Compliance, Encompass, Credit Changes in the Primary and Secondary Markets
Today are Q2 earnings numbers from JP Morgan, Citigroup, Wells Fargo and PNC – a look at the mortgage numbers in Monday’s commentary. What may be of more interest to some is that Sunday will be an anniversary of sorts: On July 16, 2013, the U.S. Senate confirmed Richard Cordray to a five-year term as Director of the CFPB in a 66–34 vote. He was sworn in the next day. His term ends in 2018. Will he leave voluntarily (a run at Ohio’s governor?), involuntarily, or term out? Stay tuned…
Trends in Credit Guidelines and Underwriting
Does anyone out there disagree that mortgage loans given to people who can't document their income helped cause the credit crisis? Yes, there is plenty of blame to go around, from borrowers to investors and politicians. Critics point out that no-doc and low-doc loans are usually given to borrowers that can't fully document their income. Yet it seems that investor demand for them, because of their higher yields, are helping lenders re-introduce them in various forms. Investors are seeking riskier assets with higher yields such as those found on alternative documentation loans. Hey, 8% is better than 4%, right? Banks have largely stayed clear of the market, leaving the origination to small and mid-sized lenders trying to gain small amounts of market share. On the demand side, private equity funds, hedge funds, and mutual funds are stepping up as buyers and placing the loans into private funds that are sold to institutional investors and wealthy clients. What could go wrong?
Advocates of the current crop of loans say that they require borrowers to show good credit and substantial assets or income, even if they can't verify it using traditional methods. And they'll say that a 43 percent DTI is a line drawn in the sand. And thus Alt-A loans have been re-branded as non-QM loans to avoid any stigma and where each lender has their own requirements. Self-employed borrowers can be served, as well as those who report their income sporadically.
Alt-A, depending on one's definition, hit their peak origination year in 2006 with $400 billion being originated. By early 2010 more than a quarter of them were more than 90 days delinquent, according to CoreLogic, nearly 4x worse than conventional conforming mortgages. Will things be different this time?
Mike Steer with MQM Research writes, "Here's a link to a chart - in the top left - that may be a good addition to your article I commented on a few weeks back about easing credit standards."
According to the Fannie Mae Lender Sentiment Survey, mortgage lenders eased credit standards in the second quarter as purchase volume was lower than expected and competition increased. Approximately 17% of lenders eased their standards for loans eligible for sale to the government-sponsored enterprises during the second quarter, up from 13% in the first quarter and 12% for the second quarter of 2016.
I received this note. "As a government underwriter (FHA, VA and USDA) I must agree with the industry vet regarding HUD (e.g., its housing goals influencing lenders to move down the credit curve). We have already lowered credit score and income requirement for the sake of homeownership because it vital to our economy. We must show some common sense when underwriting, however. When I have a borrower with a 580 FICO, without any money but a gift, I think to myself would I loan this person my 'personal' money? No! I remember not so long ago when a 640 FICO was required for FHA."
Fannie Mae's DU will be updated in late July to allow more loans to be approved up to the maximum allowable debt-to-income (DTI) ratio of 50%. A new Perspectives article by Jude Landis, Vice President, Credit Policy, provides insight into how DU's assessment mitigates risk for lenders and investors while responsibly expanding homeownership opportunities and delivering value to Fannie's customers.
Effective Friday, July 7, 2017, Flagstar Bank will no longer have a minimum credit score overlay when the mortgage insurance option is Lender Paid Mortgage Insurance (LPMI). Previously the minimum credit score overlay for LPMI was 660 for most products. The minimum credit score requirement will now follow the product description of each product.
The three nationwide consumer reporting agencies (CRAs) are now no longer reporting most civil judgments and tax liens. As a result, they will no longer be included in credit reports. Regarding Flagstar Bank's Conventional and Jumbo transactions, the underwriter is responsible for reviewing the credit report, title commitment, declarations section on the loan application and any other document in the loan file that may disclose the borrower has a tax lien or judgement. FHA, VA and USDA have confirmed that lenders must continue to perform due diligence in reviewing the borrower's judgments and tax liens and underwrite loans according to their respective guidelines. To comply with FHA, VA and USDA requirements, for Flagstar underwritten loans only, Flagstar will verify judgments and tax liens with its existing vendor(s). To ensure loans meet guidelines, if a tax lien or judgment is found, additional conditions will apply. Delegated correspondents, including Delegated Bulk Correspondents are not subject to Flagstar's vendor verification, although full representation and warranties for the correspondent performing the due diligence will apply.
While judgments and liens may no longer appear on the credit report, Pacific Union Financial must adhere to agency/investor requirements regarding the assessment of borrower credit and/or requirements to pay off existing judgments and/or liens. For this reason, Pacific Union has made the decision to require validation of potential judgments and/or liens on all loan transactions using a third-party source. Please note, Fannie Mae issued a Lender Letter stating that lenders are not required to determine the existence of judgments or liens not included on the credit report; therefore, this policy will be an overlay to Fannie Mae requirements.
AAF Comments on GSEs' Increasingly Risky Credit Transfers. In a post on its website, AAF commented on the current status of FHFA and the GSEs, which are retaining risky assets and transferring very little credit risk while remaining dangerously undercapitalized. AAF warns that FHFA and the GSEs' actions will most likely lead to another taxpayer bailout of the entities. AAF notes that while GSE reform remains a top priority to fix the housing finance system, private MI can be more extensively used in credit risk transfer to de-risk the GSEs' portfolios, which in turn will protect US taxpayers and the federal government.
Royal Pacific Funding's Choice Product (Agency & Jumbo Fallout) offers Loan Amounts to $3,000,000, FICOs as low as 580, LTV's up to 90% and DTI's up to 55%.
MWF's Credit Approval Without a Property procedure allows transactions to be underwritten by an Underwriter WITHOUT a chosen property and receive a full Credit Approval. This program is available for Purchase Transactions only, under all products, programs and occupancy types except EEM programs and Jumbo Loans. Refer to the How-To for detailed steps about submitting a TBD in BOLT.
NewLeaf's USDA minimum credit score has been reduced to 620. All other guidelines are unchanged. A new section was added to FHA regarding Undisclosed Mortgage Debt.
Capital Markets
The laws of supply and demand dictate that when the demand for a good drops, all else being equal, the price will drop. And bond math tells us that when prices drop, rates go up. There has been a lot of talk from Fed speakers lately around future rate movement and when they plan to shrink the balance sheet. These include: continue to expect the evolution of the economy to warrant gradual increases in the federal funds rate over the next few years (Yellen); reductions in the balance sheet are likely to begin this year (Yellen); start reducing the balance sheet soon (Brainard); will be closely watching inflation before determining whether more rate hikes are appropriate (Brainard). Market participants expect the next rate hike to come in December at the earliest.
Thursday prices dropped, and rates went up slightly, for no real reason - so we're about back to Tuesday's closing levels. (How's that for insight?) Fed Chair Yellen said that the Fed would factor the yield curve into its setting of the fed funds rate, and that she sees inflation risks as two-sided and that the Fed is not seeing very substantial upward pressure on wages. The 10-year note closed 6 ticks (almost .250) lower in price to yield 2.35% but the 5-year and agency MBS prices were only down/worse slightly.
This morning we've had June's retail sales (-.2%, -.2% ex-auto) and June Consumer Price Index (unchanged, core +.1%). Soon we'll see the June industrial production and capacity utilization numbers at 9:15AM ET, 3:15AM HST, and are expected at 0.5% and 76.9% vs. unchanged and 76.6% previously. And then the non-market moving numbers of business inventories and the University of Michigan Sentiment Index. Compared to last night rates are better: the 10-year is yielding 2.30% and agency MBS prices are better by .250.
Job, Product, and Lender News
Pacific Union Financial, LLC has opened a new Distributed Retail branch in Lisle, Illinois as a part of its ongoing expansion of its Retail channel. The new branch location will serve area residents with their home purchase and refinance needs. Branch Manager, John Kocher, has been in the industry for over 21 years and joins Pacific Union from CF Funding Corporation, a residential mortgage banking firm founded by John in Naperville. "John is well respected in the Chicagoland housing market and recognized for his dedication to outstanding customer service. 'We are very excited to support John's growth initiatives and look forward to his team bringing Pacific Union's unique business model and wide array of products to his local market,' said Area Sales Manager, Jeff Wilks. If you are a loan officer in the Chicago area and looking to grow your career with a successful company that offers first-rate tools and support, then contact Jeff Wilks and learn more about Pacific Union."
matchbox LLC and Ignite Integration Solutions are sister firms focused on growing their product offerings offered in conjunction with the Encompass system. Both firms are looking for experienced Encompass administrators to enhance their team; Encompass Certification would be a beneficial qualification. The candidate will be on an Encompass development team working on Encompass projects and future development offerings. The team member will be integral part of project team and actively involved in all aspects of Encompass development related projects and can work with clients on a national level. Please submit confidential inquiries/resumes to Frank Fiore and specify the job.
AmeriHome Mortgage Company, LLC is continuing its rapid growth and is seeking a VP, Marketing Compliance Officer to join its outstanding Compliance Team in the San Fernando Valley of Southern California. This position is specifically responsible for AmeriHome's sales and marketing compliance program, including advising on strategies, reviewing collateral, monitoring related processes and controls, and reporting and escalating as needed. The ideal candidate will have a JD or CRCM, with 7+ years extensive experience in the mortgage industry or consumer financial products and services arena. Successful candidates will be knowledgeable in FRB, OCC, and CFPB rules and regulations including TILA Advertising, RESPA Sec 8, MLO Compensation, UDAAP, TCPA/TSR, GLBA/FCRA Info Sharing, and other applicable regulations--including newly issued rules and regulations. Interested candidates should apply to Shelley Tam.
If you want to sell your loan and NOT your customer, turn to LenderLive Correspondent Lending. Lenders looking for a secondary market option offering competitive pricing, minimal overlays and fast turn times, and a partner that won't compete to retain or cross-sell your customers, look to LenderLive Correspondent Lending. We are a non-depository investor. Many mortgage investors are in the same business you are; expanding 'share of wallet' is their key objective, often at the expense of your customer relationship. Contact National Sales Manager, Bob Kallio to learn more.
You should try to meet with the team from Alight while they're at the CMBA Western Secondary Market Conference-they're helping nearly 40 top independent mortgage bankers manage the future of their businesses with powerful scenario comparison and analysis. Alight pulls in data from all your mortgage lending vendors-G/L, loan origination systems, capital market providers and more-from across the enterprise so firm ownership and management teams can run unlimited what-if scenarios to see the potential operational and financial impact of decisions-on P&L, balance sheet and cash flow-before they're made. Alight will be at CMBA Western Secondary Market Conference on July 19th - 21st at The Westin St. Francis, San Francisco. Contact Randall Crail to schedule your meeting with Alight today!