Reg-Z and Non-Owner Occupied Properties; Insight on Muni Bonds; How Rating Agencies Evaluate Banks; More on Loan Origination Systems
It is easy for originators to focus on daily
rate sheets, mostly determined by what the MBS market is doing. But sometimes
it helps to be reminded that on the investor side, fixed-income money managers
have other alternatives to buy such as Treasury securities, corporate debt,
foreign debt, and so forth. And, just like MBS yields, these markets are also
prone to "herd mentality moves" and market psychology. Municipal
debt ("muni bonds") rates have been dropping significantly over the
last month. In California, for example, in spite of its well-publicized
budget woes and jokes about Arnold, a month ago yields on its tax-free muni
bond debt were at 6% (which equates to a 8-9% taxable yield) and are now back
down to about 5.25%. The muni yields have moved lower because of the lack of
any substantial new issuance. Also, "no news is good news" as one
trader told me.
Maybe the more interesting question is why
muni rates shot up in the first place. Several months ago
there were predictions of widespread muni bond default, which in turn led to
investor nervousness. The best example of this was bank
analyst-turned-muni-analyst Meredith Whitney. While many of her predictions
have not materialized (yet), she points out that the rising cost of local
government pensions could cause money to be redirected from public services and
ultimately hurt the economy - the $2.93 trillion municipal bond market will
face a "waterfall" of credit rating downgrades as the off-balance
sheet liabilities of state and local governments are scrutinized by rating
agencies. But as a muni bond trader wrote me, "The wave of defaults
predicted by some in the news never materialized. The muni yields had gotten
historically high versus other benchmarks like treasuries and corporate bonds
so they were bound to retreat at some point. I believe that muni credit as a
whole was never quite as bad as portrayed in the news. So whereas muni credit
has probably improved a little bit I think it's people's perceptions that are
starting to change for the better."
"Risk retention," "skin in the game," "holding 5% of
the security" - we have about 20 days left for the public comment period.
The information continues to pour out. There is a primer at the top right of STRATMOR and a very
thorough legal analysis at KLGates.
Practically no party involved in the mortgage
market, from borrower to investor, is void of any blame for our current
situation. (This is, of course, one of the reasons that fixes are so
difficult.) The latest group to receive some scrutiny is the rating agencies,
who seemed to have escaped much of the heat from the credit crisis. That has
been gradually changing. It is helpful, for a moment, to discuss how rating
agencies evaluate banks. Things used to be simple when banks could just get
a credit rating, but these days there is added emphasis on economic and
industry risk, as well as bank specific factors such as capital levels, risk
position and the management team. There is now a greater focus on the value of
economic and industry risk. Given the crisis, analysts now look more broadly at
national and local economic conditions, rating each based on the stability and
structure of the economy, potential imbalances and credit risk of consumers and
businesses. When it comes to the industry, analysts focus efforts on how banks
are doing with deposit taking, lending, how well regulatory agencies do in
managing financial turmoil, the competitive landscape, financial products and
the role of nonbanks. Then the focus shifts to leverage ratios, loan to deposit
ratios, reliance on wholesale funding, the overall funding mix, revenue
stability, market share, the customer base, contributions of different business
lines and geographies are analyzed, and then banks are compared to peers and slotted by business activities that are less risky, more risky or average in
comparison. It is not hard to see using similar criteria for rating securities.
This week the Securities and Exchange
Commission voted unanimously to propose tougher regulations for credit raters
which were mandated by the Dodd-Frank financial-overhaul law. The plan does not
change the current dilemma of the rating agency being paid by whoever issues
the debt, which critics say produce an inherent conflict of interest. The
intent of the regulations are to give investors with details about the
assumptions underpinning the rating and make it easier for them to compare
raters' performance and to prevent ratings from being tainted by the
salespeople who market them to issuers or by credit analysts who may be seeking
a job with an issuer they are rating. The companies will be using a new form
which will include "substantial qualitative and quantitative
information" about the rating and the methodologies used to determine it.
The proposals will now go through a 60-day public comment period; a second vote
by the commission is required to make them final. To submit comments go to SECComments.
Yesterday the commentary discussed how LOS
systems need to have flexibility and how important it is for your LOS
provider's and a company's IT department work together as a team, and
communicate their ideas and action plans in business terms. Frank Fiore,
a partner with MATCHbox LLC, wrote, "The LOS's have really improved
over the last few years and with the introduction of the SaaS offerings (hosted
platforms) it has allowed companies to gain access to the LOS with a low
initial investment. This has really benefitted smaller companies with limited
technology budgets or bankers that have been working on broker versions of the
LOS. The challenge we are seeing with the increase in this model is that
companies are under the assumption that the SaaS model is ready out of the box.
Each business model is different and each LOS needs customization for efficient
workflow and business rule enforcement, and each company needs personnel on
staff that understands the business needs and are able to translate them into
technical processes through the LOS. It is not an IT role but rather an
operations role. While the SaaS model is allowing the system to be deployed
with limited investment there is a misconception that the software
administration can be managed by the IT department, who usually does not have
knowledge of the mortgage process and cannot prioritize improvements based on
business need. There is a huge gap here. Matchbox provides full workflow
analysis and converts the business needs into technology applications through
In a story seen in The Financial Times,
"Bank of America has agreed to sell its remaining stake in BlackRock
for $2.5 billion, severing ownership ties BlackRock forged with Merrill
Lynch before the financial crisis forced the bank's merger with the biggest US
lender. The deal marks BofA's latest effort to raise capital and shed
businesses and assets that do not fit the bank's post-crisis strategy. For
BlackRock, the buy-back was an opportunity for it to spend some of its cash as
well as reduce the number of its shares. BofA became BlackRock's largest
investor through Merrill's 2006 agreement to fold its investment-management
business into the company."
GMAC reminded everyone that in 10 days we'll
have another holiday.
And unlike many during the year, we can all take this one off. Monday, May 30,
is Memorial Day, a federal holiday. Therefore, many banks and the U.S. Postal
Service will not be open for business. It cannot be included in the
rescission period for rescindable loans, and this date cannot be included
in counting the seven business day waiting period from when the initial TIL was
provided to consummation. When re-disclosure of the TIL is required, this date
also cannot be included in counting the three business day period from when a
revised TIL was provided to a borrower to consummation.
There continues to be some confusion about whether or not NOO properties are
subject to TILA's Reg. Z comp rules. Freedom Mortgage told brokers
that "Investment Property Loans Subject to TILA's Regulation Z Loan
Originator Compensation Rules: effective for new loan applications received by
Freedom on or after 5/16/2011, Freedom will require all loans on investment
properties to be originated subject to Truth in Lending Act's Regulation Z loan
origination compensation rules. Therefore, loan originator compensation on
investment properties will be required to be in compliance with Regulation Z
Section 226.36(d) whereby loan originator compensation cannot be based on the
rate, terms or conditions of the loan. Compensation will be required to be
under the borrower-paid or lender-paid compensation method."
The "scheduled economic news week"
ended yesterday with Jobless Claims (showing a decline, which helped stocks),
the Philly Fed Manufacturing Index (which declined due to slower growth, which
would help bond yields), and Existing Home Sales (decreased 0.8% in April, with
a revision downward in March). The worse-than-expected number reminded us that
that, overall, the housing market is poor. The median sales price was $163,700,
down 5.0% from the median price of $172,300 a year earlier, and the inventory
of existing homes is now over 9 months at the current pace.
When yesterday's dust had settled the 10-year
note recovered from being worse in price by .625 to close nearly unchanged at a
yield of 3.17%, and MBS prices were also about unchanged by the end of the day.
MBS selling volumes have picked up somewhat this week. And with some lower
delinquency numbers, Jay Brinkmann, MBA's chief economist noted, "Most of
these numbers continue to point to a mortgage market on the mend.
Short-term delinquencies remain at pre-recession levels. Loans 90 days or more
delinquent have now dropped for five straight quarters and are at their lowest
level since the beginning of 2009. Foreclosure starts are at the lowest level
since the end of 2008 and had the second largest drop ever. The percentage of
loans somewhere in foreclosure is down from last quarter's record high and also
had one of the largest drops we have ever seen, although the reasons for the
drop will differ from market to market."
1. - Click on Strobe.
2. - Then "//click me to get
3.- Look at the center of the screen for 15 seconds (no cheating) , and then
4.- Look at your hand holding the mouse, without moving it away from the mouse.
You'll be very surprised at what you see. (It is called "cenesthetic