In ancient days, when mortgage rates were different for various areas around the country and people relied on carbon paper and Fannie gold book amortization tables, mortgage volumes were cyclical. Lenders could count on a lull in the winter months, especially here in Colorado, since there were fewer home shoppers. But refi's don't have to wait until the summer - they're year 'round although no one expects mortgage rates to go anywhere for the next year or two so there's no hurry. I mention this because this morning the MBA reported that application activity was down last week about 1%, with refi's dropping 1.5% but purchases increasing almost 3%. Demand for mortgage purchases rose for a fourth straight week. Still, the refinance share of total mortgage activity was unchanged at 81% of applications per the MBA.

There is certainly news on the job front. Independent retail mortgage banker VITEK Mortgage Group is seeking a Chief Compliance Officer for its Sacramento headquarters. The 25 year old purchase-focused company (VITEK), which has its GNMA seller/servicer approval, continues to grow through builder & realtor partners. The CCO will re-engineer and lead a compliance division, help with compliance and the oversight of our sub-servicer.  This role will also be responsible for all corporate contract review and monitoring of compliance with investors, agencies, regulatory bodies and vendors. The ideal candidate should have 7-10 years' mortgage banking experience along with either a JD or a BA degree in Business Administration or related field.  Candidates should send their resumes to Libby Feyh at hrd@teamvitek .com.

And AllRegs is growing and looking for account executives to cover the states of Pennsylvania, Maryland and Illinois for AllRegs Education and Mortgage Products divisions. AllRegs is "the leader in compliance, education and risk management solutions for the mortgage and banking industry for the last 20 years." Duties will include selling AllRegs solutions to new and existing customers, meeting specific goals and targets for new sales and maintaining relationships with multiple contacts in each account on various business matters.  The ideal candidate will have a good working knowledge of mortgage banking and relationships in the state territory that can be leveraged. The resumes should be emailed to Larry Zastrow at lzastrow@allregs .com.

The entire industry continues to ruminate on the grim news nearly two weeks ago from the U.S. Department of Housing and Urban Development (HUD) in its 2012 Annual Report to Congress. Recall that the FHA Mutual Mortgage Insurance (MMI) Fund suffered a $16.3 billion deficit. In addition, for the fourth year in a row, the MMI Fund has failed to meet its 2% statutory reserve amount, an amount required under the National Housing Act to be held back to cover excess loss. The Act permits HUD to draw funds from the U.S. Treasury to meet its insurance claim obligations, if the fund is deemed inadequate, so no, the FHA is not going out of business, but putting this in context, the FHA has never had to draw upon Treasury funds for a bailout during its 78 year existence. But now the reserves are at negative 1.44%. As we all know the FHA is a big contributor to first-time home buyer funding, and it insures about 1.2 million residential loans (roughly 15% of all U.S. home loans). The number of loans it insures has increased dramatically over the last few years - for example in 2006 the FHA insured just 5 percent of the all U.S. home loans.

A dissection of the numbers shows that the biggest factor is bad loans made prior to 2010, and especially those made between 2007 and 2009: more than a quarter of the loans made in 2007 and 2008 were seriously delinquent as of this summer, as were 12 percent of 2009 loans - more than 17% of all of the agency's loans were delinquent by the end of September. What does this say about the performance of FHA's traditional borrowers, who are primarily moderate-income, first-time purchasers, people with limited cash for down payments and less-than-perfect credit histories? Is it them, or are they merely a victim of the credit cycle?

So just like any entity that is in the red, where you either cut spending or increase revenues, the FHA is trying to help its bottom line and long term solvency. After four years of being below the minimum, this should come as no surprise. It is raising premiums in an attempt to avoid asking the Treasury department for a bailout. But will it be enough? The Washington Post notes that the FHA's predicament is worse than the $16.3 billion figure suggests since if interest rates remain low more high-quality loans will be refinanced out of the FHA's portfolio, leaving the agency with the dregs.

No one should be surprised if down-payment assistance programs take a hit. No one can argue that the performance levels of FHA loans with Down Payment Assistance programs is worse than the overall population, and a recent audit said that had the FHA not allowed the programs to go forward, then the mortgage program's $13.5 billion net worth deficit would have turned to a positive $1.77 billion.

And no one should be surprised if the FHA raises its annual mortgage premium to possibly 2.05% - it can do that now. In 2013, HUD will once again raise mortgage insurance premium charges an additional 10 basis points, which will result in a $13 per month increase for the average FHA borrower. New borrowers early next year are likely to be charged slightly higher annual mortgage insurance premiums: 1.35% of the loan balance rather than 1.25% at present. On loans above $625,500 in high-cost areas such as California and metropolitan Washington, D.C., the annual premium will go to 1.6% from 1.5%. Conventional lenders don't mind these changes at all.

But HUD has announced a whole series of aggressive steps it intends to introduce to help shore up its flagship program. Some measures may be accomplished by the Department on its own, without seeking authority from Congress. Those proposed initiatives may include revisions to FHA's loss mitigation home-retention options to better assist delinquent borrowers, changes to streamline FHA short-sales, and/or innovations to property disposition practices. In addition, to raise revenues, expect HUD to revise its premium cancellation policy, such that mortgage insurance premiums will be required of mortgagors throughout the life of the loan, rather than ceasing once the outstanding UPB drops below 78%. We'll see how this stacks up against state-specific laws.

Some changes are statutory and therefore will require Congressional approval. There are six such proposals, listed in the Annual Report. The first is to "Extend Indemnification Authority for Direct Endorsement Lenders." The FHA has been trying since 2010 to get Congress to allow the Department to demand indemnification from DE lenders (which represent 70% of all FHA lenders). Right now, HUD has authority to require lenders with Lender Insurance (LI) approval to indemnify HUD for losses. Now HUD will seek to expand that authority to all DE lenders.

The second is to revise indemnification authority. Presently, in order to demand that a lender indemnify HUD for losses associated with FHA loans, HUD must prove that the lender "knew or should have known" of the fraudulent or errant conduct. HUD seeks an amendment to the National Housing Act that will require FHA lenders to retain all fraud-related risk, similar to the standards imposed by the Government-Sponsored Enterprises. Expect this proposal to cause major indigestion for FHA lenders.

The third is to expand its flexibility to terminate origination and underwriting authority, making it easier for HUD to terminate a lender's ability to originate or underwrite FHA insured loans if HUD were to find that the lender had an excessive rate of defaults or claims. Fourth, we may see a revision in Credit Watch Thresholds. This change would revise the statute governing Credit Watch termination authority, by allowing the Secretary greater flexibility to fine tune compare rates of defaults and claims based on geographic area, underwriting standards or populations served. Bottom line - it would allow HUD to more easily terminate a lender's authority to originate and underwrite FHA loans.

Fifth, for those servicers out there, HUD may seek authority to transfer servicing. It is believed that HUD will seek Congressional authority to allow it to transfer servicing from the current servicer to a specialty servicer identified by HUD; require the servicer to enter into a sub-servicing arrangement; or, request a servicer to engage a third party contractor to assist it with loss mitigation activities. Lenders who find themselves in a Tier III ranking, or others whose servicing is deemed inadequate, will likely be subject to this new authority.

And for reverse mortgage lenders, look for more flexibility in HECM program changes by acting through Mortgagee Letters to make changes to the HECM program. The reverse mortgage program (which enables senior homeowners to withdraw funds based on the equity in their properties) dominates the industry but has produced inordinate losses to the FHA insurance fund because of home-value declines and the failure of some borrowers to make their property tax and insurance payments, thereby triggering foreclosures. Look for changes to the program to possibly include restricting the amounts that seniors can draw down in a lump sum upfront. The MBA's Dave Stevens suggests that the FHA also needs to consider some form of basic "qualification standards" for those in the program, perhaps that applicants should have sufficient income and assets to ensure that they don't blow through their initial lump-sum drawdowns and have nothing left to pay taxes and insurance. Currently there are no such requirements.

And FHA Acting Commissioner Carol J. Galante said the agency plans to streamline the short-sale option - where owners are permitted to sell their house for less than the balance on the mortgage - to avoid the huge costs of foreclosures.

There are plenty of opinions. Jeff M. writes, "I think FHA wants to get back to the stability of the late 90s market share and their changes are pushing for this; I think FHA likes to let Fannie and Freddie drive the market with their products and act as a supporting role to that drive, but rising to the occasion in times of crisis; as we see now. Regarding life-of-loan insurance premiums, I actually agree with FHA not allowing premiums to drop off like conventional loans since FHA's insurance policy statutorily must remain in effect for the life of the loan; this was FHA policy from (I believe) its inception. I don't think this will hurt the consumer since as soon as rates drop MLOs will churn the FHA loans into conventional ones. Regarding the future of FHA refinances, having originated FHA loans for 15 years and being a former DE underwriter I think there will always be a place for the FHA refinance given the lack of price adjustments for lower scores along with the more flexible underwriting guides. The FHA refinance will most always be used (as has been the case in the past) for borrowers that either need to streamline their existing FHA loan (and can't go conventional due to high LTV) or due to their credit profile, a conventional refinance is too expensive because of the price hits. When the economy comes back and equity comes back, people's debt will again rise with their income ("Parkinson's law of economics"), then with the confluence of these factors FHA's 85% cash-out refinance will be the loan of choice to consolidate debt for these people; though we are years away from this scenario."

Moving to the markets, yes, rates are great - they may very well stay great for another year or two. But during that time there is continued economic news, so for example yesterday we a Durable Goods (better than expected) and some strong housing price numbers from Case-Shiller and the FHFA - but rates still improved. It is hard to argue with the Fed buying $4 billion a day of residential MBS! By quittin' time MBS prices improved by .250 on decent volume whereas the 10-yr was only up .125 (1.65%). Today we have the release of New Home Sales, a $35 billion 5-yr note auction, and the release of the Fed's Beige Book. Currently the 10-yr is down to 1.61%, and look for an improvement of about .125-.250 in rate sheets.

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