Comments on Non-agency Modifications and Stated Loans; Investors Examine Who is Refinancing; A Buyer for Servicing

The good news is that we've survived. The bad news is that we're still seemingly reliant upon politicians in Washington. But for the moment, go back to 7th grade science! The December solstice (today) occurs when the sun reaches its most southerly declination of -23.5 degrees. In other words, it is when the North Pole is tilted 23.5 degrees away from the sun. On the solstice, all places above a latitude of 66.5 degrees north (Arctic Polar Circle) are now in darkness, while locations below a latitude of 66.5 degrees south (Antarctic Polar Circle) receive 24 hours of daylight. It also marks the "longest" day of the year in terms of daylight hours for those living south of the equator. Oh, and by the way, since you're reading this, the purported Mayan end of the world hasn't happened quite yet, so yes, you still have to wrap those presents.

I have been retained by a servicing investor to help in its search for up to $500 million of Fannie Mae servicing. The ideal seller is a company out there that is looking to raise cash by selling a small part of their conventional portfolio. There are no parameters regarding loan limits, LTV's, or programs, but due to licensing restrictions the properties must be located in one of the following states: CA, OR, CO, WA, NM, TN, HI, or in a state not requiring licensing. The non-depository uses DMI as its subservicer, and MIAC will be handling the analytical analysis. Interested parties, principals only, should contact me at rchrisman@robchrisman .com.

Yesterday the commentary mentioned a possible U.S. Treasury plan for loan modifications for Alt-A, subprime, option ARM's, and so on - non-agency loans. I received this opinion: "Really - this is what we're paying taxes (our HIGHER) for?  So that borrowers who bought more expensive homes than conforming limits allow, or who had to lie about (oops sorry - meant to say "state") their income to get the loans get an interest subsidy for 5 years, just because someone looks into a crystal ball and establishes that there's a "reasonably foreseeable default"? Why would tax payers want to subsidize such a thing?"

Mark B. wrote, "I have some thoughts about the program you outlined the 'rumors' of. First, I live in Las Vegas.  The people that live in Las Vegas who are underwater & still current, but not 'significantly underwater' will be frustrated even more.  We talk to borrowers every day that have 'A-paper loans' that are just not owned by Fannie/Freddie & can't do anything. For example, the guy that bought a home for $400k, put $100k down, owes $280k now, and the value is $225k - he cannot do anything with his 10 year I/O loan at 6.5%?  That is the guy they should help the most as he is the most upset.  He has lost $100k but gets no relief because he is less likely to default? (I understand the default odds, but that consumer is really going to be more likely to default now since it becomes clear there is no help for him). Secondly, the guy that bought for $400k and owes 90%+ still on a 1st & 2nd, has the 2nd at I/O & still owes $320k with a value of $225k, he gets help?  No money to 5% into the deal & he gets relief because he is more likely to default?  I would like to put bets on that guy defaulting sooner or later no matter what.  He will wake up one day & see it will take 10+ years of 2-3% appreciation for him to ever get back to square one. Someone needs to convey this to the decision makers if they do this."

I highly doubt if the Mayans had stated loans, but I did recently receive this note concerning them after mentioning that I wouldn't hold my breath waiting for their return to mainstream lending. Industry vet Mike Winks, with Northpoint Bank, wrote, "I agree with the 'don't hold your breath' comment regarding bringing stated income products back. However, let's be reminded that the stated income loan in its truest (original) form makes complete sense on terms of credit risk and customer service. For borrowers with stable employment, very strong credit and high liquid assets, it is very logical for a customer-focused lender to streamline the loan origination process by not requesting full income documentation for up to two years. But, in our world of consumer protection, how does this lender protect the borrower from themselves if they do not have the documentation to determine the actual DTI? Regulatory compliance (to lenders and the GSEs) includes the requirement that borrowers are not approved for a larger loan then they can afford. Further, we cap this DTI ratio under the premise that there is an ultimate one size fits all - a point at which even liquid borrower with high assets and very strong net worth are presumed to not be able to afford the debt. Therefore, even if the borrower is satisfied with his proposed monthly payment amount on a fixed-rate loan, the lender is here to protect or limit his options. Stated income products fall very low on the lender concern list; however, it is similar thinking that is driving many of the industry's changes."

Linda J. writes, "One of the agents blogged about servicing release and it turns out that the new servicer does not have to honor the cash incentives to the homeowner in a short sale. Bank of America is doing this. The comments from the other agents are revealing! Here is a link.

Who is refinancing? Investors in mortgage securities are always interested in how long they're going to be receiving payments from borrowers and what kind of borrower attributes indicate payment habits.  With the scrapping of LTV caps on HARP loans after the announcement of HARP 2.0, about $10 billion of high-LTV pools are being issued per month and demand for those with shorter loan terms has been solid.  This is due in part to the type of borrowers that refinance into such loans. Pools of 15- and 20-year loans are making up a growing percentage of high LTV issuances-in October 2011, they comprised 6-8% of the total for pools with LTVs over 105%, but that share climbed to 16-18% by September of this year.  Demand for shorter-maturity pools is increasing because the borrowers who are refinancing now tend to be more seasoned and the difference between rates for shorter- and longer-maturity pools is relatively high.  On the consumer end of things, these loans tend to be a cheaper option, thanks to the removal of LLPAs on MHA loans with shorter durations and the fact that borrowers can build equity more quickly.  Underwater borrowers, in particular, can move out of negative equity more easily by refinancing into shorter maturity loans, and the FHFA is keen to let them know that.

Generally speaking, borrowers who refinance into loans with shorter amortization terms have better credit.  Amongst Fannie and Freddie borrowers, those who opt for 15- and 20-year loans have credit superior to those who refinance into new 30-year terms, most likely due to a combination of self-selection and tightened lending practices.  They also tend to take out smaller loans; the average size for 15-year HARP refinances ranges from $170,000-180,000, while the average for high-LTV 30-year refinances is $210,000. For investors' purposes, its high-LTV shorter-term borrowers' good credit quality that makes involuntary prepays on these bonds unlikely, along with the HARP payment reductions they receive upon refinancing.  Any fluctuation in mortgage rates isn't likely to impact prepay activity, either, as most borrowers remain ineligible for HARP refinancing.  It's difficult to predict what will happen in the long term, however, and as home prices continue to improve, LTVs will be more likely to drop to levels below the refinanceable limits, which will change the game for voluntary prepays.

As mentioned above, the good news is that we have survived the predicted Mayan apocalypse; the bad news is that we're still being jerked around by politicians' inability to reach agreement. At this point, let the nation absorb those changes on January 1! The sun will still come up the next day, and maybe we'll be better off fiscally. Until then, we're seeing some improvement in rates while they bicker and point fingers. Thursday mortgage banker supply remained uneventful at between $2.0 and $2.5 billion, and MBS prices saw a very slight improvement in price. On the 10-yr T-note camp, it closed around 1.79%, almost unchanged in spite of some better-than-expected news about the Philly Fed, Existing Home Sales, and GDP.

And how about that housing market! Homebuilder sentiment increased for the eighth straight month with the index at its highest level since April 2006. Existing Home Sales in November increased nearly 6% to a better than expected 5.04 million with sales at their highest level since November 2009. In addition, the national median home price was up about 10% from a year ago while months' supply of 4.8-months was at its lowest since September 2005. And the FHFA house price index reported prices rose 0.5 percent in October and were up 5.6 percent year-over-year. And if housing prices continue to move higher, that increases the pool of potential refi's for 2013, right?

Today we've had Personal Income & Consumption (spending) and Durable Goods for November, and look for things to really calm by late morning - there are no economic releases until late next week. Personal Income, expected +0.3% from flat, and Consumption, also expected +0.3%  percent from -0.2 percent, and Durable Goods, expected +0.2%, were +0.6%, +0.4%, and +0.7% respectively - pretty strong numbers. Of course we still have European problems, and the bickering in Washington (rates are actually helped the longer they bicker but does it help the nation?), but after this noise we find the 10-yr at 1.75% and MBS prices better by .125-.250 - we'll see if that makes it onto rate sheets.

A CHRISTMAS STORY
When four of Santa's elves got sick, the trainee elves did not produce toys as fast as the regular ones, and Santa began to feel the Pre-Christmas pressure.
Then Mrs. Claus told Santa her Mother was coming to visit, which stressed Santa even more. When he went to harness the reindeer, he found that three of them were about to give birth and two others had jumped the fence and were out, Heaven knows where. Then when he began to load the sleigh, one of the floorboards cracked, the toy bag fell to the ground and all the toys were scattered.
Frustrated, Santa went in the house for a cup of apple cider and a shot of rum. When he went to the cupboard, he discovered the elves had drunk all the cider and hidden the liquor. In his frustration, he accidentally dropped the cider jug, and it broke into hundreds of little glass pieces all over the kitchen floor. He went to get the broom and found the mice had eaten all the straw off the end of the broom.
Just then the doorbell rang, and an irritated Santa marched to the door, yanked it open, and there stood a little angel with a great big Christmas tree.
The angel said very cheerfully, "Merry Christmas, Santa. Isn't this a lovely day? I have a beautiful tree for you. Where would you like me to stick it?"
And thus began the tradition of the little angel on top of the Christmas tree.
Not a lot of people know this.