A Note on The Implications Of Flat Fee Pricing; Lender Updates Continue; Ready For Another Refi Wave?

Facebook…Facebook…Facebook…I
guess the financial press is tired of discussing things like Europe’s woes. (Even today’s closing paragraph at the bottom
is about Facebook.
) Say what you want, but it is influencing real estate
down in San Francisco
.

To help
keep things in perspective, I received this note about small improvements in
the price of real estate in various markets: “If I reduce your wages by
$1,000 a month for 5 years but finally, in one month, give you a raise of 0.2%
in February … would you really consider that positive overall? It does not
address the overreach of price declines that the banks fire sales have caused.
That little problem will take decades to resolve at 0.2% a month
increase.” I agree, and good point. We’d all agree, however, that at least the .2% improvement is better than
another drop
.

Certainly
this drop in mortgage rates is causing a nice rally in mortgage-backed security
prices (or vice versa). The March TIC (Treasury International Capital) data showed
that overseas investor holdings of
agency MBS declined by $9 billion in March
bringing the cumulative decline
in the first quarter to $24 billion. This is a continuation of the trend seen
over the past 3 years – In 2011 alone, overseas investors were net sellers of
$64 billion agency MBS.  Similar to the prior two months, overseas
investors continued grow their Treasury holdings but reduced exposure to agency
and corporate bonds. (Agency bond holdings – agency debt + agency MBS – of
foreign official institutions declined by $13 billion while their Treasury
holdings increased by $32 billion in March.) Investors from Luxembourg, Ireland
and Cayman Islands were net sellers of agency bonds, and China appears to be
continuing to reduce exposure to agency MBS by not reinvesting paydowns which
is more than offsetting positive net demand from Japan, Korea, Malaysia and
Taiwan.

The talk
about flat fee pricing continues;
here is one example of a note sent to mortgageloanorigination@cfpb.gov:
“This proposal will harm those seeking lower mortgage amounts.  Currently
if a company’s profit margin is one point in origination it is true that the
applicant for a $400,000 pays more in costs than the applicant for a $150,000
mortgage. The market, however, has prevailed that the cost of mortgages is
based upon percentages of the loan amount, i.e. points, and not flat fees, and
consumers by and large in my experience consider this a ‘fair’ practice. In
initiating a flat fee for the origination of a mortgage the ‘fairness’ factor
still comes into play.  If a flat fee is instituted companies will base
their flat fee upon their average loan amount and price off a percentage of
that loan amount.  Taking our company in Southern California our average
loan amount is somewhere around $375,000.  If we are required to institute
a flat fee and we use one and a quarter points (1.25% of loan amount) to cover
origination costs, processing, credit report fees, and our profit margin, that
is a flat fee of $4687.50, we’ll round down to $4500 for simplicity.”

The note
continues: “Now the $400,000 applicant will be paying 1.125% in origination
fees, the $500,000 applicant will be paying 0.9% and the $150,000 applicant
purchasing a condominium as their first home will be paying 3%. All markets
across the country have a wide range of applicants. Mortgage companies by and
large will price their flat fee origination costs to the middle of the market
thereby benefiting high mortgage borrowers and harming borrowers with smaller
mortgages. What will result is a lack of competition at the lower end of the
market as originators will price their fees to be attractive to the middle to
upper end of the market leaving the lower end of the mortgage market to either
pay higher fees or be limited to competitive pricing models of companies more
interested in volume than service and fulfilling client needs and abilities….Since
the originator is getting paid the same no matter where the loan is placed,
whether it is locked for 15 days just before closing or 60 days at application
there is little incentive to communicate
with the client to insure the right decision regarding locking in a loan
. The
real estate industry has always used percentages of sales price or mortgage
amount for costs to consumers.  If the CFPB feels that it is unfair for
mortgage applicants to pay different dollar amounts for mortgages based on
origination fees determined by percentage of loan amounts how is that different from real estate brokers basing their fees as a
percentage of the sales price?
In some markets agents will not take lower
price listings or buyers in that range, based on the lower compensation,
leaving the clients with reduced competition for their business.  Should a
flat origination fee model be instituted a similar result will occur in the
mortgage industry in every market nationwide.”

How do Ops
and compliance folks keep up with things? Here are some somewhat recent lender/investor/MI updates. As always, it is best
to read the actual bulletin, but this will give one a flavor for what is
happening out there. In no particular order…

Provided that they’re located in HUD- or DE lender-approved projects, units in
projects that are absent from Flagstar
Bank’s
denied list and listed as approved in the FHA’s Condominium Search
Engine are eligible for financing by the FHA.  Be aware that Flagstar
neither participates in DELRAP nor submits projects for HRAP and will only
review the project to have it taken off the denied list.  The requirements
for VA financing are similar; the condo must be absent from Flagstar Bank’s
denied list and be part of a VA-approved project. Flagstar has revised its base
pricing on Jumbo ARMs and Jumbo Fixed Rate products, which will affect certain
Jumbo price adjustments.  These changes took effect on May 14th. Other
Flagstar goings-on include the updated 90-day pricing on fixed rate government
loans in Loantrac and Price Quote and the suspension of DO Sponsorship requests
for the next two weeks or so.

Wholesale
clients of Mountain West Financial
are now able to finance HUD REOs with a repair escrow.  Under the FHA’s
Minimum Property Requirements, properties requiring less than $5,000 worth of
repairs as determined by an appraiser may be marketed for sale “as-is” with FHA
mortgage insurance available.  In such cases the purchaser must establish
cash escrow to ensure that any required repairs are carried out and may include
a cost equal to 110% of the estimated repair costs to their mortgage.  For
properties that are in need of repairs totaling more than $5,000, the proceeds
from escrow holdbacks will be held in a MWF escrow account until the repairs
are completed. Should the repair estimates be less than $1,000, the amount
listed on the HUD contract is acceptable as the amount of financeable repairs,
while a licensed contractor’s bid is required for estimates between $1,000 and
$2,000.  Estimates between $2,000 and $5,000 require two bids. For the
full details on termite/pest inspections, utility issues, appraisals over 120
days old, release of the appraisal to the lender or purchaser, appraisal
requirements for marketing, sales contract requirements, and case number
processing, speak to a MWF account executive.

Plaza Mortgage rolled out an Elite
Jumbo product that will allow consumers to take out loans of up to $2,500,000
with LTVs of up to 80%.  Single and double units, PUDs, and condos are all
eligible, and borrowers are offered purchase, rate/term, and cash out
options.  Elite Jumbo loans will be available to borrowers with credit
scores over 700 and are subject to a 6% limit on interested party contributions
as well as a requirement that they be manually underwritten.

The lower BPMI pricing and other rate changes announced by Radian Guaranty last month are officially in effect.  Updated
rate cards are available here,
though properties in New York will continue to be priced using the rates
effective from November 11, 2011.  New York properties will be priced at
the new rates upon receipt of regulatory approval.

How ’bout these mortgage rates? Are
they making a difference? Well, maybe not for the folks who couldn’t refinance
in the last 9 months, but for anyone who did, you may just see recent borrowers
coming back into the market – lured by 3.75% 30-yr mortgages that will probably
go into 3% MBS’s. Investors in
mortgage-backed securities are justifiably concerned. And companies that booked
servicing recently may be watching their portfolio run off, hopefully supported
by income from new originations
. Lenders are reporting that daily lock
activity has been fairly steady over the past couple of days, but in line with
the elevated volumes that were coming in the door at the end of last week.

Yesterday’s
news helped to support the “more slow
economy, more lower rate
” scenario. The Philadelphia Fed Business Outlook
current activity index fell to -5.8 in May, the Conference Board Leading
Economic Indicators declined 0.1% in April, and Jobless Claims were about
unchanged. But as one leading Wall Street firm noted, “Today’s move can be
attributed to a few reasons with large curve unwinds, large long end receiving,
lessening global inflation, the escalating crisis in Europe, and higher chance of
QE 3 being announced the most notables. Our 10-yr note rallied over .5 in
price, closing at 1.70%, and with the new lows in Treasury yields came new
record highs on MBS’s like 30-year FNMA 3.0%, 3.5% and 4.0% coupons.

There is nothing
exciting scheduled today for economic news, and the 10-yr is currently at 1.72% and MBS prices are worse by about .125.
Next week might be slow ahead of Memorial Day, and the focus seems to be on the
Facebook IPO. With that in mind…

A Hypothetical Letter
from Mark Zuckerberg On the eve of Facebook’s IPO:

Dear Potential Investor:
For years, you’ve wasted your time on Facebook.  Now here’s your chance to
waste your money on it, too. Tomorrow is Facebook’s IPO, and I know what some
of you are thinking. “How will Facebook be any different from the dot-com
bubble of the early 2000’s?”
For one thing, those bad dot-com stocks were all speculation and hype, and
weren’t based on real businesses.  Facebook, on the other hand, is based
on a solid foundation of angry birds and imaginary sheep. Second, Facebook is
the most successful social network in the world, enabling millions to share
information of no interest with people they barely know.
Third, every time someone clicks on a Facebook ad, Facebook makes money. 
And while no one has ever done this on purpose, millions have done it by
mistake while drunk.  We totally stole this idea from iTunes.
Finally, if you invest in Facebook, you’ll be far from alone. As a result
of using Facebook for the past few years, over 900 million people in the world
have suffered mild to moderate brain damage, impairing their ability to make
reasoned judgments. These will be your fellow Facebook investors.
With your help, if all goes as planned tomorrow, Facebook’s IPO will net $100
billion. To put that number in context, it would take JP Morgan four or
five trades to lose that much money.
One last thing: what will, I, Mark Zuckerberg, do with the $16 billion I’m
expected to earn from Facebook’s IPO?  Well, I’m considering buying
Greece, but that would still leave me with $16 billion.  LOL.
Friend me,
Mark

…(read more)

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