Google Ends Mortgage Ads; Streamlines to be Nixed from FHA Compare Ratios; Servicing Agreement Bumping Along

This is
Black (African-American) History Month. The event began as Black History Week
in 1926. For many years, the second week of February was set aside for this
celebration to coincide with the birthdays of abolitionist/editor Frederick
Douglass and Abraham Lincoln but then expanded in 1976 into Black History
Month. The 2010 census counted 42 million black (either a single ethnicity or a
combination of races) people in the U.S., nearly 14% of the population. Looking
at the states, New York had the highest population with 3.3 million blacks,
followed by Florida, Texas, Georgia, California, North Carolina, Illinois,
Maryland, Virginia and Ohio. In terms of percentages of overall state
population, Mississippi led the nation with 38%, followed by Louisiana (33),
Georgia (32), Maryland (31), South Carolina (29) and Alabama (27).

When NASA first started sending up astronauts, they quickly discovered that
ballpoint pens would not work in zero gravity.  To combat the problem,
NASA scientists spent a decade and $12 billion to develop a pen that writes in
zero gravity, upside down, underwater, on almost any surface including glass
and at temperatures ranging from below freezing to 300 centigrade. The Russians
used a pencil. There’s a lesson in that amusing tale for mortgage bankers and
Realtors – I just don’t know what it is. I do know that the definition of
“deleveraging” is, “The process or practice of reducing the level of
one’s debt by rapidly selling one’s assets.” As it turns out, Equifax reported
that U.S. consumers sharply reduced
their debts by 11% last year, from $12.4 trillion to $11.1 trillion.

This news
will prompt many lenders to throw a ticker-tape parade that will rival the NY
Giants football event today. HUD and the FHA have long promoted the FHA
Streamline Refinance as a useful tool to allow responsible homeowners to save
thousands of dollars by refinancing at today’s low interest rates. FHA-insured
borrowers must be current, and in theory they can refinance into today’s lower
rates without requiring additional underwriting. “However, it has become
apparent that some of our lending partners are reluctant to offer this product
widely because of concerns about taking
on the risk of a loan which they may not have underwritten and the potential
adverse impact such a loan may have on their FHA Compare Ratio
. In order to
expand the availability of this product for eligible borrowers, FHA will make
changes to the way in which FHA Streamline Refinance loans are displayed in the
Neighborhood Watch Early Warning System (Neighborhood Watch). Streamline Refinances will be removed from
the public compare ratio in Neighborhood Watch
, but lenders will still be
able to view their own traditional compare ratio (with streamlines included).”
The Announcement

All eyes
are on California as the deadline approaches for state officials to sign onto
the multibillion-dollar foreclosure abuse settlement.  As the largest remaining holdout,
California appears to leaning towards signing, which could potentially increase
the settlement from $19 billion to upward of $25 billion. New York seems
to be acting on the same lines
. (Do you think the AG’s are texting with
each other?) Part of the deal for these two states would be the preservation of
the right to investigate banks’ past misdeeds and adding regulation to ensure
that financial institutions adhere to the deal and that the money actually
reaches struggling homeowners.  As it stands now, the deal would allocate
$17 billion specifically for principal reductions and other relief for up to
one million borrowers whose homes are underwater. The 750,000 families
whose homes have been foreclosed would receive checks for about $2,000. A deal
has been in the making for the past 13 months, as the settlement has been
delayed on multiple occasions, so a lot is riding on the decisions of the
California and New York Attorneys General – if they do sign on, a finalized
deal will come much sooner than later.

As the
foreclosure abuses settlement deal finalizes people are getting a better idea
of the numbers involved.  The amount that home mortgage securities
investors will have to pay is now projected to be up to $40 billion, which,
according to the government, would act as a “down payment” for future principal
reduction initiatives from future settlements. The White House plans to
litigation as a key tool for procuring additional sums from large financial
institutions that will be used to further aid for struggling borrowers.  This
is part of a trend that has seen the Obama administration escalate efforts to
help US borrowers-in addition to the finalization of the foreclosure and loan
abuses settlements, a new state and federal unit has been created to
investigate mortgage-related fraud.

I will never be an internet mortgage marketing whiz kid. And I guess Google
thinks something similar – on the heels of several office closures, Google has discontinued its mortgage rate
advertising platform Google Mortgage Advisor after two years of operation

Apparently the decision was based on the product’s poor performance and a
company initiative to de-clutter by shutting down programs that aren’t as
successful as projected. Mortgage Advisor was discontinued in most US states in
November with the exception of Alabama, Alaska, California, Pennsylvania and
DC, though lenders who advertised on the platform and mortgage technology
vendors believed that the part closure was only temporary.  Google at the
time framed the decision as a strategy that would allow the company to better
focus on a smaller market, tweak the program as necessary, and then implement
the improved version on a national scale once more.  Lenders were
apparently not notified of the discontinuation and received a rather rude
surprise upon trying to log into their accounts… Some users believe that, poor
performance aside, the program was scrapped because (in the words of a former
customer who wanted to be kept anonymous) “mortgage is kind of a dirty word
across the industry.”   The fact that other Google Advisor product
searches like credit cards, certificates of deposit, and checking and savings
accounts still remain would suggest as much.

changes to the Home Affordable Refinance Program (HARP) present both
opportunities and challenges to lenders and services. DataQuick, a provider of
advanced real estate information solutions powered by data, analytics and
decisioning, has already responded with timely new offerings that quickly
identify eligible loan modification candidates. Through the application of
proprietary analytics on its nationwide property database, DataQuick has identified 6.7 million borrowers who meet the new
eligibility requirements and will most likely benefit from the revised program
Lenders and servicers can easily match their current portfolio to the database
to identify the best candidates for loan modification. HARP eligibility
requires that candidates have no late mortgage payments in the past six months
and no more than one late payment in the past 12 months.” Sounds pretty nifty –
for more information contact your DataQuick sales representative or Wendy
Barnett at (And nope, this wasn’t a paid ad.)

I am not
an expert in compliance, but this caught my eye: in the January 24th Federal
Register, HUD has proposed a rule  (ECOA/Reg B) that prohibits banks from
discriminating against borrowers based on ethnicity, religion, national origin,
gender, marital status, age (provided the applicant has the capacity to
contract), income from public assistance, or the exercise of any Consumer
Credit Protection Act.  The Fair
Housing Act prohibits discrimination on account of familial status or handicaps
These are very, very recent developments-both rules go into effect on March 5. 
It boggles the mind a bit, but better late than never, one supposes. The
January 24th Federal Register entry can be read by clicking

markets certainly don’t care about marital status or gender, and yesterday we
saw a nice little half-point rally (improvement) in the U.S.10-yr with it
closing at 1.90%. With no scheduled news in this country, Treasuries gained
today as “risk aversion” was back on worries about Greece. MBS prices improved from
nearly .5 on 30-year 3.0% coupons to just roughly unchanged on 4.5’s through 6.5’s,
as one would expect. And then overnight Greece’s main political parties
reportedly missed a deadline for responding to demands for more austerity
measures. Negotiations between Greece and its private creditors are on hold
while officials work on a rescue program with the EU, the International
Monetary Fund and the European Central Bank. Greece faces a 14.5 billion euro bond
repayment in less than six weeks. It won’t be able to make the payment without
international help.

Here in
the states, once again there is no news of substance although we do have a $32
billion 3-yr note auction at 1PM EST. Chairman Bernanke is scheduled to repeat
his recent testimony before the House Budget Committee to the Senate Budget
Committee beginning at 10AM EST, but don’t look for anything new. MBS Prices are down.

HIGH SCHOOL — 1957 vs. 2010 (Part 2 of 2)…

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Geithner Outlines Accomplishments, Future of Financial Reform

Treasury Secretary Timothy Geithner told
the Financial Stability Oversight Council that the financial system is getting
stronger and safer and that much of the excess risk-taking and careless
financial practices that caused so much damage has been forced out.  However, he said, “These gains will erode
over time if we are not able to put our full reforms into place.”

He outlined the basic framework has been
laid, with new global agreements to limit leverage, rules for managing the
failure of a large firm and the new Consumer Financial Protection Bureau (CFPB)
up and running, and the majority of the new safeguards for derivatives markets proposed.  Geithner ticked off the major accomplishments
of reform.

First, banks now face much
tougher limits on risk which are critical to reducing the risk of large
financial failures and limiting the damage such failures can cause.  The focus in 2012 will be “on defining the
new liquidity standards and on making sure that capital risk-weights are
applied consistently.”

 The new rules are tougher on
the largest banks that pose the greatest risk and are being complemented by
other limits on risk-taking such as the Volcker Rules and limits on the size of
firms and concentration of the financial systems.  These will not apply only to banks but to
other large financial institutions that could pose a threat to financial system
stability and this year the Risk Council will make the first of these

Second, the derivatives market will,
for the first time, be required to meet a comprehensive set of transparency
requirements, margin rules and other safeguards.  These reforms are designed to move
standardized contracts to clearing houses and trading platforms and will be
complemented with more conservative safeguards for the more complex and
specialized products less amenable to central clearing and electronic
trading.  These reforms, the balance of
which will be outlined this year, will lower costs for those who use the
products, allow parties to hedge against risk, but limit the potential for
abuse, the Secretary said. 

Third, is a carefully designed set
of safeguards against risk outside the banking system and enhanced protections
for the basic infrastructure of the financial markets: 

  • Money market funds will have new
    requirements designed to limit “runs.”
  • Important funding markets like the
    tri-party repo market are now more conservatively structured.
  • International trade repositories are
    being developed for derivatives, including credit default swaps.
  • Designated financial market utilities
    will have oversight and requirements for stronger financial reserves;

Fourth; there will be a stronger set
of protections in place against “too big to fail” institutions.  The key elements are:

  • Capital and liquidity rules with
    tough limits on leverage to both reduce the probability of failure and prevent
    a domino effect;
  • New protections for derivatives,
    funding markets, and for the market infrastructure to limit contagion across
    the financial system;
  • Tougher limits on institutional size;
  • A bankruptcy-type framework to
    manage the failure of large financial firms.
    This “resolution authority” will prohibit bailouts for private
    investors, protect taxpayers, and force the financial system to bear the costs
    of future crisis.

Fifth, significantly stronger
protections for investors and consumers are being put in place including the
CFPB which is working to improve disclosures for mortgages and credit cards and
developing new standards for qualified mortgages.  New authorities are being used to strengthen protections
for investors and to give shareholders greater voice on issues like executive

Geithner pointed to the failure of
account segregation rules to protect customers in the MF Global disaster as proof
of the need for more protections and said that the Council will work with the
SEC and the Commodity Futures Trading Council on this problem.   

Moving forward, reforms must be
structured to endure as the market evolves and to work not just in isolation
but to interact appropriately with each other and the broader economy.  “We
want to be careful to get the balance right-building a more stable financial
system, with better protections for consumers and investors, that allows for
financial innovation in support of economic growth.” 

First, he said, we have to make sure
we have a level playing field at home; that financial firms engaged in similar
activity and financial instruments that have similar characteristics are
treated roughly the same because small differences can have powerful effects in
shifting risk to where the rules are softer. 
A level field globally is also important, particularly with reforms that
toughen rules on capital, margin, liquidity, and leverage, as well as in the
global derivatives markets.  “In these areas we are working to discourage
other nations from applying softer rules to their institutions and to try to
attract financial activity away from the U.S. market and U.S. institutions.” 

It is necessary to align the
developing derivatives regimes around the world; preventing attempts to soften
application of capital rules, limiting the discretion available to supervisors
in enforcing rules on risk-weights for capital and designing rules for
resolution of large global institutions.  Also, because some U.S. reforms are different
or tougher from rules in other markets, there needs to be a sensible way to
apply those rules to the foreign operations of U.S. firms and the U.S.
operation of foreign firms.

 The U.S. also needs to move
forward with reforms to the mortgage market including a path to winding down
the government sponsored enterprises (GSEs.) 
The Administration has already outlined a broad strategy, Geithner said,
and expects to lay out more detail in the spring.  The immediate concern is to repair the damage
to homeowners, the housing market, and neighborhoods.  The President spoke this week about the range
of tools he plans to use.  Our ultimate goals
are to wind down the GSEs, bring private capital back into the market, reduce
the government’s direct role, and better target support toward first-time
homebuyers and low- and moderate-income Americans.

Geithner said the new system must
foster affordable rentals options, have stronger, clearer consumer protections,
and create a level playing field for all institutions participating in the
system.  For this to happen without
hurting the broader economy and adding further damage to those areas that have
been hardest hit, banks and private investors must come back into the market on
a larger scale and they want more clarity on the rules that will apply. 

Credit availability is still a problem
and there is a broad array of programs in place to improve access to credit and
capital for small businesses.  As
conditions improve, it is important that we remain focused on making sure that
small businesses, a crucial engine of job growth, have continued access to
equity capital and credit.

Many Americans trying to buy a home
or refinance their mortgage are also finding it hard to access credit, even for
FHA- or GSE-backed mortgages.  The Administration has been working closely
with the FHA and FHFA to encourage them to take additional measures to remove
unnecessary barriers and they are making progress.  They will probably outline additional reforms
in the coming weeks.

Bank supervisors, in the normal
conduct of bank exams and supervision, as well as in the design of new rules to
limit risk taking and abuse, must be careful not to overdo it with actions that
cause undue damage to the availability of credit or liquidity to markets.

Geithner said the U.S. financial
system is getting stronger
, and is now significantly stronger than it was
before the crisis.  Among the achievements:

  • Banks have increased common equity
    by more than $350 billion since 2009.
  • Banks and other financial
    institutions with more than $5 trillion in assets at the end of 2007 have been
    shut down, acquired, or restructured.
  • The asset-backed commercial paper
    market has shrunk by 70 percent since its peak in 2007, and the tri-party repo
    market and prime money market funds have shrunk by 40 percent and 33 percent
    respectively since their 2008 peaks.
  • The financial assistance we provided
    to banks through TARP, for example, will result in taxpayer gains of
    approximately $20 billion.

The Secretary said the strength of
the banks is helping to support broader economic growth, including the more
than 3 million private sector jobs created over 22 straight months, and the 30
percent increase in private investment in equipment and software.  
Broadly, the cost of credit has fallen significantly since late 2008 and early
2009.  Banks are lending more, with commercial and industrial loans to
businesses up by an annual rate of more than 10 percent over the past six

He concluded by saying that no
financial system is invulnerable to crisis, and there is a lot of unfinished
business on the path of reform.  The reforms are tough where they need to
be tough.  “But they will leave our financial system safer, better able to
help businesses raise capital, and better able to help families finance safely
the purchase of a house or a car, to borrow to invest in a college education,
or to save for retirement.  And they will protect the taxpayer from having
to pay the price of future crisis.”

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Homeowners Continue Shift Away from Cash-Out Refinancing

Homeowners who refinanced their homes during the fourth
quarter of 2011
either refinanced for about the same amount or actually brought
cash to the table according Freddie Mac. 
Fewer than 15 percent of those who refinanced during the quarter
increased their loan amount by 5 percent or more.  This is the lowest percentage of “cash-out”
borrowers in the 26 years that Freddie has been tracking the statistics.  During those 26 years covering 1985 to 2010
the average percentage of cash-out borrowers was 46 percent.

Thirty-seven percent of refinancing homeowners took out new
loans of approximately the same size as the old loan but nearly half (49
percent) actually brought cash to the table, reducing the amount of the new
loan to a median ratio of .74 of the old loan. 
The percentage of “cash-in” borrowers is also a 26-year record.

The fourth quarter figures are a stark contrast to the
pattern of refinancing during the last years of the housing boom.   During
eight consecutive quarters (Q4 of 2005 to Q3 of 2007) cash-out loans exceeded
80 percent of all refinancing and in none of those quarters did more than 8
percent of homeowners reduce the size of their mortgages when refinancing.

Borrowers who refinanced achieved a new interest rate about
1.4 percentage points lower than their old mortgage, a 26 percent improvement.  These borrowers will save a median of $2,700
during the first year if they have a $200,000 loan.

The 15 percent who did cash out took an estimated $5.5
billion in net equity out of their homes, representing 3.0 percent of the total
refinanced.  This was down from $5.6
billion and 3.7 percent in the third quarter. 
Adjusted for inflation this was the lowest level since the third quarter
of 1995.  During the peak period for
cash-out refinancing, the second quarter of 2006, homeowners cashed out $83.7
billion through refinancing, 31.1 percent of the total value of all transactions.   

Freddie Mac said that the mortgages refinanced had been in
place for a median of four years and the underlying collateral had decreased in
value by a median of 4 percent during that time.  The Freddie Mac House Price Index shows about
a 23 percent decline in its U.S. series during that four year period.  Thus, Freddie Mac says, “Borrowers who refinanced in
the fourth quarter owned homes that had held their value better than the
average home, or may reflect value-enhancing improvements that owners had made
to their homes during the intervening years.” 
This statement does not seem to recognize the possibility these
borrowers had been able to refinance solely because their homes had held value
and thus self-selected their loans for analysis.   

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Mortgage rates hit another new low

Just one day after President Obama detailed a proposal to enable millions of homeowners to refinance to record-low mortgage rates, those rates notched another record.

Housing Assistance 2012: Another Herculean Task for the FHA

Beginning the 37th month of his presidency, the Obama Administration today announced a laundry list of new programs to help struggling homeowners, crack down on abusive lending practices, make mortgage documents easier to read, convert REO to rental, and other assorted initiatives.  Some require Congressional approval; others are a work in progress, and a couple can begin quickly.
At the heart of the announcement is a broad new refinance program with the venerable FHA stepping in (once again) to help save the mortgage market by offering current but underwater non-FHA borrowers another lifeline.
Concurrently, the Administration appears to be on the verge of a broad-based “REO-to-Rental” initiative by announcing a pilot project to be led by FHFA, HUD, and Treasury.  I think the Administration is smart to move this initiative forward as they certainly have the political cover through last year’s RFI process.  They asked for comments and suggestions and reportedly received thousands of responses.  They can now say we are implementing what America said they wanted.   Of course, we do not yet know exactly how it will work.
Lawmakers and mortgage industry professionals have previously questioned whether or not FHA can handle yet another herculean task.  Recall in 2007 when the mortgage market sputtered and into 2008 when new higher loan limits were unveiled, FHA saw its share of the mortgage market jump exponentially in a matter of months. What was a $350 billion book of business in 2005 has today mushroomed to $1 trillion with more than 7.4 million homes with FHA insurance.
Since presumably these would be riskier borrowers (higher LTVs and underwater) it remains to be seen:

  1. If Congress will give FHA the authority to increase its current LTV caps.
  2. How OMB will “score” the proposal thus dictating the mortgage insurance pricing?
  3. Will proposed new bank fees and presumably higher premium revenue off-set the expected “cost” to FHA?

FHA is reportedly considering placing these loans in an insurance fund separate from its current Single Family books of business, but could ultimately require the FHA to invoke its “permanent indefinite” budget authority to keep it afloat (as opposed to the self-sustaining Mutual Mortgage Insurance fund).
That said, the Administration indicated the cost of these programs will “not add a dime to the deficit” and will be off-set by a fee on the “Largest Financial Institutions.”  (Note: Congress might have an opinion here.)
Since FHA has not in recent memory refinanced borrowers with LTVs in the 120-140 range (presumably one of the groups targeted by the Administration), I think it will be difficult to estimate the performance of these loans over time and thus their impact on FHA’s actuarial foundation regardless of which fund they place them in.  While the FHA “short re-finance” program announced in 2010 allowed a 115% CLTV, it has had very little participation thus making it difficult to gauge performance relative to what could be even higher LTV participants.
It should be noted that the Administration is targeting borrowers who have made 12 consecutive payments so one could argue that despite the fact they are underwater they have been able to afford their mortgage payments – presumably in some cases for several years.  So does that mitigate some of the potential risk meaning that they will certainly be able to afford reduced monthly payments?  But again, given FHA’s limited experience with borrowers outside their established guidelines and requirements predicting their performance with any degree of certainty is difficult at best.
And assuming those previously non-FHA borrowers default on their new FHA loan, who do you think will now be at-risk with an underwater property?  Again, the Administration stated these programs “will not add a dime to the deficit” – I hope they are right.
FHA’s actuarial soundness has been rocked by the on-going erosion of house prices nationwide which has led to three consecutive years of declines in their capital reserve ratio.  The best medicine for FHA is house price appreciation and the positive ripple effect of increased value to their housing portfolio.  But they have been waiting three years for that to happen.
Welcomed news as part of this new refinance program is they would be removed from an FHA lender’s compare ratio within Neighborhood Watch (FHA’s public database of lender’s default rates compared to its peers in a given geographic region).  That said, I suspect FHA will establish a separate category of compare ratios for this book of business, as it did for Negative Equity Refinances and the Hope For Homeowner (H4H) program.
So while this action will remove a potential barrier to participation, lenders should be cautioned that performance will still matter and they should stand ready for increased scrutiny especially by the HUD OIG.
I give the Administration credit for launching another round of housing assistance as too many homeowners continue to struggle.  Putting politics aside on the surface it appears to be the right and proper thing to do, however it remains to be seen the level of participation (and degree of Congressional acceptance) and ultimately what cost, if any, to the taxpayers – most of which have grown weary of the nagging housing crisis.
Note: We will continue to follow this initiative with keen interest as it makes its way through Congress and will offer periodic updates as developments warrant.

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