HARP’s Impact on Prepayment Speeds; Watch for Property Deed Scams

Happy Good
Friday to everyone! Corruption is the stuff of Tammany Hall and Tea Pot Dome,
right? Wrong. (Look ’em up, youngsters.) There is still corruption, and unfortunately much of it has to do with state government.

Last week
the California Department of Real Estate (DRE) issued a warning about property deed scams, which are apparently
on the rise thanks to the depressed economic climate.  The Consumer
Alert that DRE released notified homeowners of a number of red flags that
indicate fraud: changes made to a recorded document after signing (“Is that my
signature?”), recorded documents signed by a deceased person (“Look – Marilyn
Monroe’s autograph!”), documents indicating that the a portion of the property
was sold without the homeowner’s knowledge (“Who’s living in our front yard?”),
receipt of documents for a mysterious loan or transaction (“We owe how much to
who?”), or receipt of a Notice of Default or Trustee’s Sale when the property
is owned outright (“What happened on the courthouse steps?”) are all tip-offs.
Seriously, the California DRE encourages
homeowners
that experience any of the above to notify the County Recorder’s
Office and their insurance company if their title policy covers forged deeds. 
It’s also worth contacting local law enforcement, as the District Attorney
offices in several counties now have real estate fraud divisions, and, if the
real estate broker or salesperson is the likely culprit, filing a complaint
with DRE itself.  Employing an attorney familiar with real estate law is
advisable, as they can help with annulling or voiding bogus deeds.

Mortgage rates are determined primarily
by supply and demand. If there is no demand, prices drop, and rates need to go
higher to attract investors. Since demand is determined by investors such
as insurance companies, pension funds, and money managers, what they watch is
important to the business. And they
always watch prepayments –
who wants to pay 106 for a pool of 5% loans if
they’re going to pay off at 100 (par) in 3 months? An increase in LLPA’s
(loan level price adjustments) a few months ago resulted in an increase in
prepayments as originators pushed loans through prior to the increase. And an
increase in HARP loans is of particular interest: the volume of HARP loans sold
to the Fannie & Freddie more than doubled in January vs. December, but MBS
holders did not see a gigantic increase in prepayment speeds for pools with
current LTV greater than 80% in January, nor did they see a drop in prepayments
that the lower HARP volume in December would have implied – puzzling.

For more on prepayment speeds read: Effects of Cash Flows on Mortgage Servicing

There are
many analysts who believe that this
decoupling is related to the LLPA reduction that took place as part of HARP 2.0
.
Basically, the GSEs reduced the LLPA cap on HARP loans from 2% to 75 basis
points starting 1/1. This reduction in LLPAs was based on when the loans were
sold to the GSEs. It is possible that even though the rate of HARP loan
closings was roughly the same in December and January (as reflected by the
prepayments on pools with current LTV greater than 80% which stayed more or
less unchanged in the two months), lenders held on to a large portion of these
loans in December and sold them to the GSEs in January once the lower LLPAs
became effective. In other words, the HARP loan closings remained unchanged
between January and December but the volume of loans sold to the GSEs was
artificially lower for the month of December and higher for the month of
January. For example, any HARP borrower with an LTV>97% was being charged an
LLPA of 1% or higher by Fannie and Freddie till January 1st, 2012. If the
lender would have held on to this loan in their portfolio and sold it after
January 1st, 2012, they would have had to pay the GSEs an LLPA of no more than
75 basis points and numbers indicate that 40-50% of HARP loans had an LTV
greater than 97% as 2011 ended. Overall, estimates are that 50-60% of HARP
loans were impacted by the reduction in LLPAs as part of HARP 2.0. This would
explain the 35-37% drop in HARP volumes in December and the sharp reversal in
January.

(As a big side-note, folks are still
cogitating on the servicer agreement
, announced a while back and filed in
court several weeks later. As a reminder, it is between the US Department of
Justice, HUD, and 49 state attorneys general, and Bank of America, JPMorgan,
Wells Fargo, Citibank, and Ally. Servicers will receive credits for every
completed modification as well for other activities such as facilitating short
sales. The banks are required to meet 75% of their prescribed modification
targets within two years and 100% of their targets within three years or face
monetary penalties. Wells Fargo, Citigroup, and Ally have indicated that, at
least for now, they will not be applying servicer settlement modifications to
non-agency loans, i.e., private-label securities, like for jumbo loans.

But Bank of America entered into a side
agreement
with federal officials that requires it to proactively offer more
aggressive modifications to all loans that they hold on balance sheet and in
Countrywide securitizations that meet certain eligibility criteria – perhaps
upwards of 200,000 loans receiving an average debt forgiveness of $100,000!
Last week, with all the jawboning about principal forgiveness, this has
certainly caught investor’s interest: if such a mass modification program were
to occur – either because modifications on delinquent loans have been postponed
pending the finalization of the servicer settlement or because of a change to
the NPV model – the price of these securities would plunge.)

If you’ve
never seen the chart of prepayment speeds, here you go.
The April report is the third month reflecting HARP 2.0 changes, and the
numbers are telling us a few things. First, prepayment speeds are not
consistent, probably due to timing differences in HARP 2.0 implementation
across servicers. And we should remember that GSE HARP 2.0 guidelines will not
be fully implemented until June securities. And HARP 2.0 favors better credit
borrowers, just like the first HARP did. Any LO can tell you that payment
history requirements, verification of income source, and additional
underwriting required for certain riskier loans all impede these borrowers, and
they typically have the higher coupon mortgages. And some lenders are facing capacity constraints (again).

For
lenders and investors, it has been
interesting to see how investors with correspondent channels have handled the
same-servicer versus different-servicer question
. Wells, for example, isn’t
even taking locks until 4/23. Others are fully engaged through wholesale and
correspondent channels while still others haven’t rolled anything out yet. With
the update to DU/LP, cross-servicer refinances with HARP 2.0 enhancements are
now a reality. The update includes the removal of the 125% LTV cap and the
expansion of automated appraisals to more borrowers. Previously, these changes
were available only for same-servicer refinances. Even with the change, however,
“experts” believe cross-servicer activity is unlikely to increase meaningfully
from HARP 1.0 levels.

Barclays reports that “lenders have little
incentive to take on the servicing of a poor credit loan, even with HARP 2.0
changes. While servicing a performing loan is relatively simple, servicing a
delinquent loan is much costlier and requires significant expertise. In
addition, servicers are subject to specific procedures and timelines for
handling delinquent loans. Any breach of these rules could trigger a servicing
rep and warranty. All of these factors suggest that lenders will only refinance
another lender’s loan when they are comfortable with the credit risk. This
suggests that cross-servicer refinances should undergo a full re-underwriting.”

At this
time it appears that Wells’ cross-servicer
refinances will be subject to a 105% LTV cap for all HARP 2.0 refinances. This
is more stringent than HARP 2.0 guidelines where there is no LTV cap. Chase cross-servicer refinances are
subject to much stricter guidelines than same-servicer refinances. This
includes more stringent FICO, LTV, documentation, debt-to-income (DTI), and
payment history requirements. And when investors throw in some state-specific
guidelines, it indicates that investors are carefully managing their credit
exposure – is that a surprise?

And even
when a lender opts to join the HARP 2.0 wave, regardless of servicer, how is it obtaining leads? For large
banks who are servicing the loans, and who have the payment histories, it can
be relatively straightforward. For these same-servicer refinances, loan tapes
can be mined to identify, target, and even pre-qualify HARP candidates. Certain
lenders are very good at this, as we all know. But for cross-servicer
refinances, things can be difficult. Borrower loan tapes may not be as readily
available, leading to a significant information gap. Smaller originators could
receive HARP 2.0 applications directly from borrowers who are shopping around –
but are the borrowers likely to do this the ones who are having trouble with
their current servicer? Buyers beware – and watch the pull through!

Lastly,
there is more HARP-talk from the
originator trenches
: “The lender-specific overlays really muddle the
picture. The Freddie HARP loans that I’m a refinancing are currently held in
the bank’s servicing portfolio.   We manually underwrite the loan and
allow the value to be set by Freddie’s HVE, unlimited LTV (when new payment
dropping or increasing <20%), unlimited DTI, and stated income & assets
(except for “passive” income which must be verified by award letters
or most recent Sch. E.). I just closed a Freddie HARP2.0 refinance of a N/O/O
SFR where the LTV was 214%.  The rate was 4.750% at 1 point – no appraisal
required – stated income with no asset verification required. Manna from
Heaven.”

Regardless
of what the market did yesterday, which wasn’t much, today we had the
unemployment numbers ahead of an early close in the bond market. (Stock markets
are closed today.) March’s Non-Farm Payroll number came out +120k, with some
minor revisions to January and February. This was well below expectations –
perhaps the economy is not as strong as many thought! The Unemployment Rate
came in at 8.2%, and Hourly Earnings were +.2%. After this news the U.S. 10-yr T-note, which closed
yesterday at 2.17%, went from 2.20% down to 2.05%. For anyone looking to lock
today, MBS prices are considerably better.

Golf: An Ethical Question
What if you were playing in the club championship tournament finals and the
match was halved at the end of 17 holes?

You had
the honor and hit your ball a modest two hundred fifty yards to the middle of
the fairway, leaving a simple six iron to the pin.
Your opponent then hits his ball, lofting it deep into the woods to the right
of the fairway.

Being the
golfing gentleman that you are, you help your opponent look for his ball.
Just before the permitted five minute search period ends, your opponent says:
“Go ahead and hit your second shot and if I don’t find it in time, I’ll
concede the match.”
You hit your ball, landing it on the green, stopping about ten feet from the
pin.
About the time your ball comes to rest, you hear your opponent exclaim from deep
in the woods: “I found it!”
The second sound you hear is a click, the sound of a club striking a ball, and
the ball comes sailing out of the woods and lands on the green stopping no more
than six inches from the hole.
Now here is the ethical dilemma:
Do you pull the cheating jerk’s ball out of your pocket and confront him with
it, or do you keep your mouth shut?

…(read more)

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