Study: No Additional Restrictions on QRM Needed

The proposed down payment standards
for new mortgages might push 60 percent of potential borrowers into high-cost
loans or out of the housing market altogether according to a paper released
today by the Center for Responsible Lending.  The paper,
Balancing Risk and Access:  Underwriting
Standards for Qualified Residential Mortgages
, is the result of a study to
weigh the effects of proposed underwriting guidelines for qualified residential
mortgages (QRM)
, mortgages that are exempt from the risk retention requirements
laid out in the Dodd-Frank Wall Street Reform Act.

The Center, a nonprofit, nonpartisan
research and policy organization with a stated mission of “protecting
homeownership and family wealth by working to eliminate abusive financial
practices” has, along with other consumer and industry groups, raised concerns
about a potential disproportionate impact of restrictive QRM guidelines on
low-income, low-wealth, minority and other households traditionally underserved
by the mainstream mortgage market.  The
study examines the way different QRM guidelines may affect access to mortgage
credit and loan performance and estimates the additional impacts on defaults
resulting from guidelines above and beyond QM product requirements.

The researchers, Roberto G. Quercia,
University of North Carolina Center for Community Capital, Lei Ding, Wayne
State University, and Carolina Reid, Center for Responsible Lending used
datasets from Lender Processing Services (collected from servicers) and
Blackbox (data from loans in private label securities collected from investor
pools.)  They identified from among 19
million loans originated between 2000 and 2008 the 10.9 million that would meet
the current QRM guidelines, i.e. loans with full documentation that have no
negative amortization, interest only, balloon, or prepayment penalties.  Adjustable rate mortgages must have fixed
terms of at least five years and no loans over 30 years duration. 

The default rate for the universe of
loans was 11 percent, for prime conventional loans, 7.7 percent, and for loans
(regardless of type) that would have met the QM product feature limits, 5.8
percent.  In other words, the research “suggests
that the QM loan term restrictions on their own would curtail the risky lending
that occurred during the subprime boom and lead to substantially lower
foreclosure rates without overly restricting access to credit.”

The next step was to apply some of
the suggested additional criteria for QRM to the loans; a minimum down payment
of 20 percent, a range of higher FICO scores, and lower debt to income (DTI)
ratios.  The goal was to determine the
benefit of each as measured by an improvement in default rates without an undo reduction
in borrowers able to qualify for an affordable loan.

When various permutations of
loan-to-value (LTV), FICO scores, and DTI ratios were applied to the loans lower
default rates were achieved.  These
improvements, however, were accompanied by the exclusion of a larger share of
loans.  As Figure 4 shows, some of the restrictions
resulted in the exclusion of as many as 70 percent of loans.   

To quantify this, the authors
developed two additional measures.  The
first, a benefit ratio, compares the percent reduction in the number of
defaults to the percent reduction in the number of borrowers who would have
access to QRM loans with the proposed guidelines.  For example, an underwriting restriction that
resulted in a 50 percent reduction in foreclosures while excluding only 10
percent of borrowers would have a higher benefit ratio than one with the same
reduction in foreclosures that excluded 20 percent of borrowers.


One finding was that LTVs of 80 or
90 percent resulted in particularly poor outcomes while an LTV of 97 percent
had added benefits of reduced defaults relative to borrower access.  This suggests that even a very modest down payment
may play an important role in protecting against default while excluding a
smaller share of borrowers than would a higher down payment requirement.

Since underwriting is unlikely to
impose restrictions in isolation, the study analyzed a combination of possible
QRM restrictions.  They found that the
strictest guidelines produced the worst outcomes and that none of the patterns
of proposed restrictions performed as well as the QM restrictions on their own.

The second measure, an exclusion
ratio, looks at the number of performing loans a certain threshold would
exclude to prevent one default.  In this
measure, the number of excluded loans can be viewed as a proxy for the number
of “creditworthy” borrowers who would be excluded from the QRM market.

Imposing 80 percent LTV requirements
on the universe of QM loans would exclude 10 loans from the QRM market to
prevent one additional default.  Adding
to this a FICO above 690 and 30 percent DTI ratio would exclude 12 creditworthy
borrowers to prevent one default.

The current QRM criteria are more
restrictive for rate-term and cash-out refinancing than for purchase
loans.  The study found that the QM
product restrictions are the most effective in balancing the demand between reducing
defaults and ensuring access to credit.

The study also found that imposing
additional LTV, DTI, and FICO underwriting requirements
on QM loans had
disproportionate effects on low-income borrowers and borrowers of color.  Just over 75 percent of African-American
borrowers and 70 percent of Latino borrowers would not qualify for a 20 percent
down QRM mortgage and significant racial and ethnic disparities are evident for
FICO requirements as well.  At FICO
scores above 690, 42 percent of African-Americans and 32 percent of Latino
borrowers would be excluded against 22 percent of white and 25 percent of Asian
households.  At the most restrictive
combined thresholds (80 percent LTV, FICO above 690, DTI of 30 percent) approximately
85 percent of creditworthy borrowers would not qualify with African American
and Latino disqualifications each above 90 percent.

The Center says in conclusion that
its research provides “compelling evidence that the QM product loan guidelines
on their own would curtail the risky lending that occurred during the subprime
boom and lead to substantially lower foreclosure rates, while not overly
restricting access to credit.”

…(read more)

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FHA ANNOUNCES ADDITIONAL STEPS TO LIMIT RISK AND STRENGTHEN FINANCES

WASHINGTON – Today, Acting Federal Housing Administration (FHA) Commissioner Carol J. Galante announced 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.

Proposal to Seize Underwater Mortgages via Eminent Domain not Well Received

The Board of Supervisors in the California county of San Bernardino has,
perhaps unintentionally, picked a fight with some of the giants of the real
estate industry.  The Board unanimously
approved a plan two weeks ago that would use eminent domain to seize underwater
mortgages
and restructure them for homeowners unable to sell or refinance the properties.

The Homeowner Protection Program, in which San Bernardino would partner with
the cities of Ontario and Fontana within its borders, is only broadly sketched
out at present but it has already provoked a strong reaction from the Securities Industry and Financial Markets
Association (SIFMA).  SIFMA claims to
represent the interests of hundreds of securities firms, banks and asset
managers.  The trade association fired
off a letter to the Board on Friday, cosigned by more than a dozen of its
member organizations, protesting the proposed actions.  “Based on publicly available information on
the Agreement,” the letter said, “we are very concerned that the good
intentions of the Board of Supervisors will instead result in significant harm
to the residents the Agreement intends to help.”

The thrust of the letter is that such an action as proposed in San
Bernardino would significantly reduce access to credit for mortgage borrowers.  “If eminent domain were used to seize loans,
investors in these loans through mortgage-backed securities or their investment
portfolios would suffer immediate losses and likely be reluctant to provide
future funding to borrowers in these areas. 
It is essential to remember that investors in mortgage-backed securities
channel the retirement and other savings of everyday citizens through their
investment funds.  This program may cause
loans to be excluded from securitizations, and some portfolio lenders could
withdraw from these markets.  In other
words, this program could actually serve to further depress housing values in
the county by restricting the flow of credit to home buyers”

The Los Angeles Times quotes David
Wert, a spokesman for the county as saying the country would use eminent domain
to condemn mortgages on properties that are underwater, that is the owner owns
more on the mortgage than the value of the home, and would then renegotiate the
mortgages at a lower amount.  Only
homeowners who are current on their mortgage payments would be eligible for the
program.

The move is intended to help stimulate the region’s hard-hit economy by
freeing up people who have been stuck in their homes, Wert said. “Real estate
is the foundation of the inland economy, 
 [It] is based on the building and
selling of homes, and this is one way to stimulate that again.”

The program is still in its initial stages and additional details will be
hashed out in public the spokesman on said. 

Among those signing the SIFMA letter one were the Mortgage Bankers
Association, American Bankers Association, National Association of Realtors®,
The Financial Services Roundtable, American Securitization Forum, and the
Residential Servicing Coalition.

…(read more)

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Mortgage Apps Pull Back From Multi-Year Highs

Mortgage
application volume
as measured by the Mortgage Bankers Association’s (MBA) Market
Composite Index fell 7.1 percent during the week ended June 22. The change was
the same for both seasonally adjusted and unadjusted data.  Responses to MBA’s Weekly Mortgage
Applications Survey send the Refinance Index down 8 percent from the week ended
June 15 and the refinancing share of mortgage activity decreased from 80 percent of total applications
to 79 percent.  The seasonally
adjusted Purchase Index was down 1 percent from a week earlier while the
unadjusted index decreased 2 percent week-over-week and 3 percent from a year
earlier.

“Refinance volume fell
last week due largely to a fall-off in refinance applications for government
loans, which had more than doubled the prior week,” said Michael Fratantoni,
MBA’s Vice President of Research and Economics.  “The large swings in
activity were due to the implementation of FHA’s new premiums on streamline
refinances, and borrowers timing their applications to lower their premiums.”

“The decline in the refi index isn’t particularly troubling considering
the past two weeks saw the highest levels since early 2009,” says
Mortgage News Daily’s Matthew Graham.  “The pop higher in apps was fueled not only by the drop in FHA MIPs
on June 11th, but also by fresh record low rates, as well as the
announcements by several big box lenders that they’d no longer be
accepting open access (or “different servicer”) streamline
applications.  These factors not only helped concentrate application
volume in the previous two cycles, but the pull-back in open access availability
likely weighs on the current cycle as it raised new hurdles for some
borrowers, or at the very least, decreased the market’s overall capacity
to churn out streamlines.  Bottom line: this week’s drop makes sense.”

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

Interest rates were
mixed.  The contract rate for the most
popular product, the conforming (loan balance of $417,500 or less) 30-year
fixed-rate mortgage (FRM)   Jumbo 30-year FRM, (balances over $417,500)
increased to 4.12 percent with 0.35 point from 4.06 percent with 0.38 point and
the effective rate increased as well.   

The average contract
interest rate for 15-year fixed-rate mortgages decreased to 3.24 percent from
3.25 percent, with points decreasing to 0.44 from
0.45. The effective rate decreased from the previous week.

The average contract
interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to
3.71 percent from 3.72 percent, with points decreasing to 0.46 from 0.47. The
affective rate decreased.

Adjustable rate
mortgages (ARMs) had a 4 percent share of mortgage applications filed during
the week.  The average contract interest
rate for 5/1 ARMs increased to 2.81 percent from 2.75 percent, with
points increasing to 0.41 from 0.33. The
effective rate increased from last week.

All interest rates
quoted are for loans with an 80 percent loan-to-value ratio and points include the
origination fee. 

 MBA’s survey 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.  The base period and value for all indexes is
March 16, 1990+100.

…(read more)

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Scope of California Homeowner Bill of Rights Narrowed by Recent Negotiations

California’s proposed Homeowner Bill
of Rights
, originally proposed by the state’s attorney general Kamala Harris
and covered here
has been modified extensively following what the Center for Responsible Lending
(CRL) calls six weeks of intense negotiation with banks, legislators, the
attorney general and consumer groups. 

Among the changes reported by CRL is
a narrowed scope for both the loans and servicers covered by the bill.  The only loans to which the bill will now
apply are first mortgages on owner occupied one-to-four family houses and only
servicers who process more than 175 foreclosures per year will be subject to
many of its requirements.

Earlier versions of the bill
required the lender or servicer to record and provide evidence of all
assignments as part of the chain of title to foreclose.  The current version requires that only
evidence of the last assignment be available to the borrower.  The current bill also includes an express and
comprehensive right to cure until the notice of trustee sale is filed.  A servicer can avoid liability by curing a
violation before the foreclosure sale.

Originally the bill provided
post-sale minimum statutory damages of the greater of actual damages or
$10,000; the new version allows only actual damages with triple damages or a
minimum of $50,000 available only in cases of intentional reckless violations
or willful misconduct.

Unlike the National Mortgage
Settlement the California bill allows for multiple contact persons as long as
they have the access and authority of a single point of contact.  Prohibitions against dual tracking and false
documents remain as in the original law, however the enforcement provisions
sunset after five years.

CRL says that this Homeowner Bill of
Rights remains critical for large number of borrowers, their communities, and
the California housing market.  It
ensures that borrowers in owner-occupied homes applying for loan modifications
get full and fair consideration for those modifications before the foreclosure
process begins.  This will allow the
foreclosure process to move more quickly for those who do not qualify for home
retention alternatives while preventing unnecessary foreclosures on borrowers
who do.

CRL released a new study of
California delinquencies with three principal findings.  First, loan modifications work well to keep
borrowers in their homes.  More than 80 percent
of California homeowners who received modifications in 2010 stayed current and
avoided re-default despite the continued recession.  Only 2 percent of those modified loans ended
in foreclosure.

Second, large numbers of borrowers
remain at risk with nearly 700,000 California mortgages in some state of delinquency
or foreclosures.  This is one out of nine
borrowers.

Third, middle class, African
Americans, and Latinos are the hardest hit. 
The delinquency rates for African Americans and Latinos are 11.1 and
10.7 percent respectively while for Asians and whites the rates are 7 and 7.3
percent.  Delinquencies are concentrated
among middle class borrowers, those making between $42,000 and $120,000
annually.

 “California policymakers will soon have the
chance to extend key servicing reforms from the National Mortgage Settlement to
all California borrowers, said Paul Leonard, CRL’s California Director. 
“Our legislators have an historic opportunity to overcome intense opposition
from the big banks and ensure that all Californians get a fair shot at loan
modifications.”

…(read more)

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