Trends in Cash Out/Post-Purchase Financing; Affiliated Relationships

In spite of all the increased regulations and underwriting criteria that require borrowers to actually qualify, mortgage applications are hanging in there quite nicely. Today the MBA reported that last week's applications were +.2% with purchases and refis both up 0.3%. Conventional refis were off 1% but GNMA refis were up 8.2% - the highest level in 5 weeks. Purchase applications are up 18% from a year ago!

Yesterday's commentary on home ownership trends attracted a note from Andrew Jakabovics from Enterprise Community Partners. "A quick comment on your history of free and clear ownership - It's not a surprise that as the homeownership rate rises, the share of owners free and clear will go down, since the new buyers are likely taking out mortgages to buy and will remain indebted for some time to come. There is another phenomenon concurrent with the expansion of subprime and loose lending in the 2000s that also partly explains the ongoing level of indebtedness. Declining rates encouraged refinancing, so borrowers who might otherwise have paid off a high-interest-rate mortgage refinanced into a cheaper product, resetting the amortization clock. Moreover, the 2000s were a period of stagnant to declining wages, and many people who had equity built up in their homes extracted that equity to maintain or upgrade their lifestyles. (Note the interesting contrast to the consumer deleveraging we're seeing now, which is expected to reduce consumer expenditures, as reported by the NY Fed yesterday"

The housing market may be coming back, but a growing number of policy makers have expressed concerns in recent months that it's still too hard to get a mortgage. Those in the industry say, "Hey, you can't have it both ways! Besides, regarding credit, not everyone can or should buy a house." To absolutely no one's surprise, the drop in purchase mortgages has been most pronounced among borrowers with low credit scores. Originations have dropped by 30% for borrowers with credit scores above 780 between 2007 and 2012, but they've dropped by 90% for borrowers with credit scores between 620 and 680. Some of the decline is probably due to weaker loan demand. So why haven't mortgage credit standards eased up even a little bit, as they have for other consumer loans such as credit cards and autos? First, home prices have fallen so sharply that lenders are worried future price declines and job losses will leave them with more defaulted mortgages. Also, the Fed's campaign to push down interest rates means lenders haven't had to work very hard to drum up business. Together with federal efforts to ease refinancing rules, low rates have produced a surge of refinancing business. This has delivered a steady stream of high-quality, low-risk borrowers in an industry that already has shrunk significantly.

The good news is as mortgage rates rise and refinance demand drops, the capacity constraints on lenders will recede and banks will begin to compete for more of those purchase loans. The upturn in home prices could also boost lenders' confidence. But the bad news is banks are requiring tighter rules to guard against the risk they'll have to buy back defaulted loans from GSEs. Second, new federal and state rules associated with handling defaulted mortgages have raised the costs of mortgage servicing. Finally, banks face a series of new federal regulations designed to protect borrowers from receiving unaffordable mortgages, but those rules could also keep credit standards tight if banks decide potential penalties are too onerous.

When I speak with Realtors around different parts of the nation, it seems like some buyers are so desperate to purchase a home they are dispensing with getting a loan and paying cash, just to get their offer accepted. So some lenders are seeing an increasing numbers of "post-purchase financing" where there is "delayed financing" and obtaining a loan after you have purchased a property). Individual company underwriting will vary somewhat, but generally, if the subject property was purchased in the last 6 months measured from the date of purchase to the application date of the new refinance, the loan will be eligible for a Cash Out Refinance transaction provided several requirements are met - and it is important for LOs to set expectations about what is required up front.

The executed HUD-1 Settlement Statement from the purchase transaction must reflect no financing secured by the subject property was used to purchase the subject property. The purchase transaction was an Arms-Length transaction. The source of funds used to purchase the subject property must be fully documented. If funds were borrowed (either unsecured or secured by an asset other than the subject property) to purchase the subject property, those funds must be paid with the cash out proceeds and reflected on the HUD-1 Settlement Sheet for the refinance transaction. If the cash out proceeds do not pay off the borrowed funds, the payments on the balance remaining must be included in the debt to income ratio calculation.

Continuing with some general underwriting criteria for cash out refis, the amount of the cash out refinance loan can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points (subject to the maximum LTV/CLTV/HCLTV rations for the transaction. The preliminary title report for the refinance must reflect the borrower(s) as the owner of the subject property and must reflect that there are no liens on the property. And I imagine there are a few others - and don't forget the cash out pricing!

Yesterday the commentary discussed Realtor & builder relations with lenders. It led to several e-mails about builder programs around the nation. As one example, this one regarding Toll Brothers. "It appears that Toll Brothers does require a full loan application by all of our buyers, however they have the flexibility to use their own lender for the actual loan. A rep, who I assume speaks for the company, sent out, 'On top of the qualification questionnaire, the buyers must take a full loan application with TBI within 14 days of mutual acceptance. This includes the gathering of W2s, paystubs, etc. Toll requires us to submit their file to underwriting for underwriting approval. Buyers do not have to use TBI but they are required to take a full loan application with TBI (and Toll requires us to get them approved by UW)." 

And, "Regarding the paragraph about Credit Union Realtor referral programs - we see these referral programs with many credit unions. How can this NOT be a paid referral fee or kick back from the Realtor and a violation of RESPA? The funny thing is that the member could just ask the Realtor for a rebate directly and receive 100% of it, versus only a cut that the credit union is giving them."

Those companies involved in "affiliated relationships" are hoping QM's proposed 3% cap is revised, or at least revised for smaller loans. And that proposal is not stopping companies from forming affiliated relationships: yesterday news broke from Virginia regarding Monarch Mortgage, a division of Monarch Bank and Monarch Financial Holdings, announcing a marketing agreement to provide mortgage banking services for the clients of Rose & Womble Realty Company, and is planning to form a joint venture to support a long-term mortgage partnership. Rose & Womble Realty Company is one of the top residential real estate companies in Hampton Roads, with over 600 local real estate agents and supporting personnel in resale, property management, relocation, new homes and marketing services. Rose & Womble Realty also has other affiliated partnerships in title and settlement, market research, and land planning and development.

And here's an attention-grabbing headline: "Former Countrywide Executive Returns to Mortgage Bonds - PennyMac, Run by Countrywide's ex-President, Joins Growing Ranks Issuing Bonds for Nongovernment-Backed Loans." PennyMac Mortgage Investment Trust announced that its indirect wholly-owned subsidiary, PennyMac Corp., plans to make a private offering of $200 million aggregate principal amount of its Exchangeable Senior Notes due 2020 (the "Notes"). "The initial purchasers will have a 30-day option from the date of the offering to purchase up to an additional $30 million aggregate principal amount of Notes from PennyMac Corp...The Notes will be fully and unconditionally guaranteed by PMT and exchangeable for PMT's common shares of beneficial interest ("Common Shares")...The Notes will be PennyMac Corp.'s senior unsecured obligations and will rank equally with all of its present and future senior unsecured debt and senior to any future subordinated debt."

Stearns Lending snagged a top exec from Nationstar Mortgage. Aaron Samples will be running Stearns strategic development which includes its MSR Acquisitions Platform, as well as growing strategic production channels. At Nationstar Mr. Samples was VP of Business Development in its Mortgage Special Servicing group. Congrats on the new gig!

By the way, someone out there is rumored to be doing a large amount of due diligence on iMortgage...

There are two sides to every statistic, but it is hard to find much bad news in the housing market anymore. Yes, prices are increasing, but not everywhere. In some areas sales are down - but that seems to be because folks just aren't selling. Yesterday the news continued: New Home Sales of single-family properties climbed 1.5% in March, and are 17.6% higher in March than the same period in 2012. The median price of a new home climbed 3% last month from a year ago to $247,000.  Purchases increased in two of four regions in March, with a 20.6% gain in the Northeast and a 19.4% advance in the South. Sales decreased 20.9% in the West and 12.1% in the Midwest. And the FHFA House Price Index was up 0.7% in February, and the index was up 7.1% over the last 12 months, and is now 13.6% below its April 2007 peak and is roughly the same as the October 2004 index level.

In the markets, however, there isn't much to report. As Thomson Reuters reported, "At current market levels, volume has tended to be limited and investors opportunistically supportive within a tight range, and there was no deviation from that today." Today we had the March Durable Goods number (expected -2.8% versus +5.6% previously, and it came in at -5.7% versus last month's revised +4.3%) and the Treasury auctions $35 billion 5-year notes at 1PM EST. (There was no earth-shattering news from Asia or Europe overnight.) The 10-yr closed Tuesday with a yield of 1.70% and this morning we're unchanged at 1.70% and there isn't much change in agency MBS prices either.