It has been 5 years since Thornburg
Mortgage filed for Chapter 11. For folks not around then, Thornburg
Mortgage Inc. was an American corporation headquartered in Santa Fe, New
Mexico. It began in 1993, but had a hard time of it from 2007 to 2010,
certainly after filing in the spring of 2009. Many, including myself,
fondly remember the company and its personnel, and business of doing
loans that made sense with compensating factors and risk-based pricing -
even for the fabled self-employed borrower. It reminds us that despite
the shift in regulatory environment, the flow of capital has not
stopped, nor has the demand by certain borrowers for that capital. And
the thinking of non-QM loans continues to evolve - more a few paragraphs
No one should equate non-QM loans with subprime loans, and every borrower should exhibit the ability to repay. The rating agencies are warming to the non-QM idea,
and in an edition of "Consumer Financial Services Watch" Laurence Platt
noted that "Non QM Lending Facilitated by New Fitch Ratings Criteria."
Here is the link to the Fitch report.
Mr. Platt writes, "Non-QM lending received a big boost this week when
Fitch Ratings issued its criteria for analyzing residential
mortgage-backed securities under the ATR and QM rules issued by the
CFPB. It announced that it would apply a relative 'credit enhancement'
adjustment (i.e., extra collateralization) to non-QM loans pooled to
back RMBS, but the level of credit enhancement reflects its belief that
the risk of massive losses on such loans is relatively slight. In
reliance upon required third-party due-diligence reviews, Fitch said
that it would assume the accuracy of an originator's designation of
loans as 'safe harbor' QM loans, higher-priced QM loans or non-QM
letter goes on. "Violations of the ATR requirements can lead to
affirmative claims against creditors and defensive claims against
assignees for potentially significant monetary damages consisting of
actual damages, $4,000 in statutory damages, a refund of finance charges
paid at closing, and three years of interest actually paid and
attorneys' fees. Concern over the amount of such damages and the
potential impact of a borrower claim on a foreclosure action has caused
some lenders and purchasers to restrict their loan purchases to loans
that are conclusively presumed to satisfy the ATR requirements. The lack
of an active securitization market for non-QM loans, however,
constrains those who want to participate in this segment of the market
but want an ultimate 'take out' for non-QM loans that they make,
purchase or finance.
identified a number of 'key ratings drivers' that informed its
analysis, only some of which relate to potential performance of the
loans. As a threshold matter, any transaction must include adequate
representations and warranties, 'robust' enforcement mechanisms and
indemnification for breaches. It also will review the originators' and
aggregators' processes for ensuring compliance with the ATR rules, both
in design and in implementation. Fitch also will require additional
credit enhancement for deal structures that deduct expenses from
available trust funds rather than from a mortgage pool's net weighted
average coupon rate."
Mr. Platt writes, "But
the heart of the analysis relates to the likelihood of losses based on
ATR violations resulting in defensive claims against assignees. A
rating of a securitization is based in part on estimated cash flows on
the loans backing the RMBS. Losses resulting from ATR violations would
impact such cash flows unless the loan is repurchased based on a breach
of a selling representation and warranty. So the key is trying to model
the number of potential claims and the likelihood and severity of losses
resulting from such claims. This is where Fitch took a very practical
perspective. In determining the probability of an ATR violation, Fitch
first looked at the probability of default as determined by its mortgage
loan loss model. It limited its analysis to defaults in the first five
years of origination, which in its view excluded 40% of defaults that
its model predicted would occur, although it decreased the size of this
exclusion for short-term, hybrid adjustable-rate loans. It then
differentiated between states that require judicial foreclosure and
states that permit nonjudicial foreclosure, positing that borrowers in
nonjudicial states are less likely to seek counsel and file a claim in
court. Also relevant to its analysis is credit quality: it assumes that
non-QM 'lite' loans, such as jumbos with debt-to-income ratios only
slightly above 43%, pose a lesser risk. Fitch also created assumptions
for probability of resolution as a percent of challenges and anticipated
legal fees to defend such challenges."
note concludes, "The result of this analysis is an assumption that, at
least for now when there is not yet any judicial precedent that would
provide additional guidance regarding ATR challenges, higher-priced QM
loans and non-QM loans '...reflect a low probability/high severity
scenario whereby Fitch expects a limited portion of defaulted loans to
challenge ATR/HPQM status but that significant legal costs will result.'
Interestingly though, it concluded that 'Fitch expects loan modifications to be the most common resolution to ability-to-repay disputes for higher priced QM loans.'"
things are clever and fun, others aren't - like lawsuits. The CFPB is
not immune to lawsuits, and we have a brand-spanking new one against
Here is some bedtime reading: "Audit of the Department of Justice's Efforts to Address Mortgage Fraud".
Unfortunately fraud is not dead in lending (or probably any other
business, for that matter), and you can read all about it here.
Redwood Trust has not issued a non-agency bond since 2013. But that is about to change. (The story also includes an update on other non-agency news.)
On the investor side, Angel Oak completed the rollout of the 3rd generation of its Evergreen Oak Portfolio Series specifically designed to "increase loan officer's market share in today's competitive purchase environment." Highlights include: Home$ense Program - 1 day out of short sale, foreclosure, or bankruptcy; 24 month bank statement, FICOs as low as 500 and LTV's up to 80%. Portfolio Select Jumbo- FICO's down to 640, 1 year tax returns for SE, asset depletion and CLTVs to 90% on loan amounts to $1.0mil. Performance Jumbo - aggressively priced 30 year fixed. Their entire Portfolio Series offers in-house underwriting and servicing.
RightStart Mortgage is adding 25 new retail branches to increase its market footprint from 10 to 15 states, most of them in the western US. Three new branches have been added in Southern California, which will be followed by a branch in Hawaii later in the spring. The expansion will be headed up by John Stangarone, who was recently appointed Retail Business Development Manager. Stangarone
will be joined by Jonathan Okken, formerly of CNCInnovis, Countrywide,
Dollar Mortgage, Harbor Capital, CBSK Financial, and Manhattan
released a suite of new master policy resources with the intent of
improving process transparency, providing clarity of the coverage, and
offering clear steps and timelines for managing claims and resolving
disputes after having consulted extensively with the FHFA, Fannie Mae,
and Freddie Mac. The
policy has also revised the approach to rescissions, as Genworth will
now offer rescission relief after a minimum of 12 months of payments for
customers who agree to have their loan files reviewed and verified upon
submission. For loans to be salable to the Agencies, all mortgage insurers must introduce their own version of a new master policy. At present, the new policy is expected to go into effect by July 2014.
Impac Mortgage Holdings, Inc.
announced a net loss for the year ended 2013 of $(8.2) million as
compared to a net loss of $(3.4) million for the year ended 2012. In
2013, mortgage lending net earnings decreased by $18.8 million, to a
loss of $(1.2) million, as compared to 2012. "Although lending volume
slightly increased in 2013 to $2.5 billion as compared to $2.4 billion
in 2012, margin compression, an increase in interest rates, increase in
lending compliance efforts and the roll out of our new LOS system
resulted in a very challenging year for us."
Rates: up some, down some. Yesterday it was up some after the FOMC statement, SEP
projections, and Fed Chair Janet Yellen's first press conference. As
expected, the Committee announced another $10 billion in tapering, split
equally between MBS and Treasuries, while forward guidance was shifted
to a qualitative approach from quantitative with the 6.5 percent
threshold for the unemployment rate removed. But the Fed turned out to
be much more hawkish, a surprise to some given the recent data (much
attributed to weather), and analysts opined that there is a strong
potential for a Fed rate hike in mid-2015. The 10-year Treasury note was
down/worse about .75 in price, and agency MBS prices fell between
beginning in April, outright MBS purchases from the Fed will decline to
$25 billion from $30 billion. Thomson Reuters writes, "Combined with
paydowns, MBS buying is projected to decline from $2.3 billion per day
over the last half of March to just over $2 billion in the first half of
April. Although supply/Fed-demand technicals remain supportive over
this time, it is deteriorating. Currently, originator selling is
averaging roughly $1.2 billion recently, but is anticipated to increase
as purchase activity strengthens into the spring home buying season."
were quiet overnight, but today we'll have Initial Jobless Claims,
which is expected to increase to 322k from 315k, Existing Home Sales for
February, Leading Economic Indicators for February, and the Philly Fed
survey for March. At 5AM Hawaii time the Treasury announces details of
next week's auctions of 2-, 5- and 7-year notes and 2-year floating rate
note (e: $109 billion) and at 7AM HST auctions $13 billion reopened
10-year TIPS. Our risk-free 10-yr T-note closed Wednesday at 2.77% and in the early going is nearly unchanged as are agency MBS prices.