Past Mortgage News

Yesterday was a special day. In the late afternoon I visited Costco, which some people feel simultaneously represents everything that is both bad and good about the retail channel. The change in time over the weekend had made it so the setting sun shone through the front entrance, illuminating the Samsung 46 inch plasma, the flannel shirts, AND the pre-lit Christmas tree boxes all at once. It was a tender moment.
 
What are Fed Funds? These are cash balances held by banks with their local Federal Reserve Bank, typically involved in an “inter-bank sale” of a Fed fund deposit for one business day – overnight. And the Fed Funds Rate is the overnight interest rate charged by those banks with excess reserves on hand. Why would this impact the mortgage rate that James & Jen Borrower pay on their mortgage? They don’t, directly, since the credit profile of a borrower, or house, is more complicated and riskier than a bank with excess funds, and an overnight rate is obviously different than a 30 year rate.
 
As was expected, the FOMC kept its central message and the Fed Funds rate unchanged, noting that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." Of course the current economic conditions are low rates of resource utilization, subdued inflation trends, questionable housing situation, a weak labor market, and stable inflation expectations. The FOMC (Federal Open Market Committee) reduced the size of their Agency debt (bonds issued by the agencies, not directly backed by mortgages) purchase program to "about" $175 billion from $200 billion, but is still set on purchasing $1.25 trillion of agency mortgage-backed securities. Even with this adjustment the Fed balance sheet should peak above $2.6 trillion at the end of March 2010. Yesterday Wall Street dealers reported that mortgages have maintained their bid all session as sellers have been few and far between.

The Fed sees some signs of life, just like all of us do, in certain parts of the economy, and inflation not being an issue. Conditions in financial markets were roughly unchanged, but activity in the housing sector has increased over recent months. “Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.”

Fannie Mae will never be accused of not giving clients enough notice on changes. Instead of starting March 1, and now starting July 1, 2010, Fannie will “require the submission of electronic appraisal reports and their addenda in an acceptable XML format for all loans requiring an appraisal report. In support of electronic appraisal delivery, Fannie Mae is updating the 2000-Character Loan Delivery File Format.” Fannie letter goes on to list the fields and identifiers in question.
 
GMAC, to whom some lenders sell loans and warehouse with, reported a third-quarter loss tied to mortgage defaults. The net loss from continuing operations was $671 million, compared with $2.5 billion a year earlier, and was the eighth loss in nine quarters. Their Residential Capital LLC unit was specifically mentioned. GMAC received $13.5 billion in two rounds of taxpayer bailout funds and was negotiating a third infusion last month with federal regulators – expected to be announced on Monday. Res Cap’s loss narrowed to $747 million from $1.95 billion a year earlier. GMAC is boosting deposits at its Ally Bank unit to help fund new loans.
 
Radian Group, one of the top MI companies, reported a net loss for the quarter ended September 30 of about $70 million versus net income of about $37 million a year ago. Their chairman said, “We are encouraged by Radian’s lower-than-expected claims activity again this quarter, and the consistently high-quality, lower-risk mortgage insurance business we added to our book." The mortgage insurance provision for losses of $376.5 million reflects higher delinquency counts and the continued aging of delinquencies. (Radian expects delinquencies to continue to rise during the fourth quarter.) MI paid claims were $243.2 million, which again were lower than the company’s forecast, and consisted of $210.1 million of first liens and $33.1 million of second liens and Radian has reduced its claims-paid expectations from the $1.1 billion range, to a current estimate of $940 million, which includes $87 million of second-lien termination payments. And their current book of business ($3.4 billion in the last quarter) for new mortgage insurance written includes 99.9% prime credit quality and 74.6% with FICO scores of 740 or above.
Union Bank of California, owned by the Bank of Tokyo-Mitsubishi, adjusted their broker guidelines. More specifically, “two-unit condominium projects, where the HOA is inactive or “dormant”, are generally acceptable as long as the master documents allow for unit owners to obtain their own insurance, and there are no common elements other than common walls.” And for their “Portfolio Express Refinance” product, the maximum loan amount is $4,000,000 for one Portfolio Express loan but when the borrower has multiple Portfolio Express, Low Doc, Hassle Free or Fast Track loans, the $3,000,000 maximum applies. In addition, following other investors, the IRS Form 4506-T must be completed for the applicable tax years and executed by the borrower at time of application and again at closing.
 
Although it is rumored to be delayed, some time this month the FHA is to release the findings of its annual audit, which is expected to show that the projected value of the agency’s reserves has fallen below a federally mandated level of 2%, raising concerns that the FHA may need taxpayer money for the first time in its 75-year history. The price to pay for being a rescue agency? FHA officials say the agency has enough capital to withstand expected losses. Cynics say that the FHA (which doesn’t make loans but insures lenders against losses if a borrower defaults) is guaranteeing half of all home-purchase loans in some pretty badly hit areas, and delinquencies on refinance loans have risen faster than those on new loans in the past three years. Granted, practically all investors have overlays in place that improve the credit quality of the loans, but still many view an FHA loan as a substitute for the now-extinct popular subprime loan (although hard money lenders have also stepped in).  
 
Speaking of them, the FHA has made substantial changes to their guidelines pertaining to Streamline Refinance Transactions. U.S. Bank Home Mortgage Wholesale Division is the latest to outline the most crucial changes in regards to FHA Streamline Refinances. After November 18, FHA loans will require the borrower to have made at least 6 payments on the FHA-insured mortgage at the time of application. And at the date of loan application, the borrower must have an acceptable payment history which for mortgages with less than a 12 months payment history, the borrower must have made all mortgage payments within the month due, or for mortgages with a 12 months payment history or greater, the borrower must have experienced no more than one 30 day late payment in the preceding 12 months and made all mortgage payments within the month due for the three months prior to the date of loan application. In addition, there are other standard criteria regarding net tangible benefit, moving from a fixed rate loan into an ARM loan, and reducing the term.
 
For economic news we had Jobless Claims. Yesterday, however, in addition to the Fed announcement, Treasury officials announced a record $81 billion refunding package for next week. Sales include $40 billion in 3-year notes, $25 billion 10-year notes, and a $16 billion 30- year bonds to be held on Monday, Tuesday and Thursday. (Wednesday is a holiday.) Claims for jobless insurance hit a 10-month low. Are things improving or are the unemployed, or under-employed, just going off the radar screen? Initial claims for state unemployment benefits dropped 20,000 to a seasonally adjusted 512,000 in the week ended Oct. 31, the lowest since early January. The four-week moving average for new claims dropped for the ninth week in a row. Tomorrow, of course, the Labor Department is expected to report that the decline in employment is slowing and that payrolls fell 175,000 in October, compared with a decline of 263,000 in September. Currently the yield on the 10-yr stands at 3.54% and mortgage prices are a shade better than yesterday afternoon.
 

Mortgage banking is a numbers game. Although the illustration above might remind some of their CFO, in other circles it might remind others of what some mortgage bankers imagine they are facing right now: MI rescissions. Rescissions are not new. But what is this chatter about MI companies and their rash of rescinding coverage? One well-informed person wrote to me and said, "It seems that some MI companies are employing a rescind now/appeal later approach."

 
It is important to remember that MI companies generally only see a claim, filed by a servicer, after the foreclosure and the property becomes an REO. (They also see them during short sales and in a few other instances.) Of course, servicing companies keep the MI companies apprised of any 60 days-or-greater delinquencies, so it is on their radar screens. There are a few MI companies that have a reputation for rescinding on everything, but not every MI company is looking to put back every loan to the lender. The loans that are entering this process were mostly originated from 2005-07, and a portion of them are Pick-a-Pays, Option ARM’s, and the like, and in addition MI companies are seeing fraud, misrepresentation, loans not meeting the original terms of bulk commitments, and over-statement of value in them. Total loan volume increased dramatically during those years, so certainly the total number of MI rescissions has increased. Any issues with fraud or misrepresentation are a sure "red flag" when it comes to an MI company refusing to pay a claim. RMIC, for example, has a program for delegated claims servicing that will let the investor/servicer handle their own claims under certain parameters. 
 
Also adding to the increased number of loans being examined is the moratorium that servicing companies faced earlier this year. As I mentioned, the MI company usually only sees a claim when the loan becomes REO, and if there was a moratorium or backlog, they may only be seeing the loans now. MI companies have done what they can to staff up to meet the increased workload, especially on the investigation side of things, but like servicers they are trying to meet the onslaught of problem loans that have cropped up. Currently MI companies expect to pay out tens of billions in claims, with no conservatorship or TARP monies, through this cycle.
 
Given the possible losses, it should come as no surprise that rating agencies, often accused of mis-rating billions of dollars of MBS’s in previous years, are watching the MI companies closely. Especially with delinquencies moving into prime mortgages faster than expected, the rating companies are watching companies such as Old Republic, PMI, Radian, Genworth, United Guaranty, CMG Mortgage Insurance, and California Housing Loan Insurance Fund (CAHLIF). In fact, a few weeks ago S&P downgraded Mortgage Guaranty Insurance Corp (MGIC) to B+ /Negative Outlook.
 
Back to the economy! Wall Street MBS desks reported a light day yesterday, without much volatility. Originators are mostly selling their 4.75%-5.125% mortgages, although the Fed continues to buy higher coupons. We saw Construction Spending rise .8% in September, the biggest gain in a year, the ISM Factory Index come in well above forecasts, and Pending Sales of existing homes here in the US rise over 6% in September. These “pending sales” are up almost 20% versus a year ago, which many attribute to the tax credit and “really good” prices on the low end.
 
The FOMC meeting begins today, with the announcement tomorrow at 2:15PM EST with no change expected rates, but perhaps they tweak the language. The Fed may try to find a way of talking about what the conditions are under which interest rates would rise rather than simply pretending that there are no conditions under which rates would go up." So far this morning stock markets are “taking it on the chin”, rates are better, with the 10-yr down to 3.40% and mortgages a smidge better.
 
Wells Fargo’s Correspondent channel instituted some FHA Streamline Refinance Policy Changes, following HUD’s Mortgagee Letter 2009-32. After 11/17 FHA Streamline refinances purchased must meet the revised FHA policy in addition to meeting the current Wells’ policies of a minimum credit score of 640, adequate payment history, etc. What has changed is that Wells Fargo will no longer require an AUS certificate with FHA Streamline Refinances because HUD has instructed lenders not to use TOTAL on streamline refinances, and that Wells Fargo will align with HUD’s revisions on seasoning, net tangible benefit for the borrower, maximum CLTV when Streamline Refinances are serviced by Wells, etc., etc., etc. It is best for clients examine the list directly from WF.  Wells Fargo will continue to require Sellers provide an LP Feedback Certificate or DU Findings Certificate for all other FHA loan types besides the Streamline. (Speaking of which, after December 7, 2009, Wells Fargo Funding will limit the maximum CLTV allowed to 100% for FHA Streamline refinances that are not serviced by Wells Fargo.)
Wells Fargo is also adopting Fannie Mae’s qualifying ratio of 45% for Prior Approval loans. “On or after December 7, 2009, Wells Fargo will require the maximum qualifying debt to income ratio for the following conventional conforming Prior Approval underwritten loans, regardless of Loan Score and LTV.”
 
Remember that although Congress has passed a resolution regarding the loan limits, it is not law. Yesterday Flagstar addressed the current question about temporary high cost loan limits. “It appears as if these high cost loan limits will be extended through 2010. Therefore, we will continue to purchase loans under the temporary limits until further notice. An official announcement will be made once additional information becomes available.”
 
Some lenders found themselves on Citi’s “Black List”. Freddie Mac, as it turns out, also maintains an Exclusionary List “to protect the integrity of our mortgage purchase and servicing functions. The Exclusionary List is a list of people and institutions excluded from engaging in business transactions with Freddie Mac, either directly or indirectly. Over the next several months we are updating this list, and when reviewing it you will notice a significant amount of new information. You must keep the Exclusionary List confidential and use it only to ensure that no excluded person or organization is involved in a mortgage purchase or servicing transaction with Freddie Mac.” It can be found on their selling systems: please don’t ask me for it – I don’t have it, don’t have access to it, etc.!
 
Starting on 11/15, PMI is going to expand a number of their underwriting guidelines. Clients are waiting for information, but “condominiums will be insured at the same levels as Single Family Residences, to a maximum 95% LTV in non-distressed markets.  (Attached housing in Florida is not eligible.), Cash-Out Refinances will be eligible to a maximum 85% LTV with a 720 credit score in non-distressed markets, second homes will be eligible to a maximum 90% LTV with a 720 credit score in non-distressed markets, Construction-Permanent Loans in non-distressed markets will be eligible to a maximum 95% LTV to $417,000 with a 680 credit score, and 90% LTV to $625,500* with a 700 credit score (no coverage during the construction period, rehabilitation loans are not eligible), High-Balance Loans can be insured in non-distressed markets up to 90% LTV with a 700 credit score, and up to 90% LTV with a 740 credit score in distressed markets, and AZ, CA, FL, HI, MD, MI, NV, NJ and RI will now be eligible for High-Balance Loans with a maximum 85% LTV and 740 credit score.”    
 
Franklin American, after 11/18, is revising the maximum loan amount calculations for FHA Streamlines. “The UFMIP refund, if applicable, must now be subtracted from the loan calculation
− Discount points may not be included in the new mortgage amount.” They are also changing their “Net Tangible Benefit Guidelines” for refi’s so that the borrower’s total payment (PITI) must be reduced by the greater of 5% or $50, if transaction changes the loan type to a fixed rate loan from an ARM, the new the fixed rate may not be more than 2% above the existing ARM interest rate, and term reductions will no longer be eligible.

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