SunTrust Jilted; California’s Law and Basel III will NOT Help Mortgage Pricing

Tomorrow, on your day off, here is 3 ½ minutes of a few very clever
creative bets that you can win.

Speaking of clever, a veteran male trader at Chase noted, “Michigan
deployed talking urinal cakes to fight Driving Under the Influence. If one of
them sounds like my Mother-In-Law I will start wearing Depends.” That’s
darned funny.

The Census Bureau tells us that thirty-one places have “liberty” in their
names. The most populous one is Liberty, Mo. (29,149). Iowa, with four, has
more of these places than any other state: Libertyville, New Liberty, North
Liberty and West Liberty. Thirty-five places have “eagle” in their names;
eleven places have “independence” in their names. The most populous one is
Independence, Mo., with a population of 116,830. Nine places have “freedom” in
their names, one place has “patriot” in its name (Patriot, Indiana), and five
places have “America” in their names. The most populous is American Fork, Utah,
with a population of 26,263. And you wonder what those folks at the Census do
all day…

Occasionally this commentary posts job searches. Today, SunTrust is looking
for a seasoned industry veteran after being left at the altar. Must be present
to win!
Seriously, the MBA announced that instead of assuming the presidency
of SunTrust Mortgage, Dave Stevens has agreed to stay on as President and
CEO.  “The past few weeks have been extremely difficult for me
personally and professionally. After serious thought and consideration, I simply
cannot leave the MBA at such a critical time for the industry and the
association.” Stevens said.  “Frankly, at the end of the day,
stepping away now when so much progress is being made and so much still left to
be done, did not feel right.”

A statement from SunTrust noted, “We have a strong leadership team in
place, and continue to execute our business plan and serve the needs of the
clients of SunTrust Mortgage.” American Banker observed, “SunTrust’s
mortgage operations are still struggling with credit quality issues and
repurchase requests, and the Atlanta bank has been trying to reshape the
. Last month, it appointed Peter E. Mahoney as executive vice
president of mortgage strategy and Jack Wixted as executive vice president and
chief risk officer.”

On the other side of the Atlantic, Barclays CEO Bob Diamond stepped
amid increasing pressures related to investigations of possible Libor
manipulation. “The external pressure placed on Barclays has reached a
level that risks damaging the franchise — I cannot let that happen,”
Diamond said. “I am deeply disappointed that the impression created by the
events announced last week about what Barclays and its people stand for could
not be further from the truth.” Marcus Agius, who resigned as chairman
Monday, will take Diamond’s spot until a permanent successor is found.

Well, out in “the land of fruits and nuts” they did it: California
would become the first state to write into law much of the national mortgage
negotiated this year with the nation’s top five banks, and
expand it to all lenders, under wide-ranging legislation state lawmakers
approved Monday. “Majority Democrats sent the homeowner protection package to
Gov. Jerry Brown despite opposition from business and lending organizations and
most Republican legislators.” Once again, we see an illustration of the public’s
perception, and that of the popular press’s, of an issue being different than
that of the lending industry’s. On the surface it sounds great. The legislation
would require large lenders to provide a single point of contact for homeowners
who want to discuss loan modifications. It would prohibit lenders from
foreclosing while the lenders consider homeowners’ request for alternatives to
foreclosure. And it would let California homeowners sue lenders to stop
foreclosures or seek monetary damages if the lender violates state law. “The
protections would benefit all California homeowners, not just those whose
mortgages are with the five banks that signed the national settlement in
February. And many of the restrictions would become permanent, while those in
the nationwide agreement will end after five years. It applies to all
owner-occupied residences, but not commercial or rental properties.”

The new
law could easily and directly impact the price of mortgages to California
borrowers as servicers say, “If these are the new rules, we don’t want the
servicing as much, and so let’s pay less for it.”
Is the
attorney general going to persecute investors who back their prices off due to
it? The law lets homeowners sue mortgage providers if they violate state law,
but only if there is a significant violation. (What is “significant”?) Homeowners
could ask judges to halt pending foreclosures but could collect monetary
damages only if the foreclosure took place. It requires lenders to provide a
single point of contact for borrowers who want to discuss foreclosures or
refinancing, with an exemption for lenders that process fewer than 175
foreclosures per year. It bans what are known as “dual-track foreclosures” by
barring lenders from filing notices of default, notices of sale, or conducting
trustees’ sales while they are also considering alternatives to foreclosures
like loan modifications or short sales. It increases penalties for banks that
sign off on foreclosures without properly reviewing the documentation, a
process known as robo-signing.

under the “things that may increase the price of residential mortgages to
borrowers,” banks that are concerned about potential fair lending claims if
they refuse to make residential mortgage loans that are not “qualified
mortgages” or “qualified residential mortgage loans” should be equally
concerned about the new proposed bank capital rules.
On June 7,
2012, the Federal Reserve approved for publication three sets of proposed
regulations to revise the risk based capital rules for banks to make them
consistent with the new international capital standard, generally known as
Basel III, and certain requirements of the Dodd-Frank Act. The Office of the
Comptroller of the Currency and the Federal Deposit Insurance Corporation
followed suit on June 12, 2012. Conventional residential mortgage loans with
loan-to-value ratios in excess of 80%, regardless of the presence of private
mortgage insurance, could trigger material adverse capital requirements if the
loans are held for investment and do not comply with certain regulatory
underwriting criteria. Such loans could present the legal risk of loss under
the “ability to repay” rules, the credit risk of loss under the “risk
retention” rules and now increased capital charges under the implementation of
Basel III:

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

With the Colorado fires, and the hurricane season, it is a good idea for
underwriters and secondary marketing staffs to re-familiarize themselves with agency
rules for lending in disaster areas
. Rather than go into all the ins &
outs, Fannie’s is
and Freddie’s is

As part of its One Touch initiative, Wells Fargo Funding’s has set
a goal of minimum 50% funding for all first time clients, meaning that no more
than 50% of such borrowers’ loans could be suspended.

Wells Fargo Wholesale has issued a correction to an earlier announcement about
changes to FHA Streamline Refinance mortgage insurance premiums stating that,
for base loan amounts exceeding $625,000, the annual MIP paid monthly would
increase to 0.25%.  The annual MIP paid monthly for such loans will
increase 0.25% (25 bps), not to 0.25%. FHA Non-Credit Qualify Streamline and
Purchase Close calendars for the third quarter of 2012 are available via the
Broker’s First® website.  The calendars provide the dates by which credit
packages, conditions, and documents must be submitted.

The Wells inspection requirement for private sewage disposal systems may not
apply to some properties in Iowa as per state requirements.  In cases
where a customer states that a transaction is exempt from the inspection, Iowa
Senate File 261
should be consulted.

Under new rules that will come into effect on June 18th, Wells will be using
different credit scores to assess risk.  For loans not submitted via
Direct Express, the credit report generated by Wells and ordered from Equifax
and/or Credco will be used, while loans submitted via Direct Express will
continue to use the information from the credit report generated by Direct

As per agency requirements, construction-to-permanent transactions will not be
permitted as Purchase transactions as of June 18th.  Wells will continue
to allow construction-to-permanent transactions as Rate/Term or Cash-out
refinances.  The LTV/CLTV/TLTV calculation for construction-to-permanent
transactions has also been revised such that the value will be calculated using
the current appraised value of the property and must comply with the product’s
Rate/Term or Cash-out refinance guidelines.  Super Conforming Mortgage
Program loans, as they require construction to be complete, are not affected.

The Wells non-branded Consumer Handbook on Adjustable Rate Mortgages disclosure
has been updated and should be used for all loans registered after June
25th.  The old CHARM/ARM disclosure should be discarded.

Citibank has updated its Ineligible Originator List, which is posted on
the Citi Correspondent website in the elfno section.  The list, which
shows brokers, correspondents, and other originators and parties that are not
permitted to be involved in the origination of any loan submitted to Citi for
purchase, is revised regularly, as is the Appraiser Monitor/Ineligible List
(also in the elfno section of the site).

Loans on condos in Georgia that are registered after June 23rd will be subject
to Citi’s upcoming LTV/CLTV/HCLTV restrictions.  For borrowers with FICO
scores over 740, all of these values will be capped at 70%, while for those
with FICO scores less than 740, they will be capped at 60%.

Due to Freddie’s decision to retire the program in August, Citi will no longer
accept Freddie Mac Alt 97 Mortgage registrations on or after June 23rd.

All this continues to make the markets, and interest rates, be an afterthought –
there just isn’t much going on. Good news of stability, or hoped-for
stability, could nudge rates higher, while evidence that our economy is slow
tends to nudge rates lower.
Yesterday we learned that, for the first time
since July 2009, US manufacturing has decreased.  However, the economy has
grown for the 37th consecutive month according to the nations’ supply
executives in the latest Manufacturing ISM Report on Business. And Construction
Spending beat expectations, rising to its highest level in almost 2.5 years in
May as investment in residential and federal government projects surged.

By the end of the day, the third quarter started off with new record high
closing prices set on 30-year FNMA 3.5% through 4.5% coupons as 10-year notes
rallied nearly 3/4s of a point to 101-17+ (1.58%) per Thomson Reuters. “The
supply/demand dynamics were very strong today with the sell/buy ratio reported
at 1:3. Indeed, mortgage banker selling was light at around $1.5 billion, while
the weak data contributed to active buying from real money despite the price
levels with the Fed, of course, a steady player.” Agency MBS prices were marked
higher (better) by over 1/4 point on 30-year FNMA 4.0s to nearly 1/2 point on
3.0% coupons. But will the price improvements make it onto rate sheets?

Today we’ll have May’s Factory Orders (expected higher) and an early
close for the bond market – look for liquidity to dry up. Many companies are
closing early – do LO’s really expect to lock loans in, and lock desks to be
open, at 5PM on the day before a holiday? In the early going our 10-yr is at
1.60% and MBS prices are down.

Very punny, part 1 of 2:
52 cards = 1 decacards
1 kilogram of falling figs = 1 FigNewton
1000 milliliters of wet socks = 1 literhosen
1 millionth of a fish = 1 microfiche
1 trillion pins = 1 terrapin
10 rations = 1 decoration
100 rations = 1 C-ration
2 monograms = 1 diagram
4 nickels = 2 paradigms
2.4 statute miles of intravenous surgical tubing at Yale University Hospital =
1 IV League
100 Senators = Not 1 decision


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First Round of Pilot Rental Initiative Completed with 2,500 Homes Sold

The first round of winners has been
selected to purchase foreclosed real estate from Freddie Mac and Fannie
Mae.  The Federal Housing Finance Agency
(FHFA) announced today that 2,500 single family homes had been awarded to successful
bidders under a pilot initiative to convert real estate acquired by the two
government sponsored enterprises (GSE) through foreclosure into rental property. 

Successful candidates for purchasing properties
from the GSE’s real estate portfolio (REO) had undergone several steps in a
qualification process before being permitted to bid on the houses which they had
to agree to hold and rent for a period of time before reselling. 

The properties were offered in sale
pools which were geographically concentrated in various locations across the
United States.  The GSEs, FHFA and other federal
agencies involved, Departments of Treasury, Housing and Urban Development,
Federal Deposit Insurance Corporation and the Federal Reserve, had several
for the program.  They hoped to
relieve the GSEs of the costs and administrative burdens of managing thousands
of foreclosed properties, alleviate the blight imposed on communities by large
number of vacant and possibly deteriorating properties, increase the rental
stock, while at the same time not flooding the market with distressed

 FHFA described the response to the pilot
initiative as “robust with strong qualified bidder interest.”  Some 4,000 responses were received to the
initial “Request for Information” issued by the program sponsors last February,
however beyond announcing that the awards had been made FHFA released no
information on the names or even the numbers of successful bidders.

undertook this initiative to help stabilize communities and home values in
areas hard-hit by the foreclosure crisis,” said Edward J. DeMarco, Acting
Director of FHFA. “As conservator of Fannie Mae and Freddie Mac, we believe
this pilot program will assist us in achieving our objectives and help to
maximize the benefit to taxpayers. We are pleased with the response from the
market and look forward to closing transactions in the near future.”

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WASHINGTON – U.S. Housing and Urban Development Secretary Shaun Donovan today announced HUD will speed federal disaster assistance to the State of Colorado and provide support to homeowners and low-income renters forced from their homes due to the ongoing High Park and Waldo Canyon wildfires this month.

OCC Notes Fewer Banks Tightening Underwriting Standards

The Office of Comptroller of the Currency
(OCC) recently completed its 18th annual “Survey of Credit
Underwriting Practices
.” The survey seeks to identify trends in lending
and credit risks for the most common types of commercial and retail
credit offered by National Banks and Federal Savings Associations (FSA).  The latter was included for the first time in
this year’s survey.

The survey covers OCC’s examiner
assessments of underwriting standards at 87 banks with assets of three billion
dollars or more.  Examiners looked at
loan products for each company where loan volume was 2% or more of its
committed loan portfolio.  The survey covers
loans totaling $4.6 trillion as of December 31, 2011, representing 91% of total
loans in the national banking and FSA systems at that time.  The large banks discussed in the report are
the 18 largest by asset size supervised by the OCC’s large bank supervision
department; the other 69 banks are supervised by OCC’s medium size and
community bank supervision department. 
Underwriting standards refer to the terms and conditions under which
banks extend or renew credit such as financial and collateral requirements,
repayment programs, maturities, pricings, and covenants.

The results showed that underwriting
standards remain largely unchanged
from last year.  OCC examiners reported that those banks that changed
standards generally did so in response to shifts in economic outlook, the
competitive environment, or the banks risk appetite including a desire for
growth.  Loan portfolios that experienced
the most easing included indirect consumer, credit cards, large corporate,
asset base lending, and leverage loans. 
Portfolios that experienced the most tightening included high
loan-to-value (HLTV) home equity, international, commercial and residential
construction, affordable housing, and residential real estate loans.

Expectations regarding future health of
the economy
differed by bank and loan products but examiners reported that
economic outlook was one of the main reasons given for easing or tightening
standards.  Others were changes in risk
appetite and product performance. Factors contributing to eased standards were changes
in the competitive environment, increased competition and desire for growth and
increased market liquidity. 

The survey indicates that 77% of
examiner responses reflected that the overall level of credit risk will remain
either unchanged or improve over the next 12 months.  In last year’s survey 64% of the responses
showed an expectation for improvement in the level of credit risk over the
coming year. Because of the significant volume of real estate related loans,
the greatest credit risk in banks was general economic weakness and its results
and impact on real estate values.   

Eighty-four of the surveyed banks (97
percent) originate residential real estate loans.  There is a slow continued trend from
tightening to unchanged standards with 65 percent of the banks reporting
unchanged residential real estate underwriting standards.  Despite the many challenges and uncertainties
presented by the housing market, none of the banks exited the residential real
estate business during the past year however examiners reported that two banks
plan to do so in the coming year.  Additionally,
examiners indicated that quantity of risk inherent in these portfolios remained
unchanged or decreased at 81% of the banks.

Similar results were noted for
conventional home equity loans with 68% of banks keeping underwriting standards
unchanged and 18% easing standards since the 2001 survey.  Of the six banks that originated high
loan-to-value home equity loans, three banks have exited the business and one
plans to do so in the coming year

Commercial real estate (CRE) products
include residential construction, commercial construction, and all other CRE
loans.  Almost all surveyed banks offered
at least one type of CRE product and these remain a primary concern of examiners
given the current economic environment and some banks’ significant
concentrations in this product relative to their capital.  A majority of banks underwriting standards
remain unchanged for CRE; tightening continued in residential construction and
commercial (21 percent and 20 percent respectively).  Examiners site cited the distressed real
estate market, poor product performance, reduced risk appetite and changing
market strategy as the main reasons for the banks net tightening.

Nineteen banks (22 percent) offered
residential construction loan products but recent performance of these loans
has been poor and many banks have either exited the product or significantly
curtailed new originations.

Of the loan products surveyed 17% were originated
to sell, mostly large corporate loans, leveraged loans, international credits,
and asset based loans.  Examiners noted
different standards for loans originated to hold vs. loans originated to sell
in only one or two of the banks offering each product.  There has been continued improvement since
2008 in reducing the differences in hold vs. sell underwriting standards and
OCC continues to monitor and assess any differences.

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Congress Hears Different Views on Appraisal Regulation

Among those testifying at a hearing of the House Committee on Financial Oversight’s subcommittee on
Insurance, Housing, and Community Opportunity were William B.
, director, Financial Markets and Community Investment, Government
Accountability Office (GAO) and Sara
W. Stephens, president of the Appraisal Institute.  Shear restated GAO’s earlier recommendations
that federal regulators set minimum standards for registering Appraisal
Management Companies (AMC)
before a hearing on
Thursday while Stephens countered
that non-congressionally mandated regulations are threatening to hamstring and jeopardize the real estate appraisal
profession altogether.

Shear presented results of a GAO
study on appraisal oversight which confirmed that appraisals remain the most
popular form of property valuation used by Freddie Mac, Fannie Mae (the GSEs) and
major lenders.  While other valuation
methods such as broker opinions and automatic valuation models (AVM) are
quicker and less expensive, they are also considered less reliable and are not
generally used for loan originations.   While GAO did not capture data on the
prevalence of approaches used to perform appraisals, the sales comparison
approach is required by the GSEs and FHA and is reportedly used in nearly all

Charges of conflict of interest have
changed the ways in which appraisers are selected and raised concerns about the
oversight of AMCs which often manage appraisals for lenders, GAO said.  The Dodd-Frank Act reinforced earlier
requirements and guidance about selecting appraisers and prohibiting coercion
and this has encouraged more lenders to turn to AMCs.  This in turn has raised questions about the
oversight of these firms and their impact on appraisal quality.

Federal regulators and the
enterprises said they hold lenders responsible for ensuring that AMCs’ policies
and practices meet their requirements but that they generally do not directly
examine AMCs’ operations.  Some industry
participants voiced concerns that some AMCs may prioritize low costs and speed
over quality and competence. The Dodd-Frank Act requires state appraiser
licensing boards to supervise AMCs and requires other federal regulators to
establish minimum standards for states to apply in registering them. Setting
minimum standards that address key functions AMCs perform on behalf of lenders
could provide greater assurance of the quality of the appraisals those AMCs
provide GAO said, but as of June 2012, federal regulators had not completed
rulemaking for such standards.

The Appraisal Subcommittee (ASC)
established in 1989 by the Title XI of the Financial Institutions Reform,
Recover, and Enforcement Act (FIRREA) has been monitoring the appraisal function
but its effectiveness has been limited by several weaknesses which include failing
to both define the criteria it uses to assess state compliance with Title XI and
the scope of its role in monitoring the appraisal requirements of federal
banking regulators.

ASC also lacks specific policies for
determining whether activities of the Appraisal Foundation (a private nonprofit
organization that sets criteria for appraisals and appraisers) that are funded
by ASC grants are Title XI-related. Not having appropriate policies and
procedures is inconsistent with federal internal control standards that are
designed to promote the effectiveness and efficiency of federal activities.

Appraisals and other types of real
estate valuations have come under increased scrutiny following the mortgage
and Dodd-Frank codified several requirements for the independence of
appraisers and expanded the role of ASC. 
It also directed GAO to conduct two studies which were the source of Shear’s
testimony before the committee.

GAO recommends that federal
regulators consider key AMC functions in rulemaking to set minimum standards
for registering AMCs, that ASC clarify the criteria it uses to assess states’
compliance with Title XI of FIRREA and develop specific policies and procedures
for monitoring the federal banking regulators and the Appraisal Foundation.  ASC and regulators are either taking steps to
implement these recommendations or considering doing so.

Although she was not speaking directly
to the GAO report, Stephens in a written statement told committee members that,
although appraising is the most heavily regulated activity within the mortgage
and real estate sectors
, regulatory agencies are planning to enact further
changes that would threaten to tie the hands of appraisers, curtail innovation
and increase regulatory burdens on appraisers and financial institutions.

Stephens was testifying directly
against The Appraisal Foundation’s creation of a new Appraisal Practices Board
delving into appraisal practice matters without Congressional authorization.
The Foundation does not have authority to codify appraisal methods and
techniques, she said, and called it a dangerous and unjustified move.  “The regulatory burden for appraisers is on
the cusp of being expanded exponentially.”

“Appraisal methods and techniques
require judgment by the appraiser. It is assumed that the appraiser has
been thoroughly trained to judge appropriate situations. The choice of methods
and techniques are the responsibility of the appraiser in the development of
his/her scope of work” she said. For instance, whether to use reproduction cost
or replacement cost or when and how to adjust for sales concessions are
dependent on the actions of the marketplace and should not be mandated by a
body such as the Appraisal Practices Board. Hard “rules of thumb” do not work
within valuation because there always is an exception to the rule, she said.

The Appraisal Institute offered a
long list of recommendations
to Congress including that they:

  • realign the appraisal regulatory
    structure with those of other industries in the real estate and mortgage
  • Protect the independence of the
    appraisal standards-setting process and require that standards for federally
    related transactions be issued by an entity that does not develop or offer
    education for appraisers.
  • Establish limitations around the
    Appraisal Practices Board specifying that no tax dollars be used to fund the
    venture, voluntary guidance be truly voluntary, and meaningful oversight over
    the de facto regulatory action of the Foundation be established.
  • Reiterate that the Foundation does
    not have legislative authorization in the area of “methods and techniques” and
    “appraiser education.”
  • Authorize the GSEs and other agencies
    to halt purchase or guarantees of loans in states that maintain deficient
    appraiser regulatory regimes and ensure that ongoing federal support for the
    GSEs or any replacement maintains consistent appraisal rules.

The Institute said states should be restricted from
codifying voluntary guidance into state law or regulation and the Appraisal
Standards Board prohibited from specifically
referencing its works within the Uniform Standards of Professional Appraisal
Practice and laws should be established to empower state boards to investigate
and prosecute complaints involving appraisers.

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