Provident Cuts IOs; Ellie Mae up for Sale? Do Brokers Have to Keep 5% of Their Production?

I know it is already Wednesday, but here is something labeled "The Monday Map" which shows some interesting trends in personal incomes among the states - where the people with incomes are going. For example, Californians into Nevada is an easy one to spot. As Rob B. from MIAC observed, "When are politicians going to realize, that, like electricity, money will flow to the place of least resistance." Speaking of money, today we learned that some is flowing back into the mortgage market: the Mortgage Bankers Association reported that apps were up 1.3% last week. Refis were up 2.4% and are sitting at 61% of total apps; purchase apps were down slightly.

Here's one person that won't need any appraisals for a while: Darryl Layne Woods. He is the former chairman of Mainstreet Bank ($59mm, MO), and he pled guilty to siphoning off $381k of the $1mm his bank received under TARP. He used the money to buy a waterfront vacation condo in FL for himself. Under a plea agreement, he is banned from any further involvement in banking and will spend up to a year in prison.

Regulators and the public continue to see stories like the one above, and they continue to see stories about how well real estate is doing. It is hard to argue that areas of the nation are doing well. The latest comes from CoreLogic who reported that home prices, including distressed sales, increased 12.4% nationwide in July 2013 compared to July 2012, which is the 17th consecutive monthly year-over-year increase in home prices. Overall, home prices remain 17.6% below the April 2006 peak, but have increased 22.8% from the post-crisis low in February 2012.

(Read More: Home Prices Unfazed by Rising Rates)

The top five performers on the month were Chicago (48.7%), Phoenix (30.5%), Las Vegas (29.3%), Los Angeles (23.9%), and Boston (23.2%). The recent performance in Chicago is notable, as the area has historically had high levels of distress, low investor participation and has greatly lagged the national recovery. However, July marks the 4th consecutive month where Chicago HPA has exceeded the national average on both the total index and non-distressed index. The home price growth in Phoenix, Las Vegas and Los Angeles, all previously bubble markets, continues the trend of relative outperformance that has been seen throughout the year.

Is Ellie Mae up for sale? Lots of companies that have recently gone through an agonizing LOS conversion may be interested in this story.

I have received several questions along the lines of, "We're a mortgage broker doing about $20 million a month - do we have to keep 5% of our production in cash due to QRM?" The question revolves around what does a "sponsor" mean when it comes to QRM? First, remember that we have a couple months of public comment, but the concern is "...a proposed rule requiring sponsors of securitization transactions to retain risk in those transactions..."  As discussed in the original proposal, the agencies proposed that a "sponsor," as defined in a manner consistent with the definition of that term in the Commission's Regulation AB, would be a "securitizer" for the purposes of section 15G. My opinion is that a broker isn't concerned, but that mortgage bankers might be - the site to comment is below.

The SEC writes, "A sponsor typically initiates a securitization transaction by selling or pledging to a specially created issuing entity a group of financial assets that the sponsor either has originated itself or has purchased in the secondary market.46 Sponsors of asset-backed securities often include banks, mortgage companies, finance companies, investment banks and other entities that originate or acquire and package financial assets for resale as ABS. In some instances, the transfer of assets is a two-step process: the financial assets are transferred by the sponsor first to an intermediate entity, often a limited purpose entity created by the sponsor for a securitization program and commonly called a depositor, and then the depositor will transfer the assets to the issuing entity for the particular asset-backed transaction. The issuing entity, most often a trust with an independent trustee, then issues asset-backed securities to investors that are either backed by or represent interests in the assets transferred to it. The proceeds of the sale of the asset-backed securities are used to pay for the assets that were transferred to the trust. Because the issuing entity is designed to be a passive entity, one or more "servicers," often affiliated with the sponsor, are generally necessary to collect payments from obligors of the pool assets, carry out the other important functions involved in administering the assets and to calculate and pay the amounts net of fees due to the investors that hold the asset-backed securities to the trustee, which actually makes the payments to investors." 

So while "sponsor" is a commonly used term for the entity that initiates the asset-backed securities transaction, the terms "seller" or "originator" also are often used in the market. However, as noted in the text, in some instances the sponsor is not the originator of the financial assets but has purchased them in the secondary market. And so we use the term "sponsor." The credit unions' organization has certainly weighed in with its opinion.

And for the "sponsors" that must keep 5% in the form of risk retention, 5% of what? And for how long? All in all, the proposed rule would significantly increase the degree of flexibility that sponsors would have in meeting the risk retention requirements of section 15G. For example, the proposed rule would permit a sponsor to satisfy its obligation by retaining any combination of an "eligible vertical interest" and an "eligible horizontal residual interest" to meet the 5 percent minimum requirement. The agencies are also proposing that horizontal risk retention be measured by fair value, reflecting market practice, and are proposing a more flexible treatment for payments to a horizontal risk retention interest than that provided in the original proposal. In combination with these changes, the agencies propose to remove the PCCRA requirement.

The agencies have incorporated proposed standards for the expiration of the hedging and transfer restrictions and proposed new exemptions from risk retention for certain resecuritizations, seasoned loans, and certain types of securitization transactions with low credit risk. In addition, the agencies propose a new risk retention option for CLOs that is similar to the allocation to originator concept proposed for sponsors generally.

Yes, it is complicated, and mortgage bank and bank owners should read the proposal. The agencies invite comment on all aspects of the proposed rule, including comment on whether any aspects of the original proposal should be adopted in the final rule. Please provide data and explanations supporting any positions offered or changes suggested. You can submit your comments here. Or one can always e-mail the government through regs.comments@occ.treas.gov.

Those involved in the secondary markets (working with investors rather than borrowers) might be interested in the latest risk-sharing efforts from the agencies. Freddie had a deal 3-4 weeks ago, and Fannie is publicizing its approach through its lead placement agent and book runner Bank of America Merrill Lynch. BAML spread the word that today Fannie Mae is hosting an investor call (today, 12:30-2PM EDT) to present an overview of its approach to single-family risk. "Join Fannie Mae executives for a discussion of their approach to managing credit risk over the mortgage loan lifecycle. They will share how Fannie Mae's ongoing commitment to risk management strengthens loan performance and reduces losses, in anticipation of providing financial institutions with the opportunity to invest in Fannie Mae's single-family book of business through credit risk sharing transactions." Register Here.  Event Number:  595 704 387.

And HUD announced changes "to manage risk associated with the Federal Housing Administration's (FHA) reverse mortgage or Home Equity Conversion Mortgage (HECM) Program." Here you go.

"Provident Funding will discontinue all interest only loan programs effective 9/15/2013. Interest only loan files locked prior to 9/15/2013 must be Prescreen Complete no later than 10/15/2013. Interest only loans will not be eligible to fund after 12/15/2013."

Today, as it does eight times a year, the Federal Reserve will issue the Beige Book, a snapshot of business conditions in each of the Fed's 12 regional bank districts. The findings are all anecdotal; there are no numbers, and are compiled about a week before it is published and thus is very current. The Beige Book (formal title: "Summary of Commentary on Current Economic Conditions by Federal Reserve District") is updated two weeks before each meeting of the Fed's policymaking meeting in Washington. Staffers at each of the 12 regional banks compile the information by contacting businesses, economists and other financial experts by phone, through questionnaires and e-mail. The businesses range from retailers and home builders to hotels and restaurant owners. The idea is to detect trends in consumer spending, manufacturing and real estate, among other areas. Consumer spending is particularly important because it accounts for about 70 percent of gross domestic product. GDP is the value of all goods and services produced in the United States. The staffers also conduct separate monthly surveys of manufacturers in each region, paying particular attention to that region's major industries. The regional staffs compile the responses into 12 regional reports, each of which appears in the Beige Book. The writing of the introduction is rotated among the 12 regional banks, and the report becomes part of the information discussed by the Federal Open Market Committee. There you have it!

But looking back to yesterday's news, if one only looks at the scheduled numbers the economy seems to be moving along. The ISM Manufacture's Index came in at 55.7 versus 54 expected. (New orders are at their highest since April 2011.) Construction spending in August was up 0.6%, also higher than expected. Even prior to those numbers bond prices were lower, and rates higher, after the US took no military action against Syria over the weekend. By the end of the day, depending on coupon and maturity, prices were worse .250-.625 for mortgage-backed securities.

We've had some trade figures out for July. Expected lower to -$37.7B vs. -$34.2 billion prior, the deficit actually came out at -$39.1 billion. And as noted above in detail, at 2PM EDT the Fed releases its Beige Book. The 10-yr closed at a yield of 2.85% and is now 2.86% - don't look for much change in agency MBS prices.