"A group of government regulators out hiking in the Artic has managed to revive a caveman who was frozen for thousands of years. Communications so far have consisted of monosyllabic grunts, but the caveman is confident he can teach them some words." It is easy to poke fun at regulators, but at this point, can the industry really blame them for the decline in applications we're seeing? Probably not, as millions of borrowers refinanced when 30-yr rates were in the mid-3% area and aren't going to do it again unless they really need the cash. And looking at the calendar shows that we're in the middle of the slow time for purchases.
The MBA reported yesterday that apps have fallen for five straight weeks, putting us back to early September levels. Mortgage bankers remember September - many groups of senior management were evaluating overhead and personnel needs versus production, and taking action by cutting back on full time employees. After that, management was going to take a "wait and see" approach to see what volumes did heading into the holidays. Unfortunately, after decent lock volumes in late October and November, pointing to a good closing month in December, many lenders are seeing more of a dip in business coming through the door, leading to concerns about January and February.
With 24 business days left until QM, there continues to be questions about agency product. Yesterday the commentary mentioned, "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 lists everything that has 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, August 2013 edition located at this link."
To further reiterate this, let's look at this in a different way. As originators know, Fannie Mae will accept loans under three eligibility criteria: 1. a loan that is approve/eligible through DU, 2. the lender follows Fannie Mae's guidelines for manually underwritten loans, and 3. the lender has a documented variance in a master contract with Fannie Mae. In all cases, the lender must ensure that all Fannie Mae requirements are followed. The loan would therefore be eligible for Special QM status under the CFPB rule. The policy of accepting these loans as QM by aggregators such as Wells, Citi, Chase, and so on, however, is not so clear cut - check with your rep about an investor accepting Special QM loans.
A natural follow-up question is, "If a QM loan funds, but a problem existed with title at closing, and the loan turns into a buyback, is it still a QM loan?" The answer should be "yes" based on CFPB guidance if the title issue is "wholly unrelated" to the borrower's ability to repay (ATR). But, if the problem that made the loan GSE ineligible deals with calculating the borrower's income, or some other factor used in determining the borrower's ability to repay, then it likely will not be a QM loan, and must be dealt with accordingly.
Folks in the industry shouldn't forget Fannie's interactive site, the Housing Industry Forum, which will answer many questions.
One big concern that lenders have about a QM loan that turns out to be non-QM, or a loan originated knowing it is non-QM, is the potential liability and future risk of that loan. Of course, QM or non-QM, prime or subprime - it doesn't matter: any borrower can find an attorney to target the lender for a lawsuit. That possibility aside, the rating agencies are watching all of this with great interest. Fitch, for example, is seeking industry feedback by Dec 9th. And this week Moody's weighed in by saying that non-qualified mortgages will increase the risk in new residential mortgage-backed securities. Of course investor demand drives mortgage rates - it is a risk/return situation: the more risk, the higher the return demanded by the investor - just like the old subprime days.
"US residential mortgage-backed securities (RMBS) backed by non-qualified mortgages will incur higher loss severities on defaulted loans than those backed by qualified mortgages (QM), according to a new report by Moody's Investors Service. The key driver of the loss severities will be the higher legal costs and penalties for non-QM securitizations, says Moody's in the report...The rules, which implement the Ability-to-Repay (ATR) sections of the Dodd-Frank Act, give lenders protections from liability if they originate loans classified as 'qualified mortgages.'" A Moody's executive stated, "In non-QM transactions, a defaulted borrower can more easily sue a securitization trust on the grounds that the loan violated the ATR rule...Some QM loans will also be subject to a greater risk of penalty than others." Of the two types of QM loans, those with a "safe harbor" from ATR challenges and those with a "rebuttable presumption," the safe harbor loans will be less likely to incur penalties.
"Borrowers of safe harbor loans will have grounds to sue only if they can successfully challenge the loan's QM status," says Moody's Vice President Yehudah Forster, also a co-author of the report. "The specificity of most QM requirements, such as the prohibition of some affordability products as well as excessive points and fees, will make challenging the QM status difficult for borrowers." Registered users (if you don't have a password, don't ask me for one!) can access the Moody's report here.
And at an investor event, Ocwen's management had some thoughts about trends in the current environment, especially pertinent given its 3 million borrowers. (Of course, for every lender, the borrowers will be the ones to bear the brunt of all these changes.) "Banks are definitely shifting their focus to their core customers for a number of reputational regulatory issues, which all of us see every day in the press. Ocwen, as well as the other specialty services that have really benefited from this significantly, and we think we will continue to benefit into the foreseeable future. From the perspective, more than one -- more than $500 billion of servicing was transferred last year to the specialty servicers, and we expect another $1 trillion of servicing over the next several years that we transferred to the specialty servicers." Another trend that Ocwen's management is seeing is the decline of the prime market, the decline of the U.S. consumer. "The credit that we provide to U.S. consumers is restricted due to much tighter underwriting standards and the decline in the creditworthiness of the U.S. borrower. You can see that just in the decline of the average FICO scores out there. This was going to be further exacerbated by the qualified mortgage rules, which are expected to severely limit mortgage availability. I think on balance, these rules were well-meaning and well-founded. I think some elements will cause a continual restriction, a further restriction to supply of credit to borrowers.
"CoreLogic just did a study, and they say that in 2021 when the GSE exemption ends, it's estimated that only 25% of homebuyers in America will be able to qualify for mortgage, and obviously, this will result in a significant demand for both nonprime credit, as well as single-family home rentals. Home ownership continued to decline, as you can see on the chart. It's declined about 60 basis points a year, which really relates to demographics. Each cohort moves with population. This trend is expected to continue for the foreseeable future. I think that these tighter underwriting standards have created a significant demand supply in-balance and it's clearly a supply problem with respect to mortgages. It's not a demand problem...It isn't that people don't want to get a home mortgage and not a home and they simply cannot qualify and that's restricting the supply. All of Ocwen's companies are focused on this equilibrium..."
Keeping on with QM updates, in response to the final rules issued on ATR and QM, Wells will be rolling out a new Income and Debt worksheet that will take effect on January 10, 2014. The IAD worksheet requires an underwriter's full analysis of the borrower's income and debt and an explanation of how it was determined to be included in or excluded from the DTI. Sellers will be permitted to use their own version, but Wells strongly encourages the use of the published IAD worksheet to qualify loans, as this will reduce the likelihood of extended turn times and/or suspensions and Dodd-Frank requires creditors to hold documentation of their sellers' qualification methodology. The use of the IAD worksheet becomes mandatory for Conventional and Government loans with RESPA application dates on or after January 10, 2014, after which point all relevant loans be reviewed prior to purchase to ensure that they comply with QM.
Per the CFPB's rule on High-Cost Mortgages stipulating that creditors document their compliance with the associated points/fees limits, Wells will begin requiring lenders to submit a Fee Details Form that provides a complete itemization of all points and fees with the closed loan package. This also goes into effect with RESPA application dates of January 10, 2014 and after.
LoanCraft has launched its Income Portal, which features tools that allow lenders to accurately calculate DTI in their efforts to comply with the Ability to Repay rules. Lenders are issued with a Comprehensive Income Report, a single PDF that summarizes all calculations and contains all relevant images, thereby satisfying the new requirements in case of auditing. The report encompasses a summary of all income calculations, individual calculation sheets and quality assurance for each income item, all images used to support the calculations, ancillary images, and any optional debt calculations. Lenders' credit policies can be built into the calculator, including validation, expiration date of documents, and 35-plus calculation types, including those covered by Appendix Q of the CFPB rules.
The numbers show that the economy continues to click along, although there are plenty of people out there who shake their heads in wonder and say, "I am just not seeing it." Yesterday we learned that the ADP Private Payrolls number increased 215,000 in November, the most in a year. What government shutdown? The U.S. Trade deficit decreased 5.4% to $40.6 billion in October on record exports, and the Fed's Beige Book seemed to be fine. And in spite of a lack of inventory of houses for sale, the Census Bureau and HUD reported that sales of new single-family houses in October 2013 were 25% above the revised September rate, and 22% above the October 2012 number. (The median sales price of new houses sold in October 2013 was $245,800; the average sales price was $321,700. And real estate agents are concerned about there being only 183,000 new houses for sale at the end of October - a supply of 4.9 months at the current sales rate.) All of this "new news" showing strength in the economy pushed rates higher and bond prices lower. The 10-yr T-note's price was worse by more than .5, and agency MBS prices worsened by .250-.50 depending on coupon.
Today we've had a new plate of economic vittles served up. The preliminary read on Q3 GDP (+3.0 expected from +2.8 at advanced reading, actually came out stronger at +3.6%) and Initial Claims (expected at 325k versus 316k last, also stronger at 298k, down 23k from revised 325k). Later we'll see October's Factory Orders, but the damage has been done: the 10-yr is up to 2.87% after Wednesday's 2.84%, and MBS prices are worse by about .125.