Some Astute Concerns About Disparate Pricing, Assumable Loans, and the CFPB Complaint Database

Well, the rate lock renegotiation discussion continues, and here is one angle that I hadn't seen raised. "Lately we have been working/wrestling with the complex issue of 'disparate pricing.' After reading your commentary I am concerned that renegotiating a borrowers rate will not only cost us money on the execution side but also exposes us to charges, fines and lawsuits related to giving a non-protected borrower a better rate than a protected borrower simply because one forced me to renegotiate and the other didn't. Do you think there is any merit to this concern?" Let's hope the answer isn't that mortgage bankers have to drop the rates on their entire pipeline to avoid CFPB accusations of disparate pricing.

Yesterday the commentary noted how the "assumability" of some loans will impact not only decisions that existing mortgage holders have about selling their home (with that sweet 3.50% 30-yr loan), but how it will influence an increase in home equity lending. First, a clarification: per HUD, FHA loans originated after 1986 are assumable IF the new borrower can qualify. Here is that one. And as Tim K. sharply pointed out, "I don't disagree that home equity loans will be back; you should know that FHA loans are still assumable along with VA loans. This actually supports the writer's position. Selling a house with an underlying mortgage at 3.5% when prevailing rates are in the 6-7% range a few years from now will be an extremely attractive option. HELOC's will be able to fill the need for financing the remaining balance of the purchase."

But here is where my CFPB readers should pay attention. Another writer wrote in, one with many years under their belt. "Rob, whether or not a loan is assumable will become very important under Dodd Frank, anti-steering, and LO comp changes. Eventually rates will rise. But even if they don't, what obligation does an originator (or originating entity) have when the seller is offering assumable financing at preferential rates versus a new fully loaded purchase loan origination? It is not hard to see that it will be mighty tempting to steer the borrower toward to a new loan instead of a small home equity loan. And how will an appraiser, in valuing the house, monetize the difference? And what about assumption departments - are sub-servicers set up to handle that? I don't think so..."

Right or wrong, QM sure is well documented, with more coming out every day on how, as one underwriter wrote me, "the government intends to underwrite our loans." That is an open discussion topic, but here are the latest documentation guides on QM: here and here.

As a reminder, the CFPB has expanded its public Consumer Complaint Database. Its expansion will now accrue complaints in mortgages, bank deposit products and services, student loans, and other consumer loans; in the past, the database limited its scope to just credit card complaints. At least this new information will NOT encourage litigious behavior. Ballard Spahr writes in their latest Mortgage Banking Update, "The database expansion means that the added complaints will now also be available to plaintiffs' lawyers who can mine the data for potential litigation targets." <sigh> I stand corrected. The inclusion of mortgage and banking related complaints has increased the database from approximately 19k observations to over 90k. A recent CFPB complaint breakdown can be found here.

But does he who lives by the sword die by the sword? An audit of the CFPB's Consumer Response System (CRS) by the Federal Reserve's Office of Inspector General (OIG) found that improvements are needed to ensure that the requirements of the Federal Information Security Management Act of 2002 are met. The system allows consumers to submit complaints through the CFPB's website.  The OIG's Executive Summary of its findings indicates that its report includes nine recommendations to CRS management to strengthen security controls for the system. The existence of any deficiencies in the complaint system that could threaten the security of data is obviously a matter of concern to both industry and consumers.  The summary indicates that "given the sensitivity of information security work," the full audit report is restricted.  As a result, neither industry nor consumers have the information needed to assess the seriousness of the deficiencies found by the OIG.  Under these circumstances, the CFPB might consider issuing a public response to the audit to provide assurance that the complaint system is sufficiently secure despite such deficiencies.

And how about that HARP extension news! You know, yesterday when the Federal Housing Finance Agency (FHFA) directed Fannie Mae and Freddie Mac to extend the Home Affordable Refinance Program (HARP) by two years to December 31, 2015 from 12/31/13. Most of it was nothing special, but there were some tidbits that caused a stir. "More than 2 million homeowners have refinanced through HARP, proving it a useful tool for reducing risk," said FHFA Acting Director Edward J. DeMarco. "We are extending the program so more underwater borrowers can benefit from lower interest rates." In addition, FHFA will soon launch a nationwide campaign to inform homeowners about HARP. This campaign will educate consumers about HARP and its eligibility requirements and motivate them to explore their options and utilize HARP before the program ends.

(Companies and LOs originating HARP loans now know the ins and outs. How to be eligible for a HARP refinance homeowners must meet the following criteria: the loan must be owned or guaranteed by Fannie Mae or Freddie Mac, and the mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009 - this date did not change, and is a huge sticking point with many. The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009. The current LTV must be greater than 80 percent, and the borrower must be current on their mortgage payments with no late payments in the last six months and no more than one late payment in the last 12 months.)

Aside from the expiration date, there were no other changes to the terms/rules of the HARP program. The extension of the program is not a surprise since HARP refi's currently make up about 20% of total refi volume. What was a surprise to some, however, was a two year extension rather than just a one year extension. And the fact that the announcement comes earlier in the year than was expected. But some pretty smart folks out there believe that the HARP loan volume will taper off toward the end of this year and really taper off in 2014 (possibly making 2015 a moot point). In the meantime, there may be as many as 2 million eligible borrowers who haven't taken advantage of HARP, according to analysts at Bank of America Merrill Lynch - we know that 1.1 million refi'd through it in 2012.

Putting possible credit risk worries aside, HARP has become more popular among lenders as margins shrink on vanilla loans. Through their clients, Freddie & Fannie Mae refinanced a total of 97,589 mortgages through the HARP in January compared to 76,460 HARP refinances in December.  HARP borrowers are less sensitive to higher rates and fees than homeowners who have other options, leading to securities containing HARP loans bringing higher yields because borrowers are less likely to refinance again thus preserving the value of the investment.

But wait - there's more! For those lenders doing HARPs and who have a tight advertising budget, the FHFA is here to help. The FHFA director had already indicated (during his testimony before the U.S. House Committee on Financial Services last month) that a nationwide campaign to educate consumers about the HARP program and the eligibility requirements will be implemented soon. Operators standing by!

Folks are still asking about flood insurance. The federal banking agencies, along with the Farm Credit Administration, have issued amendments to the Flood Disaster Protection Act (FDPA). The amendments were part of the Biggert-Waters Flood Insurance Reform Act of 2012 (Act), enacted last July. For loans required to be insured by the FDPA, a lender or servicer must notify the borrower of the need to purchase flood insurance if the borrower's coverage lapses or is less than the required amount. If the borrower fails to purchase the insurance within 45 days of notification, the lender or servicer must force place the insurance. According to the guidance, effective July 6, 2012, the Act amended the FDPA's force placement provisions to: (i) authorizes the servicer/lender to charge the borrower premiums and fees for coverage beginning on the date the insurance lapsed or provided insufficient coverage, (ii) Require the servicer/lender, within 30 days of receiving confirmation of the borrower's coverage, to terminate any force-placed insurance and refund premiums and fees the borrower paid for any period in which the borrower's coverage and the force-placed insurance overlapped, and (iii) requires servicer/lender to accept, as confirmation of a borrower's policy, a declarations page that includes the existing policy number and insurer or agent contact information. The official release can be found here.

Who is Walter Investment Management Corp? Darned if I know, and I am too lazy to Google it, but it has a heckuvalot of money. The latest announcement is regarding Walter's purchase of a $12.2 billion reverse mortgage servicing acquisition from Wells Fargo. Yes, illion with a "b". On April 9, WAC announced that it had acquired $12.2 billion (UPB) of reverse mortgage servicing from Wells Fargo. The portfolio contains over 76,000 loans which are expected to board in the 3^rd quarter. The deal will double Walter's reverse servicing UPB to $25 billion versus Walter's reverse servicing portfolio at the end of 2012 which stood at $12.9 billion (based on unpaid principal balance). Walter did not disclose a purchase price for the portfolio, so it is too early to estimate the potential return. The company has noted an attractive market opportunity in the reverse mortgage space, so some analysts believe it to continue to look for growth opportunities in this business. After the loans are onboard, Walter will service roughly 18% of the reverse mortgage market. At the end of 2012, Nationstar serviced $28 billion of reverse mortgages, roughly 20% of the reverse mortgage market. Ocwen has also entered the market with its acquisition of Genworth's reverse mortgage company, Liberty Home Equity Solutions. Quant jocks out there estimate that the reverse mortgage market has roughly $140 billion of mortgage debt outstanding, a small part of the $10 trillion residential mortgage market (per KBW).

"Rob, why do you always quote the 10-yr yield in your commentary? MBS prices don't trade directly with that, do they?" No, they don't - but they're often close. Bad habit, I guess - they trade more off of "swaps." But traditionally, in the old days, the expected life of a 30-yr mortgage was roughly 10 years, so the duration of the two would match - all one had to do, basically, was to throw in the risk premium for individuals versus that of the U.S. government, and voila! They probably trade (i.e., duration-wise, as in how long they'll be around) closer to the 5-yr t-note, but then again, you have a whole school of thought about how new mortgages are going to be around many, many years - no one knows for sure.   READ MORE HERE

So what's going on in the markets? Well, we will start with some bank earnings later this morning, Chase and Wells, which will push the stock market, which may or may not move interest rates, depending on the spin that traders want to put on it. As discussed above, the Obama administration noted that the cash-strapped Federal Housing Administration (FHA) will likely require a $943 million taxpayer bailout to cover expected losses from loans it insured during the housing bubble. This will be the first bailout in its 80 year history.

The FHFA news that it will extend HARP two years didn't impact current coupons too much, but certainly hit the higher coupons. The buying by overseas, money managers, and the Fed (about $3-4 billion a day) continues. But they aren't buying existing securities with higher coupons - the ones that may not be on the books for long given the HARP extension and the over 1 million potential HARP borrowers.

And so we had a big rally last Friday, worsening Monday through Wednesday, then an improvement Thursday of nearly .250 in price. It is too early to know what is going on, rate-wise, but the market will have the Producer Price Index (expected -.2%), Retail Sales (expected unchanged), and the preliminary April reading on Consumer Sentiment upon which to chew. Speaking of being grammatically correct...

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