Most of my friends barely know what a mortgage broker is, yet the president brought up the term in a speech: " is our responsibility to make sure that we have a dynamic economy, we have a dynamic financial sector, but we don't have a mortgage brokerage operation that ends up providing people loans that can never be repaid and end up having ramifications throughout the system." Down about 1/3 of the way

As one would expect with that "ca-chunk" down in rates last week (which the markets have pretty much given all back), mortgage applications were up 9.3% from the prior week, per the MBA. Refi volume was up 11%, and purchases were up 2.6%. Refi's are still sitting near 80% nationwide as a percent of total applications, with ARM's at about 6%. It's hard to make a convincing case for a conventional ARM when 30-yr rates are less than 4%, but on the jumbo side there is decent demand.

With conforming mortgage limits set to return to permanent limits on Oct 1st, some investors such as Wells Fargo are reportedly considering reducing down payment requirements from 25% to 20% for jumbo loans in certain unnamed markets. Jungle drums only - I don't have anything in writing.

What is out in writing, however, is that Freddie Mac is reviewing its procedures for examining mortgages after auditors faulted its handling of lapsed loans issued before 2008. Per the FHFA, Freddie didn't do enough to find flaws that could've increased recovery of money from banks that sold defective loans. FHFA suspended loan-repurchase agreements while they sort this issue out. "It is critical that this issue be resolved, as it involves potentially considerable recoveries for Freddie Mac and ultimately taxpayers," the inspector general's office said in the report. In fact, the $1.35 billion settlement between Freddie and Bank of America in December, involving past, present and future repurchase demands on 787,000 loans, was based on the company's flawed review process. (Fannie settled for $1.52 billion.) At the end of June, Freddie Mac had $3.1 billion in repurchase demands outstanding.
Investors in mortgage-backed securities are very cognizant of news that impacts their holdings, and the prepay impact of various steps the FHFA could take to increase the refinanceability of HARP eligible loans is exactly that. It seems that these changes can be categorized into waiving the LTV Cap of 125%, eliminating or reducing LLPAs, effectively reducing reps and warrants on the new loan, and resolving MI issues. It is unlikely that the FHFA will waive reps and warranties, but they may be open to making them less relevant while refinancing borrowers through HARP. Some changes they can make to come up with a soft resolution on reps and warranties are: a) Only using automated appraisal rather than an actual appraisal; b) No employment or income verification and thus no calculation of DTI ratios. This will make the HARP streamline refinancing program similar to the FHA streamline refinancing program - since the originator is not documenting anything, there will be no need to make any representations, and the FHFA can still require that old reps and warranties will stay in place. From a prepayment perspective, the easiest enhancements like LLPA and waiving the LTV cap would probably help, but not significantly. But changes like resolution of reps and warrants would have a greater impact, as would any change in the MI policy.

But I also received this note: "Any LTV increase on either of the HARP or HAMP programs should also include removal of the requirement that the loan be delivered to Fannie Mae prior to the end of June of 2009.  I have had several deals fall apart in the last year because the original lender didn't get the loan file delivered to Fannie in time.  So even though the borrower's loan is a Fannie loan and they could save tons of money over the 2009 vintage rates, the borrower's aren't eligible for the program.  An even better help would be for the Fed and other regulators to force their regulated banks to re-negotiate adjustable rate seconds into 30-yr fixed rate loans at rates similar to the first mortgages in order to reduce future default risk.  This would allow even under water borrowers that want to keep their houses to avoid exposure to payment shock in a few years when all of the 1st / 2nd combos that we did using IO HELOCS come into their adjustment period.  If you could refinance the first down to today's rates (any CLTV as long as the loan has been current for 12 months) and fix the second (same LTV rules), the payments may be close to or lower than today's payments but we would head off another round of foreclosures and defaults over the next five years as the 10 IO payment periods end and they revert to 20-yr ARMS.  The banks should be willing to do this if the regulators would adjust their reserve requirements (or increase the reserve requirements on adjustable rate HELOCS) as an incentive for getting these done."

And also this note: "HARP is an epic failure. Why? If you were trying to fill your engine with oil, would you pour the oil into the small hole of the funnel? Of course not.  But that is EXACTLY what HARP forces our industry to try to do.  There are 4 categories of people who need HARP help: people who didn't have mortgage insurance or a 2nd lien when they took out their mortgage - but find themselves underwater, people who didn't have mortgage insurance, but have a 2nd lien in place - and find themselves underwater, people who have mortgage insurance on their loan, and anyone of the prior 3 categories of folks who find themselves owing more than 125% of the home's current value. HARP doesn't work for these folks because people in this category get the most assistance via HARP.  Better education could be useful here - but this group isn't the problem.

The writer goes on, "Banks have gotten better about subordinating to HARP loans - but the process is still fairly cumbersome in many cases - and, there are still banks that remain that use the lien as an opportunity to hold people hostage.  As long as the borrower is improving their position and not taking a riskier mortgage (fixed to ARM), it is unconscionable that they don't immediately subordinate. This is a tough category.  Folks who find themselves upside down, but have mortgage insurance, MUST try to refinance through their current servicer who MUST work with the current MI provider to modify the policy to the new loan.  Here's where the inverted funnel analogy comes into play.  There are between 4 and 5 million GSE loans that are upside down.  Many of them have MI. Servicing is concentrated, with 5 servicers having about a 70% market share. How will those 5 servicers (who are slammed anyway) be able to serve that many people?  Add to that that each of the 7 MI's have different guidelines about HARP loans.  Add to that that Fannie and Freddie have very different guidelines.  Add to that the each of the big servicers has different guidelines/overlays - and you suddenly see why less than 1 in 10 underwater GSE borrowers (who are CURRENT on their loans) have been helped by HARP!  These folks are the ones who would have their rates dropped from 6.0% to 4.0% (versus the folks who have refinanced 4 times in the past few years and only get small incremental benefits with the recent rate drop).  These folks are the ones who are strategically defaulting as they look at their huge negative equity position, coupled with the higher rate and just give up. These are the people who today's low rates will make a massive difference to. Many folks in AZ, CA, MI, FL, etc. are well over 125%.  Increasing this cap is a no-brainer.  The REMIC rules preclude some people from owning that debt - but not all.  In many instances, MBS buyers will want to take advantage of their longer durations."

October 1 is right around the corner, and investors are certainly prepping their clients. For example, Kinecta Federal Credit Union if offering up a .25% jumbo rate reduction promotion.

U.S. Bank National Wholesale Sales Division focused on appraisal issues, and reminded its brokers that, "with the implementation of the UAD set requirements for appraisals, if the effective date of appraisal is on or after 09/01/2011 the following Conventional appraisals must be in the new UAD format: 1004/70 Interior/Exterior Single Family Form, 1073/465 Interior/Exterior Condo Form, 1075/466 Exterior Only Condo Form, 2055/2055 Exterior Only Single Family Form. FHA will require the UAD format on interior appraisals with case number assignment dates on and after January 1, 2012.  Until that date either version is acceptable. VA will accept the UAD but it is not required - either version is acceptable until further clarification is received. USDA/RH will require the UAD format beginning 1/1/2012.  Until that date, either version is acceptable. If the UAD format is present but the appraiser leaves fields blank (ex: Amenities section in the Improvements section) it is not a required UAD item. Appraisal software providers have review systems built into their systems which warn appraisers if specific areas are not prepared properly." And so on - check the bulletin for more details.

As mentioned above, 10-yr and mortgage rates are about where they were pre-Operation Twist. In fact, Federal Reserve Bank of Dallas President Richard Fisher said the central bank's decision last week to push down longer-term interest rates risks may prove ineffective and may hurt job creation. (That would help rates and hurt the economy - what would you rather have?) Yesterday's 2-yr note auction was decent, and had the highest bid-to-cover ratio in a year (3.76). But Tuesday's markets moved rates higher, with the 10-yr worse by 1 point at 2.01% and MBS prices worse by roughly .5 on heavy supply (sell those locks and hedge that pipeline!)

This morning we learned that volatile Durable Goods were -.1% for August, as expected, although looking at the components it was a mixed bag. We also have a $35 billion 5-yr note auction go get through. The 10-yr is at 2.03%, and MBS prices are off slightly.

You may want, or already have, some of these government signs in your office:

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at The current blog takes a look at the recent news concerning REIT's, and the possible tax implications. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.