Why You Should Care about Mount Holly Gardens; Thoughts on M&A for Lenders; 36 business Days for QM

There is an abundance of smaller lenders who would rather focus on funding loans than on focus on compliance, and an abundance of companies with strong compliance departments looking to add production. Jeff Babcock from the STRATMOR Group sent a note to lenders, "Are you experiencing accelerating levels of anxiety about the economic viability of your mortgage origination company, especially considering the challenges imposed by current market conditions?  Do you forecast some unprofitable months ahead due to the inherent seasonality of a purchase business market environment?   Over the last four years of a refinance-driven market, the origination business has been largely cushioned from seasonality.  Would you like to explore the marketability of your company to prospective investors, but without putting yourself in play?"

His note continued. "Across the spectrum of issues and opportunities raised during our MBA Convention meetings, a frequent discussion topic was buy-side investors seeking to acquire midsize retail production platforms. This would suggest that the supply/demand economics are favorable for a seller who brings the 'right stuff' to the table.  Although this differs from buyer to buyer, generally speaking these investors are seeking some or all of the following platform characteristics: critical mass of purchase business at a current run rate of at least 75% of total production, proven ability to originate investment quality loans, a loyal LO field sales force that can be brought across to a buyer who brings attractive acquisition synergies, solid reputation with counterparties, and a corporate value system which is reasonably compatible with the buyer organization. The fundamental opportunity here is a reality that your company may have greater economic value by affiliating with a larger lender than continuing to muscle market share as a smaller independent.  The current market stresses makes this value proposition more feasible to realize. (Jeff can be reached at jeff.babcock@stratmorgroup.com.)

Where the heck is Mount Holly Gardens, and why should we care about it? It is a township in New Jersey and plenty of folks with a legal bent followed the Mount Holly Gardens discrimination dispute since it involved disparate impact. Here is the news. To sum it up, the fact that the case was settled means that the Supreme Court won't be able to hear it, and rule on it. The high court was expected to revisit a controversial legal principle known as "disparate impact," which has been used for decades to enforce the antidiscrimination Fair Housing Act of 1968. Opponents of the principle had hoped the high court would rule it unconstitutional, while civil rights groups hoped that it would be upheld.

Attorney Phil Stein (Pstein@bilzin.com) with Bilzin Sumberg Baena Price & Axelrod LLP writes, "Many held out great hope that the Supreme Court argument would take place as scheduled, and would ultimately lead to a strong rebuke to 'disparate impact' allegations by the CFPB and other oversight bodies in fair lending and UDAAP cases. Those allegations essentially make lenders vulnerable to civil liability and enforcement in instances in which no one contends that the lender had any discriminatory intent, and no one disputes that the lender's policies are anything but neutral and even-handed. The claim, therefore, is that those neutral, fair-minded policies nevertheless led somehow to inequitable results for a protected group. The settlement prevents the highest court in the land from having the opportunity to perhaps rein in disparate impact claims or eliminate them altogether."

And regarding the settlement Buckley Sandler, LLP wrote, "As the settlement process moves forward, it is expected that the Supreme Court appeal will likely be withdrawn. The Supreme Court, which agreed to address one of two disparate impact-related questions presented in the appeal; most importantly, the question of whether disparate impact claims are cognizable under the FHA. '...under current interpretation by several agencies and some Circuit Courts of Appeal, disparate impact theory allows government and private plaintiffs to establish discrimination based solely on the results of a neutral policy without having to show any intent to discriminate (or even in the demonstrated absence of intent to discriminate).' The implied significance of this case, and of real importance to the industry at-large, was the opportunity for the court to finally rule on the issue of whether the FHA permits plaintiffs to bring claims under a disparate impact theory."

Keeping in this legal vein, JP Morgan Chase has agreed to pay $4.5 billion to investors who lost money on mortgage-related securities. The settlement is with 21 major institutional investors. (This is on top of the JPM's settlement last month of a $13 billion deal with the US government over mortgage securities; $5.1 billion would go to settle charges that the bank misled mortgage giants Fannie Mae and Freddie Mac.) Now, 21 institutional investors that put money into more than 300 residential mortgage-backed securities are to be reimbursed by the bank. The securities in question were issued between 2005 and 2008 by JP Morgan and Bear Stearns - remember Bear? The deal still has to be accepted by trustees for the trusts that hold the securities.

Let's keep on with the bank, vendor, and agency updates.

During the recent MBA conference IDS, a nationwide provider of mortgage documents and compliance, announced an integration of its mortgage document preparation system, idsDoc with OpenClose's LenderAssist Web-based, mortgage banking and loan origination software (LOS). OpenClose users can now select the IDS documents they require, and are provided with the desired compliance and/or closing documents through a customized, easy-to-use interface. IDS safeguards inter-system data transfers in an effort to avoid data inconsistencies and the regulatory penalties that can follow. Documents are returned moments later and posted on a secured password protected web site or sent electronically. OpenClose users generate disclosures and closing documents through IDS without leaving the system.

NYCB Mortgage Bank has suspended its 5/1 PORT ARM 5/2/5 product line(s), and has suspended its Conforming Fannie Mae DU Refi Plus EA 30 Yr Fixed Core Level I (Standard & High Balance) product line(s).

FNMA has made several changes to its servicing policies, the first of which prohibits the use of blanket or master policies that cover multiple unaffiliated condo projects and require servicers to arrange with impacted borrowers on insurance policy renewals on or after February 1, 2014.  The existing policy for standard, Streamlined, and mortgage loan modifications for properties affected by a disaster has been updated to require the payment of the principal forbearance at the earliest maturity of the modification, sale or transfer of the property, refinance, or payoff of the interest-bearing UPB.  Property inspection reimbursement policy has been expanded to include all interior and exterior inspections, which the reimbursement amount capped at $15 per exterior and $20 per interior inspection, and guidance has been clarified to state that servicers cannot enter into an arrangement with a vendor where any conflict of interest exists.

Chase has removed the -.125 cure-by extension fee that applies to all direct trade loans and has clarified its policy to state that if all of the requested information is not received by the end of the third business day or cure-by date, the loan will be re-priced per the delivery schedule based on the date the last conditioned is received.  Loans for which all of the requested information is received before that deadline will receive the original pricing based on when the closed loan package was received, and as a reminder, loans must be locked prior to file delivery, and when Chase identifies new conditions as a result of documentation received through the suspense process, the cure-by date will not be reset.

Chase will no longer be applying the quarter Non-Agency ARM margin adjustment for Best Efforts Amortizing and Interest Only loans over $1.1m, including both new locks and loans that are re-priced to current market due to a re-lock, product change, or renegotiation.  To accommodate this change, sellers should ensure that all notes disclose the 2.25 margin instead of 2.50, regardless of the loan amount.

Without too much happening last week, agency MBS prices improved almost one point, bouncing back after the previous Friday's unemployment data caused the big selloff. But, as it always does, rates are mostly set by supply and demand, and with the mortgage supply down, and the Fed continuing to buy agency securities, well, rates could stay here for a while.

But one thing we sure don't hear about is inflation - the foe of fixed-income rates and prices. In 2008, when the Federal Reserve first announced plans to expand its balance sheet through large-scale asset purchases (quantitative easing), one of the primary concerns of critics was that the Fed's move could stoke inflation by bringing billions more dollars into the monetary system. Five years, three rounds of QE and $3.5 trillion later, we have not seen runaway inflation. In fact, it is very low - proving inflation forecasters were wrong (so far). So at this point high inflation is not a concern, and, if anything, low inflation is more of a problem.

And what about Europe - we don't hear much from it lately. Last week we learned, as expected, overall Eurozone GDP a rate of growth of 0.1% during the third quarter of the year after growing by 0.3% during the second quarter, a downshift from a relatively good performance for a region that has been trying to leave behind the sovereign debt crisis of the last several years. France was weak, but Germany strong - and the other economies are muddling along without causing a global disaster.

Returning to this country, the most significant economic data this week will be the Retail Sales data and the monthly inflation reports - although inflation has not been an issue. Retail Sales account for about 70% of economic activity and will be released on Wednesday. Anyway, today we'll have the NAHB Housing Market Index, tomorrow is an Employment Cost Index, Wednesday is Retail Sales, the CPI (Consumer Price Index), Existing Home Sales, and the release of the minutes from the Fed's October 30 meeting. Thursday is Jobless Claims and the Producer Price Index (PPI). For numbers, the yield on the risk-free 10-year T-note closed Friday at 2.71%, and is roughly unchanged from that level in the early going, as are agency MBS prices.