Who Needs HARP 3 with Rampant Loan Mods? Fannie, Freddie Stocks Rally - Much Ado About Nothing?
I have a lot of pretty interesting Freddie & Fannie news below, but let's start with this note. "Rob, my ops folks complain about the oddest things. For example, according to them, Freddie Mac's correspondence all uses the same form. So after a loan is purchased, and Freddie discovers it is missing page whatever of the closing package, and would like us to send it, that is the same letter as when Freddie wants us to repurchase the entire loan due to some incurable fault. There is no easy differentiation. Have you heard this complaint from others?" Well, coincidentally, yes I have. I don't have an answer for you, other than to talk to your Freddie rep about the form of correspondence. It would seem that a clear message is something that Freddie would strive for. But speaking of Freddie, there are plenty of rumors swirling about how Freddie has beefed up the auditing of performing loans, including loans funded nearly 10 years ago, the end result being anyone's guess. If the rumors are true, I am sure Freddie has its reasons - but ask your rep.
Fifth Third Bank (the nation's 13th largest mortgage lender) is looking for Mortgage Loan Originators (MLO's) to focus on external business as part of a new initiative and growth strategy in 2013. Most of the approximate 650 MLO's are currently partnered with the company's 1300+ Financial Centers. These external MLO's will focus on building a solid referral source network (realtors, builders, CPA's etc.) and will not be tied to the banks internal customer base. "They get the best of both worlds: the ability to build their own business along with the stable, secure bank environment, the ability to take advantage of the company's full breath of financial solutions and marketing/business development support." 5 3 is focused on hiring external MLO's in 8 markets: Chicago, South Florida, Atlanta, St. Louis, Detroit, Cleveland, Pittsburgh, and Charlotte. For more information about this opportunity contact Kiley Nielsen at Kiley.Nielsen@53 .com.
I am often asked about HARP 3.0. I ask folks, "What, aren't Streamlines and HARP 2 keeping you busy enough?" For example, I received this note about agency refi cut off dates - maybe someone can pass it along. "Who made the decision of this date as a cut-off point, and why? Could it change in the future? We have piles of applicants with FHA's interested in streamlines whose last loan closed in the 2nd half of 2009. Most of these borrowers have high rates and great credit. Every one of them has balked at the increase in insurance. Most are aware of the cutoff date, and none too happy. Why should a borrower who closed in July of 09 pay so much more than their neighbor who closed in May 09? The response I get from most in the industry is that it was made to avoid a rebate of UFMIP, which makes sense, but why wasn't the date made a rolling 37 months to make more borrowers qualified as time passes? The same holds for Fannie Refi-Plus and Freddie."
The fact is that U.S. residential borrowers who owe more on their loans than their homes' worth have increasingly found relief over the past year. Not only are we now seeing housing appreciation, which increase the refi pool, but they've had expanded refinancing options and loan modifications. For example, the FHFA released Home Affordable Refinance Program (HARP) data for December 2012. The data show that HARP volume declined sharply in December but the report attributed this to originators increasing their November volume ahead of the increase in the GSE guarantee fee (G-fee) which took effect on December 1, 2012. HARP refinance activity was down 41% month over month, following a 42% increase in November. Non-HARP GSE refis were down 36%. HARP volume as a percentage of total GSE refi fell to 21% from 23% in November. High LTV refis (to borrowers with LTVs above 125) declined 39% M/M to 18,756 loans. Full year 2012 HARP volume totaled 1,074,755 million loans while inception-to-date HARP volume has totaled 2,165,021 loans. Those in the know expect HARP volume to remain strong in 2013 but expect a downward trend during the year.
Let's take a quick look at this. In Nevada, the government's Home Affordable Refinance Program (HARP), accounted for 68% of refinancing in December. For Florida, it was 58%. When folks wonder "what ever happened to the huge shadow inventory?" HARP refis are keeping people in their homes, especially in the states where property is severely underwater.
Yet, in spite of millions refinancing, critics say that HARP continues to fall somewhat short of market and borrower expectations. Why? "While there looks to be some measure of success in providing assistance to many homeowners, HARP is not necessarily reaching those families with the greatest need: extreme negative equity." In an article for American Banker's BankThink column entitled "Focus on Easy Refis Leaves HARP's Potential Unfilled", LVG's Frank Pallotta notes that banks with the largest servicing portfolios are executing a disproportionately low percentage of their total HARP refinancings on loans with LTVs greater than 120%. During a recent study of high-LTV, HARP-eligible homeowners, LVG determined that 83% of surveyed homeowners, who were recently denied a HARP by their current servicer, did in fact qualify according to Federal HARP guidelines. And 55% of those surveyed overall, either didn't understand HARP, found it too confusing and time consuming to explore, or haven't bothered looking into its benefits.
So are millions of Fannie & Freddie (leaving FHA Streamlines out of the picture for a moment) not enough? HARP is currently limited to borrowers with loans guaranteed by F&F, leaving underwater borrowers in private-label RMBS with fewer refinancing options. The Obama administration has been supportive of expanding HARP to private-label loans (hence the rumors of HARP 3), and the Treasury recently approved a small pilot program in Oregon that would allow private-label loans to refinance through a program similar to HARP. But due to congressional resistance, an expansion of HARP to include private-label loans does not seem near at this point: how much can the government interfere with private companies?
So since private-label borrowers are ineligible for HARP, loan modifications have been the most common form of payment assistance for underwater private-label borrowers. Approximately 45% of all underwater private-label borrowers have received a loan modification, per rating agency Fitch. Modifications, distressed loan liquidations, and home price gains reduced the number of underwater loans in private-label RMBS pools from 2.04 million to 1.5 million in 2012, a decline of roughly 25%.
And speaking of private label residential mortgage-backed securities, someone else has entered the wading pool. JP Morgan is returning to the private-label RMBS market this week for the first time since the onset of the financial crisis, marketing a $616 million transaction backed by prime mortgages. The deal, titled JPMMT 2013-1, consists of 752 first-lien mortgage loans from both JP Morgan and First Republic Bank. JPM originated 62% of the collateral. The top tranche is rated AAA. The collateral pool consists of a mixture of 15-, 20-, and 30-year fixed-rate mortgages (77%) and seven- and 10-year hybrid ARMs (23%) to borrowers with strong credit profiles, full documentation, low leverage, and significant liquid reserves, according to a pre-sale report from Fitch Ratings. The AAA slice of the deal was supported by 7.40% credit enhancement.
Fitch said that the representations and warranties (R&W) framework of the transaction is "significantly diluted by qualifying and conditional language that substantially reduces lender loan breach liability and the inclusion of sunsets for a number of provisions including fraud." The rating agency said that it considered the weaker R&W framework when it determined its expected loss estimation and credit enhancement analysis. Of course investors want protection in case something goes wrong (remember, there aren't any gfees!), and Fitch warned the market last month over new RMBS provisions that may expose investors to added risks from weak underwriting and shoddy mortgage loans. While older R&W provisions and repurchase obligations were for the life of the loan, some recent RMBS proposals relieve lenders from their repurchase obligations after less than 36 months. And some reps contain so-called proximate clause language and materiality factors in determining if a breach has occurred.
Fitch said the JP Morgan deal is missing reps for early payment defaults. Additionally, certain other reps include so-called knowledge qualifiers, meaning that buyers must prove that sellers actually had knowledge that certain loans might be prone to going bad. (But is it the underwriter's job to know that the proverbial paper mill might shut down in 4 months?) The deal's documentation also includes so-called materiality conditions, including language that calls for a determination of whether a default was the result of a life event or breach.
In the meantime, the market is abuzz about the stock prices of Fannie & Freddie. Yes, they still trade, and the return to operating profitability for both (Freddie reported a $4.5 billion profit for the 4th quarter!) has resulted in their share values shooting higher. Some analysts are saying that it is possible that the GSEs could fully pay back Treasury and subsequently build capital. In its late filing notice for its 10K, Fannie Mae noted that it may release a portion of its DTA valuation allowance, which would result in a significant dividend payment to the Treasury. Others, however, say that the agencies are still $187 billion in the hole, with the government's substantial investment in the GSEs, and the "net worth sweep dividend" commencing in 2013 creates no reason whatsoever for the rally in their stock prices. And don't forget the conjecture that they'll either go away entirely or be merged. The "net worth sweep dividend," established through the third amendment to the Preferred Stock Purchase Agreement (PSPA) requires the GSEs to effectively return all excess capital to Treasury in the form of dividends. But that doesn't stop the stock price hype.
There is no doubt that the agencies are running themselves as profit centers. Fannie just announced "New Automatic Draft Process for Premium Recapture Fees." "Effective April 15, 2013, Fannie Mae will implement an updated process for the payment of premium pricing recapture fees, using an automatic draft from the lender's account instead of requesting a wire transfer. Under the Selling Guide, Fannie Mae may request the payment of premium pricing recapture fees by the lender equal to any premium paid by Fannie Mae in connection with the purchase of a mortgage if the mortgage is paid in full within 120 days from the whole loan purchase date or from the MBS issue date. Currently Fannie Mae instructs lenders to send such fees via wire transfer. Going forward, Fannie Mae will draft the premium pricing recapture fees from the account designated by the lender for the payment of fees (i.e., the account from which pair-off and extension fees are drafted). This process is expected to be more efficient for lenders by eliminating the need for separate wire transfers."
The announcement went on. "When a loan sold to Fannie Mae at a premium is paid in full within 120 days, Fannie Mae may send a notice to the lender that premium pricing recapture fees are due." [Read the bulletin for full details!] The form can be found here and "frequently asked questions" on this development can be found here.
Fannie also answered clients' questions about early pay-offs: "When a loan is paid in full within 120 days, will Fannie Mae refund LLPAs and AMDC fees paid by the lender?" The answer is "no." "Loan-level price adjustments (LLPAs) and the Adverse Market Delivery Charge (AMDC) are not refundable, regardless of how quickly a loan is paid in full after delivery to us. LLPAs are charged in exchange for Fannie Mae accepting the credit risk for the life of the loan, and are not part of the asset price. The premium represents the asset price paid for the loan acquisition by Fannie Mae." Here are the good ol' FAQs.
The agencies still wonder about their future, and no one can blame them about trying to stabilize it. This week the FHFA's head Ed DeMarco told Congress, "The U.S. housing finance system cannot really get going again until we remove this cloud of uncertainty and it will take legislation to do it. While FHFA is doing what it can to encourage private capital back into the marketplace, so long as there are two government-supported firms occupying this space, full private sector competition will be difficult, if not impossible, to achieve," he said. Good luck working with Congress on this.
A quick look at yesterday - MBS prices did not do well. One veteran MBS trader wrote, "Mortgages are getting crushed right now into this back up in rates. Yes, we've bid on a good chunk of supply in the last 1½hrs, but we're not seeing selling flows that should dictate this late day underperformance. Did I miss something? FOMC seemed pretty inline to expectations right?" The trader was right - there were no changes, as expected, and a few minor changes were made to the wording. The Fed did note that fiscal policy has become somewhat more restrictive in reference to the sequester. They also noted that inflation has been running below the committee's longer-run objective, apart from temporary variations largely reflected in energy prices.
Regardless, the residential MBS market took it on the chin. Current coupon products worsened by .250 in price, resulting in intraday price changes - curious given that the 10-yr didn't do too much (it closed at 1.94%). Today we've had Initial Jobless Claims, up 2k from a revised 334k to 336k. Ahead of us are the FHFA House Price Index for January, Existing Home Sales, Leading Indicators, and the Philly Fed. Early on the 10-yr is nearly unchanged at 1.95% as are MBS prices.
Multiple choice: Which of the following is the most different from the others?
A) A Ph.D. in Mathematical Biology
B) A Ph.D. in Theoretical Mathematics
C) A Ph.D. in Statistics
D) A large pepperoni pizza
Answer: (B) The other three can all feed a family of four.