NAR Testifies on QM; Ocwen Servicing Deal; CFPB Videos; Mergers; Top Ten Funding Defects

NAR has been invited to testify at an upcoming Congressional hearing about the Qualified Mortgage rule (QM). The House Financial Services Subcommittee on Financial Institutions and Consumer Credit has scheduled the hearing for Tuesday 6/18 at 10am. You can learn more about the QM rule and NAR's position here.  And in a letter to CFPB director Richard Cordray, NAFCU president and CEO Fred Becker asked the CFPB to re-evaluate the rule that exempts credit unions that have $2 billion or less in assets and that originated 500 or fewer mortgages per year. While the change would help many smaller credit unions, Becker's letter notes that there are a number of small lenders already approaching or surpassing the 500-loan threshold. To address that issue and allow small creditors to continue operating, Becker and NAFCU suggest to Cordray to raise the threshold to 1,000 loans.

Few can accuse the CFPB of not offering enough public comment time. And once the CFPB creates a final rule, or makes a new final rule replacing an old final rule, it certainly likes to send the news out. This goes out via e-mail, print, and block-buster movies. Well, that is a stretch, but it has put out its share of videos - and why not? Supposedly over 50% of internet bandwidth is taken up with videos. But there are indeed video presentations on the new mortgage rules. "Our goal with these is to provide an overview of the rules in a plain language format that makes the content more accessible and consumable for a broad array of industry constituents, especially smaller businesses with limited legal and compliance staff...Although the videos and guides give an overview of the rules, they are not a substitute for the underlying rules."

PHH knows a thing or two about keeping folks informed. PHH released some good information to its correspondent clients that should be known, regardless of investor, which I duplicated here in its entirety. And as we know, the more LOs know about these things, the better.

Most Common PHH Mortgage Pre-Funding Quality Defects - Non-Delegated (Tier 6).

1. Inconsistent address appearing on closing documents and what was previously disclosed on the 1003 submitted to Underwriting. No exact match to the appraisal/title, e.g., documents show "Street" but appraisal/title reflects "Avenue."
2. Inconsistent and/or incomplete liabilities on final 1003 that do not match credit report or liabilities previously disclosed.
   
3.  Inconsistent borrower name on underwriting submission and closing documents, e.g., suffixes (including Jr. and Sr.), middle name, and/or maiden name.
   
4. Missing earnest money deposit verification when the borrower receives cash back at closing.
   
5. Liens and accounts being paid off appear on the closing HUD-1/HUD-1A that were not previously disclosed or marked for payoff on the Universal Residential Loan Application (1003).
   
6. Missing breakdown of credits and charges on FHA/VA loans.
   
7. Missing tax certification or tax amount on title prevents correct debt-to-income (DTI) calculation.
   
8. Missing payoff statement(s) for an existing mortgage(s) for refinance transactions. Payoff statement(s) must be submitted to underwriting and be current for the month of disbursement and issued no more than 30 days prior to closing.
   
9. Missing final HUD-1/HUD-1A with the initial closing package upload for escrow states.
   
10. Loans closed without a "Ready to Close" status from Underwriting delay the process; e.g., if underwriting conditions are open at the time of closing and if documentation provided with the closing package does not satisfy and/or clear the open conditions.

Most Common PHH Mortgage Pre-Funding Quality Defects - Delegated (Tier 7).

1. Missing copy of final HUD-1/HUD-1A.
   
2. Program type does not match product per AUS findings.
   
3. Discrepancies for income calculation resulting in DTI variance in excess of 3% maximum.
   
4. Missing project approval code for condos/PUDs on submission checklist and/or 1008.
   
5. Incorrect calculation of debt.
   
6. Missing and/or incomplete bank statements, all pages not submitted.
   
7. Missing and/or incomplete documentation to evidence sufficient funds to close and/or reserve requirements.
8. Missing and/or incomplete notary information on the mortgage.
   
9. Missing evidence of asset liquidation.
   
10. Incomplete collateral packages; missing endorsements, allonges, assignments, subordination agreements and POAs.

Most Common PHH Mortgage Post-Funding Quality Defects.

1. Missing copy of the subordinate financing Note.
   
2. Missing and/or incomplete asset documentation.
   
3. Missing and/or incomplete income documentation.
   
4. Missing original credit report.
   
5. Missing or incomplete final loan application.
   
6. Change of Circumstances letter missing or improperly disclosed and/or dated.
   
7. DTI variance exceeds 3% maximum.
   
8. Missing and/or incomplete final HUD-1/ HUD-1A.
   
9. Missing and/or incomplete documentation of funds to close.
   
10.  Missing verbal Verification of Employment (VOE).

Let's take a look at some recent bank news over the last several weeks. Although there have been plenty of mergers, the pace is down relative to recent history - primarily because banks are so flush with cash they're buying their own stock, or paying dividends. But recently Union First Market Bankshares Corporation (NASDAQ: UBSH) and StellarOne Corporation (NASDAQ: STEL) announced the signing of a definitive merger agreement, pursuant to which Union will acquire StellarOne, creating the largest community banking institution in the Commonwealth of Virginia. Citizens and Farmers Bank ($987mm, VA) will buy Central Virginia Bank ($387mm, VA) for $855,000 in cash plus pay off $3.3mm in TARP preferred stock.

There's more! Union First Market Bank ($4.0B, VA) is buying StellarOne Bank ($3.0B, VA) for about $445mm or a 20% premium to its closing stock price at that date. First Bank ($6.5B, MO) said it will sell its subsidiary that provides homeowner association services to Union Bank ($96B, CA) for an undisclosed sum. NexTier Bank ($516mm, PA) will buy Farmers & Merchants Bank of Western Pennsylvania ($396mm, PA) for an undisclosed sum. The parent of Commerce Bank ($22.0B, MO) will buy the parent of Summit Bank ($265mm, OK) for $40.6mm in stock.

Out west, the parent of Umpqua Bank ($11.5B, OR) will buy Financial Pacific Holding Corp. for $158mm. Financial Pacific offers equipment lease financing (avg. lease is about $25,000) to small businesses nationwide (vehicles/trailers, medical, computer systems, restaurant and construction) and the portfolio is about $279mm. The holding company of Rockland Trust ($5.8B, MA) will buy the holding company of Mayflower Co-operative Bank ($255mm, MA) for $37mm in cash (30%) and stock (70%). Wilshire State Bank ($2.8B, CA) will buy BankAsiana ($207mm, NJ) for about $32.5mm. Texas Regional Bank ($165mm, TX) will acquire the Border Capital Bank ($162mm, TX) for an undisclosed sum. Bank of North Carolina ($2.9B, NC) will acquire Randolph Bank & Trust ($302mm, NC) for $10.4mm in cash and stock. The parent company of Mills County State Bank ($225mm, TX) will buy the parent company of The First National Bank of Hico ($46mm, TX) for an undisclosed sum.

But not everything has been rosy lately in bank-land. Oxford Bank ($266mm, MI) said it has terminated its agreement to be acquired by Level One Bank ($519mm, MI) due to an improving financial picture and regulatory delays in the process. Regulators closed another of Capitol Bancorp's banks, shuttering 1st Commerce Bank ($20.2mm, NV) and sold it to Plaza Bank ($438mm, CA). Plaza gets 1 branch, assumed all deposits and entered into a loss share transaction on $12.2mm of assets. Regulators also closed Mountain National Bank ($437mm, TN) on Friday and sold it to First Tennessee Bank ($25B, TN). First Tennessee gets 12 branches, assumed all deposits except brokered and bought most assets at a discount without a loss share. And Old National Bank ($9.4B, IN) will close 18 branches, as it seeks to improve efficiencies. The holding company of Whitney Bank ($13.2B, LA) and Hancock Bank ($6.6B, MS) will close about 17% of its 258 branches, as it seeks to adapt to customer changes and reduce expenses.

Yes, there is jockeying in the banks, but the FDIC reported that ccommercial banks and savings institutions insured by it reported aggregate net income of $40.3 billion in the first quarter of 2013, a $5.5 billion (16%) increase from the $34.8 billion in profits that the industry reported in the first quarter of 2012 (read MORE).  This is the 15th consecutive quarter that earnings have registered a year-over-year increase. Increased noninterest income, lower noninterest expenses, and reduced provisions for loan losses accounted for the increase in earnings from a year ago. Half of the 7,019 insured institutions reporting financial results had year-over-year increases in their earnings. The proportion of banks that were unprofitable fell to 8.4 percent, from 10.6 percent a year earlier.

Pacific Coast Bankers Bank reports that at the end of 2012, there were 7,083 banks in the US vs. 9,354 at the end of 2002 according to the FDIC (a decline of about 24% over the 10Y period). During the same period, cash balances jumped 70%, securities climbed 46% and loans increased 34%.

SNL Financial reports that as of Q1 2013, the top 10 largest banks and thrifts in the US by assets in order were JPMorgan Chase ($2.4T), Bank of America ($2.2T), Citigroup ($1.9T), Wells Fargo ($1.4T), Bank of New York Mellon ($356B), US Bank ($356B), HSBC North America ($305B), PNC ($301B), Capital One ($300B) and TD Bank US ($223B).

But rates have run up, as we know, and analysts are very interested in the impact on banks' balance sheets. While many assume higher rates will be a positive for the industry some institutions could suffer adverse effects by the actual increase, especially if a particular bank is heavily dependent on mortgage operations for its profits. With a sharp drop in refinance volumes as a result of the back-up in rates, stay tuned!

Not that this commentary can foresee the future, but it has certainly talked about the supply and demand of mortgage-backed securities, and how if supply drops and demand is constant prices improve. Yesterday this worked in our favor, as limited supply and declining prepayment risk provided a supportive tone to prices. Traders apparently saw around $1 billion of mortgage banker supply - about half of normal from a month or two ago. And the Fed continues to buy $3.2 billion, per day, net. Maybe Treasury prices came along for the ride, or perhaps they rallied on thinking that rates have run up too high too fast. Regardless, the 10-yr yield closed at 2.17% on a rally of almost .5 in price, and prices on 30-year FNMA 3.5s were up (improved) over .375.

So here we are on a Friday when many high schools are graduating classes, so look for a bit of a drop off in work attendance next week as folks head off for vacations. But that doesn't stop the news, and today we've had the May Producer Price Index (expected +.1% versus last month's -.7%, it was actually +.5% - is inflation heating up?). We'll also have the May Industrial Production and Capacity Utilization (expected +0.2 and 77.9, respectively), and a preliminary June reading on Consumer Sentiment. Rates are down from Thursday's close, with the 10-yr at 2.13% and MBS prices better by about .125.