The Latest on On-line Lending; Principal Forgiveness Cost; How HUD’s Changes Will Impact Gov’t Lenders

As red-blooded American males prepare for the advertising onslaught
of Valentine’s Day (2/14), we are reminded that the media is indeed
powerful – just ask Sarah Palin. (Hey, whatever happened to her?) All
this month the public has seen the OCC foreclosure ads.
Supports Independent Foreclosure Review Program with Public Service
Ads. On January 4, the Office of the Comptroller of the Currency (OCC)
announced that it placed print and radio public service advertisements
to inform mortgage borrowers of the Independent Foreclosure Review (IFR)
program launched by the OCC in November 2011. The print feature
explains that borrowers foreclosed upon between January 1, 2009 and
December 31, 2010 are eligible to have their foreclosures independently
reviewed to determine if the borrowers suffered financial injury as a
result of any errors by certain large, federally regulated mortgage
servicers. The ads will run in Spanish and English in 7,000 small
newspapers and on 6,500 small radio stations. Here is a copy of the OCC announcement with links to the ads.

Hiring across the country continues for some companies. SecurityNational Mortgage’s Crown Group is hiring retail
loan consultants, retail producing managers, and branch managers for
its Retail origination team, and wholesale AE’s who can build their
territory through wholesale, correspondent and retail branch
originations. The company is staffing up in the following territories –
Texas (DFW), Florida (Dade, Broward, Palm Beach and Duval counties),
Missouri, Oklahoma, New Mexico, Arkansas and Colorado.  (SNMC is also
hiring underwriters and processors in the Dallas area.)
“SecurityNational Mortgage is a nationwide lender offering Conventional,
FHA, VA and USDA loans thru its Retail, Wholesale and Correspondent
business channels.”  If you know anyone interested, please send
inquiries/resumes to”

The other day someone told me that there were actually things on the
internet other than dirty pictures. I was stunned. Seriously, although
the article is a little slanted, here is some chatter on on-line lending.

average LO probably doesn’t care too much about the proposed settlement
between the states and the servicers. But the large servicers, which
are pretty much the large banks, care, and probably really want to “move
on” from this, which in turn would help return the flow of business. At
this point, supposedly state AG negotiators have reached the final terms on a settlement deal w/the country’s biggest banks,
and the preliminary pact is now being circulated among the 50 AGs. The
price tag for the servicers is around $25 billion, depending on how many
states sign on (California and NY remain on the fence). The tentative
agreement still must be approved by all 50 state attorneys-general, and
the states will be asked either to agree to proposals or decline to
participate with Bank of America, JPMorgan Chase, Wells Fargo, Citigroup
and Ally Financial. Other banks, such as US Bancorp and PNC Financial
Services, have set aside reserves for such an outcome. Stay tuned…and
remember that the money has to come from somewhere…

Speaking of which, the FHFA noted that forgiving mortgage debt on Fannie Mae and Freddie Mac loans would cost F&F almost $100 billion.
Freddie & Fannie guarantee nearly 3 million mortgages on single-
family homes that are underwater, but almost 80% of these borrowers are
still current. Principal forgiveness would increase the size of the
government’s bailout of the companies, which have cost taxpayers more
than $153 billion since they were taken under government control in
2008. One can almost hear Mr. DeMarco thinking, “First you made us raise
our g-fees, and now this…don’t complain when we lose more money…”  –
the letter.

And for more on government mortgage agencies, late last week HUD
released its final rule to improve and expand the risk management
activities of the FHA. It was pretty much as expected but a few things
should be noted. First, HUD will seek to force indemnification for “serious and material” violations of FHA origination requirements.
For those cases not involving fraud or misrepresentation, HUD will
require indemnification within five years from the date of the mortgage
insurance endorsement. Second, the proposed rule will also require
delegated FHA lenders to continually maintain an acceptable claim and
default rate, both to gain special lender status as well as to preserve
. HUD will require that the claim and default rate for a lender be
at or below 150% of the average rate of all of the states in which it
does business. Specifically for indemnifications, HUD says that lenders
may need to buyback loans if they failed to verify and analyze the
creditworthiness, income, and/or employment of the borrower, verify the
source of assets brought by the borrower for payment of the required
down payment and/or closing costs, address property deficiencies
identified in the appraisal affecting the health and safety of the
occupants or the structural integrity of the property, or ensure that
the property appraisal satisfies FHA appraisal requirements. HUD may
seek indemnification irrespective of whether the violation caused the
mortgage default. Clearly, the rule change should result in more
putbacks to lenders going forward.

What does this mean? Since HUD will be requiring a buyback only if
the loan has seasoned less than 5-years (unless there is fraud), similar
to GSE loans, this may lead to a reluctance from lenders to
refinance existing FHA loans due to the fear of resetting the seasoning
on the loan
. Further, this impact is not restricted to loans that
are seasoned more than 5-years as the seasoning is reset on all loans.
Although this change points towards a general tightening in underwriting
and a potential slowdown in prepays, experts are uncertain how putbacks will be implemented for loans that go through FHA streamline refinancings.
For these loans, FHA does not require an appraisal or income/asset
verification and hence it is not clear what criteria will be used for
the putback. That said, most believe that lenders will be more careful
in refinancing borrowers once this rule goes into effect. Since lenders
will be assessed on the credit performance of their overall FHA book,
this should also lead to lower delinquencies and defaults on newly
originated FHA loans going forward.

And put another way, the FHA’s rule makes it tougher to qualify for
loans insured by the agency. To qualify for mortgage insurance, lenders
must offer up evidence that their seriously delinquent and claim rates
remain at or below 150 percent of aggregate rates in home states. And
the rule authorizes more extensive examination for lenders in order to
ensure that they are able to meet the FHA’s new qualifications. It
requires that certain lenders indemnify HUD in claims over loans. And
let’s not forget that many believe the FHA fund is insolvent – perhaps
this will help.

The government has trouble not interfering with home lending in the
U.S., and in fact HUD has come out saying it would like to see FHA
lenders relax their credit score minimums allowing more borrowers to
qualify for FHA loans.  But lenders are telling HUD officials the agency
must first change FHA’s lender/monitoring system (“Neighborhood Watch”)
so they aren’t stigmatized for making loans to borrowers with lower
credit scores. Neighborhood Watch ratios are used by everyone to measure
performance in relation to other lenders in a certain geography, and a
high default and claim rate can trigger audits by FHA or the HUD
Inspector Generals, and these audits often lead to indemnification
demands for actual and future losses. Because of the Neighborhood Watch
“triggers”, many lenders are only comfortable originating high credit
score FHA loans. Other lenders are interested in venturing a little down
the credit quality curve, and will often bring in outside help in
making sure their originations, operations and quality control
procedures can withstand the scrutiny of the HUD’s Quality Assurance
Division, Mortgagee Review Board and the Office of the Inspector
General. The Collingwood Group LLC has been partnering with
lenders in navigating these issues to unlock this valuable product
development opportunity in ways that are responsible and defensible. 
Inquiries should be directed to Brideen Gallagher at (And nope, this is not a paid ad.)

For news moving rates,
the two-day FOMC meeting begins today and concludes with a news
conference Wednesday.  It is expected that the Fed will maintain its
rock-bottom policy rate, so the anticipation lies in the new decision to
publish rate forecasts of each district bank out to 2015 to show
greater transparency. Any hint of QE3 from the FOMC tomorrow “will send
mortgages off to the races.” And tonight’s State of the Union Address
has been known to move markets.

Yesterday MBS prices were nearly unchanged whereas the 10-yr T-note
lost nearly .375 in price and closed at a yield of 2.07%. Today for
excitement we have a $35 billion 2-yr note auction at 11AM MST. In the early going the 10-yr is down to 2.04% and MBS prices are a shade better.

(Parental discretion advised.)
A woman asks her husband, “Would you like some bacon and eggs? A slice of toast and maybe some grapefruit and coffee?” she asks.
declines. “Thanks for asking, but I’m not hungry right now. It’s this
Viagra,” he says. “It’s really taken the edge off my appetite.”
At lunchtime she asked if he would like something. “A bowl of soup, homemade muffins, or a cheese sandwich?”

He declines. “The Viagra,” he says, “really trashes my desire for food.”
dinnertime, she asks if he wants anything to eat. “Would you like a
juicy porterhouse steak and scrumptious apple pie? Or maybe a rotisserie
chicken or tasty stir fry?”
He declines again. “Naw, still not hungry.”

“Well,” she says, “would you mind letting me up? I’m starving.”

…(read more)

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OCC: Mortgage Performance Best Since 2008

Mortgage performance during the
first quarter of 2012 was the best in three years according to the Office of Comptroller
of the Currency’s (OCC’s) Mortgage
Metrics Report
.  Percentages of
mortgages that were 30 to 59 and 60 to 89 days delinquent were at the lowest
level since at least the first quarter of 2008 when Metrics was first published. 
The percentage of mortgages current and performing at the end of the
quarter was 88.9 percent up 1.1 percent from the previous quarter and 0.3
percent from a year earlier. OCC attributed the improvement in performance to
several factors including strengthening economic conditions, seasonal effects,
servicing transfers, and the ongoing effects of both home retention programs
and home forfeiture actions.

The quality of government guaranteed
improved during the quarter with current and performing mortgages at
85.9 percent of the portfolio compared to 84.2 percent in the previous quarter but
down from 87.0 a year earlier.  Mortgages
serviced for the two government sponsored enterprises (GSEs) Fannie Mae and
Freddie Mac made up 59 percent of servicer portfolios and 93.7 percent of these
loans were current and performing, a percentage that has changed little over
the past year.

New foreclosures initiated during
the quarter were down 1.8 percent to 286,951 which OCC said reflected the
emphasis on home retention actions as well as a decrease in delinquencies.  Many servicers have also slowed new
foreclosures in response to changing servicing standards and requirements.  

Completed foreclosures increased to
122,979-up 5.9 percent from the previous quarter and 2.7 percent from the first
quarter of 2011.  The inventory of foreclosures in process increased from
the previous quarter to 1,269,921, but is down from 1,308,757 a year ago.  Deeds-in-lieu of foreclosure, and short-sales
brought the total number of home forfeiture actions to 185,781 during the
quarter, an increase of 1.9 percent from the fourth quarter of 2011 and 8.3
percent from a year earlier.

Servicers initiated 352,989 home
retention actions
during the quarter and have initiated more than 2.2 million
such actions including modifications, trial-period plans, and payment plans
over the last five quarters.  At the end
of the first quarter of 2012, 50.7 percent of modifications remained current or
were paid off.  Modifications made since 2008 that reduced borrower
monthly payments by 10 percent or more performed better (57.6 percent remained
current) than those that reduced payments by less than 10 percent (36.8

On average, modifications
implemented in the first quarter of 2012 reduced monthly principal and interest
payments by $437, which is 31 percent more than modifications implemented
during the first quarter of 2011. HAMP modification reduced payments by $588 on
average and those modifications performed better than others, with 68.2 percent
remaining current compared to 53.4 percent of modifications done by others.  OCC said HAMP’s performance reflects the
significantly reduced monthly payments, the program’s emphasis on affordability
relative to borrower income, required income verification, and the successful
completion of a required trial period.

…(read more)

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Regulators to Coordinate Large Bank Oversight Under Dodd-Frank

Five federal agencies, each of which has a supervisory responsibility vis-à-vis large financial institutions, have signed an agreement as to how their regulatory functions will be carried out under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank.)  The five agencies signing the Memorandum of Understanding (MOU) are the Federal Reserve Bank Board of Governors, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of Comptroller of the Currency, collectively referred to as the Prudential Regulators, and the new Consumer Financial Protection Bureau (CFPB).

The five have overlapping examination responsibility for insured depository institutions with more than $10 billion.  Under the MOU the agencies will coordinate examinations and other activities and share certain material supervisory information about consumer related activities including compliance with federal consumer financial laws and some laws that regulate consumer financial products and services and consumer compliance risk management programs.  Also covered by the MOU are activities such as underwriting, sales, marketing, servicing and collections if they are related to consumer financial products or services.  

The objectives of the MOU are to:

  • Fulfill the Dodd-Frank requirement that examination schedules must be coordinated and if possible done simultaneously unless the financial institutions prefer otherwise;
  • Establish voluntary arrangements for coordination and cooperation between CFPB and the Prudential Regulators
  • Minimize regulatory burden on covered institutions;
  • Avoid unnecessary duplication of effort;
  • Ensure that the CFPB and other regulators carry out their responsibilities effectively and efficiently.
  • Decrease the risk of conflicting supervisory directions by the CFPB and Prudential Regulators;
  • Increase the potential for synergies and alignment of related activities of the CFPB and Prudential Regulators.

The MOU sets out guidelines for simultaneous and coordinated examinations for the CFPB and the Prudential Regulators including that each designate a point of contact for covered institutions and will consult with the institution and agree on a reasonable timetable for sharing information.  Agencies will share with each other information about the scope, dates, estimated staffing and other details of their examinations and the established points of contact will coordinate material changes in that information.

While the agencies will generally carry out examinations in a simultaneous manner, the MOU stresses that nothing is intended to compel agencies to conduct examinations jointly.

Under the agreement the Agencies also agree to share drafts of examinations reports and each will have at least 30 days to comment on the reports of others before the initiating agency issues a financial report.  Prior to issuing a final report or taking supervisory action in connection with an examination the agencies shall take into consideration any concerns that are raised in the comments by any other Agency.

The regulators’ monitoring of institutional performance in carrying out responsibilities under the Community Reinvestment Act (CRA) is also covered in the MOU.  The Prudential Regulators are expected to routinely share CRA performance evaluations, but the 30-day comment period above does not apply to Reports of CRA Examination.

A joint press release from the five agencies said “These coordination undertakings should lead to greater uniformity and efficiencies in supervision and help to minimize regulatory burden on covered depository institutions.”


…(read more)

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Bank Regulator Halts Work of Foreclosure-Review Consultant

A U.S. banking regulator on Friday halted the work of a consulting firm hired to review foreclosure documents as part of a comprehensive review of bank foreclosure practices. The Office of the Comptroller of the Currency said Allonhill LLC had done outside work that wasn’t consistent with independence requirements for consultants working for banks in […]

Mortgage Write-Downs Granted Here, There – Not Everywhere

Fannie Mae and Freddie Mac aren’t granting reductions in homeowners’ loan balances, as has been widely noted of late. Nevertheless, a handful of Americans who have gotten into trouble on their mortgages are actually seeing their loan balances cut, as a debate rages in Washington about whether doing so on a wider scale will be effective.

More than 35,000 homeowners received principal reductions from their lender last year, the Office of the Comptroller of the Currency said in a report Wednesday. The total was up about 20% from about 29,000 in 2010. But it was still down 23% from nearly 46,000 in 2009, when banks started to write down loans acquired at a discount from failed institutions.

“Principal reduction modifications can be an effective tool in the overall arsenal,” said Bruce Kruger, the OCC’s lead mortgage expert.

Banks are mainly granting homeowners write-downs if they hold those loans on their balance sheet and tend to do so for loans that are significantly “under water”— meaning that the homeowner owes far more on the property than the home is worth. They are not permitted to do so for loans that they have sold to Fannie Mae and Freddie Mac, the federally controlled mortgage investors.

Principal reductions made up about 8.5% of all loan modifications completed in the fourth quarter, compared with 7.8% in the third quarter of last year and 2.7% in the fourth quarter of 2010, the regulator said.

The OCC’s quarterly “mortgage metrics” report covers 31.4 million loans worth $5.4 trillion, or 60% of U.S. home loans. Of those mortgages, about 3.8 million, or 12% had missed at least one mortgage payment, and 1.3 million were in foreclosure as of the end of last year.

Whether to encourage more loan reductions for troubled homeowners has been a matter of intense public interest. The Obama administration has stepped up pressure on the independent regulator for Fannie and Freddie to grant more reductions, offering new incentives to do so.

The federal regulator, the Federal Housing Finance Agency, has been evaluating the incentives the administration has offered. But the agency’s acting director, Edward DeMarco, has resisted doing so, saying that it may not make economic sense for Fannie and Freddie and could encourage more borrowers to default.

“We’re encouraging them to … look at it again because we think there’s a good economic case, a good financial case for doing it in some cases,” Treasury Secretary Timothy Geithner told House lawmakers on Wednesday.

In addition to Fannie and Freddie, other government agencies including the Federal Housing Administration and Veterans Administration do not grant principal write-downs.

Fannie and Freddie do use a similar form of loan assistance, known as principal forbearance. That kind of program does not require lenders to forgive debt. Instead, lenders set aside a portion of the loan, not requiring any payments on it until the borrower sells the home or pays off the loan.

Lenders’ use of this approach has grown significantly more than principal write-downs. They enacted nearly 103,000 principal forbearance plans enacted last year, up from about 94,000 in 2010 and 15,000 in 2009. In a letter sent to lawmakers in January, Mr. DeMarco indicated a preference for those forbearance plans, arguing that it “achieves marginally lower losses” for the taxpayer-backed company than principal forgiveness.

Mr. Kruger, the OCC’s expert, acknowledged that it’s tough to figure out which approach works better in the long run. “We have not been able to distinguish whether a principal reduction [modification] works better” than ones involving principal forbearance, he said.