VA IRRL Performance; Goverment Goes After Rating Agency; HARP 3 Chatter
Here in Las Vegas there is a concrete convention taking place. A trained economist could do a tremendous amount of analysis, chart reading, capital allocation analysis on the concrete business. I am not an economist, but can tell you that given the fancy drinks being ordered, the grins on the faces, and the couple of elevator conversations I've had, business is great for these concrete guys. And some of that has to spill into our housing market - it already has. Infrastructure is back, and the place to be - where do I send my resume?
Speaking of resumes, Real Estate Mortgage Network (REMN) has been making news lately as the company prepares its HomeBridge Correspondent division for official launch. Bela Donine, who joined REMN last summer as Managing Director of Correspondent Lending, has "quietly been building the team necessary to take this new conduit platform to the front of the pack. HomeBridge just announced its hired six national sales managers and is looking for two additional ones, along with other positions in Irvine, CA. Interested candidates should visit HomeBridge's Website for more information: homebridgecorrespondent.com/careers/.
Compass Analytics is actively seeking a Junior Hedge Manager to join its team in either its Washington D.C. area of San Francisco, CA offices. This position is responsible for pricing mortgages, applying financial models to mortgage assets to derive valuation and risk management analytics, and to use those analytics in order to execute trading strategies to mitigate interest rate risk for Compass clients. "Compass Analytics is a leading provider of mortgage analytics and services to mortgage bankers, traders, and banks, providing mortgage valuation and risk management analytics to the broad mortgage industry and employs its own analytics and trade desk to provide outsourced valuation and hedging services for over $8B in mortgages on a monthly basis." Interested candidates should submit a formal resume and cover letter explaining your interest in this position, GPA and SAT (or ACT) scores and must be authorized to work in the USA. For more information on Compass, find Compass on the web at compass-analytics.com and for questions/resume submission write to marketing@compass-analytics .com.
(By the way, Compass Analytics announced that it has licensed Andrew Davidson & Co.'s prepayment models for use by Compass's pipeline customers for retained Mortgage Servicing Rights (MSR) valuations, best execution, pipeline MSR duration calculations, MSR retain/release rich/cheap analysis and calibrated TBA durations. Compass will use AD&Co's prepayment models in concert with Compass's Mortgage Rate modeling which leverages Compass's expansive daily mortgage rate surveys and dynamic capacity modeling.)
There is plenty of blame to go around for the financial & mortgage market turmoil we've had over the last eight years: borrowers, brokers, LO's, lenders, aggregators, investors, and so on. Now it seems the focus has finally (and some would add, with good reason) to the rating agencies. "The government sues Standard & Poor's, saying it improperly gave high marks to mortgage securities that failed and sparked the financial crisis." Here you go.
"Rob, what do you hear about HARP 3?" What, HARP 2 not keeping you busy enough? About the only thing I've heard is that Senators Menendez and Boxer re-drafted their bill that would help credit-impaired homeowners refinance with plans to reintroduce it shortly. The bill was originally introduced in May 2012 and then revised in September. This latest attempt is rumored to be similar to September's, though the HARP end date was extended one year to December 31, 2014 with discretion given to the FHFA director to extend it further. Overall the bill proposes to encourage cross-servicer refis, reduce fees and to expand eligibility; however, the cut-off date for HARP would remain at May 2009. Mortgage analysts, such as those at JPMorgan, said if the bill were to pass they do not believe it would be a game changer as many of the bill's mandates are already available to lenders. Barclays said if it was implemented it should help to sustain the high levels of HARP activity which would continue to weigh on higher coupons. But politics is politics, and passage of the bill remains uncertain particularly given the divided Congress and plenty of other things on their plate (the sequester, continuing budget resolution, debt ceiling, Cabinet appointments, and so on).
I have been asked about subprime mortgages under the QM world. American Banker reports that "Subprime mortgages are likely to become harder to make and more expensive to sell based on the new qualified mortgage rule." Lenders have enough buyback and legal issues with agency loans - do they want to invite more with non-QM production? Consumers with a "higher-priced" mortgage would have more legal rights to challenge a lender in court and the general thinking is that as a result, lenders said such loans will be less likely to be underwritten or sold at a decent price. Could a secondary market evolve outside those guidelines? It could, but it's going to be expensive to the borrower. "Once identified with the predatory lending that ran rampant in the lead up to the housing crisis, most subprime loans now are simply mortgages for low-income borrowers, those with weak credit, or jumbo loans. While policymakers intended to crack down on alternative mortgages that required little to no verification, it is not clear they want to squeeze out all subprime mortgages, particularly for lower-income borrowers."
And if news from the recent ASF conference is any indicator, the demand by investors is still there, and appears stronger now than a couple years ago. Under the rule, the CFPB defines a "higher-priced" mortgage as a loan that is between 150 to 650 basis points above the prime rate. For example, if the current average prime rate is 3.25% (which it is), the CFPB would classify loans with more than a 4.75% rate as a higher-priced mortgage. But because of the artificially low interest rates, observers say even the so-called "higher-priced" loan thresholds are low. It is a difficult task to precisely price in the expectations of potential future lawsuits into today's rate sheets, either with agency or non-agency production. Subprime loans would have only a "rebuttable presumption" under the qualified mortgage rule, weaker than a full safe harbor enjoyed by prime loans. QM will have a significant impact on specialty lenders with a niche in jumbo or low-income mortgages who do not fall under the exemptions that the CFPB is offering to lenders in rural areas, although some banks can use their private banking unit as an "alternative" to write and hold jumbo mortgages outside of the QM rule. And private bank clients are less likely to sue the lender.
A week or so ago I mentioned a Harvard paper on low income housing, and received this note. Matt Thoman with Mortgage Management LLC wrote, "I have to comment on the Harvard paper. Some things in this paper are comically off base. It seems in part to be fueled by the ideology of a benevolent and infallible government, but that's not really what I want to speak about. There are several points that are completely missed here in the first ten pages or so. The first, and most glaring, is the assumption that raising low income homeownership is necessarily a good idea and that it isn't happening because of discriminatory practices. There's no mention of the statistical correlation between low income and poor credit. It's a tough sell that there is still pervasive discrimination in the mortgage industry. All the lenders I know have the primary concern of making loans to borrowers who will pay them back (at least that is the case now). This miss, right off the bat, shows the researchers of this paper were looking to solve the wrong problems. As an aside, why isn't there a stronger push to create a program to teach low income people to manage credit better? Think of how many more good customers it would create for the industry."
Matt goes on. "The second issue is that the paper addresses the CRA just long enough to state with no evidence that "it was hardly to blame for the housing bust". The CRA products may not have been the stated income or true subprime loans, but they certainly were handing out maximum financing to terrible credit score borrower at prime rates (and still would if they could get lenders on board). As the competition, it surely created a need for the more creative financing and for rates that didn't properly account for risk. To not address the downward push this gave to the market is completely negligent.
"Third, it states that homeownership is the key to personal prosperity. It might be a sign of such, but is it really a key? It's debatable, and probably contingent on increasing property values, not something to just assume. The entire section written on this is nothing but loose appeals to authority - there's no analysis whatsoever. There are contradicting opinions, but they are ignored in the final conclusion. I could go on, but I don't want to waste any more time or brain storage on this. On the bright side, the authors are probably all under consideration for cabinet positions since they're from Harvard." Thanks Matt!
"I'm hearing a lot of noise about the performance of VA IRRL's without appraisals. I was wondering if you know any data or know where I might be able to get data on the performance of VA IRRL's versus any other product lines?" Brideen Gallagher with the Collingwood Group writes, "We checked with Loan Guaranty Service and it does not routinely track the performance of VA Interest Rate Refinance loans. Additionally, VA does not require an appraisal for an IRRRL loan but many lenders have been requiring them as part of their requirements with reductions in value throughout the country. So even if VA did track the performance, it would not be able to differentiate those with appraisals and those without since an appraisal is not required."
Meanwhile, rates continue to chop around - the 10-yr seems quite content to be sitting around a 2% yield. We've had some time to ruminate on what the 4th quarter is telling us about the U.S. economy. Economic growth in the fourth quarter came in far below expectations, contracting at a 0.1 percent annualized rate. While consumer and business spending remained strong, a sharp pullback in government spending weighed on headline GDP growth. Job growth downshifted from December to January, with the unemployment rate edging slightly higher to 7.9 percent. Personal income climbed 2.6 percent in December (mostly due to accelerated dividend payments ahead of the 2013 tax policy changes), while personal spending growth remained modest at 0.2 percent. This presents a mixed picture of the economy, as the economy ended the year on a weak note but the year started off on the right foot with positive labor market news. And let's not forget that the GDP number contained a strong residential construction report, which climbed 15.3 percent.
Yesterday's fixed income markets were pretty quiet, and it was nice to see a little "green on the screen." Mortgage banker selling was below recent averages at $1.5 billion TBA (to be announced). Thomson Reuters reports that "specified pools are trading well back from their glory days of last month, with rising interest rates and increased demand to TBA rolls detracting from the need for pay-ups and prepay protection." And for today, the economic calendar is about as quiet as yesterday with only a 7AM PST read on January ISM index - expected unchanged. The 10-yr is sitting at 2.01% and MBS prices are roughly unchanged.
This is more "Whoa!" than humorous, but sometimes you just want to take a look around.