More on FHA MI & HPML Concerns; CFPB Update on June 1 Change Date; Bank M&A's Continue

It is a time to celebrate those 65 and older through ceremonies, events and public recognition - in which most of which the folks in this group have no interest in participating. As usual, the Census Bureau gives us a tally: 13.3% of the population, or 41.4 million people, were 65 and older in the United States in 2011. The projected population of people 65 and older in 2060 is 91 million - more than double where it is now! People in this age group would comprise just over one in five U.S. residents at that time. Of this number, 18.2 million would be 85 or older. About 16% of people 65 and older were in the labor force in 2010 - 6.5 million, 44% of who worked full-time, year-round. (That is a lot of old people peeking over the wheels of their Cadillacs in Florida, or attending mortgage banking conferences!)

Regarding the FHA MI changes coming up, I received feedback from Saturday's commentary, "After 20 years of being in the mortgage business I have never seen such a bone-headed move by FHA to do what they are doing with MI.  Think about it. Why would anyone do a FHA loan? The answer is DTI is above the tolerance of Fannie and Freddie. Guess where the majority of de-faults come from. You got it."

The answer is, of course, that starting June 3, the FHA will require most borrowers using its loan products to keep the insurance for the life of the loan or, in cases with a 10 percent down payment, at least 11 years. The FHA's new mortgage insurance cancellation policy is aimed at shoring up the agency's reserves. The FHA insures its own loans, and the fund registered a $13.48 billion shortfall last November (hey, maybe Freddie and Fannie can throw them a few ducats, although maybe they already are through their preferred dividend plan with the government). The shortfall was due largely to loan defaults tied to the recession and housing bust, and altering the cancellation policy and increasing the upfront insurance fees (already done) should generate billions in revenue. Lenders and Realtors know, however, that first-time homebuyers will be those most impacted by the FHA changes, and it's hard for move-up home buyers to move up if someone else doesn't buy their house.

Along those lines, Saturday's commentary mentioned the potential APR and HPML issues with the FHA MI changes, and a reader asked if HUD was aware of the issue. Rob Zimmer with the CMLA responded, "Thanks for raising this issue - HUD is aware of it, and says it will address via rulemaking. But of course timing is everything in life."

And Matt M. from Virginia wrote, "After reading the section about the new FHA LOL MIP causing them to HPML, I tested it in our LOS and it is true as far as I can tell.  At 3.25%, the APR was still just under the HPML Threshold (APOR Index + 1.5% - for first liens), but at 3.375% it was just over depending on the other fees.  A lot of investors will not purchase HPML loans and others require a lot of additional documentation.  On the surface it sounds like a plus for the borrower to have ceiling on the rate we can offer them, but a lot of times an FHA borrower is taking a higher rate to bring the cash to close down.  This is just another unintended consequence of our ever-changing industry." Thanks Matt!

Saturday's commentary also mentioned the two CFPB rule provisions that are scheduled to become effective on June 1, 2013. I received a couple very authoritative notes on current developments. "The mandatory arbitration and financing of single-premium credit insurance provisions are actually contained in the loan originator compensation rule, and not the ability to repay/QM rule. Also, in a blog item dated May 8, the CFPB announced a proposal to delay the implementation of the prohibition on the financing of single-premium credit insurance to provide more time to clarify the application of the prohibition to transactions other than those in which a lump-sum premium is financed at closing. The proposal appeared in the May 10 Federal Register and comments are due by May 25. Here is a link to the blog post on the CFPB website."

In a similar vein, another wrote, "I wanted to advise you that the CFPB has proposed a delay of the June 1 effective date of one of the two June 1 effective date provisions - the prohibition on financed credit insurance. The link to the Federal Register notice is below, and there is a short notice and comment period until 5/25 in order that the delay can/will be officially finalized by 6/1. Also, these provisions have nothing to do with the QM rule. They are components within the Loan Originator rule issued by CFPB on 1/20/2013.  There is also an Escrows rule that applies to HPML loans which is effective 6/1. If readers want to receiver all CFPB Title XIV mortgage rule updates and implementation support materials as they become available, they should sign up for the email update list on the "regulations" page (vs. the home page) of www.consumerfinance.gov. And if your readers have questions about the meaning or intent of any provision of any CFPB regulation, they can call 202/435-7700 or email CFPB_reginquiries@cfpb.gov.  A subject matter expert attorney from the Office of Regulations will contact them back via phone to discuss their questions. Here is the link to the proposal to delay the 6/1 effective date on the credit insurance financing provision in the LO rule.

On a different but related CFPB topic, the CFPB has issued a proposal to temporarily delay the June 1, 2013 effective date of the Regulation Z prohibition on financing credit insurance premiums (Section 1026.36(i)).  The proposal responds to concerns raised by industry about the CFPB's interpretation that the prohibition would apply to level premiums (meaning premiums that remain the same amount each month, are paid in full each month and are not financed). The prohibition was one of the amendments to Regulation Z made by the CFPB's final rule on loan originator compensation issued in January 2013. It was intended to implement new Truth in Lending Act Section 129C(d) added by the Dodd-Frank Act. Section 129C(d) generally prohibits a creditor from financing the purchase of credit insurance in connection with any residential mortgage loan or extension of credit under an open-end plan secured by the consumer's principal dwelling.  It also provides that fees for credit insurance "calculated and paid in full on a monthly basis shall not be considered financed by the creditor."

It raised some eyebrows in the industry when, after the conclusion of the notice and comment period, the CFPB included language in the background discussion of the final loan originator compensation rule indicating that it interpreted the rule to bar level premiums. Law firm Ballard Spahr points out that, "Because that language had not previously appeared in the background discussion of the CFPB's proposed loan originator compensation rule, the industry had no opportunity to comment on the prohibition's applicability to level premiums before the rule was finalized.  Since adoption of the final rule, the industry has been urging the CFPB to revisit its interpretation and clarify that level premiums are outside the scope of the prohibition because they are 'calculated on a monthly basis' even though they do not decrease each month as the loan balance decreases and are not 'financed' because they do not increase the borrower's principal loan amount and are paid in full each month.

Ballard Spahr continued, "If the CFPB's interpretation that level premiums are encompassed by the prohibition were to become effective, it would effectively shut down the sale of mortgage life insurance. That's because the entire industry charges mortgage life insurance premiums on a level and not a declining basis. We have been retained by several industry participants to urge the CFPB to revisit its interpretation of the prohibition as encompassing level premiums.  That language is also contrary to the interests of consumers since it would have required companies to charge higher monthly premiums in the earlier years of loans when the principal balances are highest. Comments on the proposal are due by May 25, 2013.  In its discussion of the proposal, the CFPB indicates that it plans to publish a new proposal regarding the scope of the prohibition and propose a new date for when the prohibition would become effective following finalization of that proposal."

Let's move on to a few banking updates. They just don't let up.

On Friday Sunrise Bank, of Valdosta, Georgia, learned that the sun would not rise on them on Saturday. It was closed with Synovus Bank of Columbus, Georgia, stepping in to assist. And North Carolina's Pisgah Community Bank's operations were folded into Maryland's Capital Bank, National Association. And recently Douglas County Bank, Douglasville, Georgia, was closed and Hamilton State Bank, Hoschton, Georgia, assumed all of the deposits. Parkway Bank, Lenoir, North Carolina, was closed with CertusBank, N.A., of Easley, South Carolina, taking the helm.

But bank mergers are running strong. As a quick aside, DCF Financial Services reports the medial price to tangible book value for banks nationwide over the past 3 years has been 1.17x (2010), 1.43x (2011) and 1.42x (2012).

For recent bank M&A, Dactoah Bank ($2.1B, SD) will acquire United Farmers & Merchants State Bank ($43mm, MN) for an undisclosed sum. The parent company of Harbor Community Bank ($419mm, FL) will buy the holding company of Bank of St. Augustine ($168mm, FL) for an undisclosed sum. The parent company of The First State Bank ($319mm, TX) has filed with regulators to buy a 90% interest in mortgage company Hancock Mortgage Partners for an undisclosed sum. The parent company of HomeTrust Bank ($1.5B, NC) will buy the parent company of BankGreenville ($114mm, SC) for about $7.8mm in cash. BBCN Bancorp ($5.6B, CA) will buy Foster Bankshares ($412mm, IL) for about $4.6mm. The parent company of Triumph Savings Bank ($301mm, TX) will buy the parent company of The National Bank ($937mm, IA) for an undisclosed sum - given their respective sizes, and interesting match. Sterling Financial ($9.3B, WA) will buy Commerce National Bank ($248mm, CA) for $42.9mm. Ameris Bancorp ($3.0B, GA) will buy Prosperity Bank ($737mm, FL) for $15.7mm in cash and equity.

Last week was a poor week for mortgage rates. For example, Fannie 3's (the security into which 3.25-3.75% mortgages generally are allocated) lost/fell 1.5 points. It was a week with very little data, but the small amount of data that was released reinforced the view that the labor market is improving - though still gradually. It was the third week in a row of strong Jobless Claims data, on top of the previous week's stronger-than-expected employment report. And given that the Fed has tied QE3 to the labor market, this has investors wary.

This week, however, we have lots of data, including the first May economic data points (the Empire Manufacturing Survey and the Philly Fed numbers). But let's run it all down: today is Retail Sales at 8:30AM EST, tomorrow are Import & Export Prices, Wednesday are the Producer Price Index (the change in prices of "intermediate" goods used by companies to produce finished products), Empire Manufacturing, the Industrial Production & Capacity Utilization duo, and the NAHB Housing Market Index. Thursday are Jobless Claims, the Consumer Price Index (the price change for those finished goods which are sold to consumers), Philly Fed, and the Housing Starts & Building Permits twins. And on Friday are the University of Michigan Consumer Sentiment and Leading Economic Indicators.

Friday the 10-yr.'s yield closed at 1.90%, and this morning, in the early going, we're looking at 1.89% and a nearly unchanged MBS market.

Wife: "Do you want dinner?"
Husband: "Sure! What are my choices?"
Wife: "Yes or no."