Financial Literacy and "Rational Ignorance"; More Leadership Shuffling; Ginnie Mae HMBS; Prepay Perspective
s California goes,
so goes the nation? If that is still mostly true, here is a shift in housing
demand that may be worth noting: UrbanRentals
One of the reasons I began writing this commentary many years ago, during the
Coolidge Administration as I recall, was the repeated puzzlement among folks in
the business when I would explain bond market mechanics. Namely, when
fixed-income prices fall, rates go up, and vice versa. I continue to hear
stories about how little consumers know about their mortgages, and how it
almost seems that Congress expects all the regulation to teach them about
mortgages and finances. Last year a study conducted by Dartmouth University,
and any survey of telemarketers, showed that many home owners don't know the
terms of their mortgage or the interest rate that they're paying, or how
compound interest works. Unfortunately now, more than ever, people have to
take so much responsibility for their financial lives. Pensions have been
replaced by 401(k)'s, health insurance decisions are left to the employee, etc.
Of course, the less consumers know, the more they run into trouble - like
refinancing low interest mortgages or buying overpriced credit insurance. Financial
illiteracy is an example of "rational ignorance" where the costs of
paying attention outweigh the benefits. On top of that, LO's have seen
clients where the less people know, the more overconfident in their abilities
they tend to be. It even has a name: the Dunning-Kruger effect where people
who don't know much tend not to recognize their ignorance, and therefore fail
to seek better information. Less knowledgeable borrowers are usually less
likely to do research before obtaining a mortgage. Well informed borrowers are
more likely to ask for help. So it seems that not only do we need regulations
to protect the consumer, but also proper financial education - the financial
equivalent of driver's ed!
READ MORE: Loan Disclosure Reform Incomplete without Borrower Education
A few weeks ago the head of Bank of
America's correspondent group left, and yesterday it was JPMorgan Chase
mortgage group's turn to make some news. Gone is mortgage chief David Lowman
("Dave Lowman and I have decided he will leave the firm," Frank
Bisignano, the head of home-lending, said...) It seems no mortgage lender is
immune from criticism, but Chase has been in press in recent months after it
overcharged active-duty military personnel on loans and improperly foreclosed
on other borrowers. Per Bloomberg, its mortgage unit posted at least $3.3
billion in losses during the first quarter. JPMorgan made over $5 billion in
profit in the first quarter, even with the mortgage issues - remember that
Chase acquired WAMU and Bear Stearns. Lowman came over from Citi in
2006, with Chase also hiring Cindy Armine, Citigroup's chief compliance
officer, last month to increase oversight as chief control officer of
home-lending.
"Rob, your reader's comments about
Freddie's Relief program are similar to what is happening with the VA IRRL
program. My company services the largest VA loan market in the country, North
Carolina. For decades veterans were able to refinance using the streamline IRRL
program (low doc, no credit, no appraisal, low fee loan). However, investor overlays
have all but killed this program. For a program that did not require credit
report, investors require a 640+ score. They also require income docs, too.
Here is the deal killer: appraisals! Now, VA loans are 100% purchase loans. So
if a veteran bought a house 4+ years ago, financed 103% of the purchase price,
including funding fee, do you think the house will ever appraise in this
declining market? Why do you think the VA does not require an appraisal? So we
have thousands of soldiers with mortgages rates above 6%, who could benefit
from a refi, but who cannot refinance due to investor overlays! This is not
what the VA intended with this program. Do you know of any investor who will
do a VA streamline with no appraisal?"
No one knows where the value of conventional
servicing will settle ("should servicers be paid more or less for
delinquent loans, and more or less for processing on-time payments?"), but
yesterday there was a little clarity on the HECM side. "Ginnie Mae is
changing the Servicing Fee Margin for the HMBS program. Currently, issuers
must select a Servicing Fee Margin of 6-75 basis points (bps) for
participations related to HECMs for which the servicing compensation is paid as
a flat monthly servicing fee, or 25-75 bps for participations related to HECMs
for which the servicing compensation (the basis point servicing fee) is paid as
a portion of the mortgage interest rate." Starting 7/1, "Issuers must
select a Servicing Fee Margin of at least 36 bps and no more than 150 bps,
which includes Ginnie Mae's guaranty fee of 6 bps."
A week or two ago the commentary discussed how Fannie & Freddie loans
were prepaying at different rates than they had been historically.
Yesterday Banc of America Merrill Lynch released a good research piece on the
subject. (I am traveling today, so please don't ask for a copy - contact
your BofA rep.) "There has been a sharp reversal in FN/FH speed
differences over the past 6 months. Freddie speeds used to be 2%-3% CPR faster
relative to Fannie in January 2011, for 2009/2010 vintages. However, speeds for
the two GSEs have converged now. Seasoned Fannie pools, 2008 and earlier, are
now 1-3% CPR faster than seasoned Freddie pools while they used to be 1%-3% CPR
slower in the past."
The BofA/ML document notes, "Prior to March
1, Fannie and Freddie charged fairly similar LLPAs. Fannie Mae had two
different LLPA grids, one for HARP borrowers and the other for non-HARP
borrowers. Freddie, on the other hand, had one common LLPA matrix for both
types of borrowers. As a result, Freddie LLPAs for non-HARP borrowers were 25
bps lower for some low FICO/high LTV buckets, and were marginally higher for
HARP borrowers in some cases. In December, Freddie Mac revised their LLPA, and
as a result, fees went up across a number of FICO/LTV buckets for both HARP and
non-HARP borrowers. Subsequently, Fannie Mae increased their LLPAs for non-HARP
borrowers and brought it in line with Freddie, while keeping the LLPA matrix
for HARP borrowers unchanged. After the revision, Fannie and Freddie LLPAs were
fairly similar, although higher, for non-HARP borrowers, while Freddie LLPAs
were much higher for HARP borrowers."
But then in March FHFA made some additional
changes (extending the program, adjusting the Freddie's LLPA for HARP
borrowers) but leaving enough of a difference that it may have impacted the
borrower's ability to refi. "The two key differences arose because the
Freddie Mac roll back of LLPA increase was effective starting July 1. As a
result, HARP LLPAs for loans delivered to Freddie Mac between March 1 and June
30 are much higher relative to Fannie Mae. An additional nuance of the roll
back was that HARP LLPAs were rolled back only for loans with LTV greater than
80%. Consequently, Freddie HARP LLPAs will continue to be higher even after July
1 for some FICO/LTV combinations. In our view, the increase in Freddie HARP
LLPAs starting March 1 is the single biggest reason for the dramatic slowdown
in Freddie speeds relative to Fannie for seasoned vintages."
But the plot thickens! Per the BofA/ML
report, different servicers are more or less efficient in using the HARP
program. Chase is the most efficient servicer, with gross issuance, as a
percentage of their total issuance, almost 12% more than the closest
competitor. "The credit box for Chase is wider, as the DTI and the LTV is
higher for loans originated by Chase. Although Wells Fargo is fairly aggressive
at refinancing and using the HARP/streamlined refinancing program, the credit
box for Wells Fargo is also the strictest, as can be seen by the DTI for loans
originated by Wells."
Yesterday rate sheet watchers and lock desk
folks noticed two "clunks" down in market prices. The first happened
before our markets even opened after hawkish comments from Fed President
Fisher, stronger than anticipated Chinese industrial output, and a Chinese
report signaled accelerated inflation inciting the PBOC to raise reserve
requirements by 50bps. And then in the latter half of the day Fed Chairman
Bernanke was on the tape commenting on the U.S. debt ceiling, stating it should
not be used as a mechanism to force budget cuts. Equities, which technically
have been "oversold" and therefore looking for a reason to rally,
improved, the 10-yr was worse by nearly 1 point ending up at 3.10%, and MBS
prices ended worse by .625-.750. As is typical in a sell-off, originator supply
picked up and was reportedly around $2 billion.
Speaking of mortgage banker supply, today's MBA application data for last week
showed that apps were +13%, with refi's up 16.5% and purchases +4.5%. As
of last week, per the survey sample, the refinance share of mortgage activity
is up to 70%.
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.
If
you're interested, visit my twice-a-month blog at the STRATMOR Group web site
located at www.stratmorgroup.com . The current blog takes a
look at the opinions on QRM's impact on our industry. If you have both the time
and inclination make a comment on what I have written, or on other
comments so that folks can learn what's going on out there from the other
readers.