HUD on Interest Calcs, Guidance, ECOA & QM; Why Should You Care About Basel III?

The plain fact is that people need, and for the most part want, a roof over their heads. According to an online survey conducted by Harris Interactive, 41 percent of Americans aged 18-34 display an interest in buying a home (46 percent of men and 36 percent of women in that age group). Of that group, 17 percent of men and 6 percent of women see their finances as "shaky" but still think they can afford to buy a home soon.

Across all age groups, 30 percent of respondents said they are interested in buying a home during the next year. Overall, only 5 percent of people who have or had plans to buy a home this year said they can't afford it after reviewing their taxes and finances. Among other findings: Separated, divorced, or widowed respondents were less likely to say they have an interest in buying a home this year. To sum it up, the demand for home ownership is still there - but at what rate and price?

Is your company making more money than it did last year? If so, good for you, since word has reached me from a couple informal sources that at a recent lender CEO roundtable, more than a dozen CEOs indicated profits were down a total of 33% in the first part of this year versus the same part of the year in 2012. It will be interesting to watch the MBA's numbers and other metrics as we proceed through 2013.

Here's something we haven't heard much about lately - but that certainly doesn't mean it has gone away. "Rob, why should I care about Basel III? I don't work for a bank." The most recent news mentioned that Federal Reserve Governor Sarah Bloom Raskin said regulators "must complete new international capital rules because delays may be harming financial institutions by leaving them unsure how to plan for the future. Lending decisions and funding plans today are shaped by perceptions of business conditions in the future, and those conditions include the details of the final regulatory capital framework...It seems obvious to me that uncertainty over that framework is weighing on the balance sheets of banks that will be affected by the rules."

As we all know, no one likes confusion or doubt. As a refresher, new capital rules known as Basel III, adopted by the Basel Committee on Banking Supervision, are intended to improve the quality and quantity of regulatory capital. Both the European Union and the U.S. missed a January 2013 deadline to begin phasing in the standards. The Basel committee brings together regulators from 27 nations, including the U.S., U.K. and China, to coordinate rules for banks.

Here in the U.S., about six months ago U.S. banking regulators said that they were delaying implementation of new capital rules because "many industry participants have expressed concern" the rules would go into effect before they understood or were able to adapt to them, according to a release from the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

But--and I will make this short and to the point--Basel III's requirements will impact the value of servicing. The value of the mortgage servicing rights (MSRs) cannot exceed 10% of the common equity component of Tier 1 capital, so whether you're Wells Fargo, a community bank, or a regional bank, and the value of your servicing is "too much" per Basel III guidelines, you can either sell servicing, driving the price down, or value it at less, driving the price down. Either way, servicing values go down, and when they do, rate sheet pricing for borrowers will be worse.

Most believe that the proposed Basel III capital standards would add to a series of regulatory and market over-reactions to the recent financial crisis that would significantly curtail real estate lending by the banking sector. The net effect would be a reduction in stable, collateralized lending opportunities for banks, a reduction in funding for a critical sector of the economy, and a migration of assets with from banks to other investor groups.

The main issues involve increased capital requirements, increased risk weights, the treatment of MI, and the treatment of MSRs. MSRs not deducted from capital would be 250% risk weighted. Mortgages would be divided into two categories, and when combined with loan to value determine the risk weighting for each mortgage. If it sounds complicated, it is, and thus depository banks of all sizes are watching developments closely.

Yesterday the commentary discussed recent developments in the FHA world. The FHA program has undergone some changes recently, as we know, which will impact issuance. I received this note from an experienced compliance person. "These FHA changes will be interesting to watch.  With the new FHA loans all pretty much hitting HPML status, FHA effectively shut down its 'non-credit qualifying streamline' program.  Lenders warned it ahead of time - and yes, every loan I've test-run has hit HPML.  Do you think HUD intentionally did that to stop the non-credit qualifying transactions?  Or did it just miss the point totally? 

"It amazes me that this is a surprise to management.  A lot of us said back when it implemented this that the April changes would make everyone unhappy, but the June ones will put FHA back as the agency of last resort. Credit & performance for FHA for the last couple years has been stellar; but with these changes it looks like it is intentionally trying to get only the weakest of the weak.  Maybe I'm just missing what its goal is. I'm thinking HUD needs to actually listen to those comments that come in.

"Something tells me that the FHA has run the numbers, and has come to the conclusion that the benefits outweigh the costs. But who knows for sure? I think it was actually intentional on the streamlines. As to whether it is intentionally trying to become the agency of last resort again, don't know, but have a feeling that may be the result.  If the MI companies have their way, that will happen. They are pushing hugely on marketing their benefit over FHA, so what FHA will be left with are the low credit scores.  Oh well maybe they know what they are doing."

Is it true that the FHA could stop charging extra interest on mortgage payoffs? In this day and age where every agency is focused on profits, some would say it is unlikely, but nonetheless the idea is out there.

I also received this note: "I'm sure you are aware that FHA will not allow a refi if the payment doesn't drop at least 5%. The CFPB is so concerned with 'steering' but I am not sure where you can steer anyone these days - but it forgot to put a restriction on churning in Safe Harbor. I hear all the time about the rhetoric of borrowers being steered from prime to subprime loans to make more money. As I recall from the old days, I potentially could earn a larger YSP on Prime loans than on Sub Prime loans, at lease on the scenarios I saw. Look at this article that ran on the front page of the local NJ paper yesterday, and it might answer the reason that churning is a bigger issue that steering ever was. Forget the issues the woman had, those are secondary. Why waste time, money and the expectation of a usable result when they knew it was destined to fail?" Here is the link.

Last week the Mortgage Bankers Association, American Bankers Association, American Financial Services Association, Consumer Bankers Association, Consumer Mortgage Coalition, Housing Policy Council of the Financial Services Roundtable, Independent Community Bankers of America, and U.S. Chamber of Commerce sent a letter (HERE) addressed to HUD Secretary Shaun Donovan and CFPB Director Richard Cordray requesting much needed written guidance from HUD and the CFPB that makes clear that compliance with the CFPB's ability-to repay/qualified mortgage (QM) final rule will not expose lenders to disparate impact liability under the Fair Housing Act (FHA) or the Equal Credit Opportunity Act (ECOA).

As we all remember, a year ago the CFPB issued a bulletin confirming that it plans to apply a disparate impact test in exercising its supervisory and enforcement authority under the ECOA for all types of credit, including mortgage lending. In February 2013, HUD issued a final rule (HERE) providing that disparate impact can be used to establish liability under the FHA. Use of disparate impact allows the CFPB, HUD, or a private plaintiff to prove unlawful discrimination even if there is no discriminatory intent. In their letter, the industry groups express concern that the CFPB's QM rule appears "incompatible" with disparate impact liability because it will tighten credit standards through facially neutral requirements that could lead to disparate impacts on protected classes of borrowers. Accordingly, they assert that guidance is needed to address "the significant amount of uncertainty created by the final disparate impact rule and its intersection with the CFPB's mortgage rules."

Wall Street MBS traders are starting to see what lock desks are already seeing - lower volume. Tradeweb reported volumes Monday at less than 70% of the 30-day moving average. At some point, given supply and demand, if supply is down and demand is decent, rates will drop - but not yesterday. MBS prices did poorly (in spite of $1 billion of supply versus $3 billion of Fed purchases), and the 10-yr. yield ended Monday at 2.21% - the Treasury auction this week ($66 billion) doesn't help.

This focus on what the Fed is going to do is understandable. Through QE3 it has been holding rates artificially low. We knew it had to end, the question is, how? The smartest folks in the room think the Fed will engage in a slow, steady and predictable reduction of bond purchases, say to $65 billion per month, then to $45 billion and so on, from their current $85 billion per month. But what about the problems in Europe? Whatever happened to Cyprus, or Greece? The markets have turned their attention elsewhere, and the "elsewhere" indicates things are picking up a little steam here. The uncertainty (there's always uncertainty, right?) about our jobs market will be the driving factor, which means the Fed might reduce their bond purchases once and then do nothing for a while. Or they might cut their bond buying once and then later increase it if the economy falters. Or they might indeed reduce their purchases in a series of steps if warranted by economic developments, but they don't want the markets to think that's a set plan. Just be glad we're not in the gold market - prices there continue to drop like a rock.

Today's calendar has a $32 billion 3-year note auction at 1PM EDT. Auction volumes don't move the market, but auction results can, so we'll see how that goes. In the meantime, the news is not good: the 10-yr is up to 2.28%, and the MBS prices that help set rate sheet prices are worse between .125-.250.

How many consultants does it take to change a light bulb?

a) We don't know. They never get past the feasibility study.

b) Three. One to change the bulb and two to write the standards and tell him what he did wrong.

c) Five. One to change the bulb and four to contemplate how Tom Peters would have done it.

d) Five. One to change the bulb and four to tell him how much better they could have done it.

e) What's your budget?