First Horizon’s Buybacks; Buyback Legal Chatter; Basel III and Construction Loans; Congress Snubs Small Business?

I have been subtly warning groups during speeches, and writing in this commentary, about the implications of Basel III. Most of the focus is on servicing & the value of it. But did you know that under the new Basel III rules, construction lending would likely go into the “high risk commercial real estate” category and require a 150% risk weighting? “Lenders would seek deals where a developer would contribute a substantial amount of cash equity; while banks would be less likely to let developers rely just on the equity from appraisals” per American Banker. And the government and the Fed are asking why banks aren’t lending? This is just another reason.

Last month we sold the house where my kids grew up, and I had a handyman remove the doorframe where we marked heights on birthdays. I am not mentioning this to turn the daily into a Hallmark card, but because it reminded me of one thing that the press seems to forget: a house is a home and not a share of stock. And when it comes to that, the popular press seems to forget that people need a place to live, that people want a good school district for their kids, a place to get to know the neighbors, a place to create an emotional attachment. I could go on and on, but there are very concrete reasons why people who are underwater on a house still make the payments, why many who supposedly saw the real estate decline didn’t sell their home, and why so many people don’t care about minute fluctuations in the price of housing based on the latest metric.

I’ll get off my soapbox, and get on with business: I think that the last time the S&P/Case-Shiller Home Price Index went up was during the Eisenhower Administration – until now. Seriously, for the first time in eight months the S&P/Case-Shiller Home Price Indices rose over levels of the previous month.  Data through April 2012 showed that on average home prices increased 1.3% during the month for both the 10- and 20-City Composites. Prices are still down 2.2% for the 10-City and 1.9% for the 20-City over figures for one year earlier but this is an improvement over the year-over-year losses of 2.9% 2.6% recorded in March. This report followed Monday’s news that New Home Sales jumped 7.6% in May to 369k and was up 19.8% from a year ago, and last week’s Existing Home Sales, Housing Starts and NAHB HMI which all contained some positive signs.

How’s this to grab one’s attention: “Congressional Subcommittee REFUSES Small Business Brokers and Appraisers a Seat at the Table.” The notice from the NAIHP goes on, “For the second time in a week, the Subcommittee on Insurance, Housing and Community Opportunity, Chaired by Rep. Judy Biggert (R-Illinois), refused small business housing professionals the right to be represented during Congressional testimony.” Here you go:

Yes, there are plenty of rumors that the agencies are hotly pursuing buybacks to recoup taxpayer losses, and that the agencies are losing personnel except for QA & auditing. But that reasoning doesn’t help companies like First Horizon National Corp. It “cited new information it recently received from Fannie Mae as the basis for incurring the $272 million charge this second quarter. About $250 million will go to repurchase loans made with “inadequate or incorrect” documentation, and $22 million is being charged to address pending litigation.” I don’t make this stuff up.

Last week I received a legal question about buybacks. “I was asked by a former customer of a major investor’s correspondent lending group about how others are handling repurchase/make-whole requests on older vintage loans.  His experience has been that the investor will ask to be reimbursed for losses associated with loans that have been foreclosed and disposed of without being given an opportunity to refute the alleged rep and warrant deficiency.  He has had to hire a law firm to argue each of these requests and the major investor has backed off each time. Normally, when a correspondent is still active, there is obviously leverage against the correspondent under an implied or actual threat of being terminated as a customer if a make-whole is not made, and when an investor is no longer in the correspondent business, I’ve heard rumors of it being more inclined to back down but sometimes taking a former customer to court or ‘saber rattling’. Needless to say, it is expensive to have a lawyer prepare a rebuttal to a make-whole request, just to have the investor ultimately back-off – what to do?”

I turned this over to attorney Brian Levy, who wrote, “Your question about investor willingness to sue originators over repurchase claims is difficult to answer with specificity.  My clients have been able to settle and/or avoid litigation in every engagement that I have undertaken in this area. That does not mean, however, that the threat of investor repurchase litigation over individual loans is not real or that litigation is not occurring, but it has been my experience that these disputes can be resolved (or dismissed) through extensive and detailed settlement negotiations and information exchange.  Litigation over individual repurchase claims may be fairly unusual now, but so were repurchase claims entirely prior to 2007-2008. Due to the unique nature of each originator’s position and the facts around applicable repurchase claim(s), however, it would be reckless to assume one will not be sued on specific claims based on what is generally occurring in the industry or based on what may have been past investor appetite for litigation (although these are important elements to consider in one’s strategy).”

Brian goes on. “For example, much depends on the facts and circumstances of the loan(s) in question, whether there are any other relationships between the parties that can be leveraged (loans in the pipeline, warehouse lines etc.) the overall quality, stability and reputation of the originator and, significantly, the parties’ tolerance for risk, availability or need for reserves and the desire for finality.  Moreover, investor and originator appetite for lawsuits may change over time as strategies can change in organizations and as the few cases that have been filed begin to yield decisions that are more or less favorable to one side or another. Even the tenor of discussions or lack of attention to the matter can impact a party’s willingness to file a lawsuit. All of these issues should be explored with legal counsel as part of an originator’s comprehensive repurchase management strategy.” (If you’d like to reach Brian Levy with Katten & Temple, LLP, write to him at

Here are some somewhat recent conference & investor updates, providing a flavor for the environment. They just don’t stop. As always, it is best to read the actual bulletin.

Down in California, it is time again for the CMBA’s Western Secondary conference. (I’ve been wandering around that San Francisco conference since 1986 – if those halls could talk…) The CMBA has presentations on “QM, QRM, the CFPB, Agency Direct Delivery – Reviving the Lost Art of Servicing Retained Execution, Compliance issues Facing State Licensed Mortgage Banks Today and How Regulatory Change will Impact Your Business and the Secondary Market, Manufacturing Quality – Steps to Produce a Quality Loan (Operation Focus),” and several other topics. Check it out.

In light of the increasing number of non-conforming transactions where the departure residence is retained by the borrower and is in a negative equity position, Wells Fargo issued a reminder that underwriters must weigh any and all risk factors evident in the loan file.  Each case should be weighed individually, as there are only so many situations underwriting guidelines can predict.  The Wells Seller Guide now states that, in a case where the departure residence won’t be sold at the time of closing and is in a negative equity position, paying down the lien or using additional reserves to cover the negative equity may be required to reduce overall risk.

Wells has issued another reminder that a signed Borrower Appraisal Acknowledgement is required for all loans.  The Acknowledgment, whether it’s the Wells-issued form or a custom document, must include the property address, complete lender name, borrower name, borrower signature, and borrower signature date.  If the form has checkboxes where the borrower can make a choice, these boxes must be ticked.

Due to changes to FHA Single Family Annual Mortgage Insurance and Up-Front Mortgage Insurance Premiums announced by HUD back in March, one of which requires lenders to determine the endorsement/insured date of the FHA loan as part of a Streamline Refinance transaction, Refinance Authorization results will need to be submitted to Wells with the closed loan package.  These results are necessary to ensure that the accurate MIP was applied.  This applies to all FHA Streamline Refinances with case numbers assigned on or after June 11, 2012, while loans purchased through Pass-Thru Express are excepted.

Wells’ government pricing adjusters are set to change on July 2nd.  For VA loans with scores between 620 and 639, the adjuster will go from -0.750 to -1.500.  The adjuster for loans with scores between 640 and 679, currently at -0.250, will change to -0.500.  This affects Best Effort registrations, Best Effort locks, Mandatory Commitments, Assignments of Trade, and Loan Specified Bulk Commitments.

How sensitive are our markets to European news? Sure, instead of buying our 10-yr yielding 1.65% you could buy a Spanish 10-yr yielding 6.74%. But there is instability, evidenced by this note from an MBS trader yesterday: “News of Merkel stating Europe would not have shared liability for debt ‘as long as she lives’ caused Treasuries to immediately surge higher, only to be met by better real money selling of 7s.  While the selling did help to stall the rally, the true relief didn’t come until Reuters posted a correction to its initial release, re-quoting Merkel as having said Europe would not have ‘total shared’ liability for debt as long as she lives.  The amendment took Treasuries off the highs ahead of the 2yr auction…”

Say all you want about the market, bond prices and yields are not doing a whole heckuva lot. Tuesday the 10-yr closed at 1.63%, very close to where it’s been all week, although there was some intra-day volatility blamed on Europe. (European problems will be with us for years, and paying attention to intra-day swings can become wearisome after years…) For agency mortgage-backed securities, volume has been around “average” all week, with the usual buyers (the Fed, hedge funds, money managers, overseas parties) absorbing it. Up one day, down another – yesterday was down/worse by about .250, which was about the same as the 10-yr T-note. We could have been helped by the Conference Board’s Consumer Confidence index which dropped for a fourth straight month, to 62 from a revised 64.4 in the prior month, but nope.

No one is getting any younger… (Part 1 of 2)
I very quietly confided to my best friend that I was having an affair. She turned to me and asked, “Are you having it catered?” And that, my friend, is the definition of ‘OLD’!

Just before the funeral services, the undertaker came up to the very elderly widow and asked, “How old was your husband?”
“98,” she replied. “Two years older than me.”
“So you’re 96,” the undertaker commented.
She responded, “Hardly worth going home, is it?”

Reporters interviewing a 104-year-old woman:
“And what do you think is the best thing about being 104?” the reporter asked.
She simply replied, “No peer pressure.”

I feel like my body has gotten totally out of shape, so I got my doctor’s permission to join a fitness club and start exercising.  I decided to take an aerobics class for seniors. I bent, twisted, gyrated, jumped up and down, and perspired for an hour. But, by the time I got my leotards on, the class was over.

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May Housing Scorecard and Q1 Servicer Assessments Released

The May
edition of the Obama administration’s Housing Scorecard released today by the
U.S.  Departments of Housing and Urban Development
(HUD) and Treasury showed a promise of growing stability in the housing market
although officials cautioned that the overall outlook remains mixed.

The monthly
scorecard is essentially a summary of data on housing and housing finance
released by public and private sources over the previous month and/or
quarter.  Most of the data such as new
and existing home sales, permits and starts, mortgage originations, and various
house price analyses have previously been covered by MND.

This month’s
scorecard is more upbeat than many of its recent predecessors.  It notes that sales of existing houses rose
2.4 percent in April and that the inventories of newly constructed houses
increased for the first time since April 2007. 
With sales up inventories dropped to a 5.1 month supply compared to 5.2
months in March and 12.2 months at the peak in January 2009. Distressed sales
are still a big factor and serious delinquencies and underwater mortgages
continue to hold back the market.

HUD Acting Assistant Secretary Erika
Poethig said, “This month’s indicators show promise – more than 180,000
borrowers took advantage of our enhanced Home Affordable Refinance Program in
the last quarter alone and foreclosure starts are declining as more homeowners
secure mortgage relief  – but with so many households still struggling to
make ends meet it’s clear that we have more work ahead.  That is why we are asking the Congress to
approve the President’s refinancing proposal so that more homeowners can
receive assistance.”

The May Housing Scorecard and the accompanying
data from the Making Home Affordable Program (HAMP) include the results of
first quarter program assessments of participating servicers.  These Servicer Assessments summarize
performance in three categories of program implementation; identifying and
contacting homeowners; evaluating homeowners for assistance, and program
reporting, management, and governance.

In the first quarter of 2012 only
three servicers were found to need minor improvement and six in need of
moderate improvement.  For the second
consecutive quarter, none was found to be in need of substantial enough improvement
to cause for Treasury to withhold program incentives as has been done in the

Release of the first quarter
assessments coincides with the roll-out of the expanded eligibility criteria
for HAMP.  The new HAMP Tier II
guidelines include eligibility for homeowners with a debt-to-income ratio below
31 percent, properties occupied by a tenant, and vacant properties which the
borrower intends to rent.  Servicers began accepting applications for Tier
2 on June 1. 

The HAMP program received 122,872
requests for modifications during April and processed 84,394.  A total of 65,949 requests were denied and
18,445 were approved.  This brings the
number of requests for modifications since the inception of the program to 4.7
million, 2.03 million of which were approved. 

These HAMP statistics for May were also
broken down on a per-servicer basis as were program-to-date numbers.  These can be seen in their entirety here.

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Community Lenders want Smaller GSEs Retained in Secondary Market Role

The Community Mortgage Lenders of
(CMLA) is urging policy makers to consider retaining the positive aspects
of Fannie Mae and Freddie Mac
in any future secondary market design.  CMLA is asking that a smaller Fannie and
Freddie be configured to serve 30-35 percent of the overall secondary mortgage
market while being barred from securitizing or investing in anything but plain “vanilla”

The trade association stated its
preferences in a letter to the secretaries of Housing and Urban Development
(HUD), Treasury, and the Acting Director of the Federal Housing Finance Agency
(FHFA) as well as the chairs and ranking members of two congressional
committees which will be involved in the future definition of the market.    

CML said
the two government sponsored enterprises (GSEs) have benefited from the strong
oversight and leadership they have received from FHFA and that has been
reflected in the housing market where credit has remained available primarily
because of their presence.  While the
housing industry, Congress, Treasury, HUD, and the FHFA are seeking clarity on
how the GSEs should perform going forward, CMLA “believes that the housing
industry and the public at large are best served through a sensible and calculated
reformation of the GSEs that reduces their footprint in the industry while at
the same time allowing them to serve their historically critical functions.”

The CMLA endorses a future whereby Fannie and
Freddie shrink to serve 30-35 percent of the overall secondary mortgage market,
and are barred from securitizing or investing in anything but plain
“vanilla” mortgages.

While the FHFA’s October 2011 projections shows
that the balance sheets of the GSE’s are improving, FHFA has also expressed
doubt that they will ever be able to repay the government its investment during
the crisis.  CMLA believes that the
taxpayer can be repaid through creative and thoughtful planning and through
tailoring an increase in guarantee fees to more accurately price risk. 

There are a number of principles that should
inform creation of a fair and effective secondary mortgage market according to

Standardization reduces

Liquidity is needed

Conventional lending
should be protected

Loss mitigation
procedures should be retained and further enhanced

Risk must be made

Market concentration
should be reduced

Portfolio flexibility
should be increased

Proper use of
Guarantee Fees must be required

Reform must include
standards for the non-GSE Secondary Market.

The letter states that a sensible and calculated
reformation of the GSEs will result in continued liquidity and stability
without an unnecessary disruption
to the secondary market, “or worse, a
concentration of the secondary market within a limited number of large
banks/servicers.”  CMLA sets out the
following steps for the GSEs to complete within a transition time and
recognizing market realities.

  • Pay an explicit
    backstop fee to the federal government;
  • Be prevented by
    statute from securitizing or investing risky mortgages as defined by the
    Qualified Residential Mortgage Rule;
  • Be shrunk and
    normalized to sustain roughly 30 to 35 percent of the secondary market
  • Continue to be required
    to serve lenders of all sizes and to nurture smaller markets in areas of market
  • Continue to provide
    standardization of origination documentation, servicing practices,
    securitization terms and modification/foreclosure strategies as a policy of
    consumer protection;
  • Reduce and maintain
    portfolios over time, but only as transitional market pricing reduces the
    portfolios. Given that the portfolios
    provide a stabilizing influence of mortgage pricing and that the FHFA has said
    the portfolios will only cause 9 percent of overall losses “any forced downsizing
    seems politically motivated to benefit large banks and Wall Street.”
  • Establish a governing
    board to maintain and set a competitive guarantee fee following the public
    utility model with funds generated to be retained in the housing industry for
    the benefit of taxpayers;
  • Regulate
    post-conservatorship executive compensation through a governing board to
    prevent excessive risk-taking.

CMLA says it is the first trade group to call for
the GSEs to remain intact.  Mark
McDougald, Chairman of the organization said, “Our plan is forward-looking
and will result in distinct changes in the secondary market. However, we call
on Washington to move expeditiously and to avoid
drastic, politically-driven changes that will harm small lenders and the small
communities in which they serve,”

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Vacant Units Decline but so does Homeownership

Vacancy rates for both owner-occupied and rental properties dropped to new recent lows in the first quarter of 2012 according to data released by the U.S. Census Bureau on Monday.  The rental vacancy rate dropped below 9 percent for the first time since the second quarter of 2002 and the homeowner rate was the lowest since the first quarter of 2006.

Rental vacancies were at a rate of 8.8 percent compared to 9.4 percent in the fourth quarter of 2011 and 9.7 percent in the first quarter of 2011.  The rate of homeowner vacancies was 2.2 percent compared to 2.3 percent in the previous quarter and 2.6 percent in the first quarter of 2011.  This is the lowest that vacancy rate has been since the first quarter of 2006 when it was 2.1 percent.

There are an estimated 132.1 million housing units in the U.S., an increase of 486,000 since the first quarter of 2011.  Of these, 114,122 are occupied, one million more than a year earlier and 19.0 million are vacant, down just over one -half million.  At the same time the number of owner occupied houses also decreased by a half million from 75.1 million in Q1 2011 to 74.6 million.

Of vacant housing units 14.4 million or 10.6 percent are considered year-round housing and of those, 4.1 million units are for rent, 2.0 million are for sale and 7.4 million are being held off the market about half for occasional use by the owner or a non-arms length occupant.

Homeownership rates declined again in the first quarter consistent with the pattern of most quarters since the rate peaked at 69.0 percent in the third quarter of 2006.  The current rate is 65.4 percent, down from 66.0 percent in the fourth quarter and 66.4 percent in the first quarter of 2011.   Homeownership declined across all age groups and all ethnic groups covered in the study.

While the declining vacancy rates have been reflected in increasing rental prices, the same is not true for home sale prices.  The median asking rent for vacant units in the first quarter was $721, up from $712 in the previous quarter and $683 one year earlier.  The median asking sales price for vacant units in the first quarter was $133,700, down from $133,800 in Q4 and $143,700 in Q1.

Rental vacancy rates declined in three of the four regions on an annual basis.  Only in the Northeast did the rate increase from 6.8 percent in the first quarter of 2011 to 7.8 percent in the first quarter of 2012.  In the Midwest the new rate was 9.3 percent compared to 10.2 percent; the South was down from 12.5 percent to ‘10.8 percent and in the West the rate declined from 7.3 percent to 6.3 percent.  The rate also declined both inside and outside of Metropolitan Statistical areas.

Homeowner vacancy rates declined in all four regions, from 2.2 percent to 1.8 percent in the Northeast, 2.7 percent to 2.1 percent in the Midwest, 2.8 percent to 2.4 percent in the South, and 2.4 percent to 2.0 percent in the West.  Homeowner vacancies were down inside MSAs but increased 3 basis points to 2.6 percent outside of MSAs.

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February Housing Scorecard Spotlights Chicago

The Departments of Housing and Urban Development (HUD) and Treasury released the February edition of the Obama Administration’s Housing Scorecard on Friday.  The Scorecard is essentially a summary of data on housing and housing finance released by public and private sources over the previous month and/or quarter.  Most of the data such as new and existing home sales, permits and starts, mortgage originations, and various house price evaluations have been previously covered by MND. 

As an overview, the report says that the data for February shows “some promising signs of stability” although the overall outlook is mixed and there is continued fragility in home prices.  Mortgage delinquencies are still declining and are well below the levels of a year ago.  Sales of existing homes have started out the year at the strongest levels since 2007.

There has been some progress with the housing overhang.  The supply of homes on the market continued to decline in February and there is now a 6.1 month supply at the current rate of sales.  The inventory of new homes is even lower at 5.6 months, the lowest since 2006.  However, despite existing home sales reaching the highest level since May 2010, home prices changed little from the previous month, marking a fifth month of seasonal lows. 

HUD Assistant Secretary Raphael Bostic said of the scorecard, “The data this month show that we’re making important progress in providing relief to homeowners under the Obama Administration’s programs. With fewer borrowers falling behind on their mortgages and some 425,000 families taking advantage of our enhanced Home Affordable Refinance Program – standing to save on average $2,500 per year – it’s clear that the Administration’s efforts continue to provide significant positive benefits.  But 1 in 5 Americans still owes more than their home is worth. That’s why the Administration’s recent proposals are critical to promoting healing in the market. Our efforts to ramp up economic development in fragile neighborhoods and to expand homeowner access to low-interest refinance options reflect our commitment to turning these markets towards growth. That is why we are asking the Congress to approve the President’s housing proposals so that more homeowners can receive assistance.”

Each month the Scorecard spotlights a different housing market and the current edition focuses on market strength in Chicago, Illinois and its surrounding communities. The Chicago metro area was one of the hardest hit areas in the nation following the housing market downturn and HUD says the Administration has been active in trying to stabilize the market.  Its efforts, the Scorecard says, have helped more than 220,000 families in the area avoid foreclosure. 

Sales of bank-owned properties and short sales remain high at 35 percent of sales in the market compared to 29 percent nationally which leads to continued weakness in local prices.  Foreclosure processing takes an average of 575 days so properties stay in the pipeline 50 percent longer on average than in other cities.

Illinois has received more than $400 million through the Hardest Hit Fund and approximately $265 million has been awarded to 12 jurisdictions through the Neighborhood Stabilization Program to help purchase or redevelop residential properties and address the effects of abandoned and foreclosed housing. Both programs have helped provide stability to the Chicago housing market.

The Housing Scorecard usually incorporates by reference the monthly report of the Home Affordable Modification Program (HAMP) and related remediation programs.  That report however is now issued bi-monthly and not yet available for February.  

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