Huh? I head to Southern California today, but the big news comes from Illinois. Cole Taylor Mortgage looking for a buyer? It probably won't be the first time this year we hear about a sizeable mortgage company going through a transition.
The Senate Banking Committee delayed a vote until Thursday on the nomination of Mel Watt to head the FHFA. He is expected to pass through the Committee along party lines, while his fate before the full Senate is uncertain. Watt's confirmation, however, is not likely to lead to as adverse a reaction versus if mortgage rates were significantly lower as they were when the President announced the nomination. A particular concern had been the potential for a change in the HARP cut-off date to pre-June 2010 from pre-June 2009 if he became the new head.
"Rob, have you heard anything from the CFPB on the potential rate shock from 3-1 or 5-1? Isn't that agency supposed to protect the consumer from any unpleasant surprises down the road, like their payments going up when the ARM resets?" Good questions. First, I have not heard anything about this from the CFPB - are you suggesting that intermediate ARM loans be banned because of the potential payment shock? A lot of banks would be unhappy with that move. Obviously this information should be well disclosed. The CFPB's goal is to protect the consumer - if you have suggestions or comments, you should direct them to the CFPB at (202) 435-7000 or email@example.com. That being said, we can only protect the consumer from so much...
As a quick aside, since in the ARM market we seem to witnessing strong consumer demand but tepid investor demand, selling mortgages really originated out of the Alternative Mortgage Transaction Parity Act AMTPA. What most people do not understand is that for the most part, banks no longer lend their own money - they don't have enough deposits. (If I have $100,000 in savings, and I make a loan to you for $100,000, that's it - I'm done, and tapped out. I don't have the money to make another loan.) Simply put, most U.S. banks are too small to meet the nation's demand. In the old days our grandparent put their life savings into the bank and it sat there forever. Now there are other investment vehicles, and banks, and non-bank lenders, tend to sell their loans into the secondary market so they can be paid off and use the money to make new loans. One might argue that many of the small banks act as brokers, an issue which the CFPB may have overlooked.
And lastly, regarding hedging ARMs, there are alternatives such as selling them on a best efforts basis to the agencies, using 15-yr securities, and so on. I don't have a favorite, but the last blurb I saw on it came from Banc of Manhattan Capital. "As the future of the current interest rate environment becomes less certain, many originators are looking to diversify their product profile away from a solely Fixed Rate Refinance focus before the inevitable shift in rates leaves them without a production plan. The BOMC ARM Program directly addresses the two primary obstacles that prevent small to mid-sized originators from ramping up their agency ARM originations: Uncompetitive Pricing and Hedging Uncertainty. These obstacles stem from originator's inability to directly access the ARM MBS market due to pooling constraints, forcing them into the far less competitive pricing of the major aggregators. The process is simple: 1. when originating an ARM loan, the lender gets a live MBS market price for a forward commitment in the size of the loan. 2. The lender continues to originate new loans over a one or two month period, locking pricing along the way, until a minimum $1 million pool size is achieved. 3. The originator forms and delivers the pool to satisfy the forward commitment. A final price is calculated based on the weighted average of the MBS forward commitments and predetermined buyups and buydowns to address changes in Margin, Rate and Change dates. No, this is not a paid announcement, and I am sure other broker dealers have similar programs, but in this case if you're interested contact Tad Dahlke (Tad@bomcapital.com) or Hal Hermelee (Hal@bomcapital.com).
"Rob, have you seen a list of what is included in the 3% caps lenders are facing?" I have not seen a definitive list, although I have it from a good source: "The CFPB has told me that LLPA are included. You can offset them if you have SRP/YSP. If the borrower paid the LLPA directly it will be included in the 3%. What is scary is CFPB doesn't take into account volatile market conditions. When I brought up that SRPs disappear rapidly in a rising rate environment, they appeared perplexed. Think back to the last time rates were in the low 5's and we actually had some inverted SRP/YSP numbers. At one point escrows were in the 3%, but that seems to have subsided." If anyone has an exact list, please let me know and I will publish it.
I am not compliance expert, and am certainly willing to pass along tips. Charles Everson with Peoples Bank (KS) writes, "Please know that it is required to disclose loans correctly based on what we know. All the time, no matter what. Scenario: on a conventional loan, the estimated appraised value means LTV is 80.01% but the appraisal hasn't been received yet. It is absolutely required per RESPA to disclose the loan with mortgage insurance. Should the value come in high enough that the LTV is now below 80%, you should redisclose without the MI. If you disclose a conventional loan higher than 80% LTV with no mortgage insurance, it is not a valid 'changed circumstance' to add MI later after the appraisal comes back. The company would then have to eat the out-of-tolerance portion of the MI (plus it would be a violation of RESPA and we would be in regulatory trouble, not to mention the fact that the investor may choose to not purchase the loan)."
I also received this note from New York: "I had a long-time broker come to my office this morning, in shock. He has been told he has to become a banker to continue doing business after Jan 1. It appears to me that the CFPB is intentionally attacking 'Small Business.' They fully understand there is no one in government that can combat them. SBA Advocacy isn't really an advocate for small business unless it involves the EPA. House Small Business doesn't understand the Rules or their impact. Regulatory Flexibility Act, even with the 2-3 Executive Orders has no one to enforce it. Officials admit that there is a broker (as a small business) disparity. That would have called for a SBREFA Study, but none was done and CFPB certified it to GAO. The SAFE Act cost me about 16x more than a Bank/large business and it was certified to the GAO, with no hearings. QM, same thing. Why do we have RFA? If many government agencies openly or flagrantly skirt the intent of RFA why have it exist. It's all window dressing for the public."
One VP of Operations from Indiana wrote to me and observed, "Rob, I am seeing a lot of daily fluctuations in our secondary marketing profit and loss. We're using a hedging company - isn't it supposed to eliminate volatility?" Hedging seems to be somewhat misunderstood, although volatility may be reduced somewhat. You may want to check your investor line-up. I am not going to name names, but when a lender is selling to "2nd tier" companies who change prices in a much more random fashion than the mortgage-backed security market would dictate, it will lead to volatility. In other words, if your security hedges are unchanged on a given day, but your pipeline is marked down .250 in price due to Chrisman Mortgage, your only mortgage buyer, making their prices worse because they're trying to slow volumes due to operational issues, well, you are going to suffer.
This morning the MBA quantified what the industry already knew: Mortgage applications fell 2.6% for the week ending July 12, with refis dipping 4% from the previous week: the lowest level since July 2011. But the purchase index inched up 1% from last week - someone is out there buying houses using credit! As a whole, the refinance share of mortgage activity posted its lowest level since April 2011, falling to 63% of total applications, compared to 64% the previous week. The average contract interest rate for a 30-year, fixed-rate mortgage with a conforming loan balance finally halted and remained frozen at 4.68% versus jumbo mortgages decreased to 4.81%. The average 30-year, FRM backed by the FHA climbed to 4.38%, from 4.37%, the highest rate since April 2012, and the MBA reported that the 15-year, FRM dropped to 3.70%, from 3.76%, and the 5/1 ARM edged down to 3.39% from 3.40% a week prior.
Rates seem pretty quiet this week - up a little, down a little. Has an end to QE been priced in to the market? One would hope so, although the big news today will be Ben Bernanke's testimony in Washington. We could see some volatility. Until then, we have to be satisfied with yesterday's news, which, besides the Consumer Price Index heating up a little, showed both Industrial Production and Capacity Utilization increasing slightly. We also heard from the NAHB who said builder confidence rose in July to its highest level in over seven years. "Today's report is particularly encouraging in that it shows improvement in builder confidence across every region as well as solid gains in current sales conditions, traffic of prospective buyers and sales expectations for the next six months," noted NAHB Chairman. However, he cautioned that "This positive momentum could be disrupted by threats on the policy side, particularly with regard to the mortgage interest deduction and federal support for the housing finance system." "Builders are seeing more motivated buyers coming through their doors as the inventory of existing homes for sale continues to tighten," noted NAHB Chief Economist. "Meanwhile, as the infrastructure that supplies home building returns, some previously skyrocketing building material costs have begun to soften."
The text of Bernanke's testimony before Congress will be released this morning. (Let's not forget that we have Housing Starts at 8:30AM EDT, and the Beige Book will come out at 2PM EDT.) The text will probably not deviate much from what is already known from the last FOMC statement and minutes in context with recently released data. So it is from the Q&A portion (including at the Senate hearing on Thursday) where more might be revealed regarding large scale asset purchases, as well as, the future of low rates, and that could roil the markets -- up or down.