Eminent Domain; More on Mini Correspondent; Deducting Mortgage Interest; The Popularity of 15-yr Refis

The United States does not have the only government that is knee-deep in controlling lending and real estate. Beijing, which already has China's strictest real estate curbs, is being forced to take additional steps to contain surging home prices as demands for record-high down payments fail to deter buyers. The city has enforced citywide price caps since March by withholding presale permits for any new project asking selling prices authorities deem too high. Local officials will need further tightening as they struggle to meet this year's target of keeping prices unchanged from last year.

The failure of official curbs to stem price increases in the nation's capital highlights the government's struggle to keep housing affordable as urbanization sends waves of rural workers into China's largest cities. New-home prices in Beijing rose by 3.1 percent in April from the previous month, the biggest gain among the nation's four so-called first-tier cities. They rose in each of the first five months of this year and more cities are expected to follow suit with price caps.

Do you think that banks collude on foreclosures, or in trying to sell REO? Personally I don't, but it something I am asked occasionally. Granted, banks and servicers may not hustle all the time, or may not have the internal process in place to run properties through lickety-split. But a recent story from Bloomberg has me wondering about this:

"Home repossessions in the U.S. jumped 11 percent in May after declining for the previous five months as rising prices and limited inventory for sale across the country spurred banks to complete foreclosures." (The numbers are from RealtyTrac, keeper of foreclosure stats.) "'Banks are more willing to move to the final stage of foreclosure because there is sufficient demand and prices are improving,' said Eric Workman of Tinley Park, Illinois-based Mack Cos., which aggregates single-family rental homes and resells them to individuals and institutional investors. 'For a very long period of time, the market in general and specifically banks were unsure of what these assets were valued at,' Workman, vice president of sales and marketing at Mack, said in a telephone interview.

"'With increasing stability of the economy and housing prices throughout the U.S., these banks and sellers are getting much more comfortable with the value of their properties.' "'Given the shortage of inventory and rising home prices, banks have little motivation to hold back on any foreclosures, so homeowners who have not been making payments for several months or even years without a foreclosure notice should expect to see that notice coming,' Craig King, an agent at the Reno, Nevada-based Chase International brokerage, said in RealtyTrac's report."

But heck, the Federal Reserve has spent trillions of dollars trying to revive U.S. housing prices, and at long last a recovery is underway. So it's more than a little surprising that amid this progress the New York Fed would suddenly lend its intellectual imprimatur to a dubious proposal for government to use eminent domain to seize underwater mortgages. It is an issue that just won't go away, and the article, titled, "Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt" (read MORE) turned heads last week. The author wants politicians to identify mortgages worth more than the homes, seize them via the power of eminent domain out of private trusts, refinance them with government help, repackage them into new securities, and sell those securities to new investors.

This might please underwater borrowers who would immediately pay less for their loan, and the politicians would take credit for the windfall. But the not-so-free lunch would be financed by the original mortgage investors, who would suffer losses without recourse. There's also the little issue of higher interest rates for future borrowers as lenders price in this new political uncertainty into mortgage contracts. Anyway, there are many strong arguments against it; here is the NY Fed article: http://www.newyorkfed.org/research/current_issues/ci19-5.html. The write-up closely resembles the eminent-domain argument made by Mortgage Resolution Partners, a private investment firm out of San Francisco. MRP could be a big winner in such a scheme as the re-packager of the seized mortgages into new securities in return for a fee. The firm has pitched the idea to the likes of Chicago and San Bernardino County, without success.

Just when you thought you had a handle on the CFPB, FDIC and OCC, the industry continues to prep for the Fannie Mae Loan Quality Initiative. It seems nowadays that executive management is in the business of managing compliance, as opposed to lending and building their business. Despite the fact that overworked underwriters are inundated with condition reviews and sign-offs, now Fannie Mae has added the burden of how to request refresh credit reports, how to review them, what to look for and how to determine whether or not the data in the refresh credit report keeps the loan within acceptable tolerance levels (or if new debt causes the loan to deviate outside of tolerance, requiring another AUS resubmission).

A loan officer from Massachusetts wrote asking, "Rob, many of my borrowers have refinanced into shorter term mortgages. Are you hearing that elsewhere?" You bet, and along those lines Freddie Mac recently released the results of its first-quarter 2013 refinance analysis, showing more refinancers are interested in shortening their loans. Of borrowers who refinanced during Q1, 28 percent shortened their loan term, Freddie Mac reported-up from 27 percent in Q4 2012. The majority (68 percent) elected to keep the same term as the loan they had paid off, while 3 percent chose to lengthen their loan term. Likewise, 85 percent of those in refinanced their first-lien mortgage maintained about the same loan amount of lowered their principal balance by paying-in additional money at the closing table, a few points down from the 88 percent peak in Q2 2012.

The analysis also found that refinancing borrowers "overwhelmingly" opted for the safety of fixed-rate loans, with more than 95 percent taking that route. Of those who previously had a hybrid adjustable-rate mortgage (ARM), 87 percent chose a fixed-rate loan during the first quarter, the highest share since Q1 2010. Borrowers who refinanced in Q1 will save on net approximately $7 billion in interest over the next year, according to Freddie Mac. Additionally, the GSE estimated $8.1 billion in net home equity was cashed out during the refinance of conventional price-credit home mortgages, "about the same as the previous quarter and substantially less than during the peak cash-out refinance volume of $84 billion during the second quarter of 2006."

For loans refinanced through the Home Affordable Refinance Program (HARP), the median depreciation in property was 28 percent, the prior loan had a median age of about six years, and the borrower with a 30-year fixed-rate refinance (no product change) had an average interest rate deduction of 2.1 percentage points. For all non-HARP refinances during the first quarter, the median property "had very little change in value between the dates of placement of the old loan and the new refinance loan." The prior loan had a median age of 4.1 years, and borrowers who refinanced a 30-year fixed-rate into the same product had an average interest rate reduction of 1.6 percentage points.

And the debate about deducting interest on a home mortgage continues. Joe V. contributes, "Rob, regarding your entry on the MID, here is a paper by Dr. John Weicher that may address some of your reader's concerns: "Rich, Poor, and In Between: Who Benefits from the Mortgage Interest Deduction?" Here's the link. "The most common criticism is that the deduction primarily benefits upper-income taxpayers, because many homeowners are unable to take advantage of it. In fact, lower-income families receive more tax benefit-and high income taxpayers substantially less-from the mortgage interest deduction than from the deductions for either state and local income taxes or charitable contributions."

And on the current events going on in the fuzzy border between correspondent and wholesale, I received this note. "A couple of points regarding the Mini Corr model. The basic mechanisms in the wholesale channel, the mini corr channel, and the traditional correspondent channel are the same, what changes is the responsibility for each part of the transaction. In the wholesale channel the broker originates the loan and submits and it to the investor for credit underwriting, closing, compliance and funding.

"There are several variations that have cropped up in the mini corr channel in recent years; some investors want to control the entire process (underwriting, closing, post closing) only allowing the broker/originator to order funds with or without a captive/dedicated line. All mini corr investors control the credit package but will allow or compel the broker/originator to outsource the closing and post-closing to an experienced firm to ensure that the loans are closed in a compliant manner.

"This is a piece that many new mini correspondents do not appreciate but as you have stated many times, compliance these days is crucial. Loans that are non-compliant are non-saleable to the investor. The traditional correspondent model the banker underwrites, closes, executes compliance reviews and funds with a line of credit. They assume the credit and compliance risk on a file. As I understand it the lender is the entity who sends funds to the table, not who underwrites the credit package." Thanks to Greg Chaffin for this note.

And this: "Interesting that you should address this question, as many brokers are going this route with investors such as Freedom, who offers a 'guaranteed purchase' when using our warehouse line provider.  Yes, it's not true correspondent, we underwrite and prepare closing docs, but that's how we can offer the guaranteed purchase, we control everything, so the risk to us isn't any different than a brokered loan. No worries of Lender Pad, Borrower Paid...but we still decline loans - there is no nirvana in this business."

With rates having moved up (the market has been expecting rates to go up as soon as they went down many months ago - is this a surprise?) it is good to keep things in perspective. I received this note from Mike Lynch with American Mortgage Network. "I wanted to help my LOs get their mindset adjusted to the new pricing. I guessed on the 50-year-ago rates based on my father in law's input from when he bought his first house in 1964. 50 years ago, mortgage rates were at 5.25%. June of 1970? 7.5%. June of 1980? 12.71% with 1.8 points. June of 1990? 10.16% at a 2 point cost. June of 2000? 8.29% at a .9 cost. June of 2010? 4.75% at a .7 cost!"

Once again, we're looking at another week of thrill-packed data. This week, however, we can jawbone about the Fed meeting, where no change is expected but the press will be talking about it nonetheless. Besides that we do have a fair amount of housing data. We have the NAHB survey today, Housing Starts and Building Permits tomorrow, Existing Home Sales Thursday. Besides this housing noise today we have Empire Manufacturing, tomorrow the Consumer Price Index (CPI) will update the price level of a fixed market basket of goods and services purchased by consumers. Thursday is Initial Jobless Claims, the Philly Fed, and Leading Economic Indicators.

Seriously, the big story this week will be Wednesday's Fed meeting. We've moved a long way higher in rates from a month or so ago; maybe we're about done with this move, and we'll head back down. Maybe not, and the economy is strong enough to handle higher rates.