Drop in Refinancing Curtails Application Volume

The Mortgage Composite Index, a measure of loan application
volume, was down 6.7 percent on a seasonally adjusted basis and 6.6 percent
unadjusted during the week ended June 29 compared to the week ended June
22.  The Mortgage Bankers Association
(MBA) released the Composite and other results of its weekly Mortgage
Applications Survey this morning.

The decrease in mortgage volume was attributed to a drop of
8 percent in the Refinance Index which was in turn driven by a drop in
applications for government-backed refinancing loans.  The share of refinancing applications was 78
percent of all applications, down one percentage point from the previous
week.  Applications for HARP refinancing
which is available only to current Freddie Mac and Fannie Mae borrowers have represented
a quarter of all refinancing applications for the last two weeks.

The seasonally adjusted Purchase Index was up one percent
from the previous week.  The unadjusted
Purchase Index rose only slightly from the previous week and was down 7 percent
from the same week in 2011.  

Purchase Index vs 30 Yr Fixed

Click Here to View the Purchase Applications Chart

Refinance Index vs 30 Yr Fixed

Click Here to View the Refinance Applications Chart

Both the contract interest rate and the effective rate for
all loan types decreased during the week and several rates hit new all time
lows
.   The average contract rate for 30-year fixed
rate mortgages
(FRM) with conforming balances ($417,500 or less) decreased to
3.86 percent with 0.41 point from 3.88 percent with 0.40 percent, the lowest
rate for those loans since MBA began tracking them. 

Jumbo 30-year FRM (balances over $417,500) dropped four
basis points to 4.08 percent with points up to 0.38 from 0.35.  This was the second lowest jumbo loan rate in
MBA’s history.   

FHA-backed 30-year FRM also set a new benchmark low with an
average rate of 3.69 percent with 0.46 point compared to 3.71 percent with 0.46
point.   

Fifteen-year FRMs set a new low at 3.20 percent with 0.47
point.  The rate the previous week was
3.24 percent with 0.44 point.

The average 5/1 adjustable rate mortgage (ARM) rate fell to 2.76
percent with 0.45 point, down from 2.81 percent with 0.41 point.  Applications for ARMs represented only 4
percent of all mortgage applications.

All rate quotes are for loans with an 80 percent
loan-to-value ratio and points include the application fee.

The MBA’s weekly survey covers
over 75 percent of all U.S. retail residential mortgage applications, and has
been conducted weekly since 1990.  Respondents include mortgage bankers,
commercial banks and thrifts.  Base period and value for all indexes is
March 16, 1990=100.

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Proposal to Seize Underwater Mortgages via Eminent Domain not Well Received

The Board of Supervisors in the California county of San Bernardino has,
perhaps unintentionally, picked a fight with some of the giants of the real
estate industry.  The Board unanimously
approved a plan two weeks ago that would use eminent domain to seize underwater
mortgages
and restructure them for homeowners unable to sell or refinance the properties.

The Homeowner Protection Program, in which San Bernardino would partner with
the cities of Ontario and Fontana within its borders, is only broadly sketched
out at present but it has already provoked a strong reaction from the Securities Industry and Financial Markets
Association (SIFMA).  SIFMA claims to
represent the interests of hundreds of securities firms, banks and asset
managers.  The trade association fired
off a letter to the Board on Friday, cosigned by more than a dozen of its
member organizations, protesting the proposed actions.  “Based on publicly available information on
the Agreement,” the letter said, “we are very concerned that the good
intentions of the Board of Supervisors will instead result in significant harm
to the residents the Agreement intends to help.”

The thrust of the letter is that such an action as proposed in San
Bernardino would significantly reduce access to credit for mortgage borrowers.  “If eminent domain were used to seize loans,
investors in these loans through mortgage-backed securities or their investment
portfolios would suffer immediate losses and likely be reluctant to provide
future funding to borrowers in these areas. 
It is essential to remember that investors in mortgage-backed securities
channel the retirement and other savings of everyday citizens through their
investment funds.  This program may cause
loans to be excluded from securitizations, and some portfolio lenders could
withdraw from these markets.  In other
words, this program could actually serve to further depress housing values in
the county by restricting the flow of credit to home buyers”

The Los Angeles Times quotes David
Wert, a spokesman for the county as saying the country would use eminent domain
to condemn mortgages on properties that are underwater, that is the owner owns
more on the mortgage than the value of the home, and would then renegotiate the
mortgages at a lower amount.  Only
homeowners who are current on their mortgage payments would be eligible for the
program.

The move is intended to help stimulate the region’s hard-hit economy by
freeing up people who have been stuck in their homes, Wert said. “Real estate
is the foundation of the inland economy, 
 [It] is based on the building and
selling of homes, and this is one way to stimulate that again.”

The program is still in its initial stages and additional details will be
hashed out in public the spokesman on said. 

Among those signing the SIFMA letter one were the Mortgage Bankers
Association, American Bankers Association, National Association of Realtors®,
The Financial Services Roundtable, American Securitization Forum, and the
Residential Servicing Coalition.

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OCC Notes Fewer Banks Tightening Underwriting Standards

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

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

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

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

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

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

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

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

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

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

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Congress Hears Different Views on Appraisal Regulation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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OCC: Mortgage Performance Best Since 2008

Mortgage performance during the
first quarter of 2012 was the best in three years according to the Office of Comptroller
of the Currency’s (OCC’s) Mortgage
Metrics Report
.  Percentages of
mortgages that were 30 to 59 and 60 to 89 days delinquent were at the lowest
level since at least the first quarter of 2008 when Metrics was first published. 
The percentage of mortgages current and performing at the end of the
quarter was 88.9 percent up 1.1 percent from the previous quarter and 0.3
percent from a year earlier. OCC attributed the improvement in performance to
several factors including strengthening economic conditions, seasonal effects,
servicing transfers, and the ongoing effects of both home retention programs
and home forfeiture actions.

The quality of government guaranteed
mortgages
improved during the quarter with current and performing mortgages at
85.9 percent of the portfolio compared to 84.2 percent in the previous quarter but
down from 87.0 a year earlier.  Mortgages
serviced for the two government sponsored enterprises (GSEs) Fannie Mae and
Freddie Mac made up 59 percent of servicer portfolios and 93.7 percent of these
loans were current and performing, a percentage that has changed little over
the past year.

New foreclosures initiated during
the quarter were down 1.8 percent to 286,951 which OCC said reflected the
emphasis on home retention actions as well as a decrease in delinquencies.  Many servicers have also slowed new
foreclosures in response to changing servicing standards and requirements.  

Completed foreclosures increased to
122,979-up 5.9 percent from the previous quarter and 2.7 percent from the first
quarter of 2011.  The inventory of foreclosures in process increased from
the previous quarter to 1,269,921, but is down from 1,308,757 a year ago.  Deeds-in-lieu of foreclosure, and short-sales
brought the total number of home forfeiture actions to 185,781 during the
quarter, an increase of 1.9 percent from the fourth quarter of 2011 and 8.3
percent from a year earlier.

Servicers initiated 352,989 home
retention actions
during the quarter and have initiated more than 2.2 million
such actions including modifications, trial-period plans, and payment plans
over the last five quarters.  At the end
of the first quarter of 2012, 50.7 percent of modifications remained current or
were paid off.  Modifications made since 2008 that reduced borrower
monthly payments by 10 percent or more performed better (57.6 percent remained
current) than those that reduced payments by less than 10 percent (36.8
percent.)

On average, modifications
implemented in the first quarter of 2012 reduced monthly principal and interest
payments by $437, which is 31 percent more than modifications implemented
during the first quarter of 2011. HAMP modification reduced payments by $588 on
average and those modifications performed better than others, with 68.2 percent
remaining current compared to 53.4 percent of modifications done by others.  OCC said HAMP’s performance reflects the
significantly reduced monthly payments, the program’s emphasis on affordability
relative to borrower income, required income verification, and the successful
completion of a required trial period.

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