The last survey I took was regarding how happy I was with my long-distance carrier, and ended with me hanging up right in the middle of the age-and-income bracket question. I never get the cool interviews, but Barclay’s Securitized Product Research team does. The department recently conducted a two-week online survey of clients to gauge views on hedging non-agencies against macro-risks. The survey was distributed and conducted by a third-party firm contracted by Barclays to conceal the identities of the individual respondents. As a result, the survey results exclude any stratification across investor types. Out of the 12 questions on the survey (examples being, on what would you base your rate hedge ratios? What would you assume for housing across your rate shifts?) I found: “In the current situation, how much current carry are you willing to spend on hedging risks?” most interesting. Half the respondents were willing to give up 10-20% of their carry as hedging costs. Another one-third would only pay 5-10% but one-fifth were willing to give up more than 20% of their carry to hedge out the risks. As Barclays notes, in general, investors should be encouraged to consider some hedges for their portfolios. However, it doesn’t make sense for all investors to attempt to fully hedge their interest rate and/or credit risks. The cost of hedging using certain types of securities may be prohibitively high compared with the carry on some non-agency positions. As a result, Barclays advises being “judicious in sizing the hedges as well as opportunistic in putting on hedges when costs are lower.”
The top wholesale lenders & brokers sure like Moody’s all of a sudden. Third-party originated (TPO) loans previously maintained a reputation for putting residential mortgage-backed securities investors at heightened risk, but times are changing and TPO loans originated after the financial crisis are exhibiting the highest of performance standards today.
Moody’s Investors Service released a report saying loans originated by third-party brokers and correspondent lenders continue to equal retail loans in payment performance, thanks to higher underwriting guidelines and additional scrutiny of loans sourced by third-party originators. The link to the report follows, but one quote was, "The narrower gap in recent loan performance is because of tighter lending and regulatory controls over TPOs":
HUD recently released Mortgagee Letter 2013-41. The letter clarifies the self-reporting requirements of all single family FHA originations. The requirements addressed include: what must be reported, the timeframe for lenders’ internal reporting to senior management, the timeframe for lenders’ external reporting to FHA, how findings should be reported, FHA’s review process, and the repercussions of failing to report to the FHA (gulp). Here’s one take on the new rules.
What is the public reading about the desirability of the FHA program? Here is the latest. At least FHA allows 100% gifts, right? See next paragraph…
I am not an underwriter, but that doesn’t stop me from receiving questions about it. “Rob, do you hear anything from the agencies with regard to using gifts as down payments?” No, I don’t – that is definitely an underwriting issue, and whenever I write about underwriting, I receive plenty of input about exceptions. That being said, coincidentally Guy Schwartz from CMG sent out a note about this exact topic. “Sometimes we think there is very little left to learn or there is some scenario we have not seen before. For example, the following conversation, ‘Where is your money for down payment and closing costs coming from?’ To which the client states after a long pause, ‘Ah, it's coming from my cousin, he owes me money.’ It seems like people lend lots of money to cousins on a hand shake, because if you ask for the audit trail of this money it never exists. We get the cousin story frequently, and all we can do is look at each other and think, ‘oh no not the cousin story AGAIN!’ Thankfully FHA allows 100% gift of funds for down payment and closing costs. For conventional loans we have always believed that for a 20% down payment all of the funds may be a gift. Furthermore it was our understanding that if the borrower has 5% of their own money for a down payment they may get a gift for any amount. Well as Gomer Pyle use to say, ‘Surprise, Surprise, Surprise’ we found a little known secret.
“FNMA says, ‘All funds for the transaction can come from a gift. Subject to MI if the LTV>80%.’ Provided the property is a 1 unit primary residence (non-applicable for high-balance mortgage loans). Wow, we did not believe this until we saw it in black and white. We did check with one MI company and they said they were okay with this guideline. When a loan involves a non-occupant co-borrower, however, Freddie Mac still requires the borrowers to have 5% of their own money. FNMA will require the borrower to have 5% of their own money if: they are purchasing a 2-4 unit primary residence, second home, or if the loan is a high balance mortgage loan amount. Just a reminder here is a list of acceptable donors: a relative (spouse, child, other dependent or individual related by blood, marriage, adoption, legal guardianship) a fiancé, fiancée or domestic partner. The donor cannot be, or have an affiliation with, an interested third party to the transaction. So now when we get the cousin story, instead of looking at each other we will ask, ‘Do you think your cousin can gift the money back to you?’”
On November 15th the federal bank regulatory agencies with responsibility for CRA rulemaking published their final revisions to "Interagency Questions and Answers Regarding Community Reinvestment." The revisions provide additional guidance to financial institutions, and to the public, on the agencies' CRA regulations, and focus primarily on community development. Community development activities are considered as part of the CRA performance tests for large institutions, intermediate small institutions, and wholesale and limited purpose institutions. Small institutions may use community development activity to receive consideration toward an outstanding CRA rating. The amendments mainly provided clarity to: how the agencies consider community development activities that benefit a broader statewide or regional area that includes an institution's assessment area, guidance related to CRA consideration of, and documentation associated with, investments in nationwide funds, and address the treatment of loans or investments to organizations that, in turn, invest those funds and use only a portion of the income from their investment to support a community development purpose. More information on the CRA, including the Q&A portion of the report, and the agencies' CRA regulations HERE.
What’s so wrong with actor Alec Baldwin and a bunch of guys pretending to be Vikings telling me I can “earn” up to 2% cash back on credit card purchases? Well, the CFPB believes these rewards programs can involve “detailed and confusing rules” and they will be reviewing whether rewards disclosures are being made in a clear and transparent manner. The CFPB’s recent report on credit card programs identified rewards product disclosures as one of many card practices that “pose risks to consumers and may warrant further scrutiny by the Bureau.” Bloomberg News recently reported that the examinations cover the marketing of rewards programs, “particularly the marquee promise of a given card, such as cash back, or redeemable airline miles, and what a customer needs to do to get it.” The article notes that there is no apparent sudden rise in consumer complaints about rewards, but the CFPB has targeted the programs because they are the primary reason consumers choose a particular card. Mr. Baldwin never returned our phone calls regarding this story, and as to why they never made the Hunt for Red October II. Here’s the story from Bloomberg: - the mortgage industry likes it when the CFPB turns its gaze to some other industry… like how car salesman earn different commissions for selling different cars…
How about some recent vendor & conference news?
Congrats to National MI, which announced that it has been approved to write mortgage guaranty insurance in Florida. Approval by the Florida Office of Insurance Regulation marks the 49th state for mortgage insurer.
Starting December 16, Essent is decreasing monthly premiums by 5 basis points across all rate categories effective for commitments issued on or after December 16, subject to regulatory approval. Updated rate cards can be found in the full announcement. For availability of rates by state, please see the Rate Availability chart that will be posted to Essent’s website by 12/16.
LoanSifter announced its new “Fair Lending Compliance Tools” for clients who need to “help stop a Fair Lending compliance violation before it happens? Ensure you have a proactive Fair Lending review policy that can be audited? Quickly see how differently originators are pricing loans to borrowers? Automate your Fair Lending process?” LoanSifter has added new resources to proactively ensure compliance to Fair Lending and other regulatory requirements.
For industry events, the MBA is presenting its second-annual Independent Mortgage Bankers Conference next month in Florida “…designed to address the myriad challenges facing the non-bank lender and to provide critical information, strategies and connections needed to get an important leg up in both today’s and tomorrow’s markets.” Sessions include a panel of warehouse lenders, an open discussion with warehouse lenders and independent mortgage bankers, a special networking reception to connect warehouse lenders and independent mortgage bankers, and Industry Outlook featuring leading independent bank leaders focusing on business challenges including refocusing on production efforts. More info...
As a quick note, the world’s largest alternative asset manager, Blackstone Group, has reportedly spent $5 billion to buy about 30,000 single family homes in the US in a bet prices will rise and renting them out will be no big problem. Watch out if they don’t, or it is: the fear among Realtors is that if Blackstone’s return on these properties is not satisfactory, it will be time to sell 30,000 properties.
Turning to the markets…darn there’s a lot of news this week, especially for a shortened week when many companies are closed Friday in addition to the holiday Thursday. Today is Pending Home Sales. Tomorrow we’ll have the Housing Starts and Building Permits duo, along with Consumer Confidence (were you one of the 5,000 households asked?), and the S&P/Case Shiller Indices with their two month lag telling us what happened back in September. Wednesday will be Durable Goods – always volatile, since a couple aircraft orders can swing the number – Initial Jobless Claims, the Chicago Purchasing Manager Survey, and the University of Michigan Consumer survey. Friday we had a 2.75% close on the yield on the 10-yr. T-note; this morning we’re at 2.75% and agency MBS prices are worse a couple ticks – taking back some of Friday’s improvement.