Mortgage jobs; more on QM & underwriting risks in the new world; what about loan limits & gfees?
Of the 45 educational sessions here at the MBA conference, 87 of them have to do with QM. (No, that is not a misprint.) If you have to ask the person in the next cubicle over what "QM" or "ATR" is, you might want to get up to speed soon.
There are many misunderstood things, and topics to argue over, in life. Here is one: whether or not to even buy a house. In this Forbes article, the author explains why she will never own another house - and every LO is advised to figure out counterarguments for each topic.
Did the industry really dodge a bullet last week when Federal Housing Finance Agency (FHFA) acting Director Edward DeMarco said the agency will announce next month whether to reduce loan limits guaranteed by Fannie Mae and Freddie Mac? He stated that any change will not take effect until mid-2014 and would be "across the board" rather than in certain portions of the country. He also stated that possible increases in guarantee fees and more emphasis on GSE risk sharing will be part of the transition toward private participation in the secondary mortgage market. DeMarco also added that FHFA will give lenders and other mortgage market participants at least six months' notice, which could put any change effective date out to late spring of 2014 at the earliest. This was his first speech in five months - it must be odd to have the press out there talking about your replacement.
(Read More: DeMarco Announces Six Month Notice for Loan Limit Changes)
But what are the smartest guys in the room saying about maximum loan levels and gfees? First, he said that, "One of the most direct ways to increase private sector participation and reduce taxpayer exposure is through a reduction in the maximum size of loans that the Enterprises guarantee. This summer the President specifically endorsed a gradual reduction in maximum loan size. I understand the potential timing issues associated with such a change given the other regulatory changes that are scheduled to take place in the mortgage market. FHFA will follow its practice of announcing the 2014 conforming loan limits in late November, at which time further information will be provided on potential reductions in the size of loans the Enterprises will guarantee going forward. We expect to give market participants at least six months' notice of any change. Any reduction would be across the board, not just in some parts of the country. And, consistent with our practice when increasing guarantee fees, any change would be measured and gradual so as not to disrupt markets." So at least nothing will happen until May, but it is a question of "when" and not "if". And look for changes to both the $417k and the $625.5k.
"With an uncertain future and a general desire for private capital to re-enter the market, the Enterprises market presence should be reduced gradually over time. We have three main tools to accomplish this objective: First, risk-sharing transactions are important for reducing the taxpayers' long-term risk exposure. Second, guarantee fees on new mortgages average about 50 basis points...While that level is difficult to evaluate with precision, I believe we are getting closer to a level that would encourage more private sector participation, and we plan to continue pursuing gradual guarantee fee increases in the near future. Third, one of the most direct ways to increase private sector participation and reduce taxpayer exposure is through a reduction in the maximum size of loans that the Enterprises guarantee." In other words, we can expect another gfee increase, perhaps by as much as 20 basis points, orchestrated by the FHFA so impacting both Fannie and Freddie.
Even though the administration is searching for his replacement, DeMarco's opinion still matters, and he still opposes spinning the GSEs back out to the markets. "Of the various legislative proposals that have been introduced in Congress, none of them envision the Enterprises exiting conservatorship in their current corporate form. The recent quarterly earnings reports by the Enterprises show a return to profitability. To be sure this is good news compared to the previous years of losses. But we should keep the recent reports of positive net income in perspective. Much of it has been related to one-time adjustments, such as the reversal of the valuation allowance against the deferred tax asset, or releases of loan loss reserves related to improved housing market conditions. And the Enterprises' positive net incomes continue to benefit from their access to capital markets at close to Treasury rates, and their ability to operate without any capital."
But here's a bit of good news, at least for one vendor. Secure Settlements spread the word that it has successfully completed an intensive SSAE16 audit process and has been awarded SSAE16 Audit Certification. SSAE 16, developed by the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA), replaces the Statement on Auditing Standards No. 70 (SAS 70), which was the standard used for reviewing service organization control processes for nearly two decades. The outside auditor performed an independent audit and extensive testing of control activities and effectiveness at the SSI corporate headquarters and data center, with a full assessment of operations, information technology, human resources policies and procedures, risk assessment monitoring, data security and privacy management, organization integrity and ethics, financial controls, management philosophy and operating style, and oversight by executive management.
On Friday Mortgage News Daily reported that, "Savvy entrepreneurs or established organizations have little to fear from the new qualified mortgage (QM) and Ability-to-Repay (ATR) regulations about to come into effect a new white paper from CoreLogic says. They will find a way to deliver qualified and non-qualified mortgages in a way that meets all the regulations, incorporates sound lending and consumer protections, and makes a profit. The paper, ATR/QM Standards: Foundation for a Sound Housing Market, written by Faith A. Schwartz, CoreLogic's manager of government business and former director of HOPE NOW and Margarita S. Brose, a former director in Barclay Bank's Operational Risk Management Group, is upbeat about the mortgage market, its regulatory environment, and the opportunities it presents. They point to the current environment as resulting from President Obama's goals for a new housing finance system; that private capital will be at its center, but it must maintain affordability and access to homeownership. The Dodd-Frank Act (DFA) required lenders to assess the borrower's ability to repay a mortgage loan and the Consumer Financial Protection Bureau's (CFPB) regulations have formulated the rules to guide this. Full Story: QM and Non-QM Are Going to Get Along Just Fine
(Read More: DeMarco Determined to find Just the Right Amount of "Skin in the Game")
I also received this note from J. Steven Lovejoy with Shumaker Williams (Maryland): "In reference to your ATR/QM analysis. My reading of the final Rule is that even if a loan qualifies as a QM loan, the creditor is responsible for jumping through all the hoops to ensure the borrower's ability to repay. In other words, even if the loan qualifies as a QM loan, it does not eliminate the need to meet the underwriting factors. You appeared to characterize meeting those factors as a seeming alternative to qualifying under QM. I think those factors must be satisfied even for a QM loan because the rule does not provide an exception, only a safe harbor/rebuttable presumption. In my current view, even if you meet the DTI and upfront fees aspects of QM, you don't have a QM-qualified loan if you skip the 8+ underwriting factors." (This ties in precisely with the 8 factors in LoanSifter information in yesterday's commentary: DTI 43%, Interest Only, Balloon, prepayment penalties, no negative amortization, loan term, documentation type, and points & fees cap.)
So what are companies talking about with regard to minimizing underwriting risk in this QM/non-QM world? Some, perhaps more on the portfolio side, are going back to "old school" underwriting, not limited by Appendix Q or GSE analysis. One can use non-traditional income and asset sources, and verify income & job prospects while keeping good records of your assumptions. Remember that LTV is important to credit, but irrelevant to the Ability to Repay (ATR) rules. Successful payment over time is evidence of ability to repay, and companies may only make loans they are confident will repay. Sounds like the old Thornburg days!
Lenders are contemplating future liabilities and legal assaults, and are trying to figure out what to keep in each file. One thing that is important is why a loan doesn't qualify for QM, and a lender should document the need for higher pricing or special loan features. The ATR is a "reasonable and good faith" standard; lenders should document all income sources and expenses more than needed to qualify if possible, along with solid analysis of each of the eight factors. Certainly they should identify verifications and job/income stability assumptions, and do their utmost in minimizing the risk of any data sources being called into question.
What is the current chatter about record keeping? First, it should be easily retrieved, and kept for at least the life of the loan. A disaster recovery plan is important. Who is going to service the loan? Many lenders are saying "bye-bye" to their subservicers - they want control over servicing in order to mitigate the risk of foreclosure and borrower losses. The old subprime folks will tell you that servicing loss mitigation efforts can dramatically impact the borrower's ability to succeed. If a loan fails after 3 years, consider remedies other than foreclosure to mitigate liability. And for those out there who have seen the movie "Taken", recall what the kidnapper says to Liam Neeson: "Good luck."
KBW recently announced a couple deals. Cascade Bancorp, the holding company for Bank of the Cascades, and Home Federal Bancorp, the holding company for Home Federal Bank, announced the signing of a definitive agreement and plan of merger whereby Cascade and Home Federal will merge in a transaction valued at approximately $265.7 million, payable in a mix of cash and Cascade common stock to Home Federal's stockholders. The combined company will have approximately $2.4 billion in assets, serving communities across Oregon and Idaho. In addition, Northrim BanCorp, Inc. and Alaska Pacific Bancshares announced the signing of a definitive agreement for Northrim BanCorp to acquire Alaska Pacific in a stock and cash transaction currently valued at approximately $14.3 million.
The American Bankers Association - through its Corporation for American Banking subsidiary - has endorsed Freddie Mac to provide ABA members with exclusive benefits to assist in their mortgage lending activities. "The alliance offers ABA member banks access to a special set of secondary market advantages including loan origination tools, customized training, and portfolio management services."
PennyMac rolled out their USDA Guaranteed Rural Housing product, which is now on the rate sheet and eligible for purchase for all correspondents who have been approved for delivery.
Taking a quick look at the markets, using the 10-yr as a proxy for rates in general (not always 100% accurate, but somewhat close), on Friday we closed at a yield of 2.50%. Monday we closed at 2.51% - rates have hardly budged. It is too early in DC to know what rates are up to, but we do have a lot of news later. It begins at 8:30AM EDT with the delayed September PPI (+0.2 expected versus +0.3 last) and Retail Sales (+0.1 versus +0.2) reports. At 9AM EDT is the S&P/Case-Shiller Home Price Index (Aug) which is expected slightly higher to +12.5 percent from 12.4, and at 10AM EDT are October Consumer Confidence (75.3 from 79.7) and August Business Inventories (+.03 versus +0.4). In addition, Treasury auctions $35 billion in 5-year notes at 1PM EDT.