Waiting for QM, the MBA Weighs In; Who is the Largest Private Real Estate Holder?

Huh? AIG, the parent of United Guarantee, is thinking about suing the United States government over its bailout? Stranger than fiction - but true! Here is some chatter on the subject. (And see the "joke" below.)

It could be a very big day for the mortgage industry - or at least any company that wants to originate loans that can be sold in the secondary market. The mortgage industry and Wall Street are prepping for the qualified mortgage rule ("QM") which could be released in its final form by the Consumer Financial Protection Bureau today. News will either come through The Federal Register or through its website. As most know by this point, QM, or the ability to repay rule, will determine the lending standards that lenders will have to follow to prevent legal liabilities from attaching to them when extending credit to borrowers. Perhaps the most closely watch component will be the "safe harbor" clause: without a safe harbor provision written into the rule and clear lending standards, the banking industry fears excessive pullback in the extension of mortgage credit.

The final QM announcement is expected any day now, but the outcome of the Fees and Points issue in QM remains very uncertain, even at this late date.  Given the implications for wholesale lending and affiliated services, on Monday the MBA sent a letter to Director Cordray urging the CFPB to solicit additional data and public comment on this aspect of the rule during the period between final issuance and the effective date. The MBA's core point is that the CFPB rules should not pick winners and losers by creating disparate outcomes for different business models or lending channels, particularly when the end result for the consumer is identical. The MBA has asked CFPB to provide further opportunity for public comment that would allow CFPB to assess the impact of the rule on the wholesale lending channel, on affiliated providers, and on competition in the market before the compliance date of the rule, and to consider adjustments before the rule becomes effective. 

"Under the statutory framework, Qualified Mortgages (QMs) are limited to loans where the maximum points and fees paid by the borrower may not exceed three percentage points. The statute makes a number of changes to the base definition of "points and fees" (what's in and what's out) and alters the timing of payment of the fees that are counted toward the trigger. The end result is a confusing set of calculations that could have major unintended effects on the market...(For compensation) Depending on how the final rule is constructed, and how the CFPB exercises its discretionary authorities, it is possible that both compensation by a creditor or mortgage broker company to its own employees, as well as payments to the companies themselves, would be included in the calculation. (For wholesale lending) Similarly, including lender-paid compensation to a mortgage broker company in a wholesale transaction could cause a loan to exceed the three percent QM cap. The restriction may pertain even though a loan with the same interest rate and out of pocket costs made by a retail lender would not exceed the QM cap. The three percent QM limit would become a hard cap on the gross revenue of mortgage brokers..."

Everyone needs a place to live, right? There's no need to remind the Blackstone Group of that: Blackstone is now the largest U.S. private real estate owner. And Bloomberg reports that it "accelerated purchases of single-family homes as prices jumped faster than it anticipated. Blackstone has spent more than more than $2.5 billion on 16,000 homes to manage as rentals, deploying capital from the $13.3 billion fund it raised last year, said Jonathan Gray, global head of real estate for the world's largest private equity firm. That's up from $1 billion of homes owned in October, when Blackstone Chairman Stephen Schwarzman said the company was spending $100 million a week on houses." So don't ask, "Whatever happened to that 'shadow inventory'?"Here are more details.

What is also seeing some "fire in the belly" are applications for home loans. On a seasonally adjusted basis, the MBA's market-composite index rose 11.7% in the week ended Jan. 4, compared with a week earlier. The refinance index rose over 12% and purchases were up almost 10%. The share of applications filed to refinance an existing mortgage totaled 82%, but poor ARM's - they only made up about 3.2% of total activity (but up from 2.9% a week earlier). The MBA also tracks rates: the average rate on 30-year fixed rate mortgages with conforming loan balances rose to 3.61%, from 3.52% in the previous week. Rates on similar mortgages with jumbo loan balances rose to 3.78%, from 3.75% a week earlier. The average rate on 30-year fixed rate mortgages backed by the Federal Housing Administration, or FHA, edged up to 3.35%, from 3.34%. And the average rate for 15-year fixed rate mortgages was slightly higher at 2.88%, from 2.86%. (The 5/1 ARM average rate edged down to 2.64%, from 2.65%.)

"Bankers may just have gotten another golden ticket. The Basel Committee on Banking Supervision, a global group of central bankers and regulators, unveiled on Sunday newly diluted plans intended to make banks capable of withstanding the next crisis, giving banks more time to meet softer requirements and, critically, hugely loosening proposed rules over the kinds of assets banks will be encouraged to hold. This will fuel demand for riskier debt, such as mortgage-backed securities and corporate bonds, and takes the financial world a substantial step backwards towards its pre-crisis set of incentives." Here is more on the story.

This week the commentary has discussed how January is a big month for mortgage banking. Included in this is the FHA, of course, and it trying to implement/change programs that will help it financially. (Many analysts have pointed out that some of these changes should have been made long ago.) Carol Galante was recently confirmed as FHA Commissioner, which removes some uncertainty. Actions taken and implemented by the FHA are designed to increase recoveries, price risk appropriately on new loans and to shrink FHA's market share (in an attempt to restore the FHA's financial capacity) include a minimum Credit Score for new FHA Loans: borrowers with credit scores below 620 to have maximum total debt to income ratio no greater than 43%. If the borrower's debt to income ratio exceeds 43%, lenders will be required to manually underwrite the loan, also known as "down grade" loan to refer and "document" compensating factors such as larger down payment and/or high amount of reserves. Mortgagee letter finalizing this directive is scheduled to be published by January 31, 2013.

The FHA also has a moratorium on the Full-draw HECM Reverse Mortgage - changes are being considered for this product (this will not, of course, impact investors that don't even offer it, such as Flagstar). The FHA will scale back FHA market share: the FHA plans on implementing a policy that lowers the maximum LTV on loans above $625,000.00 to 95%. The combination of higher down payment and higher mortgage premiums (already implemented) for these loans will continue FHA's efforts to drive this business to the private market. And lastly, in the foreclosure channel, current FHA Guidelines allow borrowers to obtain an FHA insured mortgage three years after a foreclosure. FHA is concerned that a few lenders are inappropriately advertising and soliciting borrowers with the false pretense that they will "automatically" qualify after three years. FHA is stepping up their enforcement in regards to "lender advertising". In addition, FHA will perform additional analysis to determine if the cause of the borrower's foreclosure was due to "one time economic event" such as loss of employment. FHA is also structuring a new housing counseling initiative that would apply to a number of borrower classifications, including borrowers with a previous foreclosure. And keep in mind that Carol Galante indicated that she is committed to finalizing and implementing these additional actions by January 31!

Here is a little news from our brethren in "The Star of the North" or more commonly known as "Land of 10,000 Lakes." Competitors for decades, Prime Mortgage and Bell Mortgage will become business partners as Prime Mortgage and The Business Bank are being purchased by Bell State Bank & Trust of Fargo, North Dakota. Here is more.

Who cares about rates when all this excitement is going on? Yesterday current coupons lagged the 10-yr (the 10-yr improved over .250 in price whereas mortgage-backed securities were up about .125). Higher coupons (at this point roughly any security made up of 4.5% or higher loans) lagged after getting pounded the day before with Bank of America selling mortgage servicing rights to Nationstar and Walter Investment Management - this has been perceived as increasing prepayment speeds on those loans.

There has been little in the way of scheduled economic news this week (this changes tomorrow with the usual weekly Jobless Claims) and this morning we find the 10-yr T-note about where it has been all week: 1.87%, and MBS prices roughly unchanged.

The Borowitz Report from New York reports, "Today, American International Group (A.I.G.) issued the following letter to American taxpayers.

Dear American Taxpayers:

In 2008, you paid for a bailout of A.I.G. totaling $182 billion. Today, we are writing to tell you that we're thinking of suing you.

When we made this decision, we knew we were in for some rough treatment from the media. We've been called everything from soulless bloodsuckers to Satan's scabrous handmaidens, and worse. At A.I.G., though, we have a different name for ourselves: true American heroes.

You see, by suing the same people who bailed us out just five years ago, we are standing up for one of the most precious American rights of all: the right to sue someone who has just saved your life.

Let's say that you're trapped in a burning building and a fireman pulls you out to safety. Once you're out of the fire, though, you notice that the fireman carelessly ripped the lapel of your Armani jacket. Shouldn't you be able to sue the fireman for the full cost of its replacement?

Or let's say you're drowning in the ocean. A lifeguard dives in, pulls you back onto the shore, and administers mouth-to-mouth resuscitation. Aren't you entitled to take appropriate action-i.e., sue him for sexual harassment?

By suing you, we are standing up for the right of every other American who might, through no fault of his own, have his life saved and want to sue the person who saved him for millions of dollars. And that's why we're asking for your help today.

Lawsuits aren't cheap. They require highly paid lawyers, who rack up millions in legal fees, not to mention first-class airfare, hotels, and sumptuous gourmet meals-hardly the kind of expense that we at A.I.G. can afford.

That's why we'd like you to pay for it.

You may think we're expecting a lot, asking you for the money necessary for us to sue you. But, remember, there's a bigger principle at stake, and someday, if you're pulled from a burning building or an ocean, you'll be glad you stood with us today.

Oh, and as for our ad campaign, "Thank you, America"? We're sticking with that, just changing the first word.

See you in court,

Your friends at A.I.G.