Correspondent Investors: News, Volumes and Rumors; Government Turns Focus to HEMP

Sorry, did
I hit the incorrect letter? The Administration announced important enhancements
to the Making Home Affordable Program, including the Home Affordable Modification Program (HAMP) late last week. The
expanded program is expected to be available by May, but we should keep a few
things in mind. First, this is not the mortgage refinancing program that
President Obama mentioned in the SOTU speech (that referred to helping current
borrowers refinance into a lower rate). The HAMP update is a focus on debt
forgiveness modifications, and arguably impacts investors more than originators
and Realtors – the implications for
agency MBS investors seem limited but are very meaningful for non-agency
. (Removing the 31% DTI constraint for HAMP eligible borrowers
could embrace about 800,000 potential borrowers, and the program will be
extended through 2013.)

Analysts suggest that the effect on
agency MBS prepayment speeds should be minimal
, since the vast majority of debt
forgiveness will be on delinquent loans, which are typically already bought out
of the agency MBS trust (if they are more than 120 days delinquent). The only
effect could be if underwater borrowers in agency MBS pools start going
delinquent on purpose to qualify for debt forgiveness, speeds will obviously
rise – hopefully unlikely. And only pools of loans originated before 2009
qualify for this program. FHFA Acting Director Edward DeMarco released a press
statement stating that “principal forgiveness did not provide benefits
that were greater than principal forbearance as a loss mitigation tool”.
Further, the press release noted that “FHFA’s assessment of the investor
incentives now being offered will follow its previous analysis, including
consideration of the eligible universe, operational costs to implement such
changes, and potential borrower incentive effects.” This suggests that
Fannie Mae and Freddie Mac may not adopt this program. The incentive to
investors for principal reduction in HAMP has been tripled (the range of 6-18
cent payout on debt reduction goes up to 18-63 cents) – a significant change
for various reasons and should result in higher modification rates. It is
important to note that the incentives for servicers are not any different now
than before (servicer strip dependence on the balance).

The President’s State of the Union address
suggested a new government effort to refinance borrowers but at this point most
expect it will be aimed at non-agency loans
, but more details should emerge in the near term. Total
borrower savings from such a refi effort would be at most $5-6 billion per year,
but in reality would be a small fraction of that amount. The program may
involve non-agencies refinancing into FHA loans and so expect the impact on the
agency MBS market to be modest, however. Total throughput of the program should
be low, given the challenges witnessed in agency HARP, lack of servicer
incentives, and rep/warrant hurdles. Recently a speech by HUD Secretary Donovan
sparked fears of a Ginnie refi program and while this program is likely
targeted at non-agencies investors continue to fear event risk in Ginnies,
possibly via a restructuring of MIPs at some point.

And while
we’re talking about residential MBS’s, agency (Fannie, Ginnie, Freddie) MBS prices have had a great run since
mid-December compared to Treasury prices
. Some now expect agency MBS
spreads to remain tight so long as the 10-year Treasury stays at current
levels.  Should the 10-year yield hit 2.5%, however, they would see those
spreads widen significantly. These projections are due in part to the Fed’s
announcement that they will likely keep short-term rates low until late 2014,
which both creates an ideal scenario for banks to buy up agency MBS and for
implied volatilities to decline, and to the fact that the Treasury has been
selling about $10 billion agency MBS monthly but that this should be drawing to
a close, leaving only $15 billion.  Additionally, the MBS sector is
attractively priced
compared to investment grade corporate bonds right now, so
the long-term “supply-demand technical” look good. In the event that the
10-year yield reached 2.5%, though, spreads would widen, a prediction assuming
that a selloff is caused by improving fundamentals of the economy, which
reduces the probability that the Fed’s QE3 involving agency MBS would diminish
significantly in a rates backup scenario.  Such a shift in rates would
also indicate that volatility had increased, which would likely lead to a
sudden increase in agency MBS, which of course skews that nice supply-demand
projection. There’s your dose of daily technical talk.

There is a lot of chatter about
investors out there, some of it factual, some of it rumored
. The most recent big move was from
Citibank, which, due to liquidity and market risk concerns, became the latest
major bank to stop the purchase of “medium” and “high risk” mortgage loans from
its correspondent originators. No one wants buyback requests appearing in their
mailbox, and Citi is no exception. And we know that these, if they can’t be
fought, are passed on to the company that sold the loan to the investor. So Citi is attempting to improve the quality
of the mortgages it buys
, a good thing, and told correspondent lenders
“to withdraw medium/high risk loans,” saying the bank could not
predict time frames for when the loans would be reviewed “if we are able
to review them at all.” Perhaps Citi’s pre-purchase review process (begun
in 2010) is still letting some potentially defective loans slip through.

While this
is a good goal, and should be done, for correspondent
clients it is more tough news since it comes on the heels of Bank of America
and MetLife’s exit from correspondent lending. Ally/GMAC has scaled back. And
rumors surfaced last week, and I repeat – rumors, that SunTrust will be
combining its wholesale and correspondent channels, and that PHH is also
contemplating scaling back operations.
(Of course wholesale reps love
calling on larger correspondent clients, but it doesn’t work the other way –
correspondent reps rarely want the opportunity to call on brokers. Certainly
the rep and warrants are different.) On the positive side, we have Wells Fargo being featured on the
Forbes cover
and recent results from Flagstar
showing that mortgage banking operations had strong revenues in the fourth
quarter. (Flagstar’s gain on loan sale income increased from Q3 totals to
$106.9 million, with a margin of 102 basis points. The firm reported
residential first mortgage loan originations of $10.2 billion in Q4, an
increase of $3.3 billion, or 47.1 percent, from third quarter totals.)

pretty much done with much of the earnings reports from the big
banks/servicers. Things don’t look too peachy as most took charges for
repurchasing soured loans, complying with federal mortgage servicing standards,
paying for an upcoming settlement with state attorneys general and resolving
significant foreclosure and litigation costs. Wells Fargo posted the strongest
fourth-quarter mortgage results but still had $300 million in costs related to
mortgage servicing and foreclosures. U.S.
Bancorp and PNC Financial Services both took charges in the quarter related to
the pending settlement agreement
with state attorneys general and to the
cost of complying with federal consent orders for past mortgage servicing
failures ($164 million and $240 million, respectively). Most lenders would
agree that mortgage banking profits are up and origination volume increased in
the fourth quarter, things are slower than a year ago. BofA’s mortgage origination volume dropped 77% from a year ago and
Wells saw a 6.2% decline from a year earlier in fourth-quarter mortgage
originations (to $120 billion). Chase’s mortgage origination volume dropped 24%
from a year earlier, and Citigroup’s fell 3%.
One investment bank noted,
“Solid organic loan growth is very difficult to achieve when consumers and
corporations are deleveraging (cutting back on debt in their lives) and
economic growth is moderate.”

MGIC (which injected $200 million into a subsidiary last
month to keep writing policies) announced that it posted its sixth straight
quarterly loss. MGIC said its risk-to-capital ratio will probably exceed the
maximum 25-to-1 allowed by some state regulators in the second half of this
year. The ratio was 20.3-to-1 on Dec. 31 compared with 22.2-to-1 on Sept. 30.

Friday saw our share of bank closures. In Florida First Guaranty Bank and
Trust Company of Jacksonville was enveloped by CenterState Bank of Florida, with
the help of the FDIC. Up in Tennessee, Tennessee Commerce Bank became part of
Kentucky’s Republic Bank & Trust Company and BankEast in Knoxville is now
part of U.S. Bank National Association of Ohio. And up in Minnesota Patriot
Bank Minnesota is now part of First Resource Bank of Savage, Minnesota.

also had news that the U.S. economy expanded less than forecast in the fourth
quarter as consumers curbed spending and government agencies cut back,
validating the Federal Reserve’s decision to keep interest rates low for a
longer period. GDP disappointed analysts. Remember – jobs and housing, housing
and jobs. “We’re going into 2012 with less momentum than people were thinking,”
said Michael Hanson, a senior U.S. economist at Bank of America. This week’s
Fed announcement that they would hold rates near zero for years was a stunning
admission that monetary policy has failed to stimulate the economy to anywhere
near the extent anticipated. And fiscal policy has had the same impact. So what
does the government have up its sleeve? Not much.

If that’s
the case, then we’re in for a weak 1st quarter here in the United
States, and we’re going to have to face the prospect that European debt needs
to be written off. At this point it is arguable how much of Europe’s coming
recession spills into the United States, but it will indeed have an impact.
And, more often than not, a slowing U.S.
economy leads to lower rates
(since there is less demand for capital) – unfortunately
for LO’s the lower rates have to be balanced against the higher fees,
documentation hurdles, and appraisal problems.

Our 10-yr
T-note closed Friday with a yield of 1.90%. One headline I saw this morning
noted that, “US stocks are poised to open lower Monday after the weekend came
and went without Greek leaders reaching an agreement on a debt-relief deal.” Is
that a surprise to anyone? In this country this morning we’ve already had Personal
Income +.5%, Personal Consumption was unchanged, the savings rate went to 4%,
and the Core PCE Price Index was +.2%. For the remainder of the week, the big
excitement will be Friday’s employment data. But rates continue to drop, and we find the 10-yr down to 1.83% and MBS
are about .250 better.

An old man walks into the barbershop for a shave and a haircut, but he tells
the barber he can’t get all his whiskers off because his cheeks are wrinkled
from age.
The barber gets a little wooden ball from a cup on the shelf and tells him to
put it inside his cheek to spread out the skin.
When he’s finished, the old man tells the barber that was the cleanest shave
he’s had in years. But he wanted to know what would have happened if he had
swallowed that little ball.
The barber replied: “You’d just bring it back tomorrow like everyone else

If you’re
interested, visit my twice-a-month blog at the STRATMOR Group web site located
at The current blog discusses
residential lending and mortgage programs around the world. If you have both
the time and inclination, make a comment on what I have written, or on
other comments so that folks can learn what’s going on out there from the other

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AG Holder Announces Structure of MBS Fraud Unit

The formation of the Residential
Mortgage-Backed Securities Working Group
tasked with investigating mortgage
fraud is now official.  The new office,
which will be part of the Administrations Financial Fraud Enforcement Task
Force (FFETF) was first announced by President Obama in his State of the Union
speech on Tuesday.

At a press conference this morning (video below), Attorney General Eric Holder along with
Housing and Urban Development (HUD) Secretary Shaun Donovan, Securities and
Exchange Commission (SEC) Director of Enforcement Robert Khuzami and New York
Attorney General Eric T. Schneiderman, Holder outlined the mechanics of the working
group which will bring together the Department of Justice (DOJ), several state
attorneys general and other federal entities to investigate those responsible
for misconduct contributing to the financial crisis through the pooling and
sale of residential mortgage-backed securities. 
The group will consist of at least 55 DOJ attorneys, analysts, agents,
and investigators from around the country including the 15 civil and criminal
attorneys and 10 FBI agents already employed in the FFETF unit.  This team will join existing state and federal
resources investigating similar misconduct under those authorities.

Holder said that the goal of the group will be to hold accountable any
institutions that violated the law; to compensate victims and help provide
relief for homeowners struggling from the collapse of the housing market,
caused in part by this wrongdoing and to help turn the page “on this
destructive period in our nation’s history.”

Holder confirmed the principal staff that we identified here earlier this
week:  Schneiderman will chair the group
with co-chairs Khuzami, Lanny Breuer, Assistant Attorney General, Criminal Division,
DOJ; John Walsh, U.S. Attorney, District of Colorado; and Tony West, Assistant
Attorney General, Civil Division, DOJ. 
Schneiderman will lead the effort from the state level and will be
joined by other state attorneys general.

Schneiderman said, “In coordination with our federal partners, our office
will continue its steadfast commitment to holding those responsible for the
mortgage crisis accountable, providing meaningful relief for homeowners
commensurate with the scale of the misconduct, and getting our economy moving
again.  The American people deserve a thorough investigation into the
global financial meltdown to ensure nothing like it ever happens again, and
today’s announcement is a major step in the right direction.”

The new office has been the target of criticism from Wall Street since the
President’s announcement such as that from JP Morgan Chase CEO Jamie Dimon who said
the working group would “derail” the proposed settlement between the states and
major banks, and Jaret Seiberg,
Senior Vice President of the Washington Research Group who told CNBC that the
sole purpose of the group is to bring criminal charges against bankers.

Press Conference Video

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Mortgage Rates Sideways Ahead of Wednesdays Important Events

Mortgages Rates are steady to slightly improved today after rising for the first time in a month yesterday.  Although rates change slightly every day, those changes are usually small enough as to only effect the closing costs associated with a particular rate.  Because of this, we track “Best-Execution” as the actual interest rate benchmark, and we talked about it in significant detail yesterday (READ MORE).  So although we are able to report that the rate environment is slightly improved today, those improvements have been mostly relegated to minor decreases in borrowing costs for what will likely be the same rate you would have been quoted yesterday. 

Underlying markets have been fairly equivocal for the past two days with a majority of the damage to mortgage rates having occurred with last week’s market movements that lenders more fully priced into rate sheets yesterday.  Stocks, Bonds, and MBS (the “mortgage-backed-securities” that most directly influence mortgage rates) are all very close to where they were last night, seemingly in preparation and anticipation of several important events tomorrow. These include the FOMC Statement (Fed “rate decision,” although it’s the text of the announcement that is important as no change is expected to the discount rate), the first-ever release of FOMC members forecasts, a post-announcement press conference from Ben Bernanke, as well as the 5yr Treasury Note auction. 

Tomorrow’s events, taken in conjunction with tonight’s State of The Union address presents quite a bit for mortgage markets to digest.  The speech tonight may contain mention of new housing-related initiatives (some have suggested), and similar suggestions have been made about tomorrow’s FOMC Announcement (which would be a MUCH bigger deal as far as influencing mortgage markets).  Conversely, it’s possible that some recent levity for MBS vs Treasuries is due to the EXPECTATION that the Fed will add some extra MBS-Specific quantitative easing in the near future, meaning that rates could face some added pressure if MBS are NOT specifically mentioned, although that’s not likely to cause sufficient movement tomorrow for Best-Execution to rise.  Whatever happens tomorrow, it’s a high-risk set of events that could push rates higher OR lower, but we’ll hopefully come away from it with a clearer sense of whether or not rates will make it back down to a 3.875% Best-Execution any time soon.


  • 30YR FIXED –  4.0%, 3.875% still a contender
  • FHA/VA -3.75%
  • 15 YEAR FIXED –  3.375%
  • 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
  • There are technical reasons for that as well as fundamental reasons
  • Lenders tend to get busier when rates are in this “high 3’s” level
    and can throttle their inbound volume by raising rates or costs.
  • While we don’t necessarily think rates are destined to go higher,
    given the above facts, there seems to be more risk than reward regarding
  • But that will always be the case when rates
    operating near historic lows

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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.”

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Housing: The one bailout America could really use

Laurie Goodman is an apolitical number cruncher who has spent most of her 28-year career out of the public view, studying the minutiae of mortgage-backed securities (MBS) for big investment banks. She’s long been a star among Wall Street insiders, however. She holds the record for the most top rankings for fixed-in-come research from the trade bible Institutional Investor.