Mortgage Rates Improve For a 3rd Straight Day, Nearing All-Time Lows Again

Mortgages Rates
continued their march into better territory today, capping a 3 day effort of improvement following Wednesday’s FOMC Announcement.  At this point, rates have not only solidified their re-entry into 3.875% Best-Execution levels, but some lenders are once again competitively priced at rates below that (for detail on “best-execution,” READ THIS POST). 

That said, we’ve seen a high degree of stratification over the past 3 days as lenders have responded to the bond market rally at different paces.  When we say that rate offerings are more stratified, we’re talking about various lenders offering increasingly different rates to the same type of borrowers.  At a good handful of lenders in our survey, best-execution rates are still at 4.0%, while the bulk have moved down to 3.875%.  But a few outliers now stand at 3.75% with the leaders being quite a bit further away from the laggards than normal. 

This isn’t too surprising considering the uncertainty leading up to the FOMC Announcement and the pace of the rally that followed.  Given more time to adjust, lenders will tend to get closer and closer together when underlying markets are stable and always be prone to a but of stratification when markets are on the move (especially when those moves result in shifting Best-Execution rates as opposed to simply minor changes in closing costs).  


  • 30YR FIXED –  3.875% mostly, with a few lenders at 4.0% still, fewer still at 3.75%
  • FHA/VA -3.75%
  • 15 YEAR FIXED –  3.25% now
  • 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
    operating near historic lows
  • (As always, please keep in mind
    that our talk of Best-Execution always pertains to a completely ideal
    scenario.  There can be all sorts of reasons that your quoted rate would
    not be the same as our average rates, and in those cases, assuming you’re following along on
    a day to day basis, simply use the Best-Ex levels we quote as a
    baseline to track potential movement in your quoted rate).

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AG Holder Announces Structure of MBS Fraud Unit

The formation of the Residential
Mortgage-Backed Securities Working Group
tasked with investigating mortgage
fraud is now official.  The new office,
which will be part of the Administrations Financial Fraud Enforcement Task
Force (FFETF) was first announced by President Obama in his State of the Union
speech on Tuesday.

At a press conference this morning (video below), Attorney General Eric Holder along with
Housing and Urban Development (HUD) Secretary Shaun Donovan, Securities and
Exchange Commission (SEC) Director of Enforcement Robert Khuzami and New York
Attorney General Eric T. Schneiderman, Holder outlined the mechanics of the working
group which will bring together the Department of Justice (DOJ), several state
attorneys general and other federal entities to investigate those responsible
for misconduct contributing to the financial crisis through the pooling and
sale of residential mortgage-backed securities. 
The group will consist of at least 55 DOJ attorneys, analysts, agents,
and investigators from around the country including the 15 civil and criminal
attorneys and 10 FBI agents already employed in the FFETF unit.  This team will join existing state and federal
resources investigating similar misconduct under those authorities.

Holder said that the goal of the group will be to hold accountable any
institutions that violated the law; to compensate victims and help provide
relief for homeowners struggling from the collapse of the housing market,
caused in part by this wrongdoing and to help turn the page “on this
destructive period in our nation’s history.”

Holder confirmed the principal staff that we identified here earlier this
week:  Schneiderman will chair the group
with co-chairs Khuzami, Lanny Breuer, Assistant Attorney General, Criminal Division,
DOJ; John Walsh, U.S. Attorney, District of Colorado; and Tony West, Assistant
Attorney General, Civil Division, DOJ. 
Schneiderman will lead the effort from the state level and will be
joined by other state attorneys general.

Schneiderman said, “In coordination with our federal partners, our office
will continue its steadfast commitment to holding those responsible for the
mortgage crisis accountable, providing meaningful relief for homeowners
commensurate with the scale of the misconduct, and getting our economy moving
again.  The American people deserve a thorough investigation into the
global financial meltdown to ensure nothing like it ever happens again, and
today’s announcement is a major step in the right direction.”

The new office has been the target of criticism from Wall Street since the
President’s announcement such as that from JP Morgan Chase CEO Jamie Dimon who said
the working group would “derail” the proposed settlement between the states and
major banks, and Jaret Seiberg,
Senior Vice President of the Washington Research Group who told CNBC that the
sole purpose of the group is to bring criminal charges against bankers.

Press Conference Video

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LPS: Mortgage Originations Among Highest Quality Ever in 2010-2011

The Lender Processing Services (LPS) Mortgage Monitor Report for December show
improvement in a number of the metrics it tracks. Many measures of delinquency
rates are down, inventories are clearing in some states, and recent loan
originations are “among the best quality on record.”

The overall delinquency rate did not
change from November, remaining at 8.15 percent but is down 7.7 percent since
December 2010.  Seriously delinquent
loans, those 90 or more days overdue or in foreclosure decreased 0.6 percent to
7.67 percent, a -5.9 percent change from one year earlier.

The foreclosure rate which was 4.16
percent in November fell to 4.11 percent in December and is down 1.0 percent
year-over-year.  Foreclosure starts
showed the most dramatic change.  There
were 159,092 starts in December compared to 165,205 in November, a -3.7 percent
change and starts were 38.7 percent below the level in December 2010.   This is the lowest level of foreclosure starts
since at least 2008.

While 90+ day delinquencies are about
the same in judicial and non-judicial states there remains a large distinction between
these states in other measures of foreclosure activity.  LPS found that half of all loans in
foreclosure in judicial states have not made a payment in more than two years
as the foreclosure process drags on.  The
foreclosure sales rate in non-judicial states is four times that in judicial
states (6.8 percent vs. 1.6 percent). 
Foreclosure inventories stand at about 3.5 percent nationwide; in
non-judicial states those inventories are about 2 percent while in judicial
states they are 2.5 times greater – over 6 percent.  Still, pipeline ratios (the time it would
take to clear through the inventory of loans either seriously delinquent or in
foreclosure at the current rate of foreclosure sales) has declined
significantly from earlier this year in judicial states while remaining flat in
non-judicial states.

(month ending November 11) numbered 537,720 compared to 597,888 in
October, a decline of 10.1 percent and 29.3 percent below originations one year
earlier.  The loans originated over the
last two years
, however, are among the best quality on record according to
LPS.  2010-11 vintage originations showed
90-day default rates below those of all other years, going back to 2005.
December origination data also shows that recent prepayment activity – a key
indicator of mortgage refinances – has remained strong, with 2008-09
originations, high credit score borrowers and government-backed loans having
benefited the most from recent, historically low interest rates.

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What Should the Government do to Address the Inventory of Foreclosed Properties?

Economists calculate that the decline in home prices has cost American homeowners approximately $7 trillion in home equity. Compounding this problem is the fact that the inventory of homes available for sale remains high and there is potential for a significant volume of “shadow inventory” to hit the market. Intervention is necessary to support the fragile recovery in the housing market and to prevent further declines in home values. What steps must policy makers take to prevent the loss of additional trillions in home equity?

The abundant supply of homes available for sale presents opportunities for first-time homebuyers and “move-up” buyers as affordability is at an all-time high. Many, however, are hesitant to make a move as they wait for values to reach “bottom.” Action is necessary now to establish a balance in the supply and demand for residential housing in America.

Public/Private Partnerships
Federal Deposit Insurance Corporation and the Residential Trust Corporation (FDIC/RTC) experience demonstrates that structured public/private partnerships can be successfully used as a vehicle to convey a large volume of assets of varying types and levels of quality to private-sector ownership and management, in a relatively short period of time, by appealing to a diverse group of investors who intend to employ geographically-targeted asset disposition approaches.

Applying FDIC/RTC experience to Enterprises and Federal Housing Administration (FHA) Real Estate Owned (REO)

As the strategy applies to the Enterprises and FHA, structured transactions would require joint ventures or partnerships between the Enterprises and FHA and private sector entities which are designed to facilitate the disposition and management of distressed real-estate assets.

The Enterprises and FHA make available for bulk sale all one-to-four unit single family homes and condominium REO inventory (properties may be tenant-occupied or vacant at the time of disposition). Bulk buyers are asked to construct custom REO pools (“Pick and Choose”) based on their specific investment objectives.

Once the investor completes the “Pick and Choose” process, the Enterprises and FHA forms an entity (to date, all Limited Liability Corporations or “LLCs”) to which a custom REO pool is conveyed. Under the structured transaction partnership program, the Enterprises/FHA act essentially as a passive participant or limited partner (LP), with a private-sector investor who is responsible for managing the assets and acting as the general partner (GP).

In exchange for contributing REO assets, the GP conveys a shared percentage of cash-equity (50/50 split, for example) ownership back to the Enterprise and FHA. The remainder of the purchase price is then financed through issuance of tax-free Housing Recovery Bonds. These notes would be issued by the LLC as payment to the Enterprise/FHA for the assets conveyed to the LLC by the Enterprise/FHA.

Planned use of properties, with a focus on maximizing returns under strategies tailored to local economic and real estate conditions.

Once assets are purchased by private investors, the use or disposition of those assets will be at the discretion of the buyer’s investment objectives within the constraints of Agency objectives. For example, in the hardest hit localities, where buyer uncertainty is most intense, it would be more appropriate to incentivize long-term ownership through “Rent to Hold” and “Lease to Own” structures. However, in areas where sales comparables are not greatly distorted by an oversupply of distressed assets, the Enterprises/FHA would better meet the stated objective of improving loss recoveries (ultimately improving overall execution as the program evolves) by incentivizing bulk investors who intend to “Rehab and Sell” real-estate assets to first-time home buyers and baby- boomers looking to downsize their housing needs.

Steps taken to ensure that the properties are well maintained and managed during the period they are rented or otherwise held off the market.

One potential option is for the Enterprises and FHA to partner with municipalities who designate dedicated coordinators or teams to inspect properties. In that scenario, states/municipalities would focus on aggressive code enforcement and nuisance abatement, as well as making it easier to reclaim properties by amending receivership and eminent domain laws to make them more effective for the current crisis.

Given the large number of REO properties, many of which have been on the market for extended periods, prompt rehabilitation is critical to maintaining a marketable property. HUD and FHA could also consider allowing investors to utilize the “old” FHA 203(b) and 203(k) programs – which were generally successful but ended in the late 1980’s -for the rehabilitation of single-family homes. Historically, these programs offered a practical solution for homebuyers looking to purchase a home in need of repair.

After a reasonable “first look” offer to owner-occupants, these FHA fixed rate 30 year mortgages could be made to investors to buy up the existing inventory. Individual investors, municipalities, and nonprofits represent a unique and underserved class of prospective homebuyers that require financing. Providing these groups with financing, especially rehabilitation financing like offered through the 203(k) program, would go a long way towards soaking up the excess inventory in the housing market. These investors are capital constrained and more inclined to creating bridges to occupant ownership over time through such mechanisms as “rent to own” programs. Without some sort of bridge or path to occupant ownership the Administration risks creating massive  absentee ownership that could lead to
more blight and damage to communities.

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California Says "No Thanks"; FHA Compare Ratio, and Lender FHA Changes not to be Ignored

“The trouble with quotes on the
internet is that it’s difficult to determine whether or not they are
genuine.” So said Abraham Lincoln.
But here is one I received yesterday from Steve S., the
president of Residential Mortgage Group in Minnesota: “In thinking about
the mortgage programs being proposed, we continue to be too stupid to have our
own country.” And another from a broker discussing signing documents with
his clients: “Anyway, I had an older married couple come in to sign refinance
papers this morning and when they got to the page entitled ‘Intent to Proceed
with Application,’ the husband threw up his hand and said, ‘You mean we sign
and initial 29 times and they still think we don’t intend to proceed? 
Monkeys! We are governed by Monkeys!'” These blunt thoughts reflect many
e-mails that I am receiving.

American Pacific Mortgage, a retail
mortgage banking based in Roseville, California (near Sacramento) is searching
for a Director of Hedging and Trading, reporting directly to the EVP of Capital
Markets.  The company has been in business for 16 years with a solid
production network of 100 retail branches and licenses in 19 states, primarily west
of the Rockies.  The candidate must be a team-player who thrives in a
collaborative work environment and possess extensive experience in
hedging, trading, direct loan sales to Fannie/Freddie and mortgage-backed
securitization.  Interested candidates should send a resume to Cap Markets
EVP, Chito Schnupp at or VP of HR, Amy Bush at

Financial Times reports that California
(with the largest US property market) said “no thanks” to an offer of roughly
$15 billion
in lower monthly mortgage payments and reduced loan balances
for its residents in talks to settle allegations of mortgage-related misdeeds
by leading US banks. “Bank of America had guaranteed California borrowers would
receive $8bn in mortgage aid, while Wells Fargo and JPMorgan Chase committed at
least $5bn to the state’s distressed homeowners, according to people familiar
with the matter, who declined to give exact figures.” Using my HP 12C, California
would have received more than half of about $25 billion of aid that would be
available to borrowers in a nationwide deal under discussion to settle
allegations that banks illegally seized homes using faulty documentation. “The
proposals offered were inadequate for California because they did not contain
the aspects vital for our state: transparency, real relief for distressed
homeowners and strong enforcement mechanisms to guarantee accountability,” said
Shum Preston, a spokesman for the state attorney-general. Back to the drawing

Turning to
FHA news, I received this thoughtful note on FHA compare ratios. “I wanted to share a thought on FHA’s
compare ratios and their “hard coding” of 150% as the max to be
eligible for LI (lender insurance). The problem with this approach is quickly
evident using a bit of math. A compare ratio is a peer based metric.  In other
words, everyone’s compare is based off of the entire group’s average 90 day
delinquent figures. When a hard cap is placed at 150 – with death penalty type
consequences if that cap is exceeded, the results are very predictable. Any
company that is moving toward 150 will quickly clamp down hard on their FHA
lending. They will put FICO score minimums, DTI maximums, etc., in place. They
will tell their underwriters to be very, very careful.  They will move
away from areas of the country that are experiencing economic challenges. And,
in doing so, those companies will see their 90 day defaults drop. And that will
drop the average that calculates everyone’s compare ratio, so when the average
goes down, any company whose 90 day delinquents didn’t go down by an equal
amount, will see their compare ratio go up. Those companies will then tighten –
which will mean the average will again drop – which means that any company
whose 90 day delinquents remained static – will have their compare ratio rise.
And so on. Just watch – my guess is that after a few years FHA lending will
become extraordinarily tight.  Taken to its logical conclusion, if average
90 defaults fall below 1.0%, any firm that has 1.51% (an extraordinarily clean
book) would have a 151% compare ratio and would be terminated by FHA. A compare
ratio is a useful tool – but to wrap draconian penalties around it is a
terrible mistake. Those who the FHA program is meant to help, the borrower who
isn’t, by definition, ‘perfect’, is going to be the big loser.”

have indeed been abuzz about last Friday’s FHA announcement of the latest in a
series of steps to protect and
strengthen the FHA’s Mutual Mortgage Insurance Fund
, while enabling the
agency to continue to fulfill its mission to provide access to homeownership
for qualified borrowers. “These new regulations strengthen the process by which
FHA requires certain lenders to indemnify the U.S. Department of Housing and
Urban Development (HUD) for insurance claims paid on mortgages that are found
not to meet the agency’s guidelines. In addition, the final rule requires all
lenders with the authority to insure mortgages on HUD’s behalf (‘Lender
Insurance’ mortgagee) to meet stricter performance standards to gain and
maintain their approval status.  More than 80 percent of all FHA forward
mortgage loans are insured by Lender Insurance lenders.” To read this press
release in its entirety, please visit this link.

industry operations person summed things up. “The new edict covers three
issues. The first is regarding indemnifications. The primary change is that all
direct endorsement lenders with lender insurance authority will be subject to
indemnification procedures and will not be able to negotiate the settlement as
is the current practice. The mortgagee shall indemnify HUD for an FHA insurance
claim paid within 5 years of mortgage insurance endorsement, if the mortgagee
knew or should have known of a serious and material violation of FHA
origination requirements, such that the mortgage loan should not have been
approved and endorsed by the mortgagee and irrespective of whether the
violation caused the mortgage default.

The second
is regarding Lender Insurance Authority. In order to retain their Lender
Insurance authority, mortgagees must maintain the acceptable claim and default
rate required of them when they were initially delegated such authority. A
mortgagee has an acceptable claim and default rate if its rate of claims and
defaults is at or below 150% of the average rate for insured mortgages in the
state(s) in which the mortgagee operates. HUD will monitor a mortgagee’s eligibility
to participate in the Lender Insurance program on an ongoing basis. And the
third addresses the Lender Insurance Rule in the Case of Corporate
restructuring. The proposed rule would facilitate the compliance of new lending
institutions resulting from a merger, acquisition, or reorganization with the
statutory requirements for Lender Insurance approval.”

mortgagees participating in the Lender Insurance (“LI”) program will be
required to indemnify HUD for self-endorsed loans that HUD deems ineligible for
FHA insurance based on final regulations. Since January 1, 2006, FHA
mortgagees, with approval from HUD, have been permitted to endorse loans
themselves, without first having to send the loans to HUD. The final regulation
marks the first time HUD will make significant changes to the LI program, one
of which automatically increases LI lenders’ liability for the loans they close
and self-endorse. These changes finalize LI regulations proposed by HUD in
October 2010 and will take effect on February 24, 2012. Under the final
regulation, LI lenders will be required
to indemnify HUD for an FHA insurance claim paid within five years of mortgage
endorsement if the lender knew or should have known of a serious and material
violation of FHA origination requirements that would have rendered the mortgage
ineligible for FHA insurance, regardless of whether the violation caused the
An LI lender also will be required to indemnify HUD for an
insurance claim if the lender knew or should have known that fraud or
misrepresentation was involved in connection with the origination of the loan.
While FHA-approved mortgagees may be used to receiving periodic indemnification
requests from HUD as part of an enforcement action, until now, HUD has not had
the authority to require lenders to indemnify the Department. Effective February 24, 2012, each time LI
lenders self-endorse FHA loans, they are agreeing to automatically indemnify
HUD for any losses on loans identified as containing serious and material
violations or fraud
. HUD notes in the preamble to the final regulation that
it will use existing practices, such as post-endorsement technical reviews,
quality assurance monitoring reviews, lender self-reports, OIG audits, and
other HUD investigations to identify loans for which HUD will demand
indemnification. HUD assures lenders that these processes will afford ample
opportunities to submit additional information to HUD.

While LI
lenders may have the opportunity to defend themselves against indemnification
demands, it is likely, with this new financial recovery regulation, that HUD
will focus its audits on LI loans, rather than loans from non-LI lenders. And,
that inevitably means that participation in the LI program will be costly for
FHA mortgagees. HUD also will begin to monitor a lender’s eligibility to
participate in the LI program on an “ongoing basis,” rather than annually as it
does now. HUD will change its formula for calculating a lender’s default/claim
rate by measuring whether the LI lender’s default/claim rate is below 150% of
the average rates for the states in which it does business, as opposed to 150%
of the national average. Finally, new mortgagees resulting from merger,
acquisition, or restructuring will now be eligible for the LI program under
certain circumstances, despite having less than a two-year performance history.
Should a lender be terminated, the regulation provides a process, similar to
that used for the Credit Watch program, to seek reinstatement. Lenders may find
themselves re-evaluating the costs and benefits of participating in the LI
program. And, should lenders determine that these costs are too high, HUD may
find itself manually reviewing every FHA loan prior to endorsement, wiping out
the benefits of the LI program for both HUD and FHA mortgagees.

And is any
company prepared for an FHA audit? Especially since going forward companies
will be dealing with a changed threshold for indemnification requests to a
standard that the lender, “knew or should have known” of a serious violation or
fraud?  “The Collingwood Group invites you to listen in on a conference call with FHA and Mortgagee
Review Board (MRB) experts
to address steps that lenders and servicers can
take to be proactive, manage risk and avoid FHA enforcement sanctions.” Several
authorities will converse on the purpose, function and procedures of the
Mortgagee Review Board, FHA sanctions and will provide insight into navigating
FHA compliance reviews and HUD Inspector General Audits. It is free, and being
held on Thursday, February 9th from 2-3 EST. To register

(Editor’s opinion note: The FHA can
say all it wants about its capital ratios being fine. Most analysts don’t
believe it. And, HUD, just like any organization in this situation, is going to
do what it can to lower risk, increase return, and continue to try to stick to
its charter. None of this should be a surprise to anyone.)

very briefly at the markets, there is not much going on. Rates are stable, and
with some of the transition going on, most of the focus is, and should be, on
the structural changes in the mortgage industry (like those above) rather than rates
which may not do much for a long time.
(There, I said it.) That said, things were quiet overnight and heading into the
weekend, and the 10-yr seems content around 1.93% and MBS prices are a shade

Discretion Advised.)
As a kid, I was always told by my parents to brush my teeth. Maybe if I’d seen
this 1 minute video, I would have had even more motivation.

If you’re
interested, visit my twice-a-month blog at the STRATMOR Group web site located
at . The current blog discusses
residential lending and mortgage programs around the world. If you have both
the time and inclination, make a comment on what I have written, or on
other comments so that folks can learn what’s going on out there from the other

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