Traders report that there has been "little resistance to higher rates." What does that mean? Mortgage banker origination has been heavy (hitting over $3 billion yesterday. So locks appear to be decent - but we all know that is illusory. Lock desks have seen it for many years: rates shoot up, borrowers and LOs are pushed into panic locking, shaking the low-hanging fruit off the trees, and then rates stabilize or even slide back down and locks dry up. Not only that, but in many cases the new locks are from loans that are either not ready to lock or are for loans that are even tougher to close, resulting in slightly lower pull through or renegotiations/extensions in the future.
Speaking of locks, the MBA reported that its survey of 75% of retail originations showed that the total number of mortgage applications filed in the U.S. last week fell 9% from the prior week. Refis fell for a third consecutive week, down 12%, although purchases were up 3%. The share of applications filed to refinance an existing mortgage fell to 71% from 74% a week earlier. Adjustable-rate mortgages, or ARMs, made up 5% of total activity.
But for now the best execution for 30-yr. mortgages clearly point to 3.5s, which means that rates have definitely moved to 3.75%-4.00%, or even higher depending on loan level price adjustments, and those setting prices are having to deal with companies sacrificing margin on the behalf of keeping loans coming in the door. And those with loans scheduled to fund this week are making sure they do - no one wants to try to extend when their rate lock is three points worse than the current market. The good news, although it is a little hard to focus on right now, is that rates have moved higher in reaction to the continued good economic news coming from various sources, not the least of which is housing and jobs - and no inflation. That may change, but if more borrowers qualify, or fewer homes are underwater, that is not a bad thing.
Another good thing is continued stirring in the jumbo (non-agency) market. JPMorgan Chase & Co. is planning its second sale of U.S. home-loan securities without government backing, but backed by $443 million of "high-quality" jumbo mortgages. The security is being rated by Kroll Bond Rating Agency and DBRS Ltd., which expect to grant top grades to most of the notes. Bloomberg reports that this latest Chase deal, however, "contains relatively weak contractual promises that lenders or the issuer will repurchase loans that fail to match their promised quality, DBRS said, but that 'the representations and warranties framework in this transaction does show some improvements' from JPMorgan's last deal, including how fraud is defined, DBRS analysts including Claire J. Mezzanotte and Quincy Tang said in the statement."
Redwood rolled out $299 million a couple weeks ago. Chase's last deal was back in March ($616 million), and so far this year non-agency bonds have hit the $6 billion level - much more than the $3.5 billion in all of 2012. Barclays' analysts said in a May 21 report that the expansion will be slow to accelerate and maintained a 2013 forecast of $12 billion to $15 billion. (Sales peaked at about $1.2 trillion in each of 2005 and 2006.)
But anyone setting jumbo rates and prices has noticed that the relative yields buyers demand on the bonds have been widening as issuance increases and amid investor concern that government-backed housing debt offered better value and that the mortgages will prepay slower than expected if interest rates rise or faster if they fall. Per the Bloomberg article, "A May 17 offering by Redwood Trust included $299 million of top-rated bonds that priced to yield 2.82 percent, or 1.90 percentage points more than benchmark swap rates. That compared with spreads of 1.75 percentage points on similar securities sold last month by Redwood and as low as 0.97 percentage point in January."
Ginnie doesn't want to be left in the dust, and recently announced that it guaranteed more than $39.95 billion in mortgage-backed securities (MBS) in April. "Our monthly issuance has not dropped below $30 billion in more than one year, proving the importance of the Ginnie Mae MBS as a secondary market financing vehicle," said Ginnie Mae President Ted Tozer. "Ginnie Mae continues to fill the void in the housing financing industry that was left by the exit of the private." Issuance for Ginnie Mae II single-family pools led the way with more than $31.20 billion, while Ginnie Mae I single-family pools totaled nearly $8.75 billion.
Issuance for the Ginnie Mae Home Equity Conversion Mortgage-Backed Security (HMBS), included in Ginnie Mae II single-family pools, was $972 million. Total single-family issuance for March was $37.81 billion. In addition, Ginnie Mae's multifamily MBS issuance reached $2.146 billion for the month. Ginnie Mae raises capital from investors in the global credit markets to ensure liquidity for affordable rental and homeownership opportunities across the country. Through its MBS, Ginnie Mae finances housing mortgage insurance programs run by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Office of Public and Indian Housing (PIH), and the Department of Agriculture's Rural Development Housing and Community Facilities Program (RD).
Let's move on to an overdue update on recent investor, lawsuit, agency, state, and lender news!
PennyMac reminds lenders that loans closed on or after June 15th will require 2012 tax transcripts unless the file contains evidence that an extension was filed along with a copy of the IRS notice showing that no return was filed. Loans that do not require income (non-credit qualifying FHA Streamlines and VA IRRRLs) are exempt.
The June 15th deadline also applies to Fifth Third, which will require a 2011 transcript, current paystubs, and a 2012 W-2 in addition to 2012 transcripts showing that no return was filed.
Lawsuit settlements are the name of the game. Nick Timiraos with the Wall Street Journal noted that the FHFA (which runs Freddie and Fannie) reached a settlement with Citigroup over a lawsuit in which the government was seeking unspecified damages regarding mortgage bonds sold to Fannie & Freddie. "The Federal Housing Finance Agency filed suit against Citi and 17 other banks in 2011 alleging that the banks had misrepresented the quality of mortgages packaged into more than $200 billion in bonds."
Fannie Mae has rolled out a new Quality Control Self-Assessment worksheet that includes checklists that cover ten key topics. The section on governance and authority, targeted at CEOs, senior management, and Boards of Directors, emphasizes the establishment of a target defect rate (both net and gross), identification of the company's issues, and any resulting remediation activity and implemented QC processes. The checklist also stipulates that lenders should have an origination training paradigm and a clearly defined pre-funding and post-closing program that produces regular reports and is managed by a party not associated with the front-end processes. For pre-funding, the program should include a monthly audit of a random sampling and a review that focuses on higher-risk loans, while post-closing program heavily emphasizes reviews to ensure delivery data quality. The checklist also provides specifics on how to establish and monitor a target defect rate, appraisal management, reporting, QC vendors, and third-party originations. To view the worksheet in full, visit www.efanniemae.com.
MGIC has expanded its underwriting requirements to allow manufactured homes, doublewide or larger and including condos and co-ops, in South Florida (West Palm Beach, Fort Lauderdale, and Miami). The transaction must be a fixed rate or fully amortizing ARM with minimum seven years to the first adjustment rate/term refi or purchase with a loan amount of less than $417,000 and a maximum DTI of 45%. Primary residence transactions are subject to a maximum LTV/CLTV of 95% and minimum FICO of 660; see the MGIC Underwriting Guidelines for full details of the restrictions on second homes. Manufactured homes in Puerto Rico and Guam are ineligible, as are properties on leased land, transactions with terms greater than 30 years, and temporary buydowns. For attached housing, condos, and co-ops in South Florida, the transaction must be a rate/term refinance or purchase on a primary residence and must be underwritten by MGIC. LTVs of up to 95% are allowed for loan amounts up to $417,000m while loan amounts up to $625,500 and co-ops are limited to an LTV of 90%. All transactions require a minimum 720 FICO.
Essent Guaranty, in conjunction with Ellie Mae, has announced the integration of its services with the Encompass360 mortgage management software. The integration allows lenders to underwrite their loans based on Essent's MI guidelines and receive a rate quote with more convenience.
With House Bill 431, the Vermont Legislature recently made changes to the Vermont mediation program established in 2010 to comply with the mediation requirement of HAMP. HAMP, or the Home Affordable Modification Program is a federal program set up as a result of the mortgage crisis that allows homeowners having trouble paying their mortgage to enter into modifications with lenders to lower their monthly payment. In 2010 the Vermont legislature established a program to "assure the availability of mediations and application of the federal Home Affordable Modification Program." 12 V.S.A. Ch 163, Subchapter 9. This legislation established a system under which Vermont residents facing foreclosure can take advantage of the mediation guaranteed them by HAMP. Last month, the Vermont legislature passed amendments to this legislation making it applicable to all government loss mitigation programs. These government loss mitigations programs include HAMP, as well as "any loss mitigation program for loans owned or guaranteed by government-sponsored entities." These government-sponsored entities include Fannie Mae, Freddie Mac, FHA and the VA.
Fifth Street Finance Group entered into an agreement with specialty lender Healthcare Finance Group whereby the former will acquire the latter as a portfolio company. HFG's portfolio of 57 loans is valued at $270 million, and Fifth Street anticipates investing about $110 million of its available liquidity to effect the acquisition.
The Hawaii Department of Financial Institutions has revised its continuing education requirements and will require three hours of Federal Law, two hours of Ethics, two hours of lending standards for non-traditional mortgage products, and one hour of HI-DFI-specific laws as of July 1st.
Two new appraisal messages were implemented the Fannie Mae UCDP on May 18th, while five EarlyCheck edits (LTV calculation, VA maximum loan amount, condo classification, co-op classification, and APR spread) will be modified on May 20th.
On to the markets! As noted in the opening paragraphs, rates have climbed, and in fact yields on Fannie Mae and Freddie Mac mortgage bonds rose to the highest in 13 months. Is the economy really doing that well? We will see, but speculation that the Fed will slow its bond buying is being fueled by positive readings on U.S. housing, consumer confidence, and an "okay" job market. Yesterday we learned that the Conference Board's index of consumer sentiment climbed more than forecast to 76.2 in May, the highest level in more than five years, and the S&P/Case-Shiller index of property values in 20 cities increased almost 11% in the year ended March, the biggest 12-month gain since April 2006.
For today we had the MBA applications numbers (noted near the top) and we'll also have a $35 billion 5-year note auction. But LOs and lock desks know that the last time MBS prices were at these levels was roughly one year ago. Maybe at some point we'll remember that Europe still has major problems (why is the market ignoring them?) and rates will slide back down, but until then, in the early going, the 10-yr is still sitting around 2.17% and MBS prices are roughly unchanged.