The Argument for the Fed Reducing MBS Purchases; 35 business days til QM; PACE Loan Update

For today’s history lesson, exactly 150 years ago US President Abraham Lincoln delivered the two minute Gettysburg Address. Sometimes it feels like that was about when I had my first capital markets job… Back then, the population of the U.S. was about 31 million, compared to 314 million now. We sure have grown.

Can we avoid having another “Taper Tantrum”? The Office of Management and Budget reports that the government will pay $2.5 billion to the federal employees that were furloughed for 16 days in early October 2013 in the form of back-pay and benefits. I am not passing judgment on this, but merely suggesting that the impact on the economy is not going to be as great as previously thought. (We’ll see if we go through this again in January & February…) But a recent story in the Wall Street Journal reminds us to be careful about statistics, especially when it comes to the Fed buying agency mortgage-backed securities. When it embarked on the program, The Fed was buying about 64% of eligible mortgage bond issuance. In recent months, the Fed’s purchases have accounted for around 68% - but as we know volumes are off, and analysts believe that unless they scale it back (taper), the purchases could approach 90% by year end.

It doesn’t take a genius to see that it is justifiable for the Fed to lower the amount of purchases, and still maintain the percentage of current production it is buying. The Fed has been buying $45 billion of Treasury securities and $40 billion of mortgage bonds every month. With refi business down 60%, and expected to fall further, and purchases not quite taking up the slack, agency issuance will drop more – and does the Fed want to soak up a higher percentage? “If the Fed doesn’t pull back on its mortgage-bond purchases, it will soon find itself buying an even bigger share of overall mortgage-bond issuance - effectively, by doing nothing, the Fed would increase, not decrease, its support of the mortgage market.”

“Mortgage-bond issuance is set to fall from around $150 billion each month earlier this year to between $90 billion and $100 billion monthly this fall, according to estimates by analysts at Credit Suisse, and the production of mortgage bonds that are eligible for purchase by the Fed are set to fall from $110 billion each month to around $60 billion.” So far as mortgage-backed securities are concerned, a taper might not really be a taper given the drop-off in mortgage production.

Will others pick up the slack? Before anyone becomes excited about talk of higher gfees spurring private money to come back into the market, remember that there is a cost in having no government backing. The National Information Center has released consolidated financial statements for bank holding companies for Q3 13 giving us close estimates about what is happening on bank balance sheets. Agency MBS holdings decreased by $13 billion for the top 50 banks by assets in their HTM and AFS portfolios during Q3 13. Conventional agency MBS holdings decreased by $8 billion, while the CMOs decreased by $5 billion. Wells Fargo had the largest increase in agency MBS holdings, adding $8 billion while Bank of America and Citigroup reduced their holdings by $5 billion and $6 billion, respectively. Holdings of non-agency MBS (think jumbo loans) of the top 50 banks increased by $4 billion, while the commercial MBS holdings rose by $5 billion.

We have 35 business days until QM is the law of the land.  Sections 1411 and 1412 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), require creditors to make a reasonable, good faith determination of a consumer's ability to repay any consumer credit transaction secured by a dwelling (excluding equity lines of credit, timeshare plan, reverse mortgages, or temporary loans).  Ability-to-Repay determinations; the final rule describes certain minimum requirements for creditors making ability-to-repay determinations, but does not dictate that they follow particular underwriting models. At a minimum, creditors generally must consider eight underwriting factors: 1. Current or reasonably expected income or assets; 2. Current employment status; 3. The monthly payment on the covered transaction; 4. The monthly payment on any simultaneous loan; 5. The monthly payment for mortgage-related obligations; 6. Current debt obligations, alimony and child support; 7. The monthly debt-to income ratio or residual income; and 8. Credit history. Creditors must generally use reasonably reliable third party records to verify the information they use to evaluate the factors.

But the devil is in the details! Are “bona fide” discount points included in the points and fees calculation, and if so, what does “bona fide” mean? There’s a whole lot of, “We don’t know what we don’t know until the CFPB decides what we didn’t do right” noise. Any company struggling to make money in this environment by not paying for the cost of compliance is making a mistake. Needless to say, there are plenty of them out there.

Let’s continue with some relatively recent agency and investor updates – as always it is best to read the actual bulletins.

“Rob, what are you hearing about CashCall, Inc.? The jungle drums are beating, and rumor has it that management gave up their Fannie approval recently…” I have not heard anything about CashCall, other than the company launched its auto loan division a couple weeks ago. You’re better off contacting the company directly.

A clarification to an investor update from yesterday (“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).”). NYCB actually replaced its 5/1 ARM, 5/2/5, with a 5/1 ARM, 2/2/5.

“Rob, I thought Fannie & Freddie set policy that they would not buy loans with PACE attached to them. Did F&F Change their policy?” No, there is no change to guidelines, although there was some news out last week regarding this program. On November 14, Fannie Mae issued a Selling Notice reminding lenders of this guideline. In that document (here’s the link: https://www.fanniemae.com/content/announcement/ntce111413a.pdf), however, Fannie Mae further states, “If the PACE (Property Assessed Clean Energy - a means of financing energy efficiency upgrades or renewable energy installations for buildings) loan is structured as a subordinate lien or unsecured loan, the first mortgage loan may be underwritten to Fannie Mae’s standard guidelines.”  I believe many PACE programs are set up as first lien loans, which are not permitted according to Fannie Mae’s Selling Guide because they have senior lien status to our mortgage.  I suggest you carefully review the terms for any program you are considering and specifically ask about the first lien status, relative to the mortgage lien.

Down the street at Freddie Mac, Freddie supports energy efficiency retrofits but the financing must be subordinate to the first lien delivered to Freddie. That's been part of its requirements for a very long time.  In fact, Freddie added a reminder that it won't buy PACE loans with a first lien priority in Freddie’s November 15 Bulletin. The Bulletin also instructed seller/servicers to monitor state and local laws to determine whether a jurisdiction has a PACE program that provides for First Lien priority. Quoting from page 2 of the 11/15 Bulletin: "In States or localities with PACE and PACE-like programs that provide for First Lien priority but require a “non-object” determination by the mortgagee, Seller/Servicers are required to object to the encumbrance of any Mortgage owned by Freddie Mac."

I have heard of companies “in the PACE business” allegedly telling folks that we won't find out about PACE because (they say) most underwriters have forgotten about prior agency bulletins. They also say if borrowers can refi or sell to pay off the PACE loan, F&F won't be any wiser. That is not the case – hence the bulletins last week – and the FHFA is supposedly monitoring these developments in the PACE industry. And, of course, lenders should know that if an underwriter forgets agency PACE policies and delivers a non-compliant loan, the lender would be in violation of Fannie &Freddie’s reps and warrants and risk a repurchase.

As another reminder, Wells Fargo is once again requiring sellers to submit tax transcripts in their loan files, effective immediately for all Prior Approval and delegated loans (both Government and Conventional).

Rushmore Loan Management Services LLC spread the word that it has received approval to act as a Freddie Mac seller/servicer. (With this approval, Rushmore is now an approved seller/servicer for both government-sponsored enterprises, Freddie Mac and Fannie Mae, as well as an approved issuer of Ginnie Mae mortgage backed securities.) Rushmore also announced that it had received a positive rating from Standard & Poor's Ratings Services, which assigned an average ranking to Rushmore as a residential special servicer and residential primary servicer.

US Bank rolled out its FHLMC Super Conforming 7/1 LIBOR ARM, now available to lock.  The new product allows second homes, investment properties, and cash-out refinances and permits up to 90% LTV on 1-unit primary residences.  The index, margins, and caps are the same as the existing FHLMC Conforming 7/1 LIBOR ARM (5/2/5).

US Bank has announced that it will be using the 2000 Census data to determine eligibility for all USDA loan applications requesting conditional commitments before January 10, 2014.  All packages requesting conditional commitments received by Guaranteed Rural Housing after that date will employ the 2010 Census data.

US Bank has clarified that, for Home Possible primary residences with LTV/TLTVs of less than 90%, contributions by interested parties is limited to 3% of the lesser of the sales price or appraised value.

Turning to the markets, the National Association of Home Builders reports that those tradesmen (and women) out there are about as confident as they were in October. “Given the current interest rate and pricing environment, consumers continue to show interest in purchasing new homes, but are holding back because Congress keeps pushing critical decisions on budget, tax and government spending issues down the road,” said NAHB Chairman Rick Judson. “Meanwhile, builders continue to face challenges related to rising construction costs and low appraisals.”

Monday’s market once again rewarded LOs and borrowers who didn’t lock during the unemployment data-led selloff, or lock during last few weeks. Frankly, there aren’t a lot of locks now, and the demand is still pretty strong. For Treasury securities, the 10-yr closed Friday at 2.72%, started Monday at the same level, and then closed at 2.68% - but agency MBS prices did much better.
 

For “lexophiles” (lovers of words - part 1 of 3)

A bicycle can't stand alone; it is two tired.
A will is a dead giveaway.
Time flies like an arrow; fruit flies like a banana.
A backward poet writes inverse.
A chicken crossing the road is poultry in motion.
When a clock is hungry it goes back four seconds.
The guy who fell onto an upholstery machine is now fully recovered.
You are stuck with your debt if you can't budge it.
He broke into song because he couldn't find the key.
A calendar's days are numbered.
A boiled egg is hard to beat.