First Round of Pilot Rental Initiative Completed with 2,500 Homes Sold

The first round of winners has been
selected to purchase foreclosed real estate from Freddie Mac and Fannie
Mae.  The Federal Housing Finance Agency
(FHFA) announced today that 2,500 single family homes had been awarded to successful
bidders under a pilot initiative to convert real estate acquired by the two
government sponsored enterprises (GSE) through foreclosure into rental property. 

Successful candidates for purchasing properties
from the GSE’s real estate portfolio (REO) had undergone several steps in a
qualification process before being permitted to bid on the houses which they had
to agree to hold and rent for a period of time before reselling. 

The properties were offered in sale
pools which were geographically concentrated in various locations across the
United States.  The GSEs, FHFA and other federal
agencies involved, Departments of Treasury, Housing and Urban Development,
Federal Deposit Insurance Corporation and the Federal Reserve, had several
goals
for the program.  They hoped to
relieve the GSEs of the costs and administrative burdens of managing thousands
of foreclosed properties, alleviate the blight imposed on communities by large
number of vacant and possibly deteriorating properties, increase the rental
stock, while at the same time not flooding the market with distressed
properties.

 FHFA described the response to the pilot
initiative as “robust with strong qualified bidder interest.”  Some 4,000 responses were received to the
initial “Request for Information” issued by the program sponsors last February,
however beyond announcing that the awards had been made FHFA released no
information on the names or even the numbers of successful bidders.

“FHFA
undertook this initiative to help stabilize communities and home values in
areas hard-hit by the foreclosure crisis,” said Edward J. DeMarco, Acting
Director of FHFA. “As conservator of Fannie Mae and Freddie Mac, we believe
this pilot program will assist us in achieving our objectives and help to
maximize the benefit to taxpayers. We are pleased with the response from the
market and look forward to closing transactions in the near future.”

…(read more)

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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.

…(read more)

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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 Apps Pull Back From Multi-Year Highs

Mortgage
application volume
as measured by the Mortgage Bankers Association’s (MBA) Market
Composite Index fell 7.1 percent during the week ended June 22. The change was
the same for both seasonally adjusted and unadjusted data.  Responses to MBA’s Weekly Mortgage
Applications Survey send the Refinance Index down 8 percent from the week ended
June 15 and the refinancing share of mortgage activity decreased from 80 percent of total applications
to 79 percent.  The seasonally
adjusted Purchase Index was down 1 percent from a week earlier while the
unadjusted index decreased 2 percent week-over-week and 3 percent from a year
earlier.

“Refinance volume fell
last week due largely to a fall-off in refinance applications for government
loans, which had more than doubled the prior week,” said Michael Fratantoni,
MBA’s Vice President of Research and Economics.  “The large swings in
activity were due to the implementation of FHA’s new premiums on streamline
refinances, and borrowers timing their applications to lower their premiums.”

“The decline in the refi index isn’t particularly troubling considering
the past two weeks saw the highest levels since early 2009,” says
Mortgage News Daily’s Matthew Graham.  “The pop higher in apps was fueled not only by the drop in FHA MIPs
on June 11th, but also by fresh record low rates, as well as the
announcements by several big box lenders that they’d no longer be
accepting open access (or “different servicer”) streamline
applications.  These factors not only helped concentrate application
volume in the previous two cycles, but the pull-back in open access availability
likely weighs on the current cycle as it raised new hurdles for some
borrowers, or at the very least, decreased the market’s overall capacity
to churn out streamlines.  Bottom line: this week’s drop makes sense.”

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

Interest rates were
mixed.  The contract rate for the most
popular product, the conforming (loan balance of $417,500 or less) 30-year
fixed-rate mortgage (FRM)   Jumbo 30-year FRM, (balances over $417,500)
increased to 4.12 percent with 0.35 point from 4.06 percent with 0.38 point and
the effective rate increased as well.   

The average contract
interest rate for 15-year fixed-rate mortgages decreased to 3.24 percent from
3.25 percent, with points decreasing to 0.44 from
0.45. The effective rate decreased from the previous week.

The average contract
interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to
3.71 percent from 3.72 percent, with points decreasing to 0.46 from 0.47. The
affective rate decreased.

Adjustable rate
mortgages (ARMs) had a 4 percent share of mortgage applications filed during
the week.  The average contract interest
rate for 5/1 ARMs increased to 2.81 percent from 2.75 percent, with
points increasing to 0.41 from 0.33. The
effective rate increased from last week.

All interest rates
quoted are for loans with an 80 percent loan-to-value ratio and points include the
origination fee. 

 MBA’s 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.  The base period and value for all indexes is
March 16, 1990+100.

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