NAR Weighs in on Cliff Deal; M&A and Concentration in Banking - Could Lenders Share Back Office Functions?

On this Wednesday that seems like a Monday, politicians in Washington celebrated after kind of averting a completely unnecessary crisis that was entirely of its own creation. One blog noted, "'This deal proves that if we all procrastinate long and hard enough, we can semi-solve any self-inflicted problem at the very last minute in a way that satisfies no one,' said Senate Minority Leader Mitch McConnell (R-Kentucky)...In a related story, an arsonist received an award for putting out his own fire."

This is sadly true - our elected officials seem to have kicked the can down the road (as much as I am growing to dislike that saying). Very little about the situation is resolved, and yet rates have shot higher due to possibility of an expanding economy and a small amount of uncertainty being removed from the markets. By waiting until the last minute to scrape together a limited bill (which extends the Bush-era tax rates for most Americans and extends long-term unemployment insurance, among other things), Congress sidelined some major fiscal issues they initially sought to resolve before the new year. Leaders in Washington deferred for two months the $1.2 trillion in across-the-board spending cuts (known as "sequestration") set to hit the Pentagon and domestic programs this week. Additionally, the bill passed this week failed to raise the debt ceiling, even though the Treasury technically hit the $16.4 trillion limit Monday - so we have that to worry about now. Both of these issues will come to a head just as Congress is expected to vote on a new federal budget. The convergence of these issues practically guarantees that within a matter of weeks, Washington will once again find itself embroiled in another fiscal crisis.

The National Association of Realtors weighed in on the agreement, and answers many real estate and mortgage business concerns. Here is the link.

Well, any time The Rolling Stone writes about Angelo Mozilo and Countrywide, it makes for an interesting article. And we receive a lesson on "stated" versus "verified" income.

There is little debate about Countrywide being a force in the industry. But let's not forget the massive concentration that exists in banking now. The 5 biggest banks in the U.S. control about 44% of deposits, up from 37% in 2007 and 28% 10 years ago. The information can be found at the Federal Reserve.  Here are the Reserve's websites that any reader can refer to: http://www.ffiec.gov/nicpubweb/nicweb/Top50Form.aspx, http://www.federalreserve.gov/releases/h8/current/default.htm, http://www.federalreserve.gov/releases/lbr/current/default.htm, and http://www.federalreserve.gov/econresdata/releases/combanksal/current.htm. If one takes the time to take the first report's top bank assets, one can see the trillions add up. If you look at the last two reports, you can come to some conclusion of what the total asset percentage for domestic holdings is. Recently, domestically, the top 10 largest banks have moved toward holding more than 65% of domestic total assets.

(Speaking of concentration, let's not forget that Government Sponsored Entities - pretty much Ginnie, Fannie, and Freddie - now guarantee roughly 95% of the conforming mortgage market.)

Concentration is not confined to the United States, of course. Recently there was a story about how several stockbrokers in London are in talks about merging back office operations, in a bid to cut costs and avoid becoming takeover targets in a rapidly consolidating sector. In London, at least, talks have been prompted by increasingly difficult market conditions that have led to a spate of job cuts and acquisitions among brokers. If a deal to join back office functions is agreed, it would demonstrate an unprecedented level of co-operation in the fiercely competitive sector. There is no reason to think that this won't happen in mortgage banking once rates creep up and volumes begin to slide. When business is scarcer, companies will inevitably be more attentive to costs and save wherever they can. Moving back to this chatter from London, a practical plan to merge the back offices has not been drawn up but one proposal was to pool resources for settlement and clearing, which would potentially deliver greater cost savings for
the firms involved than if they individually outsourced those functions. A big concern is how client confidentiality would be protected, how regulations would be met, and how company information would be kept confidential. November 1 saw the introduction of EU short selling regulations had highlighted the potential benefits of sharing costs. Imagine a world where major lenders, or smaller lenders forged agreements, and had one funding group, one pool of underwriters, one compliance group, one "back office".

The New York Times and many other sources reported that banking regulators are close to a $10 billion settlement with 14 banks that would end the government's efforts to hold lenders responsible for foreclosure abuses like faulty paperwork and excessive fees that may have led to evictions, according to people with knowledge of the discussions. "Under the settlement, a significant amount of the money, $3.75 billion, would go to people who have already lost their homes, making it potentially more generous to former homeowners than a broad-reaching pact in February between state attorneys general and five large banks. That set aside $1.5 billion in cash relief for Americans. Most of the relief in both agreements is meant for people who are struggling to stay in their homes and need the banks to reduce their payments or lower the amount of principal they owe."

And those outside the industry wonder why companies are wary about lending or servicing mortgages! Apparently a mandatory review of millions of bank loans was not yielding meaningful examples of the banks' wrongfully evicting homeowners who were current on their payments or making partial payments, according to the people. But we're still grappling with the $26 billion settlement between the five largest mortgage servicers and the state attorneys general, Justice Department and the Department of Housing and Urban Development after allegations arose in 2010 that bank employees were churning daily through hundreds of documents used in foreclosure proceedings without properly reviewing them for accuracy. Supposedly under the terms of the settlement being negotiated, $6 billion would come from banks to be used for relief for homeowners, including reducing their principal, helping them refinance and donating abandoned homes. And the proposed settlement would also halt a separate sweeping review of more than four million loan files that the comptroller's office and the Federal Reserve required the banks undertake as part of a consent order in April 2011. Here is the story.

The M&A, investor, and agency news rolls on. Over in Louisiana Red River Bancshares ($1.1 billion in assets) will buy Fidelity Bancorp ($126 million) for an undisclosed sum. TF Financial ($701mm, PA) will buy Roebling Financial ($162mm, NJ) for $14.5mm in cash and stock. TF is the parent of 3rd Fed Bank. And Carlyle and other private equity firms will buy financial advisory and investment banking firm Duff & Phelps for about $665 million.

Flagstar is now offering additional options for subordinate financing on Freddie Mac Relief Refinances.  These include subordinate financing that doesn't fully amortize under a level monthly payment plan for which either the maturity of balloon payment date is under five years and subordinate financing that restricts payment, such as subordinate liens with prepayment penalties.  Note that new subordinate financing isn't eligible for Relief Refinance loans.

Effective immediately for all construction-to-permanent conventional transactions, Flagstar is no longer requiring cash-out refinance borrowers to have held legal title to the lot for the six months preceding the date on which the permanent mortgage was closed.  The requirement to use the lesser of the current appraised value or the lesser of the purchase price plus improvements in order to calculate the LTV for FNMA delayed financing has also been removed.  For FHA and VA properties, Flagstar no longer requires evidence that the borrower has a history of managing rental properties when departing the current residence, though they still need to document 25% equity in the property and the lesser of two months' reserves for both properties or the reserve requirement as dictated by the TOTAL Scorecard findings.  For conventional loans where the borrower is using rental income to qualify, proof of a two-year landlord history will suffice if the loan is submitted to LP.

Flagstar is no longer requiring appraisals for IRRRL transactions that refinance Flagstar-serviced VA loans.  Appraisals are, however, still required for VA loans not serviced by Flagstar that are refinanced by an IRRRL.

As of December 27th, Flagstar has suspended the Condo-Hotel Program, which means that new registrations won't be accepted and that loans currently in the pipeline will be processed on a case-by-case basis.

In training and events news, the FHA is hosting a webinar on all things TOTAL Scorecard on January 16th.  Setting up to use the scorecard, reviewing files, downgrading files to manual underwriting, and documentation are all on the agenda.  Register at http://www.visualwebcaster.com/FHA/90907/reg.html.

A 203(h) Home Mortgage Insurance for Disaster Victims and 203(k) Rehabilitation Mortgage Insurance webinar is being offered by the FHA on January 17th.  The first half, which is devoted to the Disaster Victims Program, will discuss the program eligibility requirements, maximum insurable mortgages, closing costs, prepaid expenses, borrower cash investment, mortgage terms, MIP payment, and refinancing.  The second half, which is aimed at loan officers, processors, brokers, and agents alike, will give an overview of the Rehabilitation Mortgage Insurance Program and cover the relevant underwriting strategies.  For more information and to register, see http://www.visualwebcaster.com/event.asp?id=91458.

On to recent news: the housing industry received more good news when we found out that pending home sales increased in November for the third consecutive month and reached the highest level in two-and-a-half years, according to the National Association of Realtors (NAR). Remember that the data reflect contracts but not closings, and LO's often discuss the problems they continue to have with cancellations. Lawrence Yun, NAR's chief economist, observed, "Home sales are recovering now based solely on fundamental demand and favorable affordability conditions." On a year-over-year basis, pending home sales have risen for 19 consecutive months.

While Congress did wind up approving a bill Tues, the "fiscal cliff" has in effect been broke into two pieces, w/the "tax cliff" getting resolved on New Year's Day while a big "spending cliff" looms on the horizon in the first quarter of 2013. And analysts believe that the spending cliff will be a lot harder to negotiate vs. the tax one. As tough as the tax debate wound up being, the harder negotiations will happen in Q1 of 2013 when Republicans are likely to demand further spending cuts (and entitlement changes) before countenancing a higher debt ceiling.

For scheduled news we'll have Construction Spending, ISM Manufacturing, and ISM Prices Paid - not big market movers. On Monday the 10-yr closed at a yield of 1.75%, but in the early going today we find the 10-yr up to 1.83% and MBS prices, which will certainly make their way onto rate sheets, are worse .250-.375.

Well, there was a bit of confusion at the grocery store this morning.
When I was ready to pay for my groceries, the cashier said, "Strip down, facing me."
I gave her a startled look and made a mental note to complain to my Congressman about Homeland Security running amok, however, I did just as she had instructed.
When the hysterical shrieking and alarms finally subsided, I found out that she was referring to my credit card!!
Consequently, I have been asked to shop elsewhere in the future.
They need to make their instructions a whole lot clearer for us senior citizens!!