BofA Halts Cash-out Refinancing; Letters From the Trenches; Mortgage Hiring Continues

Hey, if
you can’t beat ’em, join ’em. I bet many
wouldn’t mind making nearly a quarter million a year being a “cutting edge”
CFPB regulator
Compare that to a story last week in the Wall Street Journal noting,
“Government regulators will cut sharply the pay of the executives they
hire to succeed the departing heads of Fannie Mae and Freddie Mac, said
regulators, which may make it difficult for the struggling mortgage-finance
giants to attract and keep qualified chief executives. Some officials even have
floated the idea of paying a salary of $1. Whatever ultimate pay arrangement is
approved by regulators for Freddie could set a precedent that would be adopted
by Fannie.” MBA President David Stevens warns that the pool of CEO
candidates will shrink as compensation for the post (which can be difficult to
fill given the limitations of being under government control) declines.

In the
private job market, Florida Capital Bank Mortgage is expanding its national mortgage
operations with the opening of an Operations Center in Northern California. FLCBM is looking for underwriters,
processors and closers for this location. In addition, they are looking for AE’s
across the country
to support its growing broker, mini-correspondent, correspondent
and Early Purchase Funding Program allowing brokers to become mortgage bankers.
Interested operational candidates can contact Gerhard Naude at and AE’s can contact Tommy
Adkins at

In addition,
Prospect Mortgage is hiring Loan
Officers and Sales Managers
who leverage relationships with business
referral partners for sales growth. Prospect Mortgage offers nationwide lending
and has branches from coast to coast. For rankings, “Prospect is one of the
largest independent residential retail mortgage lenders in the US: it is the
second largest 203K lender, a top-10 FHA lender and a top-five Fannie Mae
HomePath Renovation lender.” So if you know of anyone interested in the retail
side of things with Prospect, they should contact Chief Talent Officer Daniel
Nieto at

In other
corporate news, SunTrust Bank’s 16%
decline in earnings for the fourth quarter highlighted a problem many
originators are having: setting aside higher mortgage repurchase provisions.

Earnings were down from a year ago, as were revenues. “SunTrust’s mortgage
repurchase reserves rose to $320 million from $282 million in the third
quarter. The bank received $636 million in repurchase demands, up sharply from
$440 million a quarter earlier and $233 million in the fourth quarter 2010.”
Management saw it coming, as it warned the industry that repurchases would
increase significantly in the fourth quarter. Putting some numbers on the
problem, SunTrust holds $120 billion in unpaid balances from loans done between
2006 and 2008, and about $21 billion have gone 120 days or more past due. Of
those unpaid legacy mortgages, SunTrust has received repurchase demands on $4.4
billion, with $3.9 billion of those resolved. Repurchase issues were a factor
in the mortgage production side of SunTrust swinging to a $62 million loss from
a $41 million profit a quarter earlier.

As we move
toward having more regulators than originators, in Utah, Primary Residential Mortgage created of a new Enterprise Risk
Management (ERM) group that will “manage risk through the entire loan
origination process and ensures that the company has the appropriate monitoring
and evaluation policies.” Dave Zitting, president and CEO, observed,
“While the larger banks all have ERM departments, it’s uncommon for a
company of our size to have one but we wanted to take aggressive steps to
demonstrate to our customers, partners and employees our commitment to
providing a safe and compliant mortgage experience.” The leader of the
group noted, “In today’s mortgage environment, lenders must manage
compliance and quality issues more closely than ever before. By establishing
this new group we are implementing a solution that will sharpen our focus on
complying with all mortgage banking laws and regulations, improve on our
overall loan quality and help us to better manage risk across all areas of our

Bank of America certainly turned some heads last week
when it told its retail loan officers nationwide that the lender will halt, for
now, originations of cash-out
, citing what it calls a “surge of refinancing
activity” and capacity problems. A memo written by B of A home loans sales
executive Matt Vernon notes that “while we regret the inconvenience this will
cause to some of our customers in the short term, we are making the responsible
choice that is in the best interest of our long-term capabilities to provide a
predictable customer experience.” In spite of arguments that this is some of
the cleanest product ever to be originated, and profit margins being solid for
many in the business, BofA continued to de-emphasize residential loans in the
fourth quarter, producing just over $22 billion in mortgages, a stunning 75%
decline from 4Q 2010.

At least
Bank of America is not expecting to have the FDIC come through its doors on a
Friday afternoon…but others had that happen (for the first time in over a
month). In PA American Eagle Savings Bank was closed and became part of MD’s Capital Bank, National Association.
Down the coast in Florida, Central Florida State Bank became part of CenterState Bank of Florida, National
. And in neighboring Georgia, the depositors of The First State
Bank will soon have the name of Hamilton
State Bank
on their checks.

company transition is expected to continue in 2012. Industry vet Larry
Charbonneau, owner of Charbonneau &
, wrote to me, saying, “Rob, I’ve been in this business over
thirty years, and 2011 was one of my busiest ever. Your readers should know
that merger and acquisition activity is
picking up
. There are some commercial banks looking to acquire well
managed mortgage bankers, and the warehouse industry is very liquid now and
credit is readily available to those who have the required net worth.” If you
want to reach Larry, shoot him an e-mail at

Regarding recent legal events, David Oldenberg
writes, “Attorneys are going to do the same thing to themselves that we did
to the mortgage industry. We created better and better loans programs to get
people into homes and it back-fired when there were no more buyers left and the
bottom dropped out. Attorneys are going to keep creating more and more ways to
sue lenders and eventually they will all stop lending, leaving no one left to
sue. They will destroy their industry based on greed, the same way the mortgage
industry has destroyed itself. When I used to play stock broker and financial
advisor on my radio show, I always said, ‘the trend is your friend until the

Barry S. from Illinois wrote, “I just had another two week fight with one
of the top 4 investors. They underwrote the loan – it has MI, is a condo, and
an 800 credit score. They have some overlay that says HO6 insurance must be
escrowed, we never heard of such a thing, none of our other lenders force you
to escrow HO6 insurance. Anyway, loan was cleared to close and the underwriter
never said anything about HO6 being escrowed. We closed it and they wouldn’t
purchase the loan because the HO6 was not being escrowed on the HUD. So the
borrower signed new docs escrowing the HO6 since they had to pay it themselves
so they really didn’t care if it was escrowed. Then the original investor
refused to purchase the loan because it’s a TILA violation: they say you need
to reopen the recession period because the total payment has changed! I asked,
‘What happens each year when escrow analysis are done and servicers increase a
borrowers total payment when their taxes or insurance increase, TILA violation?
What happens when a borrower calls a bank to add escrows to their mortgage
payment TILA violation? What happens when a title company or lender puts the
wrong info for the taxes and insurance escrows and has to fix the mistake on
the HUD-1, TILA violation?’ These are the same guys who three weeks ago gave me
the same song and dance when a digit was reversed on an address in the closing
package, fun thing was the borrowers were both big time attorneys in Chicago
and couldn’t believe they had missed the mistake while signing. (An investor
finally bought that loan after a month of saying you can’t fix a typographical
error on a closing package!) But now we have to take the loan elsewhere.”

(For the uninitiated, HO6 insurance is
designed for condo owners
. The HO6 condo insurance will cover losses to any
of your persona property and any structure you own. This policy also covers
damages to any fixtures of upgrades you added on since the move-in date. A lot
of people have HO6 insurance because they are required to if they have a
mortgage on the condo. A regular condo insurance policy does not cover your
actual unit or any of your belongings. HO6 does provide liability protection.)

Sometimes it is tough for compliance and QA personnel to stay up on the changes
in the market. They should check out the next monthly conference call (free!) of
the California Mortgage Bankers
Association’s Mortgage Quality and Compliance Committee (MQAC)
– you don’t
even have to live in California. Call in this Thursday (26th) at
11AM PST (free!). The topic is “Regulatory Forecast for 2012: How Should You Be
Prepared?” Let your fingers do the walking: 1-800-351-6802, passcode 43784. For
more questions contact Dustin Hobbs with the CMBA at

Turning to
interest rates, which are still pretty low on the radar screen of concerns of
originators, they slid higher last week. In fact, Treasuries had their biggest
weekly loss in a month with the 10-yr moving to 2.02% and MBS prices (on
Friday) worse by about .125. Is the economy really picking up? The current
administration sure hopes so, although the president comes in a distant third
to stimulating the economy compared to the Federal Reserve and Congress. Existing
Home Sales increased 5% in December to an annual rate of 4.61 million units,
and were up 3.6% versus a year ago. “Record low mortgage interest rates, job
growth and bargain home prices are giving more consumers the confidence they
need to enter the market.”

scheduled economic news in the United States this week doesn’t commence until
Wednesday with Pending Home Sales, the FHFA Housing Price Index, and the FOMC’s
rate decision. Thursday is Jobless Claims, Durable Goods, New Home Sales, and
Leading Economic Indicators; on Friday are GDP and a Michigan Consumer
Sentiment number. With things continuing quiet in Europe, and no news here, we find the 10-yr’s yield up to 2.08% and
MBS prices worse.

I pointed to two old drunks sitting across the bar from us and told my friend, “That’s
us in 10 years”.
He said “That’s a mirror, dummy!”

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BofA Can’t Close Mortgage Case

Bank of America is losing ground in an important legal argument over mortgage-repurchase demands. That could eventually force it to increase estimates of potential losses from such claims.

PHH joins FHA Streamline Movement; FHA Purchase Program; TBW CFO Heading for the Slammer

Don’t do the crime if you can’t do the time. Another ex-exec (the CFO) at
Taylor Bean Whittaker is now going to prison for five years.

Rates are great, and many indices show that home prices continue to
turn the corner
. Recently the CoreLogic housing index jumped 2.4% in April,
following the upwardly revised 1.1% gain in March. This gain was the strongest
monthly return since 1976. And companies continue to try to grab market share with
BofA’s, MetLife’s, GMAC’s, and ING’s scaling back.

In Southern California Americash is looking for experienced retail loan
officers. With volume in excess of $100 million per month, the national
mortgage banker, headquartered in Costa Mesa, is looking for LO’s that have an
NMLS license as well as a minimum of 2 active MLO state licenses. Americash was
established in 1998, is licensed in 19 states, has direct Fannie approval and
underwrites to DU findings with no investor overlays including HARP 2.0 (Fannie
& Freddie). Americash provides heavy internet marketing, direct mail and
exclusive inbound leads to it’s LO’s, combined with “advanced technology and
tremendous operations support” for it’s LO’s. If you know someone interested,
they should fax their resume to 866-275-9644 or e-mail it to gstrunz@americashloans .com. You
can also visit them online at www.americashloans .com.

And for something a little off the beaten path, an experienced,
well-financed mortgage-banking group is actively pursuing opportunities to
purchase controlling or full interest in an established mortgage bank with
current annual production in the $50 million to $300 million range. “Our group
will provide a minimum of $5 million injection of equity. We will provide a
strong forward and reverse origination strategy to build a national platform
with the right firm. The mortgage-banking firm MUST have minimum of a New York
state license – multi-state license is preferred – and must be DE FHA lender
and preferably have seller/servicer approval from Fannie and/or Freddie. We
would like Chase and/or Wells (preferably both) to be current approved
investors; of course other investors are also a positive. Our offer will be
based on the number of state licenses held as well as other criteria mentioned
above. All inquiries will be kept strictly confidential.” Please contact Mr.
Kalin at mk@buildaforce .com or call
1-800-283-6950 to discuss further.


And, of course, we can’t avoid CFPB chatter – I received this note: “The
US Chamber of Commerce held a round table. It seems that practically every
financial sector is very nervous about the CFPB. At first, under Warren we were
apprehensive but understood her vision and where they (the Agency) were going. But,
in late 2011, there was a radical climate change at CFPB as the cultures
clashed when CFPB brought over the folks from other agencies, FRP, HUD etc. The
willingness to work with industry and the respect the industry had for the
original vision of CFPB had been radically diminished in the recent months.
Cordray needs to make a radical diversion from the current course or the next
few years are going to become very adversarial and unproductive for the US
economy.” Stay tuned!

joined the ranks of national lenders changing FHA Streamline policies.
immediately, PHH will no longer accept new registrations of non-PHH Serviced
FHA Streamline Refinances*. FHA Streamlined Refinance on PHH Serviced loans
will continue to be allowed. Non-PHH Serviced FHA Streamline Refinances registered prior to June 16 must
adhere to the following timelines in order to remain eligible. Tier 3: The loan
must be submitted for underwriting (‘In Underwriting’ status) by Monday, June
25, and it must be closed and disbursed by Wednesday, August 15. Tier 6: Loans
must be submitted for underwriting (‘In Underwriting’ status) by Monday, June
25. In addition, loans must also be delivered to PHH (‘In Post Closing’ status)
by Tuesday, July 31, and the loan must be funded/purchased by PHH on or before
Wednesday, August 15. Tier 7: Loans must also be delivered to PHH (‘In Post
Closing’ status) by Tuesday, July 31 and the loan must be funded/purchased by
PHH on or before Wednesday, August 15. *A non-PHH Serviced FHA Streamline
Refinance loan is defined as a refinance that is paying off a loan which is not
currently in the PHH Servicing Portfolio.”

This change, and others, prompted the president of one West Coast investor to
write, “Several of our mortgage banker clients selling us FHA Streamline
products asked me what I know that the big boys don’t.  Rob, it is
absolutely concerning to me that our industry has truly forgotten its roots
and culture and has allowed big bank overlays to influence better decision
.  The same irrational thought parallels yesterday’s commentary
on the encroaching CFPB’s employment of socialistic compensation tactics. 
What concerns me is the more time these things manifest, the more they’re
legitimized.  We need to push back on these things, hard.”

In an attempt to help the liquidity of our markets, recently FHA and
HUD jointly announced the Distressed Asset Stabilization Program, allowing
private investors to purchase pools of mortgages headed for foreclosure with
the hope of bringing the loan out of default
. Thousands of borrowers
severely delinquent on loans insured by the Federal Housing Administration will
be aided under an enhanced government note sale program. With this, loans
available for purchase could increase by as much as 10 times, making it easier
for borrowers to avoid foreclosure. Bringing these loans out of default helps
both the borrower and the neighborhood avoid the disinvestment and decline in
value that accompanies a distressed property. This note sales program was
originally launched by the FHA as a pilot in 2010, resulting in the purchase of
more than 2,100 single family loans to date. But what loans are eligible to
enter the pool?
The borrower must be at least six months delinquent on
their mortgage; the servicer has exhausted all steps in the FHA loss mitigation
process; the servicer has initiated foreclosure proceedings; and the borrower
is not in bankruptcy. Under this program, FHA-insured notes are sold at a
market-determined price usually below the outstanding principal balance. When
the note is purchased, foreclosure is delayed for a minimum of six additional
months as the borrower gets direct help from their servicer to help to find an
affordable solution to avoid foreclosure. The investor purchases the loan at a
discount and then takes additional steps to help the borrower avoid default,
whether through modifying their loan terms or helping them through a short
sale, in order to maximize the return on the sale. The FHA’s goal is to help
mitigate the negative effects of the foreclosure process as part of the
Administration’s broader commitment to community stabilization. FHA eventually
hopes have the number of loans available for purchase at a quarterly rate of up
to 5,000, and add a new neighborhood stabilization pool to encourage investment
in communities hardest hit by the foreclosure crisis. And HUD will require that
no more than 50% of the loans within a purchased pool become real-estate owned
(REO) properties and that the servicer hold the loan for at least three years
if unable to bring the loan out of default. With FHA’s inventory of REO
properties available for sale is at its lowest level since 2009, it is hoped
that many neighborhoods still fighting to recover from the housing crisis will
potentially avoid foreclosures and homes going into the REO portfolio.

Well, we had another Greek election Sunday. It was hoped that the outcome
will help reduce some of the uncertainty in Europe. The election featured a
conservative party which supports the EU bailout package against a radical
leftist party which opposes the bailout plan, and as polling indicated, it was
a close race. (Prior to the election, analysts said that if the leftist
candidate wins, it likely will destabilize the country and call into question
whether Greece will remain in the EU.) Given the small size of Greece, its exit
from the EU would not have a major impact on economic activity in the region.
The major concern is that once one country leaves the EU, it could open the
door for other countries to follow, which could have a destabilizing effect on
economies around the world. European issues will be with us for years.

As it turns out, Greece’s center-right New Democracy won, and the party
will try to form a coalition on Monday to back the country’s international
bailout after its narrow victory. As the market breathes a collective sigh of
relief, no one should get too carried away with euphoric feelings. “Greece is a
highly divided, highly volatile and deeply troubled country. A coalition
government is by no means a done deal and anything that does get formed, will
likely break quickly,” as one Wall Street analyst put it.

The Federal Reserve kicks off a two-day meeting tomorrow, and the
situation in Europe likely will have a strong influence on it. With slow
economic growth in the US, a prolonged period of economic weakness likely in
Europe, and slowing growth in most emerging economies, the Fed may be more
willing to provide additional stimulus. And as we’ve seen, bond purchases are
one form of stimulus, which has certainly helped mortgage rates.

For the second consecutive week an ostensibly “game-changing” weekend
development in Europe has been quickly dismissed by investors (Spain’s banks
and now Greece’s elections). Here, besides the Fed meeting, with no change
to overnight Fed Funds expected, this week is pretty dry for news out of the
U.S. Tomorrow we’ll have Housing Starts and Building Permits; Thursday we have Existing
Home Sales. Our benchmark 10-yr T-note, which closed Friday at 1.59%, this
morning is at 1.57%, and MBS prices are a shade better

Men are like… (Parental discretion advised; Part 1 of 2)

1. Men are like weather. Nothing can be done to change them.
2. Men are like blenders. You need one, but you’re not quite sure why.

3. Men are like laxatives. They irritate the cr-p out of you.
4. Men are like bananas. The older they get, the less firm they are.
5. Men are like chocolate bars. Sweet, smooth, & they usually head right
for your hips.
6. Men are like commercials. You can’t believe a word they say.

(Part 2 tomorrow.)

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Full speed ahead on Basel III; Commentary And Input On Appraisal Issues

for borrowers, and rate sheet pricing, the
Fed voted “full speed ahead” for Basel III
. “Mortgage
servicing rights (MSR), for instance, are used far more by U.S. lenders than by
their international competitors. Banks get paid fees for servicing a home loan,
which means collecting payments and managing foreclosures, and because they can
be sold in markets, their value has been allowed to count toward capital
requirements. The Basel agreement limited
to 10 percent how much MSR’s could count toward the common equity component and
the Fed decided to strictly follow that standard.
In anticipation of the
new rules, some banks have been selling
off mortgage servicing rights
, like earlier this week when BofA agreed to
sell $10.4 billion in mortgage servicing rights to a unit of Nationstar
Mortgage.” (FULL STORY)

The slow
world economies have been a help for mortgage rates, and with volumes
continuing to be good some companies are expanding. For example, in Southern
California iServe Residential Lending is
searching for underwriters (DE or Conventional), closers, and lock/appraisal
desk personnel
. (The positions are in San Diego, although underwriters can
work from home both in San Diego and other markets) iServe is licensed in 20
states – and has agency approval so is a direct lender.  With a successful
long-term purchase strategy, iServe has a complete product mix of conventional,
government, and jumbo products.  For more information, go to or email

One state over, in Scottsdale, Arizona, independent
retail mortgage banker On Q Financial is looking for an experienced Business
Analyst/Developer to assist its Information Technology business unit with
strategic projects
. The incumbent will elicit, analyze, specify, and
validate the business needs of project stakeholders, be they business partners
or end-users. The Business Analyst/Developer will apply proven communication,
analytical, and problem-solving skills to help design and develop processes,
reporting mechanisms and interfaces between internal and external applications.
Strong applicants will have experience with Encompass SDK, AMB and Microsoft
SQL Server. Candidates should send their resume to Devin Dvorak at

Appraisals! Often times it goes against the grain
of a lender to advance money without knowing the value of the collateral. Even
the HARP II program has complications & “work-arounds” involving value and
appraisals. I received this note from a mid-sized correspondent about
appraisals & AMC’s: I was trying to do a loan on a property in the suburban
NYC area. And FHA appraisal was done in 2011for another lender at $460k. But our
pricing offered better options than the previous lender, and 2011 income docs
allowed for more favorable DTI, so it made sense to delay. The original
appraiser could not be assigned due to being on the investor’s Unacceptable List,
so the broker ordered a new appraisal through our AMC. The appraiser is from
same county as the property, but takes more than 2 weeks to deliver (need new
photos, need to go to town hall for tax classification, I uploaded it but the file
was corrupt, etc…). The appraisal is delivered to the broker, lender and
borrower at $365k, but two hours later the appraiser sends in a retraction statement,
saying value is $350k.

“Our chief
underwriter, aware of these unusual events and that the new value results in a
denial, permits a new appraisal to be done through another approved AMC chosen
by the lender. The new appraisal brings value in at $520k! The underwriters have
now ordered a full desk review, asked to consider data pulled from both
appraisals along with direct questions from the underwriter of the three ‘experts’
in the appraisal field, since they are all licensed and educated, who are
relied upon throughout the whole lending system, within 90 days in a stable and
desirable area of the country, and range from $350k, $365k, to $460k to $520k. 
The property is not that difficult to appraise: not unique, no obsolescence, no
undesirable market features, and typical for the area. Oh, and did I mention an
expiring rate lock? Here is another example where borrowers experience
unnecessary pain, probably additional costs…lenders and brokers take a black
eye and quality of appraisal work is still compromised.”

Fairway Independent Mortgage, in a note sent to clients, wrote, “From
February of 2010 to February of this year there has been a decline of 39%, or 1,569,
licensed appraisers in Massachusetts. In the past year we lost another 160
appraisers in 12 months! In 2011 the state issued 53 appraisal trainee licenses
which was a decrease of 30, apparently 83 trainee appraisers did not renew
their credentials. The barriers to entry in the appraisal industry are extreme.
New regulation no longer allows for trainees to perform certain functions that
they use to be able to perform. This has made it harder for appraisal companies
to grow and train new staff since they can no longer perform any tasks that
would merit compensation. The hands of appraisal companies are tied!”

note goes on: “Steve Sousa, Executive Vice President of the MA Board of Real
Estate Appraisers (MBREA), explains, ‘Where before many certified appraisers
might have one or more trainees out performing supervised work, now you have
very few, almost none at all, trainees engaged in the process. There are pretty
severe restrictions on licensed appraisers as well, forcing many out of the
profession… between 2011 and 2012 the number of certified residential and
certified general appraisers fell for the first time. Age is beginning to take
its toll as a significant number of appraisers are approaching retirement age.’

“How do
you train an apprentice if that apprentice is not allowed to perform most
functions needed to facilitate the training?” Fairway asks. “How do we replace
an aging workforce if the barriers to entry are too prohibitive? As an industry
we need to lobby our representatives and regulators to get some of these
restrictions eased before we have another crisis on our hands. In the meantime,
it is our professional obligation to educate buyers, sellers and all
involved in a real estate transaction about the real time necessary to complete
the transaction, and that patience is a virtue, and a necessity! Allow enough
time for all to get their jobs done in order to achieve the goal of a happy
buyer and seller at the closing table.”

One of the questions that tend to pop up everywhere is, “With appraisers
seemingly afraid to show an appreciating market, how will property values ever
increase?” I received this note from Mike
Ousley of Direct Valuations
. “Over the past several months, when we
have been seeing nascent improvement in the real estate market, I have been
hearing the issue of appraisers not recognizing the direction of the market.
‘Why aren’t appraisers recognizing the markets that are appreciating?  We
are getting multiple offers on sales, with accepted offers often times being
above the original list price, yet the appraisals are coming in well below even
the original list price of the property, making it extremely difficult to
finance these deals unless the buyer is willing to come in with more cash or
the seller is willing to renegotiate to a lower sales price – it’s killing the
housing recovery!’ It seems that appraisers are not recognizing what market
factors are at play in those neighborhoods where demand is exceeding
supply.  A negative adjustment to the listing – when all over the news and
in the multiple listing services, listings are noted as selling above list
price.  No time adjustments for those sales that sold months ago, when all
over the news and borne out by multiple listing reports, sales prices are
appreciating.  Comparing ‘homes’ to a property for no other reason other
than it sold within the past 6 months and is similar in size, regardless of its
amenities, market appeal or condition.  NOT considering what drives a
buyer’s motives and what motivates a buyer to consider move-in, modernized
property versus a 50 year old tar & gravel roof with minimal

Mike goes on: “The question is – What to do about this problem? 
First, appraisers must consider all aspects that lead to demand for a
property.  Picking the ‘best’ comparable properties to compare to the
subject is the first order of business.  The closer you get to comparing
‘like’ properties – those that buyers would find as reasonable substitutes –
the closer you will get to measuring the demand and the associated market value
of the property that is under contract.  It’s not sufficient to just
report ‘sales’, the appraiser must report ‘competing sales’. Second, and
equally as important, the appraiser must assess the market conditions and
recognize what direction the market is going in as to price.  As many
appraisers were slow to recognize the market when it softened and started to
depreciate, so too are appraisers slow to recognize when the market is heating
up and appreciating.  This is partly due to the process – to look at
‘sales’ that have closed, which by their very nature are backward looking and
historical.  What’s missing in simply reporting those sales is adjusting for
the difference of the market conditions between when they entered contract and
what is happening and relevant currently.  It’s called adjusting for
TIME.  Just like a negative adjustment to past sales will account for
worsening conditions presently, a
positive adjustment to those comparable sales will account for improving
.  One way to help support those time adjustments (both
negative and positive) is to consider what is competing on the market
(listings) as well as listing price to sales price differences and how those
prices compare to current sales and how long properties are on the market,
indicating demand for those properties.”

And lastly Mike notes, “Appraisers must reckon with time and its effect on
value.  Certainly, it will take reporting sales, competing listings and
analyzing list to sales price as well as days on market factors and adjusting
for time and the theory of substitution.  But, what’s also missing is that
underwriters and investors have to also reckon with these time adjustments. 
If appraisers are willing to be so bold as to make positive time adjustments to
account for market appreciation, then underwriters and investors will also have
to be so bold as to accept them and not discount them, or worse, blatantly say
‘we don’t accept positive time adjustments’.  Keep in mind, a time
adjustment is just as relevant as an adjustment for size differences, pool
adjustments or any other adjustment for a difference between the subject
property and the comparable sales and listings used in the market analysis.
Hillary Clinton said, ‘It takes a village.’  With regards to a housing
recovery and appreciation, it takes the village of appraisers, lenders,
underwriters and investors to recognize and accept market factors at play in
each and every neighborhood. (If you have questions, you can write to Mike
Ousley, President & CEO of Direct Valuations, at

Michael Simmons with Axis Appraisal
writes, “One of the biggest challenges for lenders and
investors is reconciling data in appraisals. Appraisers almost exclusively
utilize MLS based data in their reports while underwriters are often saddled
with less focused data from AVM’s (and other automated data sources) that
typically include public record information. Underwriters then have to operate
with uncorroborated information in an attempt to identify true market data if
they are expected to support – or reject – an appraiser’s value conclusion.
That’s an impossible task for an underwriter and often leads to misleading
conclusions and embeds inefficiencies in the process. (‘Inefficiencies’ being
code for ‘let’s order a desk review’). So where do we go from here?”

Mr. Simmons answers his own question, “Lenders and Investors today are
demanding ever more and better data … and they should. But data alone is not
sufficient. It needs to be married with robust
– and that takes a local, skilled appraiser.  We at AXIS
believe that this next generation of analytics will actually increase the need
for more highly trained and qualified appraisers. We believe this explosion of
new analytic tools and improved technology will create not only greater demand
and heightened opportunities for appraisers, but enhance the quality and
security of all loans. The next step will be for our industry to do a better
job of educating lenders, brokers, and borrowers to better understand the
forces that impact their markets.” (Michael Simmons, SVP of Axis, can be
reached at

Through it
all, the fixed-income and equity markets continue to be nudged by events here
and abroad, along with performance of our own mortgage-backed securities. Bernanke
said, in testimony to the Joint Economic Committee in Washington, that the U.S.
economy is at risk from Europe’s debt crisis and the prospect of domestic
fiscal tightening, while refraining from discussing steps the central bank
might take to protect the expansion. “As always, the Federal Reserve
remains prepared to take action as needed to protect the U.S. financial system
and economy in the event that financial stresses escalate.”

Buyers yesterday
were hedge funds and money managers, along with the Fed, which adequately
absorbed the $2.5+ billion in originator supply. Speaking of the Fed, it
released its weekly report on MBS purchases and buying remained at a daily
average of $1.2 billion for a total of $6 billion net for the week ending June
6. Over this same period, mortgage banker selling totaled over $15 billion
indicating coverage of just 40% of the supply. “Normal” daily supply
levels are in the $1.5 to $2.0 billion range which allows were Fed coverage in
the area of 60-70%. By the end of the day Thursday, MBS and many rate sheets
had improved by about .250 while the 10-yr closed at 1.66% – mortgages had a
lot of buying interest from strong demand from Asia, the Fed, money managers,
and hedge funds.

Today’s calendar
is rather anticlimactic: we’ve had the International Trade numbers for April,
which came in at -$50.1 billion compared to -$51.83 billion in March. And while
Europe continues to muddle along heading into the weekend, we find the 10-yr down to 1.57% and MBS prices better by about


The Shredder:
A young engineer was leaving the office at 5:45PM when he found the CEO
standing in front of a shredder with a piece of paper in his hand.
“Listen,” said the CEO, “this is a very sensitive and important
document and my secretary is not
here. Can you make this thing work?”
“Certainly,” said the young engineer. He turned on the machine,
inserted the paper, and pressed the start button.
“Excellent, excellent!” said the CEO as his paper disappeared inside
the machine, “I just need one copy.”
Lesson: Never, never assume that your boss knows what they’re doing.

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Details on the Fed Basel III Vote Tomorrow; How it May Impact Rate Sheets / Volumes, and the BofA Servicing Sale

Today is
June 6th, and 68 years ago the most famous D-Day took place on the shores of
Normandy. (D-Day, by the way, is a variable used in planning, just like H-Hour,
for many events.) The German Lieutenant barges in and says “Mein Fuhrer,
the Allies have invaded Normandy!” Puzzled by the outburst Hitler replies,
” Funny…. I did nazi this coming.” Speaking of “not
seeing” something coming, I received this note: “Rob, when do you think that the CFPB, in its
efforts to ensure counterparty accountability, will require lenders to monitor
what borrowers do with the money that is lent to them?
If they’re going to
make sure that the borrower can pay back the loan through QM, why not go a step
farther and track what they’re doing with the money.” I have not heard
that, and let’s hope it never comes to that, because of the cost of something
like that will, of course, be passed on to the person refinancing, causing
borrowing costs to go even higher.

What are you doing tomorrow at 9AM PST? You could always listen in to the
White House Call with Nevada
” as “Senior Administration Officials” discuss the
President’s refinancing proposal with Nevadans. One must RSVP by 8AM PST on
Thursday, June 7th to join them, “and please be sure to dial in 3 minutes
early so that we are able to start the call on time. Please RSVP here;
the call-in number is (866) 837-9781, Passcode Title: White House Call with
Nevada Leaders.

The Fed
has to be “raking in the bucks” – remember that every day it has been
in, buying 1-2 billion of agency MBS, and now these positions are trading at
premiums such as 104, 105, 106 – that is a very nice gain IF they sell and IF
their pools don’t refinance. Speaking of the Fed, with the swearing in of a
seventh board member, the Federal Reserve is at full capacity for the first
time since 2006, and President Obama nominated
six of seven governors

In his
most recent press conference, Bernanke warned that there was nothing which the
Fed could do regarding the “fiscal
.” Bernanke said, “And I am concerned that if all the tax
increases and all the spending cuts that are associated with the current law
which would take place, absent any Congressional action, that would occur on
January 1st that that would be a significant risk to the recovery. So I am
looking and hoping that Congress will take actions that will address … both
requirements of good fiscal policy.” The markets are well aware that under
current laws, at the start of 2013 a) the end of the “Bush era” tax
cuts occur, the most notable of which is an increase from 15% to 43.5% in the
top tier of tax on dividends, b) a 3.8% tax surcharge which combined with the
expiration of the “Bush era” tax cuts would move the top capital
gains rate from 15% to 23.8%, and c) massive spending cuts mandated by law.
This is all law, until Congress decides to change it, but the tax increases alone
on dividends and capital gains are going to have a very significant negative
effect on equities and may also drive interest rates up as investors demand
real positive after-tax returns.

We “only”
have six (6) more months of election stuff to listen to every day. But as one
reader wrote, “Bernanke is making one gigantic point: There is nothing which
the monetary policy of the Fed can do in face of insanely irresponsible fiscal
policy. Forget everything else. If one increases taxes and decreases spending
per what is in place then GDP will take a sizable hit because both consumers
and government will be spending less. The worst part is that there is an
election coming and the imbeciles in Congress cannot be bothered with this
trivia before mid-November. Reelection is more important to them than the
economy. This is, in my mind, the heart of the problem.”

is a very important meeting by the Federal Reserve, during which it will vote
on Basel III. More details 

Many folks have asked about how Basel
III will impact borrower’s prices.

In December 2010, the proposed Basel III Accord was finalized which, if adopted
by U.S. banking regulators, will result in a new regulatory capital regime for
MSR (mortgage servicing rights) assets. Under the Basel III Accord, the
amount of MSRs that can be counted as Tier 1 capital is capped at 10%, effective
January 1, 2013, with a phased implementation through 2018.  In addition,
a bank must deduct the amount by which the aggregate of the following three
items exceeds 15% of Tier 1 capital: (i) significant investments in
unconsolidated financial institutions; (ii) MSRs; and (iii) deferred tax assets
arising from temporary differences. The exclusions from the 10% and 15% thresholds
will be phased in from 2013 to 2018.

What does this mean? Basel III as currently proposed (and fully phased in) will
increase required capital for most entities but will significantly increase the
effective capital requirements for entities with large MSR positions relative
to their Tier 1 capital. This includes a few score of banks, including
Wells Fargo. Under Basel III, for those institutions at or above the 10% of
Tier 1 capital level, the marginal capital requirement is effectively
100%.  The net effect of Basel III is potentially a significant increase
in capital requirements for the industry as a whole. Some of the largest originators, who are market leaders in setting
mortgage rates, will need to either raise mortgage rates while reducing
servicing released premiums paid in order to compensate for any incremental
capital required, or accept lower returns
. And you can bet that if Wells or
Citi or Chase lowers their SRP’s, the market will follow – and the borrower
will bear the brunt of it.

But there
are, alternatively, other solutions to manage the 10% capital limitation,
including acquisition/merger, selling the MSR, and structuring and/or holding
more loans on balance sheet (eliminating the recognition of a separate servicing
asset). So it is no surprise to see the
news yesterday that non-depository Nationstar Mortgage has signed a definitive
agreement to acquire approximately $10.4 billion in residential mortgage
servicing rights, as measured by unpaid principal balance, from Bank of
The acquired servicing portfolio consists entirely of loans in
government-sponsored enterprise (GSE) pools – expect the loans to transfer from
Bank of America in July. Nationstar currently services more than 635,000
residential mortgages totaling nearly $103 billion in unpaid principal balance.

This leads
into a little agency news. Fannie Mae’s FHFA appointed Timothy Mayopoulos as
its new chief executive officer. Mayopoulis has interesting credentials: he’s
been Fannie general counsel for three years – prior to that he was general
counsel for BofA. Mayopoulos’ promotion from general counsel takes effect on
June 18, and the promotion means a pay cut for him – he will make $9.73 per
hour. Seriously, his salary will be around $500,000 – which is much less than the CEO of an average sized
mortgage company’s earnings for the last few years

Fannie Mae
bought just $52 billion of home mortgages from its seller/servicers in April, a
45% plunge from March, and Freddie Mac bought $26 billion of loans, a 39%
decline from March. Were the March purchase figures an aberration because
lenders rushed to get loans closed before an incoming g-fee increase, pushing
the March numbers higher? Perhaps.

But the
market for “investor kicked loans” remains competitive with many investors
looking for loans that have been rejected by aggregators and/or the agencies. They
all have their pluses and minuses. For example, some provide higher prices
but will reject loans for non-eligible related issues while others will provide
a lower price but will reject fewer loans. Some will purchase 30-day+ RESPA
cures and some won’t, some will run updated property valuations and some won’t. Readers
have noted that there are more investors interested in Fannie product rather
than Freddie, and very few will purchase HomePath, Texas cash outs, and VA
IRRRLs. Don’t ask me for names (I don’t have them) but pricing is
typically two to five points back of corresponding screen prices (mid 90’s to
105) with the spread back of screen depending on the loan’s perceived risk, and
for non-agency eligible loans (i.e. scratch and dent loans), look for pricing
in the 70’s & 80’s if the loan is performing.

morning we learned, from the MBA, that the number of mortgage applications
filed in the U.S. last week rose 1.3% from the prior week, with the refinance numbers +2% hitting 78% of
total applications!
ARM’s seem stuck around 5%. One interesting thing to
note: the average rate on 30-year fixed-rate mortgages with conforming loan
balances fell to 3.87% while rates on similar mortgages with jumbo loan balances
decreased to 4.13% – a spread of about .25%.

have certainly been in selling: originator selling over the past couple days
has been over $7 billion, and as supply/demand laws dictate, MBS prices
worsened relative to Treasury prices. As one trader put it, “Watching MBS break
12 ‘wider’ in two session was about as enjoyable as watching my wedding
video with my Mother-in-Law.” The daily Fed buying of $1-1.5 billion can only
do so much – what happens if it goes away entirely, leaving money managers,
REIT’s, and hedge funds on their own to absorb the supply? So Tuesday both
current coupon MBS prices and our 10-yr T-note were worse by .250-.375, and the
10-yr closed at 1.56%.

things were pretty quiet in Europe, and we did have a little news out this
morning. The final Q1 reading on Productivity (-0.9% vs. -0.5% previous, worse
than expected) and Unit Labor Costs (+1.3% vs. +2.0%, also worse than expected).
Later we’ll have the 2PM EST release of the Beige Book, containing economic
anecdotes from the 12 Federal Reserve Districts in preparation for the June
19-20 meeting. We find the yield on the
10-yr at 1.63% and MBS prices lower from Tuesday’s close.

At Sunday School they were teaching how God created everything, including human
Little Johnny seemed especially intent when they told him how Eve was created
out of one of Adam’s ribs.
Later in the week his mother noticed him lying down as though he were ill, and
she asked, “Johnny, what is the matter?”
Little Johnny responded, “I have pain in my side. I think I’m going to
have a wife.”


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