I wrote about buybacks yesterday, basically saying that the problem is on the rise. I received some comments about my buyback information yesterday. An underwriter wrote and said, "It is ridiculous out here. Recently we were asked to buy back an 11-year old loan! The borrower was not making his payments, and the agency found some ancient flaw in the documentation to 'hang their hat on'. And now they are shoving stated income loans back at us, after forensically documenting the income - with the flaw being that in the past, stated income loans were not supposed to have their income documented! How do we trust the guidelines that we're using now if they're going to be second guessed years down the road?"

On the other hand, the managing director of Charbonneau & Associates (advisory services for mortgage company merger and acquisitions) wrote to me and countered, "Since January I have reviewed dozens of mortgage companies from coast to coast and not one has had buyback exposure of more than five or so loans, and these are firms doing $300 million to $3 billion a year in originations. So even if the large banks are being hammered by repurchase requests from Fannie & Freddie, small- to medium-sized nonbanks are escaping mostly unscathed."

A Secondary VP wrote, "I have seen dozens of reasons for buybacks, but the primary two seem to be appraisal & collateral value issues and over-stated income. One sure fire red flag is when the income changed between the initial and final app. In addition, we've had occupancy issues, where borrowers told us that they were going to live in the property but did not. We now have 2 full time people doing nothing but rebut investor arguments, with mixed success. All we hear from the large investors is that they have written their contracts so that the buyback reps & warrants flow through us to the original lender."

Another commented on appraisal issues. "When I see the GSE's, Big 4 and the MI's come back with their earnest condemnation of the opinion of value given by the licensed appraiser who walked through the home 3 or 4 years ago - and use the completely biased, totally bought and paid for, opinion of value from a retrospective appraiser derived without the benefit of entering the home - I fume. The intellectual fiction that is the "retrospective appraisal" is an abomination.  Mortgage companies used third party, licensed appraisers to give their educated opinion as to a property's value.  How can an opinion be wrong?  I think an enterprising lawyer might find that these opinions are protected by the 1st amendment - similar to the way the rating agencies ratings on securitizations have that protection. It remains a shame that no one will address this broken system.  Why are the lenders on the hook for the work of an independent, licensed third party?"

Regarding rating agencies...Wednesday I mentioned that "the federal banking agencies have agreed to publish an advance notice of proposed rulemaking regarding alternatives to the use of credit ratings in their risk-based capital rules for banking organizations...Through this advance notice, the agencies are seeking to gather information as they begin to develop alternatives to the use of credit ratings in their capital rules." This is a big step in addressing the problem with major credit rating agencies that gave unwarranted high ratings to mortgage-backed securities - the FDIC has taken the first step away from using private credit rating agencies in assessing whether financial institutions have adequate capital. The FDIC is seeking public comment on a better way to determine banks' risk-taking.

On the commercial side of things, Vornado Realty Trust has completed a sale of $660 million worth of 10-year mortgage notes. The notes are backed by 40 strip shopping centers located in the Mid-Atlantic region. "A $600 million portion of the notes bears interest at the initial rate of 4.17 percent and a weighted average rate of 4.31 percent over the 10-year term (with a 30-yr amortization). The remaining $60 million portion has a variable rate that bears interest at 1.35 percent over LIBOR with a 1% floor and an initial rate of 2.35%.

Fannie Mae announced changes in its Selling Guide from Announcement SEL-2010-10. These include mortgage loans secured by properties subject to unexpired redemption periods, delivery of repurchased loans, general warranty of project eligibility, seasoned mortgage loan requirements, co-op share loan documentation, termination of inactive document custodians, and title Insurance ALTA Endorsement 21-06. If you find this fascinating, go to https://www.efanniemae.com/sf/ and click "Selling Guide update incorporates policy changes in Ann. SEL-2010-10".

U.S. Bank Home Mortgage Wholesale Sales Division has made several changes to our "Delegated Underwriting" authority eligibility requirements. These changes will be effective for new loan applications taken on or after Monday, August 16, 2010, and subsequently sold to USBHM. Each of our Delegated Lenders will receive a letter outlining their level of delegation and eligibility criteria for underwriting authority."

Starting today PHH has a pricing change for "Lender Paid Single Premium and Lender Funded MI Options". "The lender paid rate and term refinance pricing adjustment will no longer be applied when the representative credit score for the loan is 720 or greater and the loan is utilizing either the Lender Paid Single Premium or Lender Funded (SMART) MI option."

If one is on top of a Himalayan mountaintop, what does one make of same-day headlines reading, "Prices Reduced on 25% of Listed Homes", "Mortgage Defaults Down, Bank Repos Up", and "Mortgage Rates Fall to Record Lows Again"?

When you combine the large amounts of cash that companies and individuals are sitting on with the general feeling of "it's too much hassle to get a loan these days", one should see an increase in all-cash house purchase transactions, right? That is exactly what is happening. In spite of rates being historically low, refi volumes are below that of 2003, and on the purchase side, NAR reports that about one-quarter of existing home sales have been all-cash transactions in 2010, compared with about 5-10% several years ago. And lots of borrowers are retiring their mortgages entirely. Freddie Mac's Quarterly Refinance Report showed that more than 20% of refinancing homeowners paid down their principal balance when they refinanced in the first half of this year. Lenders all seem to be very busy, but unfortunately in many cases it is because every loan, it seems, has "issues" that need to be overcome in order to fund and therefore create a lot of work that wasn't there in the past.

So all is not rosy for originators, or borrowers looking for mortgages, in spite of the current (and expected for a long time) low rates. Home sales in many areas are down in general, and a segment of the population who owned more than one place a few years ago has been jettisoning houses. As everyone knows, often times the equity is not there in the property, and/or potential borrowers continue to want to sit on cash if they think that property values are going to sink more. The HARP (program) has helped hundreds of thousands of borrowers lower their payments, since it allows for 125% on a refi. But anyone with a 2^nd mortgage has a problem in that many lenders either won't subordinate, drag their feet, or charge unusual fees to do so - not exactly conducive to the lending process.

You can talk about the global economic news until the cows come home (although I've never had a cow come home), but few out there will disagree that the US economy is slow, is expected to be slow for quite some time, and that rates are benefiting from it. Following the Fed's Tuesday announcement, economists scaled down their forecasts for GDP, talked about how unemployment will be with us well into the future, and wrung their hands over the housing market. Wednesday's trade figures did nothing to change that, nor did Jobless Claims, and in fact reconfirmed the "slow economy" outlook to the point of pushing the DOW down for three days in a row - four if you count the expectations for today.

MBS sales doubled yesterday with the increase in mortgage rates. Almost $5 billion came out of originator's pockets yesterday, with roughly 75% being 4% securities. Few hedging originators want to be caught in any short squeezes in 4.5% securities (meaning they've sold MBS's backed by 4.75-5.125% mortgages, but then don't have the mortgages to fill the trades when the investor expects them), and 3.5%'s are not quite liquid enough yet. The 10-yr ended the day at 2.74ish, worse by less than .250, but 30-yr mortgages ended the day worse by about .375.

High School Reunion Secrets (Parental discretion advised.)

Rachel, Clare and Jen haven't seen each other since high school. They rediscover each other via a reunion website and arrange to meet for lunch in a wine bar.

Rachel arrives first, wearing camel Versace. She orders a bottle of chilled Chablis. Clare arrives shortly afterward, in gray Chanel. After the required ritualized kisses she joins Rachel in a glass of Chablis. Then Sam walks in, wearing a faded old Barbour anorak, blue jeans and Wellington boots. She too shares the wine.

Rachel explains that after leaving school and graduating from Princeton she met and married Timothy, with whom she has a beautiful daughter. Timothy is a partner in one of New York's leading law firms. They live in a 4000 sq ft co-op on Fifth Avenue, where Susanna, the daughter, attends drama school. They have a second home in the hills above Monte Carlo.

Clare relates that she graduated from Harvard Med School and became a Consultant Gynecologist. Her husband, Clive, is a leading Wall Street investment banker. They live on Long Island and have a second home in Florida.

Jen explains that she left school at 17 and ran off with her boyfriend, James. They run a tropical bird park in California and grow their own vegetables. James can stand five parrots, side by side, on his "willy".

Half way down the third bottle of Chablis, several hours later, Rachel blurts out that her husband isn't Tim, he's Tom and he's a cashier at Walmart. They live in a small condo in Brooklyn and have a travel trailer parked at a nearby a storage facility.

Clare, chastened and encouraged by her old friend's honesty, explains that she and Clive are nurses in Bellevue. They live in Jersey City and vacation at a motel in Orlando.

Jen says that the fifth parrot has to stand on one leg.