As the industry waits for Nationstar's earnings call tomorrow, and hoping all the rumors of this venture-capital-owned lender shutting down a channel or two are false, it has turned some attention to Ellie Mae. Ellie reported a lower-than-expected third-quarter profit, hurt by lower mortgage volumes and higher R&D spending, pushing its shares down more than 20% last week. Its net income halved in the quarter ended Sept. 30, and Ellie warned of lower-than-expected earnings in the fourth quarter. R&D expenses rose more than 38 percent, and let us not forget its acquisition of MortgageCEO, a software company specializing in customer relationship management for the residential mortgage industry.
We have a new set of collector's items: Ally Financial t-shirts and coffee mugs. Ally Financial has closed the book on the mortgage business. It no longer offers or services home loans and the pipeline of pending mortgages stands at zero, according to a presentation by the Detroit-based auto financer. The company has paid a settlement reached last month with U.S. regulators tied to its residential lending, and that's the last of any significant costs, Jeff Brown, senior executive vice president for finance, told investors on a conference call.
"Rob, you're getting forgetful in your old age. We were told that there is a 7-year waiver on the QM stuff (unless FNMA and FREDDIE MAC privatize before the 7 years) like 43% DTI. You should remind folks." Not so fast. First of all, the QM comment period for FHA just ended - so the industry is waiting to hear its stance. And to the best of my knowledge, FHFA directed Fannie & Freddie to comply on 3 fronts: to only buy loans with terms up to 30 years, fully amortizing, and 3 points in fees.
Although direction from the FHFA may change in the future, one way to think about the current situation is that there is a "Standard QM" (43 DTI, ARMs max interest rate, and so on) and a "Special QM" (exemption GSE for 7 years - a loan is QM if eligible for sale to an agency, but this expires in 7 years or if they come out from conservatorship). To the best of my knowledge there is no intent to reduce DTI at this point. But why take my word for it - the agencies have put forth guidance. For example, Fannie has its "Quarterly Compass" - two pages which list everything that has been announced, along with upcoming dates. And Fannie has consolidated everything it has published on QM in three publications: Lender Letter LL-2013-05 - Qualified Mortgages, Lender Letter LL-2013-06 - Additional information about ATR and QM requirements, and Announcement SEL-2013-06 - Updates related to Ability to Repay and Qualified Mortgage (QM). Links to each of these documents are available through the Fannie Mae Quarterly Compass.
And folks in the industry shouldn't forget Fannie's interactive site, the Housing Industry Forum! Fannie posted an HFI article on ATR and QM yesterday.
Last week the American Bankers Association expressed strong support for the re-proposed Qualified Residential Mortgage standard. Their proposal aligns QRM with the CFPB's Qualified Mortgage rule, released earlier this year. "A QRM standard that mirrors the CFPB's QM rule is a big step forward in strengthening the housing market," said Frank Keating, ABA president and CEO. "QM loans will be well underwritten and cannot include risky features, so it makes little sense to define QRM more narrowly." Contained in the letter, the revised rule: reduces the risk of default and delinquency, provides clarity and consistency for mortgage professionals, and ensures creditworthy homebuyers have access to safe mortgage financing. The ABA warned that an alternative approach included in the proposal, known as QRM-plus, which requires borrowers to put 30 percent down, will constrain the availability credit and encouraged its abandonment.
While we're talking about the agencies, I received this note. "Rob, we have heard that acting director Ed DeMarco is on his way out of the FHFA - but what are you hearing about Mel Watt, and, assuming our politicians stop and take a breath and he is confirmed, how will that impact my company?" If Rep. Watt were to win confirmation and take over the FHFA, then his next policy steps would likely be determined by at least one of two issues outside of the FHFA's direct control. The first is Congressional consideration of the Mortgage Debt Forgiveness Act extension, and the second is mortgage rates. If Rep. Watt is eventually confirmed, and other policy issues go his way, insiders expect the FHFA to work towards some form of principal reduction (likely through HAMP) and institute specific changes to the HARP.
Republicans are not wild about Watt for a couple reasons. First, he has no current experience in the industry. But more importantly, he has been in Congress for a couple decades - is a politician the best person to run Fannie & Freddie when the government keeps talking about lessening its role?
On the principal reduction front, the HAMP Principal Reduction Alternative (PRA) remains the likeliest vehicle for Rep. Watt to embrace. This probably would not impact servicers too much, and might be a slight positive for private mortgage insurers given its impact on mortgage credit. For specialty servicers, principal reduction through the HAMP PRA would decrease the fees collected but would also lessen the cost to service the loan. Most believe that even if Rep. Watt were to be confirmed, his ability to implement a broader principal reduction program through the HAMP could be limited as there appears to be little will in Congress to extend 2007's Mortgage Debt Forgiveness Act past its January 1, 2014 expiration.
This Act was set to expire at the end of 2012 but was extended as part of the fiscal cliff deal, and is crucial to foreclosure mitigation efforts such as principal forgiveness and short sales. Normally, U.S. law decrees that when a lender forgives all or a portion of a borrower's debt, the forgiven amount is considered taxable income for the borrower. This is known as Cancellation of Debt (COD) Income and must be included in a taxpayer's gross income. This Act, however, created an exception to this rule under the U.S. Tax Code. The Mortgage Forgiveness Debt Relief Act allows homeowners who received principal reductions or other forms of debt forgiveness to not pay taxes on the amount forgiven. The amount extends up to $2 million of debt forgiven on the homeowner's principal residence. For homeowner's to qualify, their debt must have been used to "buy, build, or substantially improve" their principal residence and be secured by that residence.
HARP is kind of off the front burner for many lenders, but it could become a discussion topic again if Watt is confirmed. The likeliest initiative for Rep. Watt to embrace if he were to be confirmed would be incentivizing cross-servicer refinancings through the HARP (i.e. implement the Boxer-Menendez bill). This would be an incremental negative for both mortgage servicers and Agency mortgage REITs as they would face increased prepayment rates. And he might try to change the HARP eligibility date - thereby allowing re-HARPing - although it is unlikely. The FHFA Director is not empowered to expand HARP to non-Agency mortgages.
All of this chattering is generally overshadowed by the rate environment. For many lenders, volumes are down 50%, margins are down, and costs are up. (Let's not forget a purchase loan is more expensive to originate than a refi.) Given the expectation for rates to remain at current levels or potentially move higher, the refinance boom we experienced over the past 12 years has likely ended.
But John Jacobs with Patriot Bank Mortgage writes, "I was shocked, as I imagine many other mortgage bankers were, to see that our mortgage-bankers association (MBA) has endorsed the nomination of Mel Watt to head the FHFA. Mel Watt has made his position clear on principal forgiveness and other anti-lender positions, and is anti-security holder. Given we need more private capital involvement, if the GSE's are going to be relegated to a back-seat in the securitization food-chain, this seems counter-intuitive to endorse an FHFA nominee that apparently does not support a robust and stable securities market. Principle forgiveness is very egalitarian, but reduces the value of mortgage-backed securities to their investors dollar for dollar. The possibility of principle reductions being imposed by government fiat will weigh on security's pricing at a minimum and may sideline investors that may have participated in buying mortgage-backed securities altogether, thus making for a less liquid and higher priced securities market."
Mr. Jacobs continues, "Just like the bailout of the auto industry, and the subsequent government failure to recognize the property rights of bondholders, so too is principle forgiveness. Mel Watt is an activist that advocates using housing policy for social engineering reasons, much like Maxine Waters, and Barney Frank. As you well know, that hasn't worked out well for the health and vitality of the mortgage-banking industry. This appointment is so typical of this administration that tries to impose its will on American business when their legislative initiatives fail. We need the rank-in-file members of MBA to state their disappointment with this nominee and ask our leadership to advocate for the mortgage-banking industry and not try to 'play nice' with big government ideologues."
Rates took it on the chin Tuesday - mostly attributed to a "second tier" number that rarely moves the multi-trillion dollar bond market. But the October Institute of Supply Management number (ISM) came in stronger than expected, which is interesting given the number was tabulated during the shutdown. Did the shutdown really hurt the economy? Yesterday's ISM number followed last week's better-than-projected Chicago PMI and ISM-manufacturing reports, as favorable data could encourage the FOMC to announce tapering earlier than the odds favored March 2014.
Suddenly the market shifted. Traders reported MBS investors were selling certain parts of their holdings, and mortgage banker supply rose to about $1.5 billion - more than the daily Fed buying of $2.5 billion. (Heck, what if the Fed weren't buying anything?) Agency MBS prices worsened about .625 and the 10-yr closed at 2.66%.
It is a new day, and quiet so far. The MBA told us that apps last week were down 7% - ouch. We will have September Leading Indicators (+0.6 expected) at 10AM EST. Other events include the Treasury Quarterly Refunding announcement and details of next week's auctions of 3- and 10-year notes and 30-year bonds. Rates and the 10-yr are seeing a bounce from Tuesday's close, with the 10-yr down to 2.63% and agency MBS better by .125.