Europe's Economy Improving; Issue With Freddie Increasing Market Share; Rate Locks Continue Down
Per the recent post regarding the STRATMOR Group's mid-year survey, over 50 lenders have responded to the STRATMOR Survey on what actions lenders are taking in response to the changing market. Based on early feedback, 30-40% of the lenders are cutting back office staff in the 3Q and another 25% have undertaken staff re-assignments. How does this compare to the actions your company is taking? Full survey results are only available, and free, to participants and this survey is open for responses until August 21. To take the survey click here. The full results are will be available at the end of August.
On January 31, this commentary noted, "If you want to raise an eyebrow or two, click on the APR on these loans, offered not by the tribes listed, but by an individual who is a member of the tribes. And we wonder why the public's confidence in lenders has a long way to go..." Well, Western Sky is now the target of a lawsuit by New York over its exorbitant fees. Glad that maybe seven months ago this commentary perhaps brought this to light in some small way.
Stop the presses! A while back Ginnie Mae announced its June numbers, and it reported having guaranteed just over $41 billion in MBS for the month, the second in a row in which issuance has exceeded $40 billion. Most of that comes from GNMA II single family pools ($32 billion), with GNMA I single family ($7 billion), GNMA multifamily ($2 billion), and GNMA HMBS ($700 million) pools making up the rest.
But Ginnie is only considered one of the agencies. "Rob, I keep hearing about Fannie Mae and Freddie Mac, i.e., the FHFA, wanting to encourage 'private money' coming back into lending. How are they doing that?" There are two major tools at their disposal: guarantee or guarantor fee (gfee) and loan amount. It is widely anticipated that a gfee increase announcement will happen before too long, probably giving lenders a few months to prepare. And the general feeling is that the agencies will increase gfees to the point where they think private capital would have to be compensated to assume more risk. But loan amount changes could also be in the cards. Taken to an extreme, if F&F lower loan limits to $100k nationwide, think of what that would do to residential lending! No group is going to be in favor of that, mind you, but it is an option.
A company like Chase or Wells can always change market share with a moment's notice by changing pricing, and everyone would consider it perfectly normal. But a story out this week shows that Freddie is also going after market share by spending big bucks. There is nothing wrong with that, right? Well, remember that an argument can be made that Freddie is using taxpayer money to take market share away from Fannie Mae, who would have to use taxpayer money to maintain its market share! It's a wild, whacky world out there! This is a simplistic view, I know, but I for one don't want my taxes going toward intra-agency competition. According to the article in the Financial Times, "Because Freddie's securities trade at a lower price it compensates lenders with fee rebates in an attempt to maintain its market share. Even with the compensation, its market share has drifted down from a long-term average of 40 per cent to a range in the low-30s over the past two years. Both companies' profits go directly to the Treasury under the terms of their $190bn bailout, so Freddie's compensation payments reduce the amount of money flowing back to taxpayers. The bill has risen to $400m-$600m a year, as the price differential with Fannie has widened, according to a Deutsche Bank estimate. Freddie's smaller size means that Fannie's securities have been more liquid. 'The performance of the security is a long-run issue, it creates a competitive disadvantage for us,' Freddie chief executive Donald Layton said last week. Here is a link to the article.
Many groups have put forth ideas about a plan to unify Fannie and Freddie contracts in the "to be announced" (TBA) market, where investors buy MBS. And the prices in the mortgage-backed security market determine rate sheets across the land. It is no surprise that Freddie has long pushed for a unified TBA contract, like the little brother that wants to go to the same movie as his older sister, while Fannie said it would support any idea that would improve the overall efficiency of the market, like the big sister saying, "Whatever." SIFMA, a finance industry trade group, is very interested in participating in the outcome, and the MBA's Secondary Marketing Committee is meeting next week to discuss developments. (MBA members can contact Dan McPheeters for more info: DMcPheeters@mortgagebankers.org.)
While we're mired down in the secondary markets, let's play some catch up with lender, investor, vendor, and agency updates.
Out west, Sierra Pacific Mortgage announced it is no longer requiring any valuation on FHA Streamlines with a credit score of 660 or better. "For scores 640-659 we will still need to run a valuation model and have an LTV of no more than 129%."
US Bank has updated guidance on VA refinances that are not eligible to be closed as IRRRLs on how non-delegated lenders should process them through the AUS. For rate/term transactions, cash back cannot exceed $500 and the borrower must be fully credit-qualified, and the transaction should be processed as paying off first mortgage liens and any other liens used to acquire or improve the property with no cumulative draws in the last 12 months greater than $2000. Cash-out transactions should be processed as paying off any debt other than first mortgage liens or liens acquired to purchase or improve the property, and as with rate/term, cash back is capped at $500 and full credit qualifying is required.
In cases where business funds are used in a transaction, US Bank is now allowing the required information to come from a business banker or CPA that has an existing relationship with the borrower and business. This includes a business letter explaining how withdrawing the business funds will impact the viability of the business and a cash flow analysis. As a reminder, seasoned funds in a personal account (e.g. funds that have been there for at least 90 days) are not subject to these requirements.
PennyMac has revised its Agency cash-out LLPA such that all FICO/LTV scenarios and loan terms now incur an extra -.25 adjustment.
As part of its analysis of pre-purchase suspense and post-purchase defect analysis, Citi reminds correspondent lenders that the cost of the Closing Protection Letter as a prepaid finance charge item must be included on the HUD-1. Other errors the analysis identifies are failure to re-disclose the Truth in Lending disclosure when the closing/escrow/attorney fee increases from the estimated HUD-1 and estimated TIL, not including the title agent's cost for an express mail/courier fee as a prepaid finance charge, and not including the cost of e-recording or rush recording as a prepaid finance charge.
Citi is now requiring borrowers to include monthly real estate taxes in the calculation of the monthly housing expense if the abatement expires in five years or less, which replaces the previous three-year time frame. Borrowers must be qualified with the annual tax amount required at the end of the expired tax abated year for abatements less than five years.
Citi is no longer allowing 15% of the value for an incomplete swimming pool to be included in a work escrow; this has been changed to 10% or less. In addition, Citi will not underwrite loans where the amount of a third party contract price has been added to the purchase price for a home for the purposes of calculating the permissible work completion escrow percentage.
In training and events news:
The Texas Mortgage Bankers Association will be holding its 2013 Reverse Mortgage Day in Austin from September 9th-10th. Speakers will include senior members of the FHA and TMBA, amongst others. Interested parties should register here.
The FHA is holding an on-site training that will focus on the appraisal process in New Orleans, LA on August 14th. This session will go over protocol, recent updates, and how to determine property eligibility, and Louisiana continuing education credits are available. Register here.
The same training will be held in Oklahoma City, OK on August 21st. Register here.
There will also be a training session in Lake Forest, CA on September 6th designed specifically for California-licensed appraisers who are looking to be added to the FHA Appraisers Roster. The course counts as seven Continuing Education Units towards license renewal/recertification. Details available here.
The MBA released the application numbers for last week, confirming what every residential lender out there knows: volumes are generally down. The number of mortgage applications filed in the U.S. last week dropped 4.7% from the prior week, with refis down 4.4% and purchases down 5.4%. (Refis stand at 63% of all apps; ARMs at 6%.)
The markets were beat like a rented mule yesterday. Yes, total retail sales for July increased by just 0.2%, about even with overall consumer price inflation. Despite the soft headline number, the components of retail sales still make a case for consumer resilience - for example, ex-auto retail sales gained a respectable 0.5%. In fact, traders blamed stronger-than-expected global economic data and increased expectations that the Fed will begin to taper sooner than later for the market sell-off. Consumer spending, measured by retail sales, is an important driver to the economy and therefore rates: 2nd quarter GDP is still estimated at 2.5%, but some quant jocks slid their 3rd quarter estimates higher after the Retail Sales numbers.
How do you like this news story: "The German and French economies grew faster than the United States in the second quarter, pulling the euro zone out of its longest recession"? The Eurozone's expected return to economic growth is likely to be felt globally, as the region ceases to weigh on world recovery, analysts say. "We're not expecting a boom in Europe, but there is a momentum shift. ... There's a change in perception from when people didn't see a way out of the crisis to now seeing growth," said Joseph Lupton, a senior economist at JPMorgan Chase. So the recent movement in rates isn't all due to activity in the United States: Europe is back in the picture - and things are better.
On this side of The Pond today we saw the Producer Price numbers for July, which were unchanged. That is much less than expected. Ex-food and energy it was +.1%. After the news, the 10-yr. yield, which closed out Tuesday at 2.71%, is unchanged at 2.71%, as are MBS prices.