortgage market. Among these is a moratorium on the standard fixed rate reverse mortgage (which accounts for around 90% of the reverse mortgage market). Almost all reverse mortgage production is currently being done through the FHA. Even a temporary moratorium could meaningfully reduce reverse mortgage production, and whatever portion was left would probably move to the HECM Saver program, which allows for smaller equity withdrawals. (This program currently accounts for around 10% of the market.)

My guess is that Walter Investment Management has the largest exposure to this program. Walter acquired Reverse Mortgage Solutions, a leading reverse mortgage originator and servicer, in November.

But the letter didn't stop with fixed rate reverse mortgages. The four proposals described in the letter include: 1) mortgage applications with a credit score below 620 must be manually underwritten if they have a debt-to-income ratio above 43%; 2) the maximum LTV ratio on loans above $625,000 will be reduced to 95% from 96.5%; 3) borrowers will be able to access FHA-insured loans three years after a foreclosure only if they have re-established good credit; and 4) as mentioned above, a moratorium on production of standard fixed rate reverse mortgage, the Home Equity Conversion Mortgages (HECM). Analysts suggest that the HECM moratorium proposal is the only one of the four that would have a meaningful impact on the market.

Although some LO's have built their business around the product, HECM loan production is very small on a relative basis, expected to be $12 billion this year, or 0.7% of the $1.7 trillion total expected origination volume and HECM outstanding at $78 billion is also under 1% of mortgage debt outstanding. The concern about this program is based on the disproportionately weak performance of the program from the FHA's perspective. The total capital level at FHA at the end of FY12 was -1.44% with the regular program at -1.28% and the HECM program at -3.58%. HECM accounted for about 7% of FHA insurance-in-force.

There is an alternative, and LO's would expect a large proportion of borrowers to move to the HECM Saver program. This program allows for lower equity withdrawals (compared to the 80% of equity permitted under the FHA fixed rate program), so it has a much lower risk profile.

How will this HECM news impact prices? First, there is probably nothing in short run as too many players have too much at stake and will just fall back to what they were taught in Econ 101 about supply and demand curves. Second, and in the longer term, when volumes continue dropping but with greater velocity, this will ultimately affects sponsorship in capital markets. With smaller volumes, there is less incentive for Wall St traders & investors to focus on the product - and this affects liquidity and pricing to originators. And as this is happening, traders will probably expect bid-ask and pricing spreads to increase to reflect liquidity issues, also hurting prices.

While we're talking FHA, both FHA and VA have announced their 2013 loan limits. Flagstar told clients that FHA loan limits are based on case number assignment date, and no FHA county limits have decreased. Some FHA county limits increased, so if a loan amount falls within the 2013 limits but exceeds 2012 limits, the case number may not be ordered until January 1, 2013 or later. VA loan limits are based on the closing date of the loan, regardless of rescission period.  However, in counties where the 2013 county limit is lower than 2012, VA will permit a loan to close at the higher loan amount after December 31, provided the borrower has executed a purchase agreement or loan application. "County loan limits that are increasing or remaining the same will populate in Loantrac and Mortrac on January 1, 2013.  However, in order to allow loans having a completed application or 1003 to close after December 31, Loantrac will not be updated with the lower 2013 county limits until March 1, 2013. Therefore, lenders will be able to register and submit loans for applications taken on or after January 1 at the higher 2012 limits.  Under no circumstances can the loan close at the higher 2012 limits unless the borrower executed an application or purchase agreement on or before December 31. There will be no hard stop in the system to prevent lenders from registering and submitting these loans, and they will be able to lock them.  However, under no circumstances will the loan be approved, closed, funded, disbursed or purchased unless the combination of down payment or equity plus the veteran's entitlement is at least 25% of the total loan amount, including the financed funding fee."

Wells Fargo officially announced a new SRP schedule and updated Best Effort base pricing and Mandatory adjusters. SRPs are being reduced to "more accurately reflect the true economic value of servicing in today's market". It supposedly balances out with an increase in base pricing.

For fans of monitoring counterparty risk for closing agents, Fannie Mae's required documentation checklist for Seller/Servicer has been revised. On Page 3 of the checklist "File 14_Closing", the Seller/Servicer must supply procedures for approving and managing closing agents and a roster of approved closing agents.

Psst! Wanna buy a bank? Give Bankia SA (the largest Spanish bank to get a bailout) a call - it is trying to sell its bank in Florida, City National Bank of Florida ($4.3B, FL) in a deal that could be worth $500mm. City National has 26 branches. On the other end of the continental US, Sterling Financial Corp. ($9.5B, WA) has entered into a definitive agreement to buy the Seattle-area branches of Boston Private Financial ($6.1B, MA). The branches have about $190mm in deposits and $270mm in loans.

Citigroup has announced it will close 62% of its Pennsylvania branches (13 of 21), as it focuses on urban geographies over suburban ones and seeks to improve efficiencies as it reduces costs.

It is a little hard to focus on day-to-day fluctuations in rates with Christmas around the corner, and the Fed in buying $4 billion a day, but let's give it a shot! In a reversal of Tuesday's fun, Wednesday saw Treasury and MBS prices rally and rates drop (yes, that's the way it works). Perhaps it was because President Obama warned he would veto a bill in the House that would extend the Bush-era tax cuts for those earning up to $1 million. House speaker Boehner considers this "Plan B" to be a backup plan in the event an agreement on the fiscal cliff is not reached by Jan. 1. This led to risk aversion with fixed income securities improving: 10-year notes by about .250 (1.81%) and current coupon MBS by about the same.

Today we've had the final Q3 reading on GDP, called slightly higher to 2.8% from 2.7% (it actually went to +3.1%), along with Initial Jobless Claims, projected to increase to 357k from 343k (actual 361k from a revised 344k, +17k). At 8AM MST are November's Existing Home Sales & Leading Economic Indicators, and a December Philly Fed number and the FHFA House Price Index for October. In the early going we find the 10-yr yield back down to 1.79% and MBS prices a shade better.

At this time of the year, when the roadblocks come up with great regularity, I would like to share a personal experience with my closest friends about drinking and driving. As you well know, some of us have been known to have had brushes with the authorities on our way home from an occasional social session over the years.  A couple of nights ago, I had a few beers at Spanish Springs Lanes after a nice dinner and wine at home. Knowing full well I may have been slightly over the limit, I did something I've never done before; I took a cab home. Sure enough, I passed a police road block but, since it was a cab, they waved it past.  I arrived home safely without incident, which was a real surprise as I have never driven a cab before and am not sure where I got it or what to do with it now that it's in my garage.