A study by the Brookings Institution of the largest 100 metropolitan areas quantifies what Realtors have intuitively known forever: housing costs an average of 2.4x more near a high scoring public school than a low scoring school (about $11,000 more per year). In addition, home values are $205,000 higher on average in the neighborhoods of high scoring versus low scoring schools and those homes have 1.5 more rooms. Finally, the study found 60% of high school dropouts came from the bottom 20% of families by income and 70% of students enrolled at the most competitive universities in the country came from the top quintile of parental socio-economic status. The moral: pick your parents wisely! (And check out the joke below.)
"Rob - does anything the Fed do, or doesn't do, impact REITs? If they are expected to be buying a sizeable chunk of mortgage production this year, should we be worried?" In my humble opinion, the Fed isn't as unpredictable as the market might have you think. Or the financial press, which often has little else to talk about. The decisions of the Fed are not as random as, say, a drunken sailor walking down the dock (a popular comparison for stock movements). But perhaps more importantly, and think about this the next time the Fed meets or releases its minutes, there are implications of the market and press perceiving the Fed to be less predictable - and implications for mortgage REITs.
Remember the big market move in January when the Fed reminded us that eventually QE3 would cease? And this week the big equity market reaction to fairly innocuous statements of the obvious from "several participants" in the FOMC meeting minutes? Both are proof that nobody really has any confidence in what things are worth in the absence of central bank manipulation. (And that is "manipulation" rather than "support" - where would home loan rates be without the MBS buying, combined with the gfee and loan level price adjustments we've seen?)
Returning to REITs, many analysts argue that the group becomes relatively more attractive (vs. broader equities) when ongoing Fed manipulation becomes less certain. Sure, a Fed pullback on asset purchases probably helps MBS spreads, so that's good. But more importantly, the prospect of yanking the rug out from under the "risk on" trade potentially crushes beta, and mortgage REITs (very generally speaking) are just about the opposite of the beta trade. (What is a "beta"? It is the measure of a stock's risk in relation to the market. Let's say a particular REIT has a beta of 0.7 - it means the REITs price is likely to move up or down 70 % of the market change.)
So maybe the REIT group sells off a bit on book value concerns, but analysts argue that a comfortable 12% yield with contained book value risk suddenly looks a lot better to somebody thinking "Well, equities are up 8% on the year, I can lock that in, and rotate into a fairly defensive 12% yield and either wait for a broad market pullback or clip coupons until I at least feel better." See the options one has when you have a big research staff and lots of computers?
REITs are very good at leveraging their capital, similar to the way a homeowner who buys a $100k house with $20k down. If the house price goes up 10% in a year, the homeowner earns a 50% return on their money; if the house drops in value by 10%, the homeowner loses 50%. Bear with me here - take for example the contrast between generic Fannie 30 year 3% securities (containing 3.35-3.875% mortgages, and down 189 basis points year to date), versus Fannie 30-year 5% securities (down only 16 basis points) or Fannie 30-year 6% securities (yes, they're actually out there, and are up 33 basis points). Then throw 8x leverage on those changes. Some REITs have effectively said "we're really not interested in playing the low coupon generic game because we know we don't know how to hedge it." Others embrace "trendier" MBS pockets (e.g., the low coupon trade) for a number of reasons. Regardless of investment, when the Fed throws the schedule and length of its manipulations into question, it might sway a REIT toward portfolios further away from the bull's eye of Fed purchases - and the Fed is mostly buying 3%, current coupon securities. So the smartest guys in the room think that REITs will continue to buy mortgage-backed securities, and some may actually enjoy the "uncertainty" about the Fed's actions. (The rest of us can be happy that the Fed will certainly buy current coupon MBS well into the future.)
"Rob, what do you hear about the USDA program, where loans are insured by the U.S. Department of Agriculture? It is my mainstay - is it going away? I've used the 100% financing option for many borrowers under the USDA Rural Development Guaranteed Housing Loan program." I can't predict what the government is going to do. But from what various sources have written to me (thank you very much!!), it looks like updates will be made. Large investors have a handful of underwriting changes in queue as USDA announced a new guide effective immediately, but when you have a lot of moving pieces like the big aggregators do, it takes some time to understand what the material changes are to policy they have to make.
I have heard nothing on the front of the program going away permanently. This is contingent on funds though (having them available throughout this fiscal year) and what will be approved for the next fiscal year. Digging into some of the details, regarding Credit Waivers the USDA now requires a credit waiver form (AND all supporting documentation) for loans with a credit score < 680 (previously required if < 640 credit). Loans with a credit score >/= 680 will also require a credit waiver if there is any adverse credit (supporting documentation needs to be retained in the loan file, but does not need to be sent to USDA). Verification of rent or housing debt: Loans with a credit score < 680 will require verification of 12 month rent/housing payment history for borrowers that currently pay rent/housing expenses (previously required if < 640 credit). Student loan documentation must identify the current payment, loan type and payment structure; the credit report alone is not acceptable documentation. The payment used to calculate debt ratios will vary based on the payment structure (previously the payment could be determined by using 1% of the balance). Lastly, debt paid by the business under a Sole Proprietorship must be included in ratios (no longer excluded). (Editor's note: I sure hope this is right, as I don't want letters from underwriters filled with words in capital letters!)
And here is one note regarding the USDA program: "I personally had a conversation with a couple of my contacts at USDA including the new Director of Housing in California regarding the current and future status of the USDA program. USDA had a lot of cutbacks of its 'staff in the last 12 months (golden handshakes). With that being said, they hope they will not be severely affected by the government sequestration. There is currently plenty of money to fund the USDA program, however they estimate sequestration would enact approximately 8.2% in budget cuts. This program is heavily supported politically. The bigger concern from inside USDA is what will happen after March 26, 2013 since that agency has no authority to approve loans after that date unless a budget is passed or the continuing resolution is extended (which in all probability will happen). Additionally, as we know, eligibility sites will be reduced. New maps are poised and ready to go. However, posting the revised maps to USDA's website has been delayed. Homes which are USDA-eligible today may not be USDA-eligible in April.
While we're mired down in underwriting and updates, we may-as-well turn to some current news from agencies and investors. As always, it is best to read the full bulletin!
Citibank has updated its Ineligible Originator List, which shows all brokers, correspondents, and others party to origination that are prohibited from playing a role in the origination process of loans that are submitted for purchase. Here's the full list.
Effective for new loan registrations dated February 23rd and after, Citi will remove its existing LTV/CLTV/HCLTV, credit, and occupancy-related overlays for condos in Florida and Georgia. Investment properties will be permitted, and relevant transactions will no longer be subject to the previous 60/70% LTV requirements. LTV/CLTV/HCLTV, credit, and occupancy guidelines for similar condo transactions will apply instead.
Citi is aligning its policy with Fannie Mae, beginning on February 23rd, such that it will treat loans as cash-out refinances if the borrower finances the payment of real estate taxes for the subject property in the loan amount without establishing an escrow account or the real estate taxes are more than 60 days delinquent. This does not apply to DU Refi Plus or LP Open Access transactions.
As per the Freddie Mac announcement in October 2012, Citi will cease to accept 5/1 ARM LP Open Access loans with 5/2/5 caps after April 30th. All affected loans must be purchased by this date.
Fifth Third has announced plans to start offering HomePath loans at some point this spring, likely in early April. Clients are reminded that even though HomePath is included in the most recent system update, it should not be selected until further notice.
Effective for applications received on February 10th and after, Fifth Third has implemented new caps for all conforming 5/1 LIBOR ARMs. The caps are now 2/2/5 with a margin of 2.25%.
As a reminder, Fifth Third will not consider loans eligible for purchase if the lender-paid mortgage insurance premium is disclosed in the GFE or HUD-1. Single premium LPMI must be from Radian unless otherwise stated in the relevant product manual.
PennyMac has implemented a defective delivery re-pricing schedule that is now in effect for all Best Effort locks, Mandatory Forward trades, and Loan Level Bulk trades dated February 15th and after. Under the re-pricing schedule, any loan that is delivered on time but has defective documentation or information will be subject to an adjuster of -.125% for 8-14 days, -.250% for 15-22 days, and -.375% for 23-29 days. Loans aged 30 days or more may either be subject to an additional -.125% for each 7-day period or rejected.
As per its seasoned loan timetable, closed loans not delivered within 60 days of the Note date are subject to review, approval, and adjusters in increments of --.125% for every additional 30-day period up to 120 days. Loans aged between 120 days and 9 months may be subject to additional fees as determined by PennyMac upon review.
Plaza Mortgage has revised borrower overlays for its FHA Streamline program, lowering the minimum FICO to 640 and allowing CLTVs up to 125%.
Mountain West Financial is no longer accepting Data Quick reports for VA IRRRLs; full conventional appraisals are required instead.
M&T Bank has released a list of Federally Declared counties where properties require full interior and exterior re-inspections. For the full list of counties in Connecticut, D.C., Delaware, Maryland, Massachusetts, Maine, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, and West Virginia, refer to the most recent Risk Management bulletin, available from the M&T site.
In training and events news:
Wells Fargo will be offering a Diverse Segments Educational seminar on March 14th in Frederick, MD. Designed for loan originators, branch managers, CRA managers, Affordable Housing specialists, and purchase market specialists, the program will focus on the current purchase market and how to strategically use available data to build a solid purchase strategy. Visit here to register for Chuck Bishop's lesson.
Don't ever, ever, ever complain about your dentist again. Ever.