We'll see a lot of housing news this week. Recently May 2013's, and before that April's, national and regional prices showed continued improvements - a sign of the spring buying season. These gains should be considered contextually against last year's low price floor. Price trends for the 30 metro markets are a reminder to keep a close eye on prices at a more granular level. At the national and regional levels, the state of the broader housing market is not representative of the health of individual markets. Cleveland, a market that continues to struggle with quarterly losses, shows no signs of recovery with yearly declines of 4.0%. Conversely, Las Vegas' gains ramped up to 27.0%, surpassing the come-back kid Phoenix. But despite May's momentum, let's not forget Las Vegas prices remain 57.1% below the peak. Again, context is critical when analyzing the housing recovery.
Here's a little write up on how REIT stocks have taken it on the chin lately, and some thoughts on how to look at the industry as a whole.
Last week the commentary presented a formula and information on what constitutes the QM 3% cap of borrowers. In response, I heard from Optimal Blue's Tammy Butler. "Rob, I have read with great interest the comments from your subscribers regarding the points and fees test. Coming from the pricing world, it is imperative that we understand how this is going to work. This is why I put together a handy guide to assist lenders who are either the creditor pricing to their retail originators, or a creditor pricing to their TPO's. While I suspect we will not know exactly how this all shakes out in the end, we have to start with a basic understanding and then be prepared to change if the CFPB does." Here is Optimal Blue's 3% QM write up. (If you'd like to reach Tammy at OB with questions or comments, write to her at firstname.lastname@example.org.)
Before we discuss the quagmire in New York, yet another big mortgage case has settled. "The FHFA brought the case against UBS in 2011, saying the bank made misleading statements and didn't conduct full due diligence when it sold $4.5 billion in these securities to the government-backed mortgage financiers." $745 million for $4.5 billion (read more).
As mentioned in Saturday's commentary, the industry is very concerned about recent developments in New York. As one person wrote me, "The real story is the unintended consequences of over regulation. N.Y. State has now harmed the people they think they were protecting, and hurting small business owner at the same time."
William Kooper from the MBA sent me a note: "Volunteers from a few of the regional MBAs in NY are working together on this issue as we don't have a state MBA in NY. We did assist in helping the Northeastern NY MBA (Jim Bopp at Platinum) organize a first-ever unified lobby day in early June when they raised this. We got them a meeting with the Governor's staff for that, and they did a number of other meetings with legislators on the appropriate senate and assembly committees. Our efforts since then have been to help these groups by providing the federal context for this issue. Different volunteers are having meetings with legislators and staff and some are in daily contact with the NY Dept. of Financial Services...and providing the department with data. Hopefully we'll have more news this week."
Basically, regulators in New York State are concerned that the increased MIP could raise the loans' APR and convert them into subprime, and froze the FHA's MIP cancellation policy. And major investors such as Wells Fargo have changed their policies on buying these loans - is the borrower better off? The New York State Department of Financial Services directed FHA lenders not to use the increased mortgage insurance premium in calculating a loan's annual percentage rate and fully indexed rate to prevent such mortgages from falling into the "subprime" category. The moratorium is for 60 days.
The industry knows that the higher MIPs are the result of FHA's recent policy change, which took effect on June 3, which requires that the MIP be paid over the life of the loan and no longer allows MIP cancellation when a loan amortizes to a 78 percent loan-to-value ratio. The NYDFS is concerned that the increased MIP could raise the loans' APR and convert them into subprime, subjecting such notes to further state scrutiny and restrictions. The increasing number of loans considered subprime since June 3 has made it difficult for New York homeowners to obtain mortgage financing, the agency said. With the 60-day suspension of FHA's new MIP policy, the agency expects the disruption to correct itself over time as lagging mortgage rate indices align with actual market rates.
The MBA gives us a little history. In August of 2008, a bill was put into place that created New York Banking Law § 6-m. The purpose of this legislation was to provide consumer protections by establishing specific underwriting standards for a new class of mortgages called "subprime home loans." New York already had a statute, § 6-l, which governs "high-cost" mortgages. Subprime mortgages are defined as a mortgage loan with a fully-indexed annual percentage rate (APR) that exceeds by more than 175 basis points for a first-lien loan the average commitment rate for loans in the northeast region with a comparable duration as published in the weekly Freddie Mac Primary Mortgage Market Survey (PMMS) in the week prior to the week in which the lender received a completed loan application. A home loan triggers the state standards if the principal amount is equal to or below the conforming loan size limit established by Freddie Mac."
Investors and servicers know that the law says if a loan meeting the New York statutory definition of subprime goes into foreclosure, the borrower may be awarded actual damages by the court if they prevail in a foreclosure action by a "preponderance of the evidence." The MBA notes, "Moreover, in order to enforce lender compliance with § 6-m, a borrower 'may be granted injunctive, declaratory and such other equitable relief as the court deems appropriate.' 'A court may also award reasonable attorneys' fees to a prevailing borrower.' Significantly, the borrower may also assert a violation of this section as a defense against 'any action by a lender or assignee to enforce a loan against a borrower in default more than sixty days or in foreclosure.'
"Mortgage bankers, who sell their loans to investors, have consequently had to stay within the narrow 175 basis point spread to avoid triggering the subprime definition, as purchasers or assignees would not accept the heightened legal and business risk exposure associated with the purchase of these loans. During late January of this year, the FHA, whose insurance programs allow a large share of New York consumers to qualify for mortgages, announced a series of changes in a continued effort to better manage the risk and strengthen the federal Mutual Mortgage Insurance Fund (MMIF)."
We all saw how FHA Mortgagee Letter 2013-04 changed MIP, and how most FHA borrowers now will continue paying annual mortgage insurance premiums (MIP) for the life of their mortgage loan. The effect of FHA's announcement is that it increased by 55 to 60 basis points the loan's APR. This increase does NOT affect the note rate on the loan nor does it affect the borrower's monthly payment. However, because the FHA requires the MIP to now be calculated over the life of the loan, it does increase the calculated APR. The unintended consequence of FHA's announcement, when combined with the current rising interest rate environment, is that a significant proportion of FHA loans now trigger New York's subprime calculation, which all but eliminates the ability of lenders to fund these loans on warehouse lines, and to sell them on the secondary market.
Now what? The MBA writes, "In response, on July 3, 2013, the New York State Department of Financial Services issued a temporary order that directed lenders for 60 days to not use a mortgage loan's MIP to calculate the APR and fully indexed rates in determining whether the loan is subject to New York's definition of a subprime home loan. Mortgage lenders in New York are grateful for the 60-day order, however, the industry disagrees with the Department's statement in the order that 'this disruption will self-correct over time,' and believe a long term solution is necessary, and additionally that New York needs to take additional steps now to assist the market using the broad authority granted the Superintendent."
Interestingly, a long term solution requires statutory change, and the New York Legislature is not scheduled to reconvene until January 2014. The MBA recommends that NY pay attention to the Dodd-Frank law. "Dodd-Frank law and the CFPB rules provide that making a QM loan that satisfies specified product limitations and underwriting requirements confers legal protections to lenders that the loan has satisfied the ability to repay requirement. This is particularly important since a failure to meet the ability to repay requirements can result in very significant liability including actual damages, up to three years of finance charges, attorney fees, and claims that may be brought at foreclosure for the life of the mortgage. Thus, with firm national standards for underwriting in place under CPFB's QM rule, New York's legislature should consider, when it reconvenes, aligning its laws with those consumer protections under Dodd-Frank. For example, New York could exempt all loans that meet federal QM standards from the New York 'subprime loan' definition, and apply the "subprime" restrictions only to non-QM loans under the CFPB's rule. This would create more incentives in New York's marketplace for lenders to originate QM loans."
The markets aren't doing much of anything, and one trader wrote, "Quiet, illiquid, choppy, thin, summer doldrums will likely be the daily descriptions for this week for MBS trading. The highlight for the week is the $99 billion in 2-, 5- and 7-year notes auctioned beginning Tuesday through Thursday, while economic data consists of housing-related reports through mid-week."
For summer chatter today we'll have Existing Home Sales, tomorrow is the FHFA Housing Price Index, Wednesday is New Home Sales, Thursday is Jobless Claims and Durable Goods, and Friday is the Michigan Sentiment number. In the early going today rates are slightly better, with the 10-yr at 2.47% (close 2.49%) and agency MBS prices a shade higher.
Here is an actual sign posted at a golf club in Scotland UK:
1. BACK STRAIGHT, KNEES BENT, FEET SHOULDER- WIDTH APART.
2. FORM A LOOSE GRIP.
3. KEEP YOUR HEAD DOWN!
4. AVOID A QUICK BACK SWING.
5. STAY OUT OF THE WATER.
6. TRY NOT TO HIT ANYONE.
7. IF YOU ARE TAKING TOO LONG, LET OTHERS GO AHEAD OF YOU.
8. DON'T STAND DIRECTLY IN FRONT OF OTHERS.
9. QUIET PLEASE...WHILE OTHERS ARE PREPARING.
10. DON'T TAKE EXTRA STROKES.
WELL DONE. NOW, FLUSH THE URINAL, GO OUTSIDE, AND TEE OFF.