Refi Plan for Gon-government Loans? Chalk Another One up for MERS

In last
night’s speech President Obama asked for creation of special unit of federal
prosecutors to further investigate mortgage lending practices that led to the
housing crisis. “This new unit will hold accountable those who broke the
law, speed assistance to homeowners, and help turn the page on an era of
recklessness that hurt so many Americans.” Soon afterward I received this
note: “I guess former Senator Dodd, Barney Frank, Bill Clinton, and Andrew
Cuomo had better assemble good teams of attorneys. I don’t remember who ran the
FDIC for the last 8 years but Shelia Bair and Alan Greenspan might need one
too!” Obviously the government’s housing
ownership push to artificial levels a decade ago is well remembered.

there were two quotes that caught the
interest of those in our business
. The first was, “…..responsible
homeowners shouldn’t have to sit and wait for the housing market to hit bottom
to get some relief. That’s why I’m sending this Congress a plan that gives
every responsible homeowner the chance to save about $3,000 a year on their
mortgage, by refinancing at historically low interest rates. No more red tape.
No more runaround from the banks. A small
fee on the largest financial institutions
will ensure that it won’t add to
the deficit, and will give banks that were rescued by taxpayers a chance to
repay a deficit of trust. Let’s never forget: millions of Americans who work
hard and play by the rules every day deserve a government and a financial
system that do the same.” Obviously any type of grand refinance scheme
hurts the price of premium (above par) MBS’s.

Long on rhetoric
and short on details, as one would expect from any SOTU speech, the best
article so far is from the WSJ.  The reporter speculates the government will
use FHA/FN/FH to refi loans they don’t already guarantee
.  But what’s the cost if the government isn’t
assuming some losses?  And the mechanics
of entering the private mortgage market make one’s head spin. Any new
legislation is going to have a very tough time clearing congress ahead of the
election – I would put the odds near zero. Here is the article.

The second
quote was directly at money center
commercial banks
. “I will not go back to the days when Wall Street was
allowed to play by its own set of rules. The new rules we passed restore what
should be any financial system’s core purpose: Getting funding to entrepreneurs
with the best ideas, and getting loans to responsible families who want to buy
a home, start a business, or send a kid to college. So if you’re a big bank or
financial institution, you are no longer allowed to make risky bets with your
customers’ deposits. You’re required to write out a “living will”
that details exactly how you’ll pay the bills if you fail – because the rest of us aren’t bailing you out ever
. And if you’re a mortgage lender or a payday lender or a credit card
company, the days of signing people up for products they can’t afford with
confusing forms and deceptive practices are over. Today, American consumers
finally have a watchdog in Richard Cordray with one job: To look out for them.
We will also establish a Financial Crimes Unit of highly trained investigators
to crack down on large-scale fraud and protect people’s investments. Some
financial firms violate major anti-fraud laws because there’s no real penalty
for being a repeat offender…So pass legislation that makes the penalties for
fraud count.”

I lose track of the MERS lawsuits around the country, at various stages of
appeal, with attorneys on both sides doing very well for themselves. I did
notice, however, that Mortgage
Electronic Registration Systems had a nice victory yesterday
as the U.S.
Court of Appeals for the 11th Judicial Circuit validated its rights to assign a
security deed and/or foreclose on secured property.  The decision upheld
the decision of the U.S. District Court for the Northern District of Georgia in
Smith V. Saxon Mortgage. The plaintiff in the original case had contested the
foreclosure of her home on the grounds that: The assignment of the security
deed was invalid because MERS, as nominee of a defunct lender could not assign
the documents of its own volition, and that the “splitting” of the
mortgage and the note rendered the mortgage null and void and therefore notices
of foreclosure were invalid as not coming from a secured creditor. In the
original District Court opinion in March 2011, the judge pointed to the
standard language in the Georgia security deed signed by all borrowers at
closing which grants MERS the power to act on behalf of the current and future
owners of the loan. “Unless the instrument creating the power specifically
provides to the contrary . . . an assignee thereof . . . may exercise any power
therein contained,” she wrote. “The Security Deed…transfers rights to
MERS, and MERS’ assigns may exercise any power contained therein.”

Hey, when
was the last time a mortgage company went public? Residential mortgage loan servicer
Nationstar Mortgage Holdings named
Bank of America Merrill Lynch to underwrite its initial public offering. Last
May, the company, which is backed by private equity firm Fortress Investment
Group LLC, filed with the SEC to raise up to $400 million in an IPO and use the
proceeds from the offering to service acquisitions and for other general
corporate purposes. But in other Fortress news, Daniel Mudd (charged with
securities fraud during his Fannie Mae CEO reign) has resigned from the board
of Fortress.

Flagstar Bancorp came out with its earnings, and saw
its losses narrow to $45 million in the fourth quarter from $192 million a year
earlier, but worsen from the $14 million loss in the 3rd quarter. Flagstar has had 14 straight quarterly
. On the mortgage side, originations were up 11% to $10 billion from
$9 billion in the year-ago period, and originations for the entire year
increased to $27 billion from $26 billion in 2010. The company sold and
securitized $10.5 billion in loans during the quarter, up from $8.6 billion in
the year-ago period, but the gain-on-sale margin fell sharply to 1.02% from 1.53%.
Interest rate lock commitments (IRLCs), the primary driver of GOS revenues,
declined 14.5% to $11.2 billion from $13.1 billion. Charge-offs were down ($19
million in bad residential loans down from $360 million in the year-ago quarter).
Net servicing revenue increased 71.3% from the prior quarter to $29 million,
but the company’s reserve for probable losses on representations and warranties
rose to $69 million from $10 million a year ago.

The value
of servicing is indeed in a state of flux, but that doesn’t stop pools from being
bought and sold. The latest offering comes from MountainView Servicing Group: a $129 million portfolio of Ginnie
Mae mortgage servicing rights containing 566 loans that are 99% FHA fixed-rate
mortgages. Approximately 50% of the portfolio is retail origination and the
other half is through third-party brokers. The loans are 14 months seasoned and
spread between California (97%) and Illinois (3%). The weighted average
servicing fee is .396%. Bids are due next Tuesday – contact Troy Rusniak at for more information.

Over the last month, mortgage-backed
security prices have done better than Treasury prices, mostly because of supply
(mortgage banker selling of $1-2 billion per day) and demand (the Fed alone is
buying $1.2 billion per day) issues
. Could this relative price movement
change direction?  Sure – some broker-dealers believe that a sustained
selloff in the rates market that will take the 10-year Treasury to 2.5% or
above would be the most likely scenario in which MBS spreads would widen
significantly.  This is due to a number of factors, including a prediction
that, assuming a selloff is caused by improving fundamentals of the US economy,
the probability of Fed’s QE 3 involving agency MBS should diminish
significantly in a rates backup scenario.

On top of that, IF rates were to see that big of a move, it would mean that
volatility has increased – rarely a good thing for MBS’s. And when that happens,
“convexity hedging” related selling from servicers and originators would
probably lead to a sudden increase in the supply of agency MBS in this
scenario, resulting in even more selling. Lastly, domestic banks have been
providing a very strong bid for agency MBS over the past 5-6 months, and in a rates
backup scenario, their deposit growth is likely to be lower, meaning that banks
would be unlikely to grow their holdings until rates stabilize again. Simple!

Looking at
where things are now, yesterday rates barely budged (the 10-yr at 2.06%) and
MBS prices flat – it is really quiet out there. The 2-yr note auction went just
fine yesterday; today we have $35 billion in 5-yr notes to auction off. Later
today we’ll have the FOMC’s trifecta of its statement (12:30), economic
projections (2PM) and press conference (2:15). (There was one news item this
morning – the MBA’s weekly mortgage apps number for last week dropped 5%. Refinance
activity slipped 5.2%, and purchase apps dropped 5.4% – refi percentage stands
at about 81% of all apps. The four-week moving average for all mortgage applications
is still up 4.1%.) Currently rates are
still nearly unchanged, with the 10-yr sitting around 2.05% and MBS prices
perhaps a shade better

Yes, last
night was the State of the Union address, which is often high gratuitous
applause and low on substance. But politics is definitely in the news, and here
is a handy-dandy guide to figuring out which candidates most closely fits your
beliefs: Link

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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FHFA Answers Conflict of Interest Charges against Freddie Mac

Federal Housing Finance Agency (FHFA) issued a statement late Monday refuting a
from ProPublic and NPR
that a complicated investment strategy utilized by Freddie Mac had influenced
it to discourage refinancing of some of its mortgages.  FHFA confirmed that the investments using
Collateralized Mortgage Obligations (CMOs) exist but said they did not impact
refinancing decisions and that their use has ended. (the NPR Story)

Freddie Mac’s charter calls for
it to make home loans more accessible, both to purchase and refinance their
homes but the ProPublica story, written by Jesse
Eisinger (ProPublica) and Chris Arnold (NPR) charged that the CMO trades “give Freddie a powerful incentive to do
the opposite
, highlighting a conflict of interest at the heart of the company.
In addition to being an instrument of government policy dedicated to making
home loans more accessible, Freddie also has giant investment portfolios and
could lose substantial amounts of money if too many borrowers refinance.”

in a nutshell, is what the story (we are quoting from an “updated” version)
says Freddie has been doing.  

creates a security (MBS) backed by mortgages it guarantees which was divided
into two parts.  The larger portion, backed
by principal, was fairly low risk, paid a low return and was sold to investors.  The smaller portion, backed by interest
payments on the mortgages, was riskier, and paid a higher return determined by
the interest rates on the underlying loans. 
This portion, called an inverse floater, was retained by Freddie Mac.

2010 and 2011 Freddie Mac’s purchase (retention) of these inverse floaters rose
dramatically, from a total of 12 purchased in 2008 and 2009 to 29.  Most of the mortgages backing these floaters had
interest rates of 6.5 to 7 percent.

structuring these transactions, Freddie Mac sells off most of the value of the
MBS but does not reduce its risk because it still guarantees the underlying
mortgages and must pay the entire value in the case of default.  The floaters, stripped of the real value of
the underlying principal, are also now harder and possibly more expensive to
sell, and as Freddie gets paid the difference between the interest rates on the
loans and the current interest rate, if rates rise, the value of the floaters

Freddie, under its agreement with the Treasury Department, has reduced the size
of its portfolio by 6 percent between 2010 and 2011, “that $43 billion drop in
the portfolio overstates the risk reduction because the company retained risk
through the inverse floaters

the real value of the floater is the high rate of interest being paid by the
mortgagee, if large numbers pay off their loans the floater loses value.  Thus, the article charges, Freddie has tried
to deter prospective refinancers by tightening its underwriting guidelines and
raising prices.  It cites, as its sole
example of tightened standards that in October 2010 the company changed a rule
that had prohibited financing for persons who had engaged in some short sales
to prohibiting financing for persons who had engaged in any short sale, but it
also quotes critics who charge that the Home Affordable Refinance Program
(HARP) could be reaching “millions more people if Fannie (Mae) and Freddie
implemented the program more effectively.”

has discouraged refinancing by raising fees. 
During Thanksgiving week in 2010, the article contends, Freddie quietly
announced it was raising post-settlement delivery fees.  In November 2011, FHFA announced that the
GSEs were eliminating or reducing some fees but the Federal Reserve said that “more
might be done.”

Freddie Mac has limited refinancing, the article says, it also affected the whole
economy which might benefit from billions of dollars of discretionary income generated
through lower mortgage payments.  Refinancing
might also reduce foreclosures and limit the losses the GSEs suffer through defaults
of their guaranteed loans.

authors say there is no evidence that decisions about trades and decisions
about refinancing were coordinated.  “The
company is a key gatekeeper for home loans but says its traders are “walled
off” from the officials who have restricted homeowners from taking advantage of
historically low interest rates by imposing higher fees and new rules.”

ProPublica/NPR says that the
floater trades “raise questions about the FHFA’s oversight of Fannie and
Freddie” as a regulator but, as conservator it also acts as the board of
directors and shareholders and has emphasized that its main goal is to limit
taxpayer losses.  This has frustrated the
administration because FHFA has made preserving the companies’ assets a
priority over helping homeowners.  The
President tried to replace acting director Edward J. DeMarco, but Congress
refused to confirm his nominee. 

authors conclude by saying that FHFA knew about the inverse floater trades
before they were approached about the story but officials declined to comment on whether the
FHFA knew about them as Freddie was conducting them or whether the FHFA had
explicitly approved them.”

FHFA statement
said that Freddie Mac has historically used CMOs as a tool to
manage its retained portfolio and to address issues associated with security
performance.  The inverse floaters were
used to finance mortgages sold to Freddie through its cash window and to sell
mortgages out of its portfolio “in response to market demand and to shrink its
own portfolio.”  The inverse floater
essentially leaves Freddie with a portion of the risk exposure it would have
had if it had kept the entire mortgage on its balance sheet and also results in
a more complex financing structure that requires specialized risk management
processes.  (Full FHFA Statement)

agency said that for several reasons Freddie’s retention of inverse floaters ended in
2011 and only $5 billion is held in the company’s $650 billion retained
portfolio.  Later that year FHFA staff
identified concerns about the floaters and the company agreed that these
transactions would not resume pending completing of the agency examination.

investments FHFA said did not have any impact on the recent changes to
HARP.  In evaluating changes, FHFA
specifically directed both Freddie and Fannie not to consider changes in their
own investment income in the HARP evaluation process and now that the HARP
changes are in place the refinance process is between borrowers and loan
originators and servicers, not Freddie Mac.

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Why a New Refinance Program Faces Long Odds

Rep. Scott Garrett (R., N.J.) opposes using a levy on large banks to offset the costs of proposed refinancing program.

President Barack Obama last week outlined a forthcoming plan to allow more homeowners who are current on their mortgages to refinance at today’s low rates. A levy on large banks would be used to offset the costs of the program.

But any such scheme that relies on a bank tax “would be dead on arrival,” said Rep. Scott Garrett (R., N.J.), chairman of the subcommittee on Capital Markets and Government-Sponsored Enterprises, in an interview last week. “No one is going to suggest that the way to help the mortgage market is to propose a tax indirectly on the system,” he said.

While the White House hasn’t spelled out any details for the program, including the mechanism for mass refinancing or the costs of such an initiative, the administration’s plan is expected to call on Congress to relax limits on allowing borrowers to refinance through the Federal Housing Administration, according to people familiar with the matter.

The FHA already faces a dire financial condition. It doesn’t make loans directly but instead insures lenders against losses on loans that meet certain standards. It charges insurance premiums to offset the cost of defaults. But its loan-guarantee business has swelled dramatically as the private market imploded over the past four years, and mounting defaults are expected to burn big holes in the agency’s reserves.

Using the FHA to refinance more borrowers “would be imprudent considering the way the balance sheet looks right now,” said Mr. Garrett. “It’s not a viable idea.”

Mr. Garrett said that while using a bank tax to offset potential losses to the FHA was a nonstarter, he said he didn’t oppose mass refinancing in principle. “If magically there were some additional funds to pay for the program that don’t have a negative impact on the economy, sure, but I’m not sure what they are,” he said.

The upshot: the refinance program is likely to reignite a long running political debate over how far the government should go to assist homeowners during a housing crisis that is entering its sixth year. But unless there’s a bipartisan appetite to allow unspent funds from, say, the Troubled Asset Relief Program to fund such refinance efforts, homeowners shouldn’t hold their breath on this latest call to action.

Follow Nick @NickTimiraos

Housing Industry Reacts to State of the Union

Housing featured prominently in
President Obama’s State of the Union speech on Tuesday night.  The President made two specific proposals,
one to deal with the ghosts of housing past, the other to provide expanded
credit to homeowners.

In contrast to the settlement with banks
that Obama was widely rumored to announce
at the State of the Union, he instead directed Attorney General Eric Holder to
create a new office on Mortgage Origination and Securitization Abuses.  The President said, “The American people
deserve a robust and comprehensive investigation into the global financial meltdown
to ensure nothing like it ever happens again.”

According to the Huffington Post, the new
office will take a three-pronged approach to the issue, holding financial
institutions accountable for abuses, compensating victims, and providing relief
for homeowners, and will operate as part of the existing Financial Fraud
Enforcement Task Force.  On Wednesday several
news outlets were reporting that the unit will be chaired by State Attorney
General Eric Schneiderman, who has been regarded as among the toughest of state
law enforcement officers with Lanny Breuer, an assistant attorney general in
the Criminal Division of the Department of Justice (DOJ) as co-chair.  Others reported to be in the group are Robert
Khuzami, director of enforcement at the Securities and Exchange Commission,
U.S. Attorney for Colorado John Walsh and Tony West, assistant AG, DOJ. 

The President’s second and more
broad-reaching proposal was for a massive refinancing of mortgage loans that
would reach beyond the current government initiates such as the Home Affordable
Refinance Program (HARP).  While few
details are available, the President said that his proposed initiative would
cut red tape and could save homeowners about $3,000 a year on their mortgage
payments because of the current historically low rates.  Unlike HARP, the program would apply to all
borrowers whether or not their current mortgages are government-backed and
would be paid for by a small fee on the largest financial institutions. Obama
did not mention principal reduction in his proposal.

Bloomberg is reporting that the program is
Obama’s response to a call by Fed Chairman Ben Bernanke in a paper sent to Congress
earlier this month for the administration to offer more aid for housing.   While largely dealing with the need to
convert excess housing inventory to rental property, the paper also touched on
the benefits of easing refinancing beyond the HARP program.

Bloomberg also outlined some of the
tradeoffs of a super-refinancing program saying it may damage investors in
government-backed securities by more quickly paying off those with high coupons
and limited default risk while aiding holders of other home-loan securities and
banks.  Word that such a proposal might be
forthcoming in the President’s speech, Bloomberg said, “Roiled the market for
Fannie Mae and Freddie Mac securities according to a note to clients by Bank of
America Corp.”

The Associated Press quoted Stan
Humphries, chief economist at Zillow as saying the refinancing could allow 10
million more homeowners to refinance and, by preventing foreclosures and
freeing up money for Americans to spend, could give the economy a $40 to $75
billion jolt.  The Federal Reserve, the
AP said, was more cautious, estimating that 2.5 million additional homeowners
might be able to refinance.

The refinancing initiative would require
approval by Congress, however the day after the speech the focus was on other issues
such as tax reform and we could not find any reaction from members of Congress
specific to the refinancing issue.  Even the
Mortgage Bankers Association (MBA) issued a statement from its president David
H. Stevens which did not mention the refinancing program, obliquely addressing
instead the creation of the mortgage fraud office.    

“Like the
President, we believe it is time to move forward with rebuilding this nation’s
housing market and that lenders and borrowers alike contributed to the housing
crisis we are currently in.  Let there also be no mistake, those who
committed illegal acts ought to face the consequences, if they haven’t already.”

then called for a clear national housing policy “that establishes certainty for
lenders and borrowers alike.”  This,
according to MBA, requires finalizing the Risk Retention/Qualified Residential
Mortgage (QRM) rule “in a way that ensures access to credit for all qualified
borrowers,” establishing working national servicing standards, developing a
legal safe-harbor for Dodd-Frank QRM/Ability to Repay requirements, and “Move(ing)
quickly to determine the proper role of the federal government in the mortgage market
in order to ensure sufficient mortgage liquidity through all markets, good and

of the fraud office generated substantial comment, much of which was
unfavorable.  A lot of the criticism
focused on the lack of prosecutions that have emerged from the existing fraud
task force and there was a strong suspicion voiced by the liberal blogosphere
that the new office was merely a cover for pushing the DOJ/50-state attorneys
general settlement with major banks.  However,
one analysis, written by Shahien Nasiripour in U.S. Politics and Policies pointed out the wider powers of
enforcement available to attorneys general in some states such as New York’s
Martin Act and how the states and federal government might use the new office
to pool their powers and responsibilities to the benefit of each.  

The new
office will not lure California Attorney General Kamala Harris back into the
fold.  Harris and Schneiderman both
withdrew from the national foreclosure settlement last year, feeling that it
did not represent the interest of their respective states.  Despite the appointment of Schneiderman to
head the new office, Harris announced on Wednesday that she would not be
rejoining her fellow AGs
in their negotiations saying that the latest
settlement proposal was inadequate for California.  A spokesman for her office said, “Our
state has been clear about what any multistate settlement must contain:
transparency, relief going to the most distressed homeowners, and meaningful
enforcement that ensures accountability. At this point, this deal does not
suffice for California.”

Here’s the video of the speech beginning at the point discussing housing related issues…

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Analysts: Refinancing Plan ‘Dead on Arrival’?

White House officials are optimistic that the new refinancing plan outlined by President Barack Obama on Tuesday night will be enacted into law. There are few details so far, but Mr. Obama said in his speech that he would send Congress a plan “that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates.”

Most analysts, however, are skeptical. They don’t give the refinancing plan much of a chance of winding its way through a deeply divided Congress, especially during an election year.

Here’s a sampling of their views:

Edward Mills, analyst, FBR Capital Markets: “We believe that this program would be dead on arrival in Congress, as congressional Republicans are opposed to additional intervention in the mortgage market and are philosophically opposed to a bank tax. This should be confirmation that the administration realizes that a mass-refinance program can only be achieved by legislation and not by regulatory fiat.”

Jaret Seiberg, senior policy analyst, Guggenheim Securities: “The question is whether Congress will enact this into law. To us, that is a very high hurdle in an election year. Republicans will be loathe to give the president a political win and we expect they will portray this as a policy that rewards the irresponsible at the expense of the responsible. Yet one should not dismiss this idea outright. We believe it may be far less expensive for the government than the market may believe. That could make it difficult for Republicans from states still suffering from housing woes to object.”

Alec Phillips, economist, Goldman Sachs: “While the universe of eligible borrowers isn’t entirely clear, this implies that the legislation might go beyond refinancing loans backed by Fannie Mae and Freddie Mac and could also allow refinancing of loans held by investors or banks. Given the stalemate in Congress on most housing-related issues at present, the fact that the president is seeking congressional approval should probably be interpreted as a sign that the administration has taken its own refinancing efforts as far as it can without legislation.”

Issac Boltansky, policy analyst, Compass Point Research & Trading: “While the details of the plan were almost nonexistent, the broad contours of the plan lead us to believe that the likelihood of successfully enacting it are exceptionally low. We are concerned that the proposal would have to be enacted legislatively, that it would call on the government taking on much more mortgage risk, and that the corresponding proposed bank tax will serve as a political wedge.”

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