“Dead On Arrival” Refi Plan to be Announced Today; Large Investors Devolve/Evolve – Is Servicing, or F&F, the Answer?

Here we
are in February already, which has Valentine’s Day. Some guys out there look
forward to that day with about as much anticipation as hugging their
girlfriend’s cat, or picking out a costume at Halloween. Comparisons aside, the
most popular theory is that Valentine was a clergyman who was executed for
secretly marrying couples in ancient Rome. Per the census bureau, there are
1,177 U.S. manufacturing establishments that produced chocolate and cocoa
products in 2009 (it is its own food group, right?), employing 34,252 people.
California led the nation in the number of chocolate and cocoa manufacturing
establishments, with 135, followed by Pennsylvania, with 111, with the total
value of shipments totaling nearly $13 billion. And Americans consumed almost 25 pounds of candy per capita.

As much as
the government talks about staying out of housing, it can’t. President Obama is expected to unveil a new
refi plan today in Virginia at 11AM CST.
Whatever plan it is, no one
expects it to pass through Congress, IF Congressional approval is required. Recall
that this plan was previewed by Obama during his SOTU address last week.  The plan would allow non-agency mortgage
holders (so those mortgages not backed by Fannie/Freddie) who are current to
refinance into a lower-interest federally insured mortgage (via the FHA).  Borrowers could qualify even if they had
negative equity.  The plan could help as
many as 3.5M homeowners refinance.  The
plan is expected to cost ~$5-10B and Obama will call for a new fee to be
charged to banks to pay for the proposal – because they have all the money,
right?  Watch his speech live here.

Rates can
do whatever they want, but if large investors go away, and the government does
away with Fannie & Freddie, is the borrower better off? (Remember
borrowers?) As was mentioned in this commentary earlier this week, there have
been rumors about PHH Mortgage and
SunTrust
. PHH especially, after the S&P downgrade and the CFPB probe
being revealed, was rumored to be having funding problems and being forced to
downsize.  Sources indicate that those rumors are true, and that PHH
Mortgage has eliminated twelve account rep positions and retained only
six.  In addition, clients are suggesting that PHH is cutting back on
pricing and increasing internal requirements for loan purchases. And at
SunTrust, the entire mortgage channel is indeed going through reorganization,
making the business “flatter” and cutting costs.

“In
reaction to the Federal Housing Finance Agency statement released December 29,
2011 regarding guarantee fee increases, Chase
Lock Extension fees will increase
by 0.25% for all extension terms.”
So reads the latest release from Chase. So, for example, a 7 day extension will
cost .625 instead of .375 (which many viewed as steep to begin with); 30 days
will now cost a point.

Needless
to say with all this, the mortgage herd
(especially those companies that sell to them) is spooked
. Competitors are
warily watching, not really wanting a huge increase in volume coming their way.
And smaller shops are wondering, “When is this going to end?” Or “What
am I supposed to do?” Some lenders with
a minimum net worth of $2.5 million have begun selling loans directly to Fannie
and Freddie
, with the servicing either being retained (in house or with a
subservicer) or sold released to a servicing counterparty of F&F (such as
Central, USB, PHH, and so on). But that is not a sure thing either, as the
FHFA, not content to leave well enough alone, has offered two options to revamp
the economics of mortgage servicing rights – which brings up the issue of how the market values servicing versus how
the lender values servicing.

Retaining mortgage servicing isn’t a matter of just saying, “Sounds good, let’s
crank it up.” CFO’s and owners need to be fully aware of the capital it
requires, both in pricing the loans, in carrying them on the books, and in
setting aside reserves for delinquencies. Depending on the arrangement
(actual-actual or scheduled-actual) the servicer must fund principal and
interest payments to investors, which can quickly eat up cash.

(By the
way, SunTrust will buy FirstAgain LLC
for an undisclosed sum, as it seeks to increase direct online lending.
FirstAgain specializes in providing direct unsecured loans to super-prime
borrowers via the Internet and operates proprietary technology offering
clients’ completely digital and paperless origination, underwriting and
servicing.)

It can’t
be any fun to be a large financial institution any more – not like the old
days. A new federal task group set up to
investigate residential mortgage-backed securities (RMBS) fraud signed off on
subpoenas for 11 undisclosed financial institutions
. New York Attorney
General and co-chair Eric Schneiderman did not name any of the financial
institutions subpoenaed by the group but said that the group has “jurisdiction
to go after every aspect of the artificial inflation… and the crash that
brought down the economy” over the last several years. He said that the group would levy “appropriate civil and criminal charges”
against financial institutions as investigations moved forward under the
auspices of the Financial Fraud Enforcement Task Force. (What about the
borrowers who abused the system?) Of course the SEC has already “issued scores”
of their own subpoenas, obtained millions of documents, and interviewed dozens
and dozens of key witnesses related to mortgage-backed securities. Officials
said that the unit will include in its ranks more than 55 Justice Department
attorneys and investigators, 15 civil and criminal attorneys, and 10 agents and
analysts with the Federal Bureau of Investigation. Thirty more attorneys and
personnel will take up positions in the group in the weeks ahead. Critics point
to job growth at the Federal level rather than the private sector – our tax
money at work!

I received
this note. “Rob, who is going to
regulate the regulators
? They must be tripping over each other with the
confusing jurisdictions and responsibilities. I have been in the real estate
and mortgage business for years, and I am feeling like one of those floats in
the Macy’s parade and everyone shooting at it because it is such a big
target.” President Obama did indeed create yet another regulatory body noted
above to investigate financial institutions. He directed Attorney General Eric
Holder to create a new office on Mortgage Origination and Securitization
Abuses.  The President said, “The American people deserve a robust
and comprehensive investigation into the global financial meltdown to ensure
nothing like it ever happens again.” According to the Huffington Post, the
new office will take a three-pronged approach to the issue, holding financial
institutions accountable for abuses, compensating victims, and providing relief
for homeowners, and will operate as part of the existing Financial Fraud
Enforcement Task Force. Good luck working with the state Attorneys General, the
Department of Justice, the SEC, the OCC, the FBI…

But we may not have Treasury Secretary Timothy Geithner to kick around much
longer. He said President Barack Obama is likely to be re-elected, but he isn’t
likely to stay for a second term. “I’m confident he’ll be president. But
I’m also confident he’s going to have the privilege of having another secretary
of the Treasury.”

Remember the little thing in NPR about
Freddie betting against homeowners?

“Freddie Mac stopped making investments in derivatives known as inverse
floaters last year after a regulatory exam raised questions about the mortgage
company’s controls, the Federal Housing Finance Agency said. An FHFA
examination “identified concerns regarding the controls, including risk
management, surrounding the inverse floaters,” the oversight agency said in a statement.
‘FHFA and Freddie Mac agreed that these transactions would not resume.'”
Read all about it.

Above I
mentioned the U.S. becoming a nation of renters – but often times investors and
lenders do not have sufficient insight into distressed property trends at the
national and local level which reduces their ability to effectively manage
collateral risk and establish effective loss mitigation strategies and accurate
loss projections. DataQuick has
developed a Distress Property Analysis Tool called RiskFinder Distress
to
come up with monthly statistics for the past 10 years to help track trends and
help identify geography, down to a neighborhood level, that most negatively
impacted by distressed property trends. For more information contact your
DataQuick representative or Wendy Barnett at wbarnett@dataquick.com.

The MBA
reported that apps last week
dropped about 3% after dropping 5% the week
before. (Refi’s dropped 3.6%, purchases down 1.7%, with refi’s accounting for
an even 80% of nationwide retail applications.) But at least the “Bernanke
freight train bond market,” as one MBS salesman noted, is rolling along. “With
the Fed potentially on hold thru 2014 and QE3 being discussed,” Fannie 3.5’s are nearly at a price of 104 –
that is a 4 point premium for 3.75-4.125% 30-yr loans, not even including the
servicing!
Yesterday we had a slew of news: the Employment Cost Index rose
0.4% in 4Q 2011, the S&P/Case-Shiller index showed that home prices
continued to decline in November, the ISM Chicago Purchasing Managers Index
fell, and the Conference Board’s Consumer Confidence Index dropped as well. Most of the news out yesterday points to a
slow economy in this country, and a slowing economy generally leads to lower
rates.

So are
LO’s excited about a continued refi boom? Perhaps – but rates haven’t been an
issue in a long time. Investors are not necessarily excited about more
refinancing – they’d like to keep the existing MBS’s on their books a while
longer. Thomson Reuters noted, “Traders have cautioned of the potential for
increased supply in coming days as originator pipelines have been building up
in response to the decline in rates.” But the U.S. 10-yr T-note hit 1.80% and
rate sheet MBS prices improved by another .125.

Today
we’ve already had the MBA apps numbers out, noted above. And we’ve also had the
ADP Employment report for January, always of questionable predictive ability
for the actual government numbers Friday. The number was +170k for January,
with a downward revision for December but still this is the 24th straight
gain in private payrolls. Later we’ll have another ISM Index and Construction
Spending at 10AM EST, along with the Treasury announcing the size of next
week’s 3, 10, and 30-yr auctions (estimated unchanged at $72 billion). So far rates are flat to Tuesday’s close
with the 10-yr at 1.81% and MBS prices unchanged.

CONFUCIUS DIDN’T SAY:
Man who eats many prunes get good run for money.
War does not determine who is right, it determines who is left.
Man who fight with wife all day get no piece at night.
It takes many nails to build a crib, but one screw to fill it.
Man who drives like hell is bound to get there.
Man who stands on toilet is high on pot.
Man who live in glass house should change clothes in basement.
Man who fish in other man’s well often catch crabs.
Finally CONFUCIUS SAY –
“A lion will not cheat on his wife, but a Tiger Wood!”

If you’re
interested, visit my twice-a-month blog at the STRATMOR Group web site located
at www.stratmorgroup.com. 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
readers.

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