Eminent Domain Setback; Upcoming Repurchase Thoughts; Employment Data Primer; 5yr GSE Anniversary--Would You There?
On Saturday we'll have an exciting anniversary: on 9/7/08 Treasury Secretary Hank Paulson announced a plan where the government took control of Fannie Mae and Freddie Mac. Remember that the Treasury Department initially pledged up to $200 billion of financial support in anticipation of future mortgage defaults, and that was later doubled to $400 billion. As of today, Fannie and Freddie have received $187 billion of taxpayer aid. But they're making some coin now! Which leads me to...
Here's an interesting note I received: "Rob, my sister is thinking about taking a job with one of the agencies. What have you heard about them lately?" Well, there are plenty of agencies, but I assume you're asking about Fannie Mae or Freddie Mac. Both have suffered from a loss of experienced personnel in the last 5+ years, although I think the "brain drain" has slowed in the last 2 years. Both agencies, however, seem to have a lot of key areas where they are basically operating with the 4th and 5th string teams. It is logical that the ability to attract talent outside the two GSEs is awfully difficult.
Insiders tell me that it is not an environment that is very conducive to creative thinking. For example, the FHFA has to approve everything of any consequence, and supposedly it is more thinly staffed than the agencies, and some would argue have even less experience. (I know the STACR deals done recently by them feel "new" but they're pretty basic senior sub structures that have been around quite a while in the GSE/Wall Street space.) I think most of personnel are treading water to see what happens next.
Although there will be a lot of groundwork laid this year, verbally, no one expects much of substance until after the elections next year, and then it is on to the presidential election in 2016. (How does anything get done?) If your sister has a positive attitude, and is optimistic, she will fit in nicely with those agency employees who believe that something interesting could actually come out of a GSE restructuring. The names could change, but personnel-wise there's hope that their skill sets will be highly valued in any start up type entities that are ultimately created.
With Congress having been on vacation for over a month, not much has happened regarding the agencies - and many do not expect anything concrete to come out of Congress for quite some time - perhaps years. The House and Senate have proposed different approaches to housing finance reform - and although nothing proposed so far will sail through unscathed, it is interesting to see check the wind direction.
The leading House proposal, introduced by Republicans, leans heavily toward privatization and would eliminate the affordable housing responsibilities of Fannie Mae and Freddie Mac. In contrast, the Senate proposal, introduced in a bipartisan effort, would combine a government backstop (arguably through more transparent means than those GSEs currently provide) with a continued attempt to fund affordable housing programs. Notwithstanding those differences, law firm K&L Gates points out there is one common element of both proposals - a reduced government role in the housing finance sector. This core principle has been echoed by the President, who recently laid out general principles for housing finance reform that include winding down the GSEs, amplifying the role of private risk capital, and preserving the function of FHA insurance.
There might not be much new with the agencies, but there is with eminent domain. For example, North Las Vegas rejected it. In the next state over, SIFMA and the Chamber of Commerce have filed a "friend of the court brief" supporting Wells Fargo's position in a case involving a plan by Richmond, CA, to use eminent domain to seize certain mortgages. Wells Fargo is asking a judge to block the plan's implementation. "We ... believe that the execution of these plans to use eminent domain will result in a serious contraction of credit availability, as lenders and secondary market sources of funding react with defensive, very stringent underwriting criteria," said managing director and head of SIFMA's Asset Management Group Timothy Cameron.
In fact, for proponents of Richmond's eminent domain plan, recent events did not help to advance their cause. The lending and securitization industry likes this - no one wants to buy a security that can crumble, and if no one wants to buy that security, the price drops and rates go up to compensate for the risk - and the borrower pays more. Several developments, in addition to the lawsuit filed against the city by opponents of the plan, have begun to cast doubt on the viability of the program.
First, media began to highlight an under-reported angle to the story - if the plan were to be enacted and borrowers were essentially relieved of tens of thousands (or hundreds of thousands) of mortgage debt, they may face a significant tax liability. Congress and California lawmakers have extended mortgage debt forgiveness on a year-by-year basis for the past few years, but there is no indication the protection will be extended before the end of this year, putting potential participants of the program at risk. And then the San Francisco Chronicle reported that the City of Richmond found no buyers when it attempted to refinance municipal bonds earlier in the month, costing them nearly $4 million in lost savings. It is not clear that Wall Street was spurning the city's bonds due to the eminent domain program, but it has certainly given city leaders another reason to pause.
And more information is coming to light about the status of the 600-plus loans that the city made offers on, and will presumably exercise eminent domain on it if the offers aren't accepted. According to opponents of the plan, 31% of the loans aren't underwater; 10% have at least 20% equity; and 68% of all loans are current. The new information gives opponents the ability to characterize the program as a for-profit scheme designed to enrich Mortgage Resolution Partners (MRP).
But speaking of purchasing loans, for those of you who haven't had a repurchase demand in a while, you may want to consider what might be coming down the pike. Katten & Temple attorney Brian Levy, who has helped many lenders contest and defend repurchase demands, believes, with the losses of the 2004-2009 period waning, we may see new types of buyback requests in the near future. Levy thinks that investors may seek to give loans back that are troublesome for reasons other than just default. He warns that investors with loans facing consumer litigation or regulatory actions arising out of allegations of compliance violations, particularly the thorny new regulations such as LO Compensation and QM/ATR, may be inclined to mitigate those expenses by using buyback provisions in sale contracts to give messy loans back to originators, even without losses or defaults.
Another concern Levy describes is the potential for buybacks arising from environmental issues. Most investor sale agreements contain specific representations regarding environmental issues (Freddie Mac and Fannie Mae also require that an appraiser disclose environmental risks). According to Levy, it's not hard to envision a situation in which a residential subdivision discovers an environmental threat (e.g., chemical runoff from a landfill; or "vapor plumes" where toxic gases spread underground from sources such as dry cleaners or oil pipelines). Information regarding these risks is routinely obtained on commercial real estate loans, but, despite availability at fairly reasonable cost, environmental reports are almost never obtained on residential property. Levy imagines a deteriorating environmental problem where defaults, borrower litigation and/or enforcement actions cause investors to seek to push back these loans to the originators. Readers can learn more in Levy's article in Mortgage Banking Magazine.
How about some upcoming events and the ABA/SunTrust news?
The Illinois Mortgage Bankers Association is sponsoring a Mortgage Market Update Conference on September 19 in Oak Brook. The agenda includes presentations by Fannie Mae on reps and warrants and the post purchase review process, subject matter expert, Loretta Kirkwood, on fair lending risk and the CFPB, and a lender panel discussion on these topics as well as QM and loan officer compensation. Attendees must register in advance here.
The Arizona Association of Mortgage Professionals (AZAMP) will be holding their annual Education and Lender Expo event on September 20th and 21st at the Phoenix Convention Center. Marc Savitt, President of the National Association of Independent Housing Professionals (NAIHP) will be the speaking at the luncheon. He will cover L.O. compensation, QM, and other CFPB regulations. For more information please follow this link.
AllRegs will be holding a webinar on the CFPB servicing final rules on September 20th, intended to provide participants with both a refresher and guidance on preparing for the rules' implementation in September 2014. Register here.
I don't know much about the ABA, and certainly didn't know it acts as a cooperative for members. The American Bankers Association (through its Corporation for American Banking subsidiary) has "endorsed" SunTrust Mortgage, Inc. to offer ABA members an outlet to sell mortgage loans on advantaged terms. SunTrust's mortgage correspondent channel creates liquidity for banks originating mortgage loans by purchasing the loans that banks might otherwise keep in portfolio. "This alliance will allow ABA member banks access to a full array of SunTrust's mortgage products...SunTrust joins a group of existing strategic mortgage solutions providers that offer ABA members advantaged programs to also help them compete in the areas of compliance, fraud prevention, loan sales, quality control, operational efficiency and mortgage portfolio risk analysis." (SunTrust had fallen to #10 in the correspondent channel in the first quarter, per NMN.) More on the ABA here.
Tomorrow we'll have the employment data. Employment is one of the most widely watched indications of strength or weakness in the economy and we judge this primarily using the monthly increase in total non-farm payrolls and the unemployment rate. These numbers are released by the Bureau of Labor Statistics (BLS), usually on the first Friday of each new month, and represent the previous month's activity. For non-farm payrolls, the BLS takes information from the Household Survey conducted by the Bureau of Census. The survey provides information on employment of the US population and classifies it by age, sex and other characteristics. The survey of Current Employment Statistics looks at about 150,000 work sites, both public and private, to provide industry information on hours and earnings.
Then there is the misleading unemployment rate. The rate is the number of unemployed as a percentage of the total civilian labor force. If the size of the civilian labor force falls and the number of unemployed falls a bit more, then the unemployment rate drops (but not really due to strength). The participation level of the US labor force in the 1990s was over 70%; now they are in the low 60% range. So a smaller percentage of adults are working. Not only that, but in the last report, 65% of the jobs were part time, and more than 50% were low paying positions at retailers and restaurants. In fact, this year low paying jobs have provided 61% of the nation's job growth although those industries make up only 39% of overall US jobs. Meanwhile, mid-paying industries have only contributed 22% of this year's jobs gain.
For employment, there are other indicators as well, such as today's weekly jobless claims (both initial and continuing), and today's (coincidentally) ADP Employment Change which shows jobs growth in the private sector (have been stronger than employment as a whole as government payrolls have dropped).
Nope, rates aren't as good as they were. And in my conversations with LOs and lock desks, the argument that "rates are still good by historical standards" carries less and less weight every week. Has everyone who could refinance done so? In spite of the Fed continuing to buy billions in agency MBS and originators selling less and less every day, the prices of mortgages have not held in well. Yesterday, for example, current coupon MBS prices were worse nearly .5 and the 10-yr closed at a yield of 2.90%.
In the early going things aren't much better today. We've had the August ADP employment changes, expected lower to +170k and actually at +178k - close to expectations. We also had the weekly jobless claims (expected +330k, it went from 332k to 323k), the Q2 final of nonfarm productivity and unit labor costs (+2.3%, unit labor costs unchanged); later, at 10AM EDT is July Factor Orders (lower from +1.5) and August non-manufacturing ISM (lower form 56.0). Rate-wise, the 10-yr yield is the highest it has been in a couple years - 2.96% - and agency MBS prices are worse about .375.