Eminent Domain is Back; More on Affiliates; is HAMP Still Important?

Underwriters and loan originators are acutely aware of a trend reflected in a stat the Census Bureau recently released: the number of businesses without paid employees in the U.S. rose 1.7 percent to 22.5 million in 2011. The report covered U.S. businesses without paid employees, and covered businesses with no paid employees, annual business receipts of $1,000 or more ($1 or more in the construction industries) and subject to federal income taxes. "Approximately 75 percent of all U.S. business locations are nonemployer businesses," said William Bostic Jr., associate director for economic programs at the U.S. Census Bureau. Just think of all the legal businesses: 19.4 million sole proprietorships, 1.4 million corporations and 1.6 million partnerships.

"Rob, it seems that the MBA's total for total mortgage production volume for 2012 differs from that of Fannie Mae's. Why?" All numbers for 2012, or for any period of time, are estimates until the HMDA data for 2012 come out.  Even then it is a bit of an estimate to account for originations by firms that do not have to report under HMDA.  Until then groups like the MBA or the agencies look at different measures of the market to come up with estimates. Fannie may look at DU volume, home sales, etc.  The MBA may look at the weekly applications numbers, pull-through rates, home sales and various other things. One group may under or over-estimate the numbers, for example, if they incorrectly estimate lending by credit unions, for example, or portfolio lenders, HARP volume, etc. Hope that helps.

I am continuing to receive reader comments on the flaws in the government-designated compensation program causing lenders to turn their focus away from small-loan borrowers. This note is from a senior executive whose company was recently examined by the CFPB. "In response to your commentary noting, 'the commoditization of the loan officers and/or brokers' income has eliminated any incentive to invest time on such borrowers. Why not go after two or three easy deals and walk away from the one difficult?' The CFPB will tell you that we have to treat all applicants the same, regardless of loan amount, and that we have to offer mortgages to every income class. Their enforcement attorney said, "If you're going to be in mortgages, you're going to offer them to everyone".  In fact, they told us that we must spend the same amount of time with each applicant; from greeting them at the door to processing. Humorously, that prompted our compliance department to instruct underwriters that they must spend the same amount of time on each file. We're down to 2 files per day per underwriter already!"

Saturday's commentary mentioned a definition of affiliates from the CFPB's perspective. I received a note warning lenders about over generalizing.  The commentary, noted, from a knowledgeable source, "Here is the scoop on affiliate definition under TILA/Reg. Z: 'Organization 1 is only an affiliate of Organization 2 if (1) org 1 holds a "controlling interest" in org 2; (2) org 2 holds a "controlling interest" in org 1; or (3) org 1 and org 2 a under "common control."  The TILA citation for this definition is 1026.32(b)(2) and the nomenclature in the definition sources back to the Bank Holding Company Act definition of affiliate (all noted in the regulation's text)."

The note said, "What definition that the CFPB or state regulators use is the million dollar question. I know I've talked to other prominent RESPA attorneys about this and none of them are willing to write an opinion letter on the 25% ownership under the BHCA because they fear the 'more than 1% ownership' issue under RESPA will be the standard. As is common with much of the new regulations, one needs to be very careful about overgeneralizing. For example, to analyze the question of what an affiliate relationship means under the QM points and fees test you need to look at the Bank Holding Company Act's definitions. Most people wouldn't know that under the BHC Act, however, 'control' is possible with 25% or less ownership. Under RESPA, by contrast, just 1% ownership can result in an affiliated business arrangement requiring compliance with disclosure and other obligations. Sorting through the details of any particular situation should be done in consultation with qualified counsel. The CFPB is going to have to clarify this issue."

I also received this note. "There are concerns about Berkshire's ownership in Wells Fargo and in Homeservices (read more...) because under RESPA it is possible that an agent for XYZ Realty who has a client who buys a property and gets a loan directly from a Wells Fargo bank retail office (not the affiliated Wells mortgage arm of Homeservices) could trigger the 1% ownership for 3% cap purposes. The PulteGroup and many other builder/Realtor/lender combinations still remain very concerned about having ownership & affiliate relationships better defined."

Eminent domain - it just won't go away. Here is the latest from out in California.

By now we all know that like HARP, HAMP has been extended. Is it still relevant? The Home Affordable Modification Program is the Obama administration's signature consumer-mortgage modification initiative. It was due to expire at the end of the year, and was extended for two more years. The program had some issues early in its rollout. Officials wanted to ensure taxpayer money wasn't wasted, so they required increased documentation and complete forms (imagine that!). But over the past two years officials have retooled the program by adding features that encourage banks to write down loan balances for borrowers who owe more than their homes are worth. They also have relaxed some requirements on documenting borrowers' incomes and occupancy.

It has not created quite the splash that the administration hoped for: $29.9 billion was allocated for HAMP but only $5.2 billion spent through March. Nearly 1.2 million delinquent borrowers have received a permanent modification via HAMP, and about 866,000 modifications were active through March. The program encourages mortgage companies to lower borrowers' monthly payments to about 31% of their incomes by extending loan terms, reducing interest rates and forgiving principal. Analysts say that the extension was expected. The GSEs recently announced changes that would allow modifications (including HAMP) to be done with less onerous documentation requirements.

In general, the industry views the extension as a positive for the mortgage servicers, mortgage insurers, and non-Agency mortgage REITs - any holder of mortgage credit risk. Remember that mortgage servicers get annual payments of $1,500 for successful permanent modifications under HAMP. So even if a HAMP modification just replaces a potential proprietary modification, the economics are more attractive. Mortgage insurers could be the biggest beneficiaries. HAMP has already contributed to meaningfully lower losses for the MIs and the extension of HAMP should help this to continue. And HAMP will also be positive for non-Agency MBS holders as it should moderately help the performance of non-Agency bonds.

Increased documentation is everywhere, and most veterans agree that it is not a bad thing. Companies have been created to provide pre-funding and post-closing programs  with risk analytics/QC check points for Bank CEOs and Senior management Paul Trimakas with Quatrro Mortgage Solutions writes, "We've seen a huge increase in companies that are monitoring the QC process prior to the loan actually closing while trying to improve their efficiency. Quattro offers clients a doubling of underwriter production from 2.5 loans per day to 4-5 units/day, and to pre-underwrite and audit recommendations for better UW efficiency and production. We're seeing our clients have a need to facilitate CEOs and senior management with a Dashboard (24/7 pipeline risk analytics for critical/noncritical errors), improve loan quality without increasing overhead, and a need for 'Six Sigma' quality resources, reporting and transparency keep CEO's and Senior management in total control of their loan processing operations with deep domain knowledge and continuous improvements." Makes sense to me - if you want to contact Paul write to him at Paul.T@Quatrro.com or check out www.quatrro.com.

Along those lines, on May 7 Fannie Mae announced its Servicing Management Default Underwriter (SMDU) a rules engine developed to improve the evaluation of loan modification workout options and expand the number of options available to borrowers.  Fannie Mae partnered with several vendors, including Grid Financial Services to make this rules engine available to all Fannie Mae Servicers. Leslie Peeler, Senior Vice President of Fannie Mae's Nations Servicing Organization, said "SMDU addresses several challenges the servicing industry has faced in recent years by eliminating a manual and resource-intensive process for servicers while improving accuracy and consistency."  Grid Financial has developed a full service loss mitigation/default services web-based platform (Grid-SMDU) that is fully integrated with SMDU.  Grid-SMDU was built for the small to mid-sized servicer that may not have the staff, the time or the interest in building an integration platform with SMDU, but would like to reap the benefits of SMDU.  (Personally I don't know much about this topic, but if you think it is relevant to you, contact Michael Paul at Grid Financial Services, Inc., at mpaul@gridfinancialservices.com.)

While we're looking at this subject, let's look at some recent investor, training, bank, agency, and vendor updates.

The FDIC helped shut down Banks of Wisconsin (Kenosha, WI) and entered into a purchase and assumption agreement with North Shore Bank, FSB, Brookfield, Wisconsin, to assume all of the deposits of Banks of Wisconsin.

Optimal Blue has implemented the new FHA Annual MIP values Effective 6/3/13. Optimal Blue has added new FHA Case # date range:  "On or after 6/3/13". It will also update FHA date range:  "On or after 4/1/13" TO: "4/1/12-6/2/13". Those case #'s issued "On or after 6/3/13" will reflect: "Collecting annual MIP on FHA-insured mortgages for the first 30 years the loan, for loans with an LTV greater than 90% at origination; collecting annual MIP on FHA-insured mortgages for the first 11 years of the loan, for loans with an LTV less than or equal to 90% at origination; and removing the exemption of MIP for loans with a term of less than or equal to 15 years and an LTV less than or equal to 78% at origination."

Cole Taylor has increased its maximum loan amount for Jumbo transactions on primary residence purchases, rate/term refinances, and cash-out refinances from $1.5 million to $2 million.  A minimum FICO of 720 and a maximum LTV of 70% are requires for purchase and rate/term refinances, while cash-out refinances are subject to an LTV maximum of 55% and require a FICO of at least 740.  All applicable transactions are subject to a maximum DTI of 40%.

We closed the 10-yr at 2.16% on Friday. Given the current economy, does it really deserve to be that high? Or given the current economy, does it really deserve to be that low? The market is clearly focused on the decent housing and jobs markets, and the Fed changing its Quantitative Easing program due to things picking up. But many feel that all of this is an overreaction. These discussions are all predicated on the US economic data continuing to trend up and with the inflation data running well below target, and any hiccup on the growth front will see the move to higher yields quickly arrested and rates move back down.

Let's not forget Europe. It is still weak, and after three years of deep spending cuts the EU confirmed a shift in its policy as they are now pushing for structural economic reforms while maintaining budget discipline by tackling inefficiencies in labor markets, tax code, pension systems and public services. The European Commission will now extend timelines for deficit targets (below 3% of GDP) for several countries like France, Spain, Slovenia and Poland, along with the Netherlands, Portugal and Belgium.

But here, we have a very busy week of scheduled economic news ahead of us. Today is the ISM Manufacturing Index and Construction Spending, tomorrow are the trade numbers, Wednesday are the ADP, Factory Orders, Productivity numbers, and the release of the Fed's Beige Book, Thursday, and June 6th, Initial Claims will measure the number of new filings for state jobless benefits. And lastly, Friday, June 7th, the Employment Report will produce the result of two surveys gauging the unemployment rate - always important but perhaps more so now given that it helps the Fed base its QE program off of employment benchmarks. Ahead of all that, the 10-yr is at 2.17% and agency MBS prices are basically unchanged from Friday's close.