First Horizon’s Buybacks; Buyback Legal Chatter; Basel III and Construction Loans; Congress Snubs Small Business?

I have been subtly warning groups during speeches, and writing in this commentary, about the implications of Basel III. Most of the focus is on servicing & the value of it. But did you know that under the new Basel III rules, construction lending would likely go into the “high risk commercial real estate” category and require a 150% risk weighting? “Lenders would seek deals where a developer would contribute a substantial amount of cash equity; while banks would be less likely to let developers rely just on the equity from appraisals” per American Banker. And the government and the Fed are asking why banks aren’t lending? This is just another reason.

Last month we sold the house where my kids grew up, and I had a handyman remove the doorframe where we marked heights on birthdays. I am not mentioning this to turn the daily into a Hallmark card, but because it reminded me of one thing that the press seems to forget: a house is a home and not a share of stock. And when it comes to that, the popular press seems to forget that people need a place to live, that people want a good school district for their kids, a place to get to know the neighbors, a place to create an emotional attachment. I could go on and on, but there are very concrete reasons why people who are underwater on a house still make the payments, why many who supposedly saw the real estate decline didn’t sell their home, and why so many people don’t care about minute fluctuations in the price of housing based on the latest metric.

I’ll get off my soapbox, and get on with business: I think that the last time the S&P/Case-Shiller Home Price Index went up was during the Eisenhower Administration – until now. Seriously, for the first time in eight months the S&P/Case-Shiller Home Price Indices rose over levels of the previous month.  Data through April 2012 showed that on average home prices increased 1.3% during the month for both the 10- and 20-City Composites. Prices are still down 2.2% for the 10-City and 1.9% for the 20-City over figures for one year earlier but this is an improvement over the year-over-year losses of 2.9% 2.6% recorded in March. This report followed Monday’s news that New Home Sales jumped 7.6% in May to 369k and was up 19.8% from a year ago, and last week’s Existing Home Sales, Housing Starts and NAHB HMI which all contained some positive signs.

How’s this to grab one’s attention: “Congressional Subcommittee REFUSES Small Business Brokers and Appraisers a Seat at the Table.” The notice from the NAIHP goes on, “For the second time in a week, the Subcommittee on Insurance, Housing and Community Opportunity, Chaired by Rep. Judy Biggert (R-Illinois), refused small business housing professionals the right to be represented during Congressional testimony.” Here you go: http://www.naihp.org/.

Yes, there are plenty of rumors that the agencies are hotly pursuing buybacks to recoup taxpayer losses, and that the agencies are losing personnel except for QA & auditing. But that reasoning doesn’t help companies like First Horizon National Corp. It “cited new information it recently received from Fannie Mae as the basis for incurring the $272 million charge this second quarter. About $250 million will go to repurchase loans made with “inadequate or incorrect” documentation, and $22 million is being charged to address pending litigation.” I don’t make this stuff up.

Last week I received a legal question about buybacks. “I was asked by a former customer of a major investor’s correspondent lending group about how others are handling repurchase/make-whole requests on older vintage loans.  His experience has been that the investor will ask to be reimbursed for losses associated with loans that have been foreclosed and disposed of without being given an opportunity to refute the alleged rep and warrant deficiency.  He has had to hire a law firm to argue each of these requests and the major investor has backed off each time. Normally, when a correspondent is still active, there is obviously leverage against the correspondent under an implied or actual threat of being terminated as a customer if a make-whole is not made, and when an investor is no longer in the correspondent business, I’ve heard rumors of it being more inclined to back down but sometimes taking a former customer to court or ‘saber rattling’. Needless to say, it is expensive to have a lawyer prepare a rebuttal to a make-whole request, just to have the investor ultimately back-off – what to do?”

I turned this over to attorney Brian Levy, who wrote, “Your question about investor willingness to sue originators over repurchase claims is difficult to answer with specificity.  My clients have been able to settle and/or avoid litigation in every engagement that I have undertaken in this area. That does not mean, however, that the threat of investor repurchase litigation over individual loans is not real or that litigation is not occurring, but it has been my experience that these disputes can be resolved (or dismissed) through extensive and detailed settlement negotiations and information exchange.  Litigation over individual repurchase claims may be fairly unusual now, but so were repurchase claims entirely prior to 2007-2008. Due to the unique nature of each originator’s position and the facts around applicable repurchase claim(s), however, it would be reckless to assume one will not be sued on specific claims based on what is generally occurring in the industry or based on what may have been past investor appetite for litigation (although these are important elements to consider in one’s strategy).”

Brian goes on. “For example, much depends on the facts and circumstances of the loan(s) in question, whether there are any other relationships between the parties that can be leveraged (loans in the pipeline, warehouse lines etc.) the overall quality, stability and reputation of the originator and, significantly, the parties’ tolerance for risk, availability or need for reserves and the desire for finality.  Moreover, investor and originator appetite for lawsuits may change over time as strategies can change in organizations and as the few cases that have been filed begin to yield decisions that are more or less favorable to one side or another. Even the tenor of discussions or lack of attention to the matter can impact a party’s willingness to file a lawsuit. All of these issues should be explored with legal counsel as part of an originator’s comprehensive repurchase management strategy.” (If you’d like to reach Brian Levy with Katten & Temple, LLP, write to him at blevy@kattentemple.com.)

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

Down in California, it is time again for the CMBA’s Western Secondary conference. (I’ve been wandering around that San Francisco conference since 1986 – if those halls could talk…) The CMBA has presentations on “QM, QRM, the CFPB, Agency Direct Delivery – Reviving the Lost Art of Servicing Retained Execution, Compliance issues Facing State Licensed Mortgage Banks Today and How Regulatory Change will Impact Your Business and the Secondary Market, Manufacturing Quality – Steps to Produce a Quality Loan (Operation Focus),” and several other topics. Check it out.

In light of the increasing number of non-conforming transactions where the departure residence is retained by the borrower and is in a negative equity position, Wells Fargo issued a reminder that underwriters must weigh any and all risk factors evident in the loan file.  Each case should be weighed individually, as there are only so many situations underwriting guidelines can predict.  The Wells Seller Guide now states that, in a case where the departure residence won’t be sold at the time of closing and is in a negative equity position, paying down the lien or using additional reserves to cover the negative equity may be required to reduce overall risk.

Wells has issued another reminder that a signed Borrower Appraisal Acknowledgement is required for all loans.  The Acknowledgment, whether it’s the Wells-issued form or a custom document, must include the property address, complete lender name, borrower name, borrower signature, and borrower signature date.  If the form has checkboxes where the borrower can make a choice, these boxes must be ticked.

Due to changes to FHA Single Family Annual Mortgage Insurance and Up-Front Mortgage Insurance Premiums announced by HUD back in March, one of which requires lenders to determine the endorsement/insured date of the FHA loan as part of a Streamline Refinance transaction, Refinance Authorization results will need to be submitted to Wells with the closed loan package.  These results are necessary to ensure that the accurate MIP was applied.  This applies to all FHA Streamline Refinances with case numbers assigned on or after June 11, 2012, while loans purchased through Pass-Thru Express are excepted.

Wells’ government pricing adjusters are set to change on July 2nd.  For VA loans with scores between 620 and 639, the adjuster will go from -0.750 to -1.500.  The adjuster for loans with scores between 640 and 679, currently at -0.250, will change to -0.500.  This affects Best Effort registrations, Best Effort locks, Mandatory Commitments, Assignments of Trade, and Loan Specified Bulk Commitments.

How sensitive are our markets to European news? Sure, instead of buying our 10-yr yielding 1.65% you could buy a Spanish 10-yr yielding 6.74%. But there is instability, evidenced by this note from an MBS trader yesterday: “News of Merkel stating Europe would not have shared liability for debt ‘as long as she lives’ caused Treasuries to immediately surge higher, only to be met by better real money selling of 7s.  While the selling did help to stall the rally, the true relief didn’t come until Reuters posted a correction to its initial release, re-quoting Merkel as having said Europe would not have ‘total shared’ liability for debt as long as she lives.  The amendment took Treasuries off the highs ahead of the 2yr auction…”

Say all you want about the market, bond prices and yields are not doing a whole heckuva lot. Tuesday the 10-yr closed at 1.63%, very close to where it’s been all week, although there was some intra-day volatility blamed on Europe. (European problems will be with us for years, and paying attention to intra-day swings can become wearisome after years…) For agency mortgage-backed securities, volume has been around “average” all week, with the usual buyers (the Fed, hedge funds, money managers, overseas parties) absorbing it. Up one day, down another – yesterday was down/worse by about .250, which was about the same as the 10-yr T-note. We could have been helped by the Conference Board’s Consumer Confidence index which dropped for a fourth straight month, to 62 from a revised 64.4 in the prior month, but nope.

No one is getting any younger… (Part 1 of 2)
I very quietly confided to my best friend that I was having an affair. She turned to me and asked, “Are you having it catered?” And that, my friend, is the definition of ‘OLD’!

Just before the funeral services, the undertaker came up to the very elderly widow and asked, “How old was your husband?”
“98,” she replied. “Two years older than me.”
“So you’re 96,” the undertaker commented.
She responded, “Hardly worth going home, is it?”

Reporters interviewing a 104-year-old woman:
“And what do you think is the best thing about being 104?” the reporter asked.
She simply replied, “No peer pressure.”

I feel like my body has gotten totally out of shape, so I got my doctor’s permission to join a fitness club and start exercising.  I decided to take an aerobics class for seniors. I bent, twisted, gyrated, jumped up and down, and perspired for an hour. But, by the time I got my leotards on, the class was over.

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Mortgage Rates Finish Out Close To Unchanged After Bumpy Start

Mortgage Rates held steady to slightly weaker today, though some lenders recalled rate sheets in the afternoon as bond markets improved.  That helped the average Best-Execution rate get back near Friday’s offerings, which were among the best of the week last week.  Over the past two weeks, rates have been operating in a fairly narrow range resting on all-time lows.  Today’s rates are closer to those lows than most of the other sessions. 

On Friday, we noted that the gains brought many lenders back into the 3.625% Best-Execution territory.  That continues to be the case today, though several lenders have yet to reprice positively and are still closer to 3.75%.  Either way, it’s fair to say that we’re now hovering fairly consistently between 3.75 and 3.625 after being stuck at 3.875% for ages.  

(Read More:What is A Best-Execution Mortgage Rate?)

It was a choppy and volatile day for most markets, at least if we count the global market open which saw heavy buying in stocks and selling in bonds.  When bond markets sell-off, prices move lower and yields move higher.  Movements in those yields often equate to the interest rate movement in the mortgage market, albeit by varying degrees.  

The level of connection between broader markets and mortgage rates was fairly subdued today.  But for the most part, the bulk of the damage done to bond markets by news of Spain’s bailout, was seen in the overnight hours.  After some early morning jitters, bond markets kept improving into the afternoon, ultimately allowing some of the positive reprices in the mortgage market.  Apart from reaction to the Spanish bailout news, there was little else on the calendar today driving markets.

Long Term Guidance: We’d continue to advocate not trying to “get ahead” of current market movements as a high degree of uncertainty is pervasive.  While it’s a reasonably safe assumption that European concerns will generally help rates stay lower than they otherwise would be, that “otherwise would be” part is very much a moving target.  Best bet is to focus on the fact that rates are at their all time lows, and can change quickly based on events that aren’t “scheduled” or able to be forecast.  Risk vs reward for floating vs locking looks a bit larger than we’d like, but not out of the question for those who understand the risks and have an exit strategy if things don’t go their way.

Loan Originator Perspective With Rates At All Time Lows

Ted Rood, Senior Mortgage Consultant,  Wintrust Mortgage

We’ve seen lender rate sheets somewhat worse than it should be, given the price of mortgage backed securities.  That sometimes means rates have room to improve as lenders become more confident in their pricing models.  Floating still involves risk, despite the daily European chaos.  Risk versus reward probably favors locking if you’re not a gambler.

Brett Boyke Senior Mortgage Banker,  Wintrust Mortgage

Color me surprised by the way the mortgage and bond markets are performing today. I really thought we would see an adverse response rate wise to the Spain bail out, and we would see that fade towards mid week. 

Jeff Statz, Mortgage Advisor,  Network Funding, L.P.

MBS are looking to release some of the potential energy stored from last week’s sideways trading. This would be a great time to lock. If choosing to float, I would check the Rate Watch section in the morning and again in the afternoon for signs of weakness, keeping your hand over the Lock button.

Kent Mikkola #353976, Mortgage Consultant ,  M & M Mortgage, LLC #213677

Regardless of the room lenders may have to give up any more credit, floating is a risky proposition.

 

Today’s BEST-EXECUTION Rates 

  • 30YR FIXED –  3.75%
  • FHA/VA -3.75%
  • 15 YEAR FIXED –  3.125 edging down to 3.00%
  • 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
  • Rates could easily move higher or lower, but given the nearness to all time lows, there’s generally more risk than reward regarding floating
  • But that will always be the case when rates operate near all-time levels, and as 2011 showed us, it doesn’t always mean they’re done improving.
  • (As always, please keep in mind that our talk of Best-Execution always pertains to a completely ideal scenario.  There can be all sorts of reasons that your quoted rate would not be the same as our average rates, and in those cases, assuming you’re following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).

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Brookfield Speeds Ahead With Real-Estate Fund

Brookfield Asset Management, looking to raise a giant global opportunity real-estate fund in a brutal fundraising environment, is off to a good start with $2 billion at its first close.

April New Home Sales Bounce Back after March Drop

Sales of new single-family houses in April 2012 were at a seasonally adjusted annual rate of 343,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 3.3 percent above the March rate of 332,000 and is 9.9 percent above the April 2011 estimate of 312,000.  The March rate had originally been estimated at 328,000 so this revision somewhat moderates to -5.9 percent the sharp 7.1 percent decline which had been the focus of the March report.

On a non-seasonally adjusted basis there were an estimated 33,000 homes sold during the month, up from 32,000 in March.  This was the highest number of estimated monthly sales since April 2010 when there were 41,000 sales.  Sales one year earlier, April 2011, totaled 30,000.

At the end of April there were 146,000 new homes for sale (seasonally adjusted), more than half of which (88,000) were in the South.  The total represents a 5.1 month supply at the current sales pace, down from 6.7 months one year earlier when there were 174,000 new homes on the market.

Sales rose in all regions except the South where the annual rate was 177,000 units, down 10.6 percent from March but up 4.7 percent year-over-year. The rate in the Northeast was 28,000 units, up 7.7 percent from March and 16.7 percent from one year earlier.  The rate in the Midwest was 50,000, an increase of 28.2 percent and 22.0 percent respectively while in the West sales were at a rate of 88,000 units, up 27.5 percent and 12.8 percent.

The median sales price of new houses sold in April 2012 was $235,700 and the average sales price was $282,600 compared to $224,700 and $269,900 in April 2011.

MND received some reactions from industry analysts.  Andrew Grantham, an economist with CIBA World Markets said of the Census data “The slightly better figure reflected both a sharper rebound during the current month and some slight upward revisions to previous data. However, following a still sharp decline in March, the underlying trend in new home sales since the start of the year remains broadly flat, following the gradual uptrend towards the end of 2011. While this morning’s figures were slightly better than expected, reaction should be limited as markets remain preoccupied with events and news flow out of Europe.”

“The new homes sales data is much like what we saw from existing home sales yesterday,” according to Sean Incremona, Economist, 4Cast Ltd. “There is progress but still at a gradual pace. It is still baby steps. This increase of 343,000 still comes in below that February high, which was probably inflated by weather. It does look like we have found a bottom, which is encouraging, but it is still very slow progress at this point.”

Subodh Kumar, Chief Investment Strategist, Subodh Kumar and Associates said, “I don’t think this adds anything new for the market at this stage because there was some indication housing was bottoming out from yesterday’s numbers.

“It’s positive in the sense there have been various signs the pressure on housing is starting to abate. If new housing starts to pick up, it has a chain effect on the rest of the housing market.”

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