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: http://www.naihp.org/.

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 blevy@kattentemple.com.)

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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Mortgage Rates Finish Out Close To Unchanged After Bumpy Start

Mortgage Rates held steady to slightly weaker today, though some lenders recalled rate sheets in the afternoon as bond markets improved.  That helped the average Best-Execution rate get back near Friday’s offerings, which were among the best of the week last week.  Over the past two weeks, rates have been operating in a fairly narrow range resting on all-time lows.  Today’s rates are closer to those lows than most of the other sessions. 

On Friday, we noted that the gains brought many lenders back into the 3.625% Best-Execution territory.  That continues to be the case today, though several lenders have yet to reprice positively and are still closer to 3.75%.  Either way, it’s fair to say that we’re now hovering fairly consistently between 3.75 and 3.625 after being stuck at 3.875% for ages.  

(Read More:What is A Best-Execution Mortgage Rate?)

It was a choppy and volatile day for most markets, at least if we count the global market open which saw heavy buying in stocks and selling in bonds.  When bond markets sell-off, prices move lower and yields move higher.  Movements in those yields often equate to the interest rate movement in the mortgage market, albeit by varying degrees.  

The level of connection between broader markets and mortgage rates was fairly subdued today.  But for the most part, the bulk of the damage done to bond markets by news of Spain’s bailout, was seen in the overnight hours.  After some early morning jitters, bond markets kept improving into the afternoon, ultimately allowing some of the positive reprices in the mortgage market.  Apart from reaction to the Spanish bailout news, there was little else on the calendar today driving markets.

Long Term Guidance: We’d continue to advocate not trying to “get ahead” of current market movements as a high degree of uncertainty is pervasive.  While it’s a reasonably safe assumption that European concerns will generally help rates stay lower than they otherwise would be, that “otherwise would be” part is very much a moving target.  Best bet is to focus on the fact that rates are at their all time lows, and can change quickly based on events that aren’t “scheduled” or able to be forecast.  Risk vs reward for floating vs locking looks a bit larger than we’d like, but not out of the question for those who understand the risks and have an exit strategy if things don’t go their way.

Loan Originator Perspective With Rates At All Time Lows

Ted Rood, Senior Mortgage Consultant,  Wintrust Mortgage

We’ve seen lender rate sheets somewhat worse than it should be, given the price of mortgage backed securities.  That sometimes means rates have room to improve as lenders become more confident in their pricing models.  Floating still involves risk, despite the daily European chaos.  Risk versus reward probably favors locking if you’re not a gambler.

Brett Boyke Senior Mortgage Banker,  Wintrust Mortgage

Color me surprised by the way the mortgage and bond markets are performing today. I really thought we would see an adverse response rate wise to the Spain bail out, and we would see that fade towards mid week. 

Jeff Statz, Mortgage Advisor,  Network Funding, L.P.

MBS are looking to release some of the potential energy stored from last week’s sideways trading. This would be a great time to lock. If choosing to float, I would check the Rate Watch section in the morning and again in the afternoon for signs of weakness, keeping your hand over the Lock button.

Kent Mikkola #353976, Mortgage Consultant ,  M & M Mortgage, LLC #213677

Regardless of the room lenders may have to give up any more credit, floating is a risky proposition.

 

Today’s BEST-EXECUTION Rates 

  • 30YR FIXED –  3.75%
  • FHA/VA -3.75%
  • 15 YEAR FIXED –  3.125 edging down to 3.00%
  • 5 YEAR ARMS –  2.625-3. 25% depending on the lender

Ongoing Lock/Float Considerations 

  • Rates and costs continue to operate near all time best levels
  • Current levels have experienced increasing resistance in improving much from here
  • Rates could easily move higher or lower, but given the nearness to all time lows, there’s generally more risk than reward regarding floating
  • But that will always be the case when rates operate near all-time levels, and as 2011 showed us, it doesn’t always mean they’re done improving.
  • (As always, please keep in mind that our talk of Best-Execution always pertains to a completely ideal scenario.  There can be all sorts of reasons that your quoted rate would not be the same as our average rates, and in those cases, assuming you’re following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).

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FHA Stepping up Bulk Sales Volume

Acting
Federal Housing Finance Agency (FHA) Commissioner Carol Galante and Housing and
Urban Development (HUD) Secretary Shawn Donovan announced late Friday afternoon
a new bulk sale program to liquidate some of the reported 700,000 delinquent loans
backed by FHA insurance
.  The Distressed Asset Stabilization Program is an outgrown of a pilot program that
allows private investors to purchase pools of mortgages headed for foreclosure.  The pilot has resulted in sales of more than
2,100 single family loans to date.

Beginning with the September 2012
scheduled sale, FHA will increase the number of loans available for purchase
from approximately 1,800 each year to 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.

According to an article in the Wall Street Journal published before the sale was officially announced, FHA is undertaking
bulk sales in an effort to reduce its growing portfolio of distressed loans and
to avoid the costly process of foreclosure, but also because its own rules
limit ways in which the mortgages can be modified, leaving little room for aggressive
loan modifications like those done by Freddie Mac, Fannie Mae, and proprietary
lenders.  Once sold these strictures
disappear, the new servicer can take more drastic steps to bring the loans back
on line.

Under the new program, the current servicer
can place a loan into the bulk sale loan pool if the borrower is at least six
months delinquent on his mortgage and has exhausted all steps in the FHA loss
mitigation process.  The servicer must
also have initiated foreclosure proceedings and the borrower cannot be in bankruptcy.

Once
accepted from the servicers, the notes are sold competitively at a
market-determined price generally below the outstanding principal balance. To
minimize the chance “vulture investors” will take advantage of the program, potential
investors must agree to hold off foreclosure for a minimum of six months and
work with the borrowers to help find an affordable solution to keep them in
their homes. FHA also seeks to provide some protection to the market by
requiring purchasers to hold back from sale at least 50 percent of the homes
backing the loans for at least three years.

“The Distressed Asset Stabilization
Program offers a better shot for the struggling homeowner and lower losses to
the FHA,” Galante said. “By addressing the growing back log of distressed
mortgages, FHA is helping to mitigate the negative effects of the foreclosure
process as part of the Administration’s broader commitment to community
stabilization.”

“While our housing market has
momentum we haven’t seen since before the crisis, there are still thousands of
FHA borrowers who are severely delinquent today – who have exhausted their
options and could lose their homes in a matter of months,” said HUD Secretary
Shaun Donovan. “With this program, we will increase by as much as ten times the
number of loans available for purchase while making it easier for borrowers to
avoid foreclosure. Finding ways to bring these loans out of default not only
helps the borrower, but helps the entire neighborhood avoid the disinvestment
and decline in value that accompanies a distressed property.”

 “Currently, FHA’s inventory of REO properties
available for sale is at its lowest level since FY 2009,” added Galante. “At
the same time, the inventory of seriously delinquent loans is near an all time
high. With many neighborhoods still fighting to recover from the housing
crisis, going upstream will allow us to help more borrowers before they go
through foreclosure and their homes ever come into the REO portfolio.” 

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FHA Expected to Announce New Bulk Sales Agenda

The Federal Housing Finance Agency (FHA)
is expected to announce before the close of business today a new bulk sale
program
to liquidate some of the reported 700,000 delinquent loans they
insure
.  According to The Wall Street Journal, the agency may
be planning on selling as many as 5,000 distressed loans each quarter over an
unspecified period of time.

Bulk sales were used on a large scale by
the Resolution Trust Corporation and the Federal Deposit Insurance Corporation
during the savings and loan and banking crises of the 80s and 90s and FDIC
continues to use this mechanism to clear the assets of failed banks.  Lenders and guarantors such as Freddie Mac
and Fannie Mae generally shy away from these sales because of the deep
discounts needed to move the loans.  Even
the “good” loans such as are sold by the FDIC because they are too costly and time
consuming for the institution to manage are discounted substantially; seriously
delinquent loans go for pennies on the dollar. 
 

The Journal
states that FHA is considering bulk sales in an effort to reduce its growing
portfolio of distressed loans
and to avoid the costly process of foreclosure,
but also because its own rules limit ways in which the mortgages can be
modified, leaving little room for aggressive loan modifications like those done
by Freddie Mac, Fannie Mae, and proprietary lenders.  Once sold these strictures disappear and the
investor can take more drastic steps to bring the loans back on line.

Bulk sales can be hugely profitable for
investors, but in this case the sales may also allow some homeowners to stave
off foreclosure by cutting better deals than would have been possible with FHA.  The Journal
quotes FHA’s acting commissioner Carol Galante as saying “There will be an incentive for a modification that isn’t able
to be done under the current system. It will be cost-effective for the
FHA….It will be better for the communities.”

Investors
also face some restrictions that work for the benefit of homeowners and the
marketplace.  They can’t foreclose for
six months after buying the loans and must agree to hold back from sale at
least 50 percent of the homes backing the loans for at least three years.

Galante
told the Journal that FHA was trying to minimize the impact of any vulture
investors who buy hoping for a quick foreclosure, eviction, and resale.  “We are trying to change, frankly, the
behavior of who’s interested in buying these notes,” she said.

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