Harkening back to the Prius' brake recall issue, this bumper sticker was seen: "TOYOTA: Once you drive one, you'll never stop." Pun aside, I would imagine that some in the mortgage banking business wonder if "it" (large-scale regulatory change) will ever stop, while others seem to see some opportunities out there for mortgage companies that are still around. Just as it seems that practically all companies have put in place their compensation plans (get those loans in by tomorrow!), now the industry can turn its attention to what loans do and don't fall under risk retention guidelines.

Speaking of compensation, yesterday a judge heard pleadings regarding the NAMB/NAIHP motion for a temporary restraining order to prevent the rules from becoming effective this Friday. The judge's last words, reportedly, were that they should expect her ruling shortly. If the judge rules in favor of granting a temporary restraining order, she will probably also grant a preliminary injunction, which would prevent the rule from becoming effective until after July 21st, when the new Consumer Protection Bureau comes into effect.

Markets don't like uncertainty. So, on the plus side, at least yesterday's QRM-related proposals by the Federal Deposit Insurance Corp. (FDIC) and the Federal Reserve (the Fed) removed some of it. And it would certainly seem to help the argument of many in the industry that we're better off with government sponsored agencies (GSE's) than without them. Qualified mortgages are defined as those that will not require any form of risk retention by any entity. The proposal limits qualified mortgages to below 80% LTV for purchase loans, below 75% CLTV for refinanced loans, and below 70% CLTV for cash out refinance transactions. Negam loans, IO loans, and loans with significant rate increases are excluded. Front end/back end DTI is capped at 28% and 36%, respectively, and for ARMs, these ratios are calculated at the maximum interest rate attainable in the first five years after origination of the loan. There is also a restriction on the timing of prior delinquencies. In particular, mortgages made to borrowers who have been 60 days or more delinquent on a prior mortgage at any time in the preceding 24 months do not qualify. Any pools with an explicit government guarantee or backed by the GSEs, as long as they are under conservatorship or receivership, is exempt from risk retention requirements.
 
In the short run, most experts see no significant effect on the mortgage origination and funding universe if what was proposed goes through. This is because more than 90% of current originations are done through the GSEs and FHA which are not really affected by this proposal. The remaining origination volume is being funded through bank balance sheets, so is not affected by risk retention.
 
The proposals are out for comments, which are due by June 10th. Barclays Capital notes that the definition of risk retention exempt qualified residential mortgages (QRMs) is slightly stricter than expected (but remember that GSE and FHA guaranteed loans remain qualified, currently +/- 90% of production). This hints at tighter credit availability in the future, especially once the GSEs start pulling back. The risk retention provisions for non-qualified mortgages are likely to benefit banks with large balance sheets. The REIT model of securitization is also likely to benefit. But for non-QRM mortgages, traditional wholesale and conduit mortgage origination channels likely become non-viable. Accessing securitization channels will also become more difficult and/or expensive for smaller originators and banks for these kinds of loans. The "premium capture account" removes incentives for sponsors to profit upfront from securitization, strengthening the incentive alignment of risk retention. However, in its current proposed form, it significantly discourages securitization of any premium non-QRM loans.

For non-eligible transactions, the proposal calls for minimum 5% risk retention in several possible shapes - such risk would be retained by the sponsor of the deal. The sponsor has the ability to allocate risk to the originator (originator agreeing), provided the originator has supplied at least 20% of the pool and will retain at least 20% of the risk. This prevents any risk retention being forced on smaller originators. Additionally, the originator is the "original" originator of the loan, and not an intermediary. Certainly the existing risk retention proposals benefit two entities - big balance sheet banks and REITs. Barclays Capital notes that a big balance sheet bank can originate loans through its retail channel, and securitize them through its broker dealer while retaining the risk on its balance sheet. Smaller originators and banks are at a disadvantage for two reasons. First, due to the 20% floor, sponsors will have to retain risk on loans originated by these smaller entities. This implies that sponsors will typically pay a lower dollar price for these loans. Moreover, smaller originators cannot circumvent this by selling their loans to big banks because risk retention guidelines are tied to the original originator. The only option for these smaller entities is, therefore, to either aggregate a significant number of loans, which is expensive, or to sell to a willing sponsor at a lower price.

The REIT model benefits because REITs - as sponsors - are ideal candidates to retain the risk on a transaction while funding the structure by selling the senior tranches. Given reduced competition from traditional aggregators and securitizers, the REIT model will likely get a boost per Barclays.

There are mortgage jobs out there. Nationstar Mortgage is looking for wholesale AE's in Northern California, Oregon, and Idaho. You can view their website at http://www.nationstarbroker.com, but Nationstar, owned by Fortress Investment Group and servicing $65 billion, offers Fannie & Freddie products (including HomePath & Open Access) products in 48 states. AE's can contact Tim McAvenia at Tim.McAvenia@nationstarmail.com.

Move over Wells, Bank of America, Chase, Citi, and others. Here comes Guild Mortgage. After months of planning (I was sworn to secrecy) it has begun a correspondent lending division to perhaps add to its $6 billion servicing portfolio. Guild, which is a mortgage banker and not a depository institution, will initially target community banks and credit unions. For more information on positions or signing up contact Shawn Kirkland at shawn.kirkland@guildmortgage.net.

Here is something that we haven't seen for a while - like since 2005. Mortgage Bank of California, a Southern California wholesale operation, appears to offer 100% financing, doesn't have to disclose YSP, offers 10 days from date of submission to loan documents, is a "direct lender" in control of the appraisal process, and offers a no-cost loan (no points, no fees for the exception of standard 3rd party fees like title and escrow). And the marketing piece that I saw noted "we have a legal way per RESPA to pay out to affiliates" but also notes that the company sells loans to GMAC, Citi, Wells Fargo, Bank of America, Chase and Flagstar. Angie West at awest@bankofcalifornia.com can provide you with her marketing piece.

How 'bout those rates? Ok, there is not much going on. Monday's 2-yr auction was poor, and yesterday's $35 billion was bit "sloppy" but not as bad as the 2-yr. (Today we have $29 billion 7-yr. sale.) Stocks rose in spite of the economic outlook being whacked yesterday by a couple pieces of minor news. The S&P/Case-Shiller Home Price Index, which I don't think has ever gone up, showed its 20-city index down 1% in January, and down over 3% for the last 12 months. (11 cities saw prices sink to new lows - Atlanta, Charlotte, N.C., Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Portland, Ore., Seattle and Tampa.) And the Conference Board's Consumer Confidence Index dropped to 63.4 in March, down from 72.0 in February.

Yesterday, for the day 10-year notes lost about .375 and closed at 3.49%. Current coupon mortgage prices were worse by about .250. This morning we have already learned that the ADP employment number showed an increase of 201k jobs, with service sector jobs +164k, and small business gains positive for 13 straight months. The MBA reported that apps dropped last week by 7.5%, with refi's down about 10% and now accounting for about 64% of all apps. Currently the 10-yr is yielding 3.47% and MBS prices are roughly unchanged.

 (Warning: parental discretion advised.)

A Russian and Ole the Norwegian wrestler were set to square off for the Olympic Gold Medal. Before the final match, the Norwegian wrestling coach came to Ole and said, "Now, don't forget all the research we've done on this Russian. He's never lost a match because of this 'pretzel' hold he has". Whatever you do, do not let him get you in that hold! If he does, you're finished'. Ole nodded in acknowledgment.  

As the match started, Ole and the Russian circled each other several times, looking for an opening. All of a sudden, the Russian lunged forward, grabbing Ole and wrapping him up in the dreaded pretzel hold. A sigh of disappointment arose from the crowd and the coach buried his face in his hands, for he knew all was lost. He couldn't watch the inevitable happen.

Suddenly, there was a scream, then a cheer from the crowd, and the coach raised his eyes just in time to watch the Russian go flying up in the air. His back hit the mat with a thud and Ole collapsed on top of him making the pin and winning the match.

The crowd went crazy. The coach was astounded.

When he finally got his wrestler alone, he asked, "How did you ever get out of that hold? No one has ever done it before!"

Ole answered, "Vell, I vas ready to give up ven he got me in dat hold, but at da last moment, I opened my eyes and saw dis pair of testicles right in front of my face...I had nuttin' to lose so wid my last ounce of strength I stretched out my neck and bit dose babies just as hard as I could."

So the trainer exclaimed, "That's what finished him off!"

"Vel not really. You'd be amazed how strong you get ven you bite your own nuts!"