Freddie and Fannie Can Earn a Profit, Right? And their Double-secret "High Risk" Watch List of 300 lenders
"Rob, I'm a new LO in Connecticut. What's the scoop on this news
about loans in my state being more expensive than others for home loans?"
Under the FHFA's proposal, Fannie & Freddie would hike fees between 15 and
30 basis points on lenders in Connecticut, Florida, Illinois, New Jersey, and
New York. During a foreclosure those states apparently have considerably
longer time frames to obtain marketable title than the national average as well
as costs that range between 9 and 18 percentage points above the national
State specific pricing, especially for aggregator's servicing released
premiums, have been around a long time. (In fact, it is not hard to remember
the days when newspapers would publish the average rates in different areas of
the U.S., rather than a national average.) And it is no secret that the
agencies are out to make profits, just like the rest of the industry, and rumored
that many segments of their businesses have a goal to be self-sufficient in
case they're eventually peeled off. Here is the link to FHFA press release.
And here is the link to the actual notice.
But don't stop there! The FHFA's report on the "High Risk"
Watch List at Freddie and Fannie is worth a gander. The report made a case
study out of TBW, but provides information about how to stay off the list
(wherever the list is - ask your rep). Go to http://www.fhfaoig.gov/
and look under "Current Activities" for "FHFA's Oversight of the
Enterprises' Management of High-Risk Seller/Servicers".
Recently Edward DeMarco, Acting Director of the Federal Housing Finance
Agency (FHFA) and thought to be a good guy by most accounts with whom I've
spoken, sketched in a broad outline of the agency's vision for the future of
the mortgage finance markets in the coming years. That future, of course, may
or may not include Fannie or Freddie. It seems that the FHFA has three goals
for its conservatorship: build a new infrastructure for the secondary mortgage
market, gradually contract the GSEs' dominant presence in the marketplace while
simplifying and shrinking their operations, and maintain foreclosure prevention
activities and credit availability for both new and refinanced mortgages.
Any lender issuing Fannie securities is quick to notice that a new
securitization platform for the secondary market is a key to this vision, but
will also notice that a single, common securitization platform is not the same
as a single security. The FHFA plans that this platform would be a utility that
would outlast the GSE's. DeMarco said he strongly believes in competitive
markets and, as a utility, the platform should enhance liquidity,
standardization, and transparency, all of which should foster that
competition. Whatever the structure of the secondary market of the
future, certain key functions will need to be performed and in many cases, like
developing data reporting standards, the standardization of such functions will
benefit the overall market.
And taking an even further step back, the last FHFA semi-annual report to
Congress included a section detailing, in financial terms, the fall of Freddie
and Fannie. Are we being reminded that anyone who doesn't know history is
doomed to repeat it? The GSEs' mission was to provide liquidity to the housing
finance system. They did this primarily by supporting the secondary mortgage
market through the purchase of residential mortgages from originators who then
used the proceeds to originate more loans, either holding the mortgages in
investment portfolios or packaging them into mortgage-backed securities (MBS).
These MBS were then sold to investors, and with a fee, the GSEs guaranteed the
performance of the MBS they sold. The operations were financed through
MBS sales and through funds borrowed from large individual, institutional, and
foreign investors. The GSEs hold they maintained special accounts or reserves
to which they made regular contributions called provisions for loan losses, as
there will inevitably be defaults from some homebuyers. The fees they charged
for their guarantees were intended to cover the small subset of loans that were
expected to default and reserves were established for those losses - see where
the gfees come in?
Upon default, loan servicers may commence foreclosure and take possession
of the collateral property. Upon completion of this process, the GSE
erases or charges off the unpaid mortgage balance, debiting the corresponding
loss reserves. If the collateral property is subsequently sold the
proceeds will offset losses. When the housing market collapsed, losses on
loans and guarantees vastly exceeded that loss-covering capacity. The GSEs had
grown rapidly with only a thin capital cushion to provide protection against
losses, and the capital they were required to hold met regulatory standards but
fell well below the capital levels maintained by many large financial
institutions (private money), eventually evidenced by rates of seriously
delinquent mortgages they either owned or guaranteed exceeded any levels of the
previous decade. And as we all know, since conservatorship the private sector
has almost abandoned the secondary market and the GSEs and Ginnie Mae have
stepped up to fill the void.
Of course, wanting to earn a profit leads to business decisions that aren't
always popular in the industry - no surprise. I received this note: "Rob, there
is a lot of informal chatter about sales caps. Some say that a policy
exists, others say it is being formulated, still others say that it won't
happen given the agencies supposedly wanting to cultivate more clients and the
government not wanting to dampen any housing rebound. And I have heard that the
MBA has had policy discussions with Fannie Mae. At our shop we think that the
agencies will have to consider how selling servicing fits into this. More
precisely, as best we can tell from the rumors, the sale of servicing
doesn't currently provide relief from the potential cap. I understand the
counterparty concerns that Fannie has, but this aspect of the new policy makes
no sense. Sale of the servicing transfers the sellers' reps &
warrants to the servicer, so that reduces Fannie's exposure to the original
seller. Hopefully any agency putting a cap in place during the next year
considers this. Ironically, under the Bifurcated Co-Issue program, the seller's
reps don't transfer to the servicer, so Fannie requires a significantly higher
net worth for a seller to participate. I guess they feel like they can
have it both ways?"
But this note on the gfee increase: "I'm amazed at how many comments
I've heard and read from the mortgage industry about the guarantee fees hurting
the customers, borrowers, and consumers. I'd like to know the last time
10 bps made a deal fall out or cause the borrower to not qualify. Even if
the lender has to increase rates by 1/8th to cover the cost, it's hard to say
that a consumer getting a 3.625% 30 year fixed instead of a 3.5% rate is
getting taken by the government. Let's remember the government is the
reason the rates are this low to begin with. Our industry can't have it
both ways. We can't have the government pressuring and keeping rates low
while at the same time not expecting them to 'attempt' to be sustainable."
to recent agency and investor updates and event announcements, I am very
excited because Lindsay Lohan and Amanda Bynes have decided, as part of their
work release program, to help with the investor updates. It turns out that,
deep down inside, both of them feel very deeply about documentation, DTI
changes, mortgage conferences, and program rollouts.
Washington State mortgage professionals - mark your calendars - the Washington
Association of Mortgage Professionals (WAMP) 2012 Business and Humanitarian
Leadership Awards (annual industry celebration) is being held at the Seattle
Renaissance Hotel, Thursday, October 4th. Per the organizer, last year's
event was very well attended and everyone had a great time, this year's event
promises to be even more spectacular. For additional information, and to
register for the event, please visit www.myWAMP.org.
Many LO's are pleased about an alternative to documenting income for
Refi Plus loans where payment increases will be under 20 percent.
Rather than requiring that at least one of the borrowers has a documented
source of income, Fannie Mae will now accept verification of liquid financial
reserves equal to at least 12 months of the new mortgage payment (PITIA). Documentation
can be through one or more recent statement of liquid reserves in bank
accounts, money markets, stock accounts, retirement savings accounts, or
certificates of deposit. Fannie Mae is also providing streamlined
documentation requirements for other underwriting criteria for these loans: https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2012/sel1209.pdf.
Not to belabor the point, but Fannie relaxed HARP reps and warrants.
Specifically, "the lender is not required to make any representation and
warranty as to the value, marketability, or condition of the subject
property." Documentation and borrower qualification regs were also
loosened. One LO wrote to me, "Take that NAR!"
Citibank has revised
its loan registration policy for large deposits. In cases where an
account was opened within 90 days of the loan application or the sum of
unexplained deposits on the borrower's account statements over a 30-day period
exceeds 25% of the total monthly qualifying income, the source of the funds
must be fully documented and explained. This will affect loans registered
on and after September 22nd.
In compliance with recent Freddie policy changes, Citi has updated its
eligibility requirements for condo projects, which now apply to all project
review types. The new requirements state that all projects currently
embroiled in litigation concerning their soundness, safety, habitability, or
functionality are ineligible. Litigation involving non-monetary neighbor
disputes about rights of quiet enjoyment, for example, would not render a
project ineligible. Lawsuits where the litigation amount is known and the
insurance provider has agreed to both cover this amount and provide defense are
also acceptable. As part of Citi's alignment with Freddie policy, all
budget and legal document reviews for condo projects will be subject to the
scrutiny of additional details.
Citi has clarified that a verification of mortgage must be obtained for each
mortgage liability where the borrower is presently an obligor on the note
secured by real estate and the mortgage is not disclosed on the credit
report. The mortgage must also be verified if borrowers are obligated on
an undisclosed mortgage and their personal tax returns include mortgage
interest deductions or payments.
The Citi requirements for tax-exempt income documentation have been updated to
state that borrowers with tax-exempt and/or non-taxable income are to be
evaluated using the same protocol as for borrowers with higher gross taxable
income. No additional documentation is necessary for borrowers who
indicate that they did not file a tax return provided that the 4506T transcript
backs this up.
Lastly, Citi reminded correspondents that it will accept Life of Loan flood
certifications from Core Logic Flood Services at no charge, while loans
submitted for purchase with life of Loan Certification from other determination
services are subject to a $10 fee.
Well, the markets grind on. It is hard to be excited about economic news
when we know the Fed is going to keep overnight rates near 0% for 2-3 more
years, and are in buying billions of MBS every day soaking up the supply.
But yesterday after the early going we learned that the Conference Board's
index of leading economic indicators fell 0.1% in August, following an increase
in July and a decline in June. "The U.S. LEI has declined in three of the last
six months. While its six-month growth rate has slowed substantially, it still
remains in growth territory due to positive contributions from the financial
components including stock prices, yield spread and the Leading Credit Index." And
the Philadelphia Federal Reserve Bank's general economic index improved to
minus 1.9, higher than forecast, from minus 7.1 in August.
The weak news led to agency MBS prices being "higher and tighter" (to
Treasury yields), and setting more price records. Hey, what's to stop more of that if originator supply is $2 billion per
day and the Fed is buying $4 billion? MBS prices improved by about .250 -
whether that was passed on to rate sheets remains to be seen - while the lowly
10-yr Treasury was basically unchanged at 1.78%. And in the early going
today, with no scheduled news, we're unchanged from Thursday afternoon.
Perks of reaching 50, or being over 60 and heading towards 70 (part 1 of 2):
1. Kidnappers are not very interested in you.
2. In a hostage situation you are likely to be released first.
3. No one expects you to run. Anywhere.
4. People call at 9 PM and ask, "Did I wake you?"
5. People no longer view you as a hypochondriac.
6. There is nothing left to learn the hard way.
7. Things you buy now won't wear out.
8. You can eat supper at 5PM.
9. You can live without sex but not your glasses.