NJ Adopts Uniform State Test; The Supreme Court & Fair Lending; New Non-Agency Security?

I am in Colorado this week for the Richey May President & CEO Roundtable meeting, but here is some news regarding Ohio. When we think "The Federal Reserve", we usually think of the Board of Governors and Ben Bernanke, not any one of the 12 reserve banks who make up the system. I bring this up due to a small white paper written by the Cleveland Fed entitled "Policy Considerations for Improving Ohio's Housing Markets". In the report, they outline some of the main findings from the Federal Reserve Bank of Cleveland's years of research and outreach with Ohio bankers, community development practitioners, and other market participants.

They offer the report as an Ohio-centric companion to the nationally focused housing market report issued by the Board of Governors of the Federal Reserve System in January 2012, and provide a framework for weighing the pros and cons of programs aimed at stabilizing the housing sector. It's a great example of what makes the Federal Reserve System unique, and well worth a read by originators and real estate professionals in the region (read the report HERE).

Ask a secondary person how your bank can become more profitable and they might suggest more catered lunches....or possibly, creating and selling bonds backed by origination debt. While one idea isn't necessarily better than the other, the opportunity for small originators to securitize may be shrinking as Fannie Mae ramps up purchases of home loans from lenders for cash. While their cash window allows for quick sales, and the requisite liquidity some banks operate under, the process cuts out originators from the more profitable business of creating and selling MBS.

According to the article noted below, "About 31 percent of the $305 billion in new Fannie Mae-guaranteed securities in the first four months of this year were tied to so-called cash window purchases, almost triple the share in early 2011, according to data compiled by Bloomberg and JPMorgan Chase & Co. analysts' estimates." Bloomberg's article gives excellent examples of a shifting GSE, once a giant of liquidity, now more of an uncertain profit center for the U.S. Government, who currently owns around 90%. The most extensive article I've seen recently can be found HERE.

Certainly Capital Markets followers closely watch the difference between cash and security prices. The agencies, basically, buy loans two ways, and the prices can reflect the ultimate disposition of the loan: whether it is held in portfolio, or securitized by the agency rather than the lender. The issue was raised in last week's forum held by Fannie Mae, especially as this question pertains to developing the capability to securitize Fannie's ARM production purchased through the cash window. It is well known that Fannie has this ability for fixed-rate loans but not for adjustable production, which in turn impacts Fannie's ARM cash pricing. But Fannie and Freddie have plenty of projects to work on!

Moving away from agency securities to non-agency, Shellpoint Partners LLC is planning a $251 million transaction backed by non-government loans (read more HERE). Many know Shellpoint as the company backed by mortgage-bond pioneer Lewis Ranieri. And many remember that in November 2008, Franklin Bank in Houston, TX, failed after taking large real estate loan losses. The bank was founded by Ranieri, who served as the bank's chairman and took over the CEO duties in May 2008.

I am not a Fair Lending expert, but I received this note: "Hey Rob, do you see the following as a Fair Lending issue? We received notification from our investor, BB&T, that they would accept a manually underwritten VA loan only with an additional .25% "risk fee" and tried to explain that there's a 'known' issue running DU on VA's right now. We manually approved one for a well-qualified veteran where the DTI was 37.7% and Residual Income exceeded the requirement by 319%. The investor required an additional $546.50 because of the DU 'glitch,' which we paid instead of passing it on.  VA allows (and has always allowed) manual underwriting. Have you heard anything like this?"

I have heard things occasionally, and the commentary mentioned the use of DU on VA loans about a month ago. DU may deem the loan an eligible transaction for VA financing, but an investor's overlay may cause issues with credit or pricing. As you noted, VA has always allowed manual underwriting. But it is best to contact either your Fannie rep regarding DU questions, or the investor rep - in this case BB&T, for full requirements or overlays.

Speaking of Fair Lending, the U.S. Supreme Court will hear arguments in a major fair lending case that the industry has been following. Should Fair Lending suits survive when there is no indication that the lender intentionally discriminated against a particular group? The case itself (Mount Holly v. Mount Holly Gardens Citizens in Action Inc.) concerns a lawsuit filed by residents in New Jersey who pushed back against a redevelopment plan for a state township, saying the redevelopment would have a disparate impact on minorities by creating a community they could no longer afford and claims the plan to redevelop the township will have a disparate impact on minorities, thereby violating the Fair Housing Act. Here is the latest.

Fair Lending is certainly a component of loan officer licensing. In the past year, a number of states have expanded their use of the Nationwide Mortgage Licensing System (NMLS) to manage license authorities beyond the mortgage industry. The NMLS now administers state licenses for a variety of license types. The expansion of the NMLS into new license types is expected to continue in 2013 and beyond, raising important questions about licensing compliance and state regulatory supervision. A June 19 Ballard Spahr webinar will review the system's functionality and discuss ways that companies can adapt their compliance practices to this new licensing landscape.

The webinar will take place on Wednesday from 12:00 PM - 1:00 PM ET, and will be moderated by John D. Socknat, Practice Leader of Ballard Spahr. Panelists include Leslie Pettijohn, the Texas Consumer Credit Commissioner, and Tim Doyle, a top official with the Conference of State Bank Supervisors, which created the NMLS and whose wholly owned subsidiary, the State Regulatory Registry LLC (SRR), owns and operates the NMLS. Topics include how the NMLS works, how state reporting and renewal requirements are affected by the NMLS, the impact on examinations and state supervision, and additional states and license types migrating to the NMLS.  Learn more HERE.

The MBA of New Jersey reports, through E. Robert Levy, Executive Director & Counsel, that New Jersey has adopted the Uniform State Test. "We have been informed by the New Jersey Department of Banking that it has decided to utilize the new Uniform State Test (UST) as authorized by the CFPB, in lieu of the New Jersey state law test currently in effect.  The UST will be in effect in New Jersey as of July 1, 2013 and will replace the State law test from that date forward. The UST will allow those who pass it and the National Test to be licensed in all those states utilizing the new UST, rather than having to take each state's test. It is anticipated that while many states such as Pennsylvania have already adopted the UST, all states, with a few possible exceptions, will use and accept the UST, a significant benefit for those who will be originating loans in multiple states or who will move to another state with a new sponsoring company."

A recent Minnesota state court decision serves as a reminder to internet lenders of the perils of relying on choice-of-law provisions or arguments citing the Commerce Clause of the U.S. Constitution to avoid application of a borrower's home state law. In Minnesota v. Integrity Advance LLC, the Minnesota Second Judicial District Court ruled that a payday lender, in making at least 1,269 internet loans to Minnesota residents, had committed at least 7,614 separate violations of state law. The court rejected the lender's arguments that it was entitled to rely on the Delaware choice-of-law provision in its loan contracts and that application of Minnesota law would violate the Commerce Clause.

This case is a very good example of the severe penalties that Internet lenders can face for violations. Violations of Minnesota's payday loan law are subject to statutory damages of up to $1,000 per violation and civil penalties of up to $25,000 per violation. Noting that assessment of the maximum statutory damages and civil penalties formula would produce a total penalty of nearly $40 million, the court found the state's imposition of a total penalty of $7 million to be "both measured as well as appropriate." It also held the lender liable for the state's costs, disbursements, and attorneys' fees.

This morning the press seemed consumed with Ben Bernanke's retirement. That aside, the Fed's QE3 has held interest rates artificially low for quite some time, and there is plenty of conjecture about what will happen when it stops, and when that will be. My guess is that the sun will come up regardless, that borrowers will borrow and people will buy homes. But that is just a guess, given that they were doing those things when rates were well above 15%. There are many smart folks that think any change in Fed policy won't happen until 2014, but the market has become increasingly skittish. Even if "tapering" is really the same as tightening, QE and hiking rates are 2 different things.

Yesterday, with no real news, rates went higher on the release of a questionable article about how the Fed is close to commencing easing off its bond purchases. It was one reporter's opinion, but nonetheless moved the markets and agency MBS prices worsened .250 in a matter of minutes. By the close of the bond markets at 2PM PST, current coupon prices were worse .250 and the 10-yr was at 2.17%. There is one thing to note, and that is the June NAHB Homebuilder confidence index posted a large increase to the highest level since April 2006.

Today we've had the Consumer Price Index (CPI), and the Housing Starts/Building Permits duo, all released at 8:30 New York time. The CPI for May, expected at +0.2%, came in at +.1%, core +.2%. May's Housing Starts were +6.8% and Building Permits, a read on the future, were -3.1%. In the early going the rates are slightly higher from Monday's close with the 10-yr at 2.20% and MBS prices not doing much after Monday's prices changes.

From The London Times: A Well-Planned Retirement

Outside England's Bristol Zoo there is a parking lot for 150 cars and 8 buses. For 25 years, its parking fees were managed by a very pleasant attendant. The fees for cars was $1.40, and for buses $7.

Then, one day, after 25 solid years of never missing a day of work, he just didn't show up, so the zoo management called the city council and asked it to send them another parking agent. The council did some research and replied that the parking lot was the zoo's own responsibility. The zoo advised the council that the attendant was a city employee.

The city council responded that the lot attendant had never been on the city payroll.

Meanwhile, sitting in his villa somewhere on the coast of Spain, or France, or Italy, is a man who'd apparently had a ticket booth installed completely on his own and then had simply begun to show up every day, commencing to collect and keep the parking fees, estimated at about $560 per day -- for 25 years. Assuming 7 days a week, this amounts to just over $7 million dollars. And no one even knows his name.