Wells’ Mortgage Earnings Indicative of Industry? HUD to Limit Appeals?; CFPB Appraisal Fees

Federal Reserve does other things besides keep overnight Fed Funds at 0% for
years at a stretch. It releases some interesting stats on mortgages that, if
you need a filler for a presentation you’re doing, might come in handy – you’ll
notice mortgage debt dropping.

I don’t think that many in the business have an awareness of how Basel III will
impact banks
, and therefore mortgages and servicing, and therefore mortgage pricing for consumers.” I
tend to agree, although I am trying to alert folks about the possible

Basel III
is expected to be the norm for banks around the world, which brings up the
question, “How do borrowers finance
their homes in other countries?
” There is an in-depth look at this –
click on the link near the top right of this page.

Yesterday Citigroup missed estimates, reporting
disappointing earnings although net credit losses fell 40% as full-year net
income grew 6%. Citi Holdings (the bank’s operation set up to handle its toxic
debt remnants) saw its revenue fall $6.4 billion, but Citi released $1.5
billion in loan loss reserves, a 35% decrease from 2010 – nice to see.

Wells Fargo beat estimates with a 2011 net income
up 28% from 2010, helped by a release of $600 million from loan loss reserves
during the 4th quarter. Wells has tended to focus on the consumer
(as we’ve all noticed, given its 30%+ mortgage market share) and not on
investment banking as other banks have done. Wells Fargo said its bucket of
nonperforming loans in the fourth quarter declined roughly 20% from the period
a year earlier. Its loan total grew to $770 billion in 2011 from $757 billion at
the end of 2010, and profit in the
community banking division, which includes Wells Fargo’s retail branches and
mortgage business, soared 30 percent
. New mortgages rose 35% to $120
billion from the prior quarter, and net interest margin, the difference between
what the bank pays for funds and what it earns on loans and securities, climbed
to 3.89% from 3.84%.

banking non-interest income stood at $2.4 billion for Q4, up $531 million from
third quarter 2011, on $120 billion in originations, compared to $89 billion in
originations in Q3. Mortgage banking non-interest income in Q4 included a $404
million provision for mortgage loan repurchase losses, compared with $390
million in the third quarter (included in net gains from mortgage loan
origination/sales activities). Net mortgage servicing rights (MSRs) results
were a $201 million gain, compared to a $607 million gain in Q3 of 2011. The
ratio of MSRs to related loans serviced for others was 76 basis points and
the average note rate on the servicing
portfolio was at 5.14 percent
. Wells Fargo’s unclosed pipeline as of Dec.
31 was $72 billion, compared to $84 billion at Sept. 30, 2011.

Wells is seeing what many mortgage
banks are seeing in the FHA/VA sector
Yes, government loan production has increased, but so have delinquencies. By
the end of the fourth quarter, $19.2 billion of these loans were more than 90 days
past due, up from $16.4 billion the previous quarter and $14.7 billion at Dec.
31, 2010. (Wells became the top FHA and VA mortgage originator in the country
after 2010 and originated more than $112 billion worth of these guaranteed

Here is an
interesting note related to Wells’ FHA update. “Rob, I have a quandary that maybe you or one of the readers can help with.
We are a small mortgage broker shop incorporated in 1991. Up until recently we
were a mini-eagle when HUD/FHA eliminated that particular category. This is the
first part of the problem. We are no longer able to track the loans we
originated. We can see the general numbers up to last year when we were no
longer able to order case numbers with our ID. The previous loans’ performance,
however, is still being tracked within the two year time frame. And here is the
issue: our compare ratio is way out of
. As you know the compare ration is the percentage of loans that are
delinquent compared to the total number of loans originated. The problem has two parts. First the
lenders want explanations for the loans that are being shown as in default but
we can no longer find out who they are. So there is no way to do an
explanation. Second, the compare ration is only comparing the loans upon which we
ordered the case number, so the list for the last two years is becoming smaller
and smaller every month as the loans form this year are not being added, but of
the three loans one was late last year. So my compare ratio has gone from under
100 to 100 to 150 to 200 and is now 250! Eventually, just before they are all
over 2 years old it will be over 1,000. I
can’t be the only broker that this is happening to!
Multiple calls to the
FHA resource center have only ended in frustration as all they can tell me is
how to get the number. What should I do?”

One list
that neither Wells or Citi find themselves on is the list of four Wall Street banks who will be bidding
on the $7 billion mortgage-related securities previously owned by AIG
are due to be auctioned tomorrow by the Federal Reserve Bank of New York. Goldman Sachs, Barclays Capital, Bank of
America and Credit Suisse will bid on the debt
, which was acquired by the
New York Fed as part of the bail-out of AIG in 2008. The auction is being
managed by BlackRock Solutions. The $7 billion is part of a $20 billion portfolio
housed in a special purpose vehicle called Maiden Lane II. If the Fed obtains a
good price, subprime debt could rally because the sale will remove a
significant amount of supply that has been hanging over the market, investors
said – prices of subprime debt fell last week as rumors of the Maiden Lane II
sale circulated among traders and investors. Stay tuned…

All these
loans began their lives as applications, and the MBA’s study, representing 75%
of retail originations, showed that apps
were up 23% last week
. Purchases were up over 10% and refi’s were up over
26% – accounting for over 82% of all applications (the highest refinance share
since October 2010).

If you want to complain about HUD loan limits, you’d better hurry. HUD has proposed eliminating maximum loan
limit appeals.
Late last week HUD published a proposed rule to eliminate
the process by which interested parties may appeal the maximum allowable loan
limit for a geographic area. Noting the modern availability of
sales-transaction data at the county level, HUD states that there is no longer
a need to allow requests for alternative limits. Further, the appeals disrupt
HUD’s overall loan limit determination process, and, by eliminating appeals,
HUD will be able to release annual loan limits earlier, thereby providing more
certainty to the market. HUD also noted that, because of the availability of
transaction data, it received zero requests for appeal of the 2011 loan limits. Copy of the proposal

Have you ever wanted to see how a rating agency looks at a residential MBS? Kroll recently rated one of Redwood Trust’s
, and here is all the nitty-gritty.
The mortgage loans were originated by First Republic Bank (55%), PrimeLending
(19%), PHH (11%), Wintrust (3%), Flagstar (8%), Sterling Savings Bank (2%),
Cole Taylor Savings Bank (1%) and Guardhill Financial Corporation (1%). 
The mortgage loans will be serviced by First Republic Bank (55%), Cenlar (19%),
PHH (11%) and Select Portfolio Servicing (15%).

news, its “Rule” appears to “have eliminated
the commentary language included in the Fed’s version which allowed appraisal
management companies (AMCs) to include the fees
they have been paying
appraisers to comply with Dodd-Frank’s “customary and reasonable” appraiser fee
requirement. ASA has repeatedly stated its belief that the Fed’s interpretation
and the massive loophole it created ran contrary to the plain language and
clear intent of Dodd-Frank.” Maybe it is a deliberate decision by the Bureau to
reject the Fed’s dubious and troubling interpretation, maybe not.
Fortunately with all this, rates are doing very little. The 10-yr T-Note seems
content around 1.85%, mortgage prices did very little yesterday while Thomson-Reuters
reported that mortgage banker selling appears to have been between $1.5 and
$2.0 billion, which was partially offset by the usual Fed support. Perhaps mortgages
may struggle a bit more than they have so far this year as some investors
believe that much of the tightening in the event of QE3 has been priced in.

morning we’ve already seen the Producer Price Index for December -.1%, ex-food
& energy +.3%; the -.1% is better than expected. At 9:15AM EST are
Industrial Production and Capacity Utilization, expected +0.5% and 78.1%
respectively, and finally at 10AM EST homebuilder sentiment is gauged with the
NAHB Index (Jan) called unchanged at 21.0. After
the PPI interest rates are basically unchanged from Tuesday’s close.

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Refinance Applications Surge 26.4% as Rates Set New Lows

Mortgage applications jumped 23.1
percent on a seasonally adjusted basis during the week ended January 13,
2012.  The increase in the Market
Composite Index, a measure of loan application volume maintained by the
Mortgage Bankers Association (MBA) reflected improvements in both the purchase
and refinance business following the traditionally slow Christmas and New Year
holiday period.  On an unadjusted basis
the index increased 38.1 percent.

The Refinance Index increased 26.4
from the week ended January 6 to its highest point since August 8,
2011.  The seasonally adjusted Purchase
Index rose 10.3 percent, returning to pre-holiday levels.  The unadjusted Purchase Index was up 28.4
percent from the previous week and was 2.2 percent higher than during the same
week in 2011.

The four-week moving average for each
index also increased; the Composite Index increased by 5.99 percent, the
seasonally adjusted Purchase Index by 1.96 percent and the Refinance Index by
7.0 percent.

Refinancing took an 82.2 percent share
of all application activity, up from 80.8 percent the previous week and the
highest share since October 22, 2010.  Applications
for adjustable rate mortgages (ARMs) constituted represented a 5.6 percent
share of applications, up two basis points from the previous week.

Purchase Index vs 30 Yr Fixed

Click Here to View the Purchase Applications Chart

Refinance Index vs 30 Yr Fixed

Click Here to View the Refinance Applications Chart

dropped last week due to continuing anxieties regarding the fragile
economic situation in Europe,” said Michael Fratantoni, MBA’s Vice
President of Research and Economics.  “With mortgage rates reaching
new lows, refinance volume jumped and MBA’s refinance index reached its highest
level in the last six months.  Purchase activity also increased as buyers
returned to the market after the holiday season.”

the exception of jumbo loans (with balances over $417,500) interest rates continued
their downward trend. Three of the rates, in fact, hit the lowest level in the
history of the MBA applications survey.  The
jumbo rate – for 30-year fixed-rate (FRM) loans – increased to 4.40 percent
from 4.34 percent with points decreasing to 0.37 from 0.47 point.  The effective rate also increased.

FRM with conforming (under $417,500) balances hit a new low, decreasing to 4.06
percent with 0.48 point from 4.11 percent with 0.41 point. The effective rate
also decreased.

for FHA guaranteed 30-year FRM were
at 3.91 percent with 0.59 point, the lowest FHA
rate in the history of MBA’s application survey, down from 3.96 percent with 0.72 point.  The effective rate also decreased from the previous week.

third all-time low is the 3.33 percent rate with 0.39 point for the 15-year FRM. 
This was a drop from 3.40 percent with 0.37 point rate the previous week.  The effective rate also decreased.

average contract interest rate for 5/1
ARMs was unchanged at the record low 2.90 percent established the previous
week.  Points decreased to 0.45 from 0.49.   The
effective rate also decreased from last week.

rates quoted are for 80 percent loan-to-value originations and points include
the application fee.

 MBA’s covers
over 75 percent of all U.S. retail residential mortgage applications, and has
been conducted weekly since 1990.  Respondents include mortgage bankers,
commercial banks and thrifts.  Base period and value for all indexes is
March 16, 1990=100.

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Mortgage Rates Begin Week Holding Steady at Record Lows

After setting new records on Friday, Mortgage Rates
are absolutely flat to start the week.  That means that Best-Execution
remains most appropriately at 3.875% although 3.75% continues to be as close as it’s
ever been to getting equal recognition.  Depending on the scenario in
question, lower rates are available and in rare cases, could make

If you didn’t catch Friday’s Article, which went into a bit more detail on how we determine “Best-Execution,” it’s worth a read.  But the bottom line is really this: regardless of the actual interest rate levels, there’s no other way to say the following: rates today and Friday are as low as they’ve ever been.  How long will this continue?  There’s no way to know for sure, but we generally advocate a conservative approach with rates at all time lows.  “Conservative” in this sense simply means that history has shown us how quickly record-low rates can disappear.  While we certainly wouldn’t rule out the possibility that rates can improve, we’ve already been experiencing the fact that further gains are hard-fought and take more time than gains seen in the middle of the range. 

Whatever your disposition toward locking vs floating, it makes sense to set yourself a “stop,” of sorts, by deciding on a rate slightly higher than what you’re currently being quoted, at which you’d lock at a loss if the market moves against you.  Locking in such a scenario can prove exceedingly frustrating more often than not as the higher probability eventuality has been for rates to return lower, but this pales in comparison to the potential frustration of rates NOT returning lower.


  • 30YR FIXED –  3.875%, 3.75% as close as it’s been
  • FHA/VA -3.75%
  • 15 YEAR FIXED –  3.375% / 3.25%
  • 5 YEAR ARMS –  2.625-3.25% depending on the lender

Ongoing Lock/Float Considerations

  • Rates and costs continue to operate near all time best levels
  • Current levels have experienced increasing resistance in improving much from here
  • There are technical reasons for that as well as fundamental reasons
  • Lenders tend to get busier when rates are in this “high 3’s” level
    and can throttle their inbound volume by raising rates or costs.
  • While we don’t necessarily think rates are destined to go higher,
    given the above facts, there seems to be more risk than reward regarding
  • But that will always be the case when rates
    operate near all-time levels, and as 2011 showed us, it doesn’t always
    mean they’re done improving.

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Appraisers say "Don’t Blame the Messenger" for Low Home Prices

Appraisal Institute has apparently had enough and has decided to fight back
against what it perceives as unwarranted blame for depressed home prices.  In a press release the Institute says, ” Don’t blame the real estate appraiser if it turns out that
house you’re trying to sell or buy isn’t worth what you thought it was.”

Speaking for the Institute, its
president Sara W. Stephens, MAI said that real estate agents, homebuilders and
others have placed blame for the market’s distressed condition on appraisers
who produce opinions of value that don’t match a home’s listing, contract or
sales price, delaying a recovery in the housing market and called that
accusation “nonsense.”

“The fact is that appraisers are
undertaking the same thorough research and thoughtful analysis that they always
have in order to continue producing reliable, credible opinions of value,”
Stephens said. “Don’t shoot the messenger.”

It is unclear why the Institute
decided to refute the claims about appraisers at this time.  We did a search and found a number of
articles with the blame appraisers theme, but none that were more recent than
last summer except for charges from the National Association of Realtors that low
appraisals are among the reasons for recent high levels of sales contract
cancellations.  NAR, however, has been complaining
about low appraisals since at least the spring of 2009. 

Noting that buyers and sellers often
have emotional value attached to a home or are unaware of the market, Stephens
pointed out that appraisals completed for mortgage transactions are used to
assist lenders, who are the clients, not buyers or sellers, in making lending
decisions – and are not intended to confirm a listing, contract or sales price.
There’s no reason to assume the contract price is the “correct” price simply
because it’s higher than the appraisal, she said.

As to the claim that appraisers are
using distressed sales as comps for market rate properties, Stevens said that
qualified appraisers know how to handle adjustments for distressed properties
and added that in some markets, distressed sales are so prevalent that it would
be improper not to use them as comparables.

The Institute also released two
handouts.  The first explains the process
of conducting an appraisal
in a declining market and includes a discussion of
how an appraiser discounts a distressed comp. The second handout attempts to
explain what an appraisers job really is, making the points that:

  • Appraisals aren’t intended to confirm a home’s sales
  • Appraisers don’t set the real estate market; they
    reflect what’s happening in the market.
  • Appraisers work not for buyers or sellers, but for
  • Appraisers are independent, third-party experts with
    no motive to be biased.
  • Appraisals sometimes are assigned to the least
    qualified, least competent appraisers, but especially in a distressed market,
    competent and qualified appraisers – such as designated members of the
    Appraisal Institute – should be hired for difficult assignments.
  • Appraisers know how to use distressed sales as

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FDIC Invites Comments on Stress Test Rules

The Federal Deposit Insurance
Corporation (FDIC) has issued a notice of proposed rulemaking (NPR) for
comment.  The NPR would require the
larger of the banks it regulates to conduct annual capital-adequacy stress
tests.  The tests are one requirement of
the Dodd-Frank Wall Street Reform Act and will affect FDIC-insured banks and
savings institutions with assets of more than $10 billion.  The FDIC currently has 23 financial
institutions meeting that criterion

The proposed rule focuses on capital
adequacy and defines a stress test as a process to assess the potential impact
on the bank of economic and financial conditions (“scenarios”) on the
consolidated earnings, losses, and capital of the covered bank over a set
planning horizon.  FDIC said that these
stress tests would be one component of the broader stress testing activities
conducted by the banks which should address the impact of a broad range of
potentially negative outcomes across a broad set of risk types with impacts
beyond capital adequacy along.  These,
however, are beyond the scope of the proposed rule.

Under the NPR each covered bank
would be required to conduct the test annually using the bank’s financial data
as of September 30 of that year.  Where
the parent company structure of the covered bank includes one or more financial
companies, each with assets greater than the $10 billion threshold, the stress
test requirement applies to the parent and to each subsidiary meeting the threshold,
however the FDIC will coordinate with other regulatory agencies to minimize
complexity or duplication of effort.

As proposed, FDIC would provide each
covered bank with a minimum of three sets of scenarios representing baseline,
adverse, and severely adverse economic and financial conditions and each bank would
use these scenarios to calculate the impact on its potential losses,
pre-provision revenues, loan loss reserves and pro forma capital positions for each quarter end within the
planning horizon.

The NPR also describes the content
of the reports institutions are required to publish, and the timeline for
conducting the stress tests and producing the required reports.

FDIC Acting Chairman Martin J.
Gruenberg said, “Both the FDIC and the institutions being tested will
benefit from the forward-looking results that the stress tests will provide.
The results will assist in ensuring an institution’s financial stability by
helping determine whether it has sufficient capital levels to withstand a
period of economic stress.”

The FDIC’s proposal will be
published in the Federal Register with a 60-day public comment period.

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