A Number of Thoughts on Fannie & Freddie; How Big are Modern Loan Files?

The old saying goes, "If there is only one attorney in a town, he'll starve to death. If there are two attorneys in a town, they'll both get rich." Attorneys enjoy working with other attorneys, for the most part, and various groups of attorneys, compliance people, and capital markets personnel have been "doing some serious settlin'" in recent weeks. US Bank agreed to pay $53mm to Freddie Mac to settle loans it sold between 2000 and 2008. PNC has agreed to pay $89mm to settle legal disputes with Freddie over mortgages it sold between 2000 and 2008. Bank of America has reached a $404mm settlement with Freddie to resolve claims around residential loans it sold from 2000 to 2009. (This settlement and a prior one effectively settle claims on all loans sold prior to 2012.) And Fifth Third Bancorp announced a settlement with Freddie worth about $25 million. Go Freddie Go!

How big is a typical loan files these days? 500 pages? No way! Yes way! Just ask the MBA.

"Seeing a spider isn't a problem. It becomes a problem when it disappears." People a lot smarter than I am don't see Fannie Mae or Freddie Mac disappearing in the near future: there is little of substance coming out of Congress, there's yet another election next year, the agencies are earning too much money right now, and maybe the right people are beginning to understand the important role. But that won't stop lawsuits: the Treasury issued a filing in which it defended its treatment of Fannie/Freddie and urged a court to dismiss investor lawsuits. The Department of the Treasury said it hasn't improperly taken anything from investors and that investors can't prove they've suffered economic harm as a result of the conservatorship.

And it is very helpful to look at recent plans for the agencies in order to determine what might be ahead. I took a stab at writing about this in a blog titled, "What Do We Know about the Future of the Agencies?" in the right-hand column of www.stratmorgroup.com.

But all of this reminds me of a recently published book, and a description of it recently written by Paul Davis. I cannot attest to whether or not it is bedside reading quality, but "The Mortgage Wars", per Mr. Davis is the story of ousted Fannie Mae CFO Timothy Howard. Sure, he hasn't been there in nine years, but it still might be of interest. Howard was cut loose in late 2004 along with then-CEO Franklin Raines. "To hear Howard explain the issue, Fannie Mae bears little responsibility for the chaos that blew up other financial institutions, led to the creation of the Troubled Asset Relief Program and is spurring ongoing debate over the fate of GSEs. To him, the crisis was caused by a handful of greedy banks and mortgage lenders; Fannie was merely collateral damage in a series of battles. 'The mortgage wars were fought not over reducing risk to the taxpayers or providing the lowest-cost and safest types of home loans to consumers,' he writes. Rather the war was over 'ideology, market power and money.' Internal mishaps do not play a major role in Howard's telling of the Fannie Mae story. Instead, he asserts that the GSE remained fundamentally sound throughout the crisis and was the victim of vicious smear campaigns from groups such as FM Watch and 'free market ideologues' at the Federal Reserve Board and Treasury Department. Issues at the GSE were merely a case of shaped perceptions and slight-of-hand, rather than real problems. Howard offers very few mea culpas. He acknowledges that Fannie took too long to address the size of its portfolio and reliance on derivatives, and he second guesses the GSE's dalliance with manufactured housing. Rather than issue apologies, Howard opts to make a case for the GSE's actions. Adding adjustable-rate mortgages to the portfolio was necessary to reduce interest rate exposure. Easing loan-to-value standards was needed to fulfill a duty to affordable housing. Soaring debt was 'entirely market driven,' he writes. Furthermore, Howard asserts that Fannie implemented new discipline that was 'uniquely prepared' for the implosion of the housing market. 'The timing ... was nearly perfect,' he adds."

The article goes on. "What about the GSEs? He argues that Fannie is much healthier than what many in Washington claim. He asserts that the Treasury and Federal Housing Finance Agency threw anchors at the GSEs after the financial crisis, while regulators tossed out lifelines to banks. By forcing Fannie to reduce the size of its mortgage portfolio and obligating it to pay outsized dividends, the Treasury all but issued the GSE 'a death sentence.' Still, he acknowledges that the GSEs should be 'wound down over time' but only because of controversy - not poor performance. 'Critics' claims notwithstanding, the 'GSE model' for the secondary mortgage market was not flawed,' he defiantly writes. 'It was sabotaged by hostile and inept regulation. And the alternative free-market model proved to be an unqualified disaster.' Fannie and Freddie 'could be de novo companies or re-chartered' with the Fed or Treasury regulating returns. Government support, in the form of a catastrophic risk reinsurance fee, could be implicit or explicit. 'If we can succeed in devising such a system, something positive will have come out of the mortgage wars after all,' he concludes."

December 31 is only 11 business days away! Ken Harney at the Washington Post has a look at a plethora of mortgage/real estate-related tax credits and exemptions that are due to expire at the end of the year.  Like many items on Congress' to-do list, Harney doesn't have much in the way of expectations that any of them will be addressed in a meaningful way in time to extend the consumer-friendly provisions.  For example, homeowners who receive a modification, short sale or principal reduction from their lender would normally face a hefty tax bill from the IRS, as the amount written down is considered income.  However, over the last few years, Congress has passed one-year measures to extend federal tax protection for those homeowners - scheduled to expire on December 31. Additionally, laws providing tax credits for energy-saving home improvements and new construction and the mortgage insurance premium write off will expire if no action is taken in Washington. If Congress does indeed fail to extend any of the measures, late December should be a very busy time as consumers scramble to take advantage while they still can.

Cole Taylor Mortgage has updated the guidelines for its Jumbo products to change the qualification for 5/1 LIBOR ARMs to the greater of the note rate plus 2% or the fully indexed rate.  Guidance has also been revised for inter vivos revocable trust closings, non-arm's length transactions, and appraisals for Jumbo ARMs, which must be locked prior to the appraisal being sent to the investor for review.  The minimum FICO for all Jumbo transactions has been changed to 720, and clarification has been added for construction-to-permanent loans.

National MI issued a press release regarding its program for rescission relief after 12 months on every loan.

United Wholesale Mortgage has rolled out its custom-developed Income Calculator, designed for brokers to accurately determine a borrower's wages for 1003 applications. Available within the EASE broker portal, the Income Calculator allows brokers to use the same tools as underwriters, making the calculation process both more accurate and efficient and reducing the likelihood of underwriters' findings. 

Many think that the government has set out to drive small broker-owners out of the business. Certainly a number of small companies have joined larger ones. In yet another example, Colorado's Milestone Mortgage merged with The Mortgage Company (TMC). Milestone Mortgage is still its own entity, but is now a branch of TMC.

Mountain West Financial is offering two options for the CHF Platinum Grant, having added the new 5% grant to the existing 3%.  CHF no longer needs to wire funds at closing, as LOs will receive an obligation letter that establishes a legally enforceable liability for CHF to reimburse MWF directly, speeding up the closing process.  Grants are available for 30-year fixed rate FHA, VA, and USDA loans to use for down payment and/or closing costs.

In anticipation of the implementation of QM, MWF is no longer offering an Interest Only option on Conforming LIBOR or DU High Balance LIBOR 5/1, 7/1, and 10/1 ARMs.  Any loans locked under the existing IO product code must fund by January 15, 2014.

Turning to interest rates, they've slid higher. There was a surge in Weekly Initial Jobless Claims, better than expected Retail Sales, and a decrease in foreclosure activity: the news continues to indicate a decent economy. Especially when combined with higher stock prices, rising home values, and improving consumer sentiment. You can pick apart the numbers as much as you want, but analysts say that the odds of a taper announcement at next week's meeting have risen materially.

That being said, as the 10 & 30-year yields rise and the 2 year yield (and other short term rates) remains relatively flat, the "steepness" of the yield curve has increased. The Fed as committed to keep short term borrowing costs low. Recently the curve has hit its highest/steepest levels since 2011 while 30 year mortgage rates have also hit their highest levels since 2011. The difference between short and long term rates back then 250 basis points (2.5%), the same as it is now. But back then we had the potential for lower rates due to a continued slowing economy and continued Quantitative Easing by the Fed. We don't have that now: the economy seems to be doing okay, and QE will be "tapered off."

I have not met Ben Bernanke, but he doesn't seem like a quitter. There is some talk out there about Bernanke stepping down as chairman following Yellen's confirmation vote next week. Yellen would take over as chairman at the January meeting instead of March. Timing aside, it probably wouldn't change anything either in terms of near-term policy; the Senate is expected to vote on Yellen sometime next week. Price-wise, the NY Fed has continued to buy nearly $3 billion per day in TBA (to be announced - general agency MBS instruments) securities which dwarfs the $800 to $900 million in pipeline hedges which corresponds to roughly 80% of lender's production.

The scheduled news this week ended with the Producer Price Index this morning. It was expected to be roughly unchanged - when was the last time inflation was a problem? - and was -.1%. No big deal. The 10-yr is roughly unchanged (at 2.86%) as are the agency MBS prices that drive rate sheet pricing.