CFPB & RMIC; New Mortgage Form Chatter; Thoughts on Hedging Non-QM Loans

Flagstar Bank has spread the word that Flagstar is adding an option for “VA IRRRL Other Servicer” to use AVM rather than an appraisal up to 100% LTV. In addition Flagstar removed its overlay on FHA loan limits for 3-4 unit properties. The broker and correspondent investor has recently put in place many enhancements to its government lending suite, so contact your Flagstar AE for more information– prospective clients should click on “Search” to find their state, and contact information for AEs.

In another private mortgage insurance company, other events are unfolding. The Consumer Financial Protection Bureau took action recently against RMIC for allegedly paying kickbacks to lenders in exchange for business. (Kickbacks: if you can’t do the time, don’t do the crime.) Per the CFPB, Republic Mortgage Insurance Company had been paying kickbacks to lenders for years, and under a proposed consent order, RMIC has agreed to pay a fine and put an end to the practice. But unlike the other fines (Castle & Cooke, $4 million out of $13 million) or Chase (in the billions), the CFPB is requiring “RMIC to pay a $100,000 penalty” due to providing kickbacks to more than 100 mortgage lenders by purchasing captive reinsurance.

Under the consent order, RMIC will be prohibited from entering into any new captive mortgage reinsurance arrangements with affiliates of lenders or obtaining captive reinsurance on any new mortgages for 10 years. As already-existing reinsurance arrangements end, the company will forfeit any right to funds “not directly related to collecting on reinsurance claims.” RMIC will also be subject to CFPB monitoring and will have to make regular compliance reports to the agency. (Followers of RMIC know that it’s currently under administrative supervision by the North Carolina Department of Insurance after the state found the company’s finances “in such a condition as to render the continuation of its business hazardous to the public or to holders of its policies or certificates of insurance,” according to a report by the state’s commissioner of insurance.) CFPB's take .

A week or two ago this commentary mentioned that the CFPB is expected to use today’s field hearing to announce the new disclosure form. Very little that comes out of government these days is much of a surprise, and sure enough Bloomberg is reporting that CFPB’s Director, Richard Cordray, will use the occasion to unveil the long-awaited new mortgage disclosure form.  Bloomberg says the CPPB will not provide a carve-out exempting small lenders from using the form. Mortgage News Daily reports that, “The supposedly simplified form has been on the drawing boards since before CFPB was formed and is intended to replace forms mandated by the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA).  A simplified format for these disclosures was first suggested by Elizabeth Warren in 2011 and was among the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act which consolidated responsibilities for the disclosures from two separate agencies into CFPB.”

Ask anyone in Columbus, OH or St. Louis, MO what they have in common with Boston, MA or Newark, NJ and you may be met with blank stares (no, it’s not fabulous chowder, or Soprano Tours). As a reminder, the CFPB recently announced new partnerships with the two mid-west cities. The new partnerships allow consumers to call a local hotline in order to reach the CFPB. A consumer who calls the local hotline with a question or complaint about consumer financial products or services will be transferred directly to the CFPB by city representatives. In an attempt to curtail the concern of long distance charges to whistle blowers the agency has stated that “Our mission at the CFPB is to make it easier for consumers to navigate the complex consumer financial markets, and we are always looking for new ways to connect with consumers, and we are happy to work with Mayor Slay to better serve the residents of St. Louis.” Press “1” for Building Permits, “2” for the CFPB.  More...

34 business days until Qualified Mortgages are the new paradigm, and, potential future liabilities aside, capital markets personnel are concerned about hedging non-QM loans. Or should they be? Bob Gundel of Compass Analytics writes, “Those lenders contemplating originating Non-QM loans should consider how pricing and hedging such loans differs from pricing and hedging vanilla agency production and take steps to prepare for these differences…How will non-QM loans sold in the secondary market? Since FHFA directed Fannie and Freddie to comply with QM in regards to term, amortization, and points and fees limits, and FHA-insured loans must adhere to the CFPB restrictions on points and fees, loans originated outside the QM guidelines would be sold to private Investors (non-agency execution), and thus would be priced as a whole loan or structured cash flow product.” Mr. Gundel goes on to describe some of the considerations prior to originating non-QM loans. “What investors are buying non-QM loans? Does the lender have more than one outlet for non-QM loans? Are investors providing daily pricing indications for non-QM product? (Many investors only provide daily best efforts pricing for non-agency, but will buy non-agency loans via mandatory bulk delivery). Do mandatory price spreads over best efforts (net of expected hedge cost) justify taking on interest rate, fallout, and basis risk? Will servicing be retained or released at execution? Are investors buying servicing? Does the lender have the ability to retain servicing? How will servicing be valued for rate sheet/MTM/book value? (What prepayment model to use?)”

The write up, which is relatively in-depth, continues. “Since investors may be spotty, and pricing unpredictable particularly in the early days, pricing loans to rates sheets, while attributing non-agency security duration to non-QM loans is the preferred method for modeling gain/loss, pullthrough, and hedge ratios.” He concludes with, “Early non-QM product will likely entail volatile prices and large profit margins. In a similar manner to the current jumbo market, a few securitizers/aggregators will emerge and the bulk of the industry will sell best efforts to those aggregators. As the market matures, pricing will become more stable, mandatory programs will open up and margins will contract.” (If you have questions about Compass or hedging, contact Bob at bgundel@compass-analytics.com.)

If you are a reverse mortgage lender, you don’t want to look up and see the Gray Panthers picketing your office. If you’re an elected official, you probably don’t want to see that the NAR, and practically anyone “in the know”, is accusing you of making mistakes. But indeed, that happened to Maxine Waters with recent flood legislation. NAR wrote, “Homeowners across the country should not be forced to pay for the sudden and dramatic flood insurance premium increases that are the unintended consequence of the Biggert-Waters Flood Insurance Reform Act of 2012, insisted the National Association of Realtors today in testimony before the U.S. House Financial Services Subcommittee on Housing and Insurance…NAR was a vocal advocate for the Biggert-Waters legislation to extend the program for 5 years and end the uncertainty of shutdowns that were stalling 40,000 home sales each month. However, due to the unprecedented scope of premium increases and other unintended consequences, NAR recommends that Congress seize the opportunity to pass the ‘Homeowner Flood Insurance Affordability Act.’” (This legislation would delay further implementation of major rate changes until the Federal Emergency Management Agency completes an affordability study required by Biggert-Waters; creates an office of the Advocate to investigate flood insurance rate increases; and reports to Congress with proposed solutions to any identified problems.)

Missouri knows a thing or two about floods. It has modified certain provisions regarding financial institutions in House Bill No. 329. The bill replaces various statutes relating to financial institutions. Under 361.160, the director of finance “must arrange to visit and examine bank and trust companies annually.” The amendment creates an exception for a "private trust company", defined as "one that does not engage in trust company business with the general public or otherwise hold itself out as a trustee or fiduciary for hire by advertising, solicitation, or other means and instead operates for the primary benefit of a family, relative of same family, or single family lineage, regardless of whether compensation is received or anticipated." These sections and modifications are effective immediately.

Here in Colorado that saw its share of flooding a few months ago, the state recently repealed various provisions and has adopted new amended provisions regarding professional standards of mortgage loan originators and companies. Under the new legislation, individuals who take residential loan modification applications or offer loan modifications are required to be licensed as a Colorado mortgage loan originator. The new law requires mortgage loan originators to have all borrowers describe, in writing, the reason they are seeking a mortgage loan, modification or refinance. The law demands that a mortgage loan originator only recommend appropriate products after making a reasonable inquiry, in order to understand a borrower's current and prospective financial status.

Shifting gears to the markets, rates slid slightly higher Tuesday, with agency MBS prices worse about .125-.250. The only reason I could discover for the increase was that “they just didn’t want to go lower.” Yes, there was some chatter about “heavy global supply” or nervousness about a Ben Bernanke speech last night. Regardless, the fact remains that at this point mortgage banker supply is about $1 billion a day and the Fed is buying more than that. The risk-free 10-yr T-note closed with a yield of 2.71%, and in the early going is basically unchanged from that level.

We do have some news coming out, like the Mortgage Bankers Association's mortgage application indexes (w/e 11/15), followed at 8:30 a.m. with October Retail Sales (+0.1 for both headline and ex-autos) and October CPI (+0.0 and +0.1 for headline and core). Last at 10 a.m. are October Existing Home Sales (-1.9 percent to 5.15 million) and September Business Inventories (unchanged at +0.3).
 
For “lexophiles” (lovers of words - part 2 of 3)

He had a photographic memory which never developed.
The short fortune teller who escaped from prison was a small medium at large.
Those who get too big for their britches will be exposed in the end.
When you've seen one shopping center, you've seen a mall.
If you jump off a bridge in Paris, you are in Seine.
When she saw her first strands of grey hair, she thought she'd dye.
Santa's little helpers are subordinate clauses.
Acupuncture is a jab well done.
The roundest knight at King Arthur's round table was Sir Cumference, Who acquired his size from too much pi.