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Jan. 13, 2011: Feedback on reverse mortgages, Bank of Internet programs, and compensation question; MBIA chatter
Rob Chrisman
When will someone buy this house? Anyone? Anyone? http://www.cnbc.com/id/40089901/?slide
I don’t
envision picket lines in the future, but the Mortgage Bankers
Association filed suit against the U.S. Department of Labor
under the Administrative Procedure Act which seeks to “set aside
DOL’s Wage and Hour Division Administrator’s Interpretation No.
2010-1 that reversed and withdrew a 2006 opinion letter from DOL
to MBA. The 2006 opinion letter interpreted DOL’s own
regulations and concluded that typical loan
officers were exempt from Fair Labor Standards Act (FLSA)
requirements for overtime payments under the
‘administrative exemption’.” If you’re interested, check out http://www.mbaa.org/DOLOvertimeCompensation.htm
“’Knowledge’
is knowing a tomato is a fruit – ‘wisdom’ is not putting it in a
fruit salad.” Well said. With the slow-down in locks and
pipelines, many originators use the time to gain some knowledge
and for some training. This one from Originator Success
Academy crossed my desk, where the training is held in
several local markets. It is “progressive training” over 4 half
days (9AM – 1PM) so you can learn in the morning and implement
in the afternoon “2 for 1 special pricing, taught by mortgage
industry trainer Ron Vaimberg and focuses on generating leads,
building a referral network, and using social networking. Check
it out at www.originatorsuccessacademy.com.
(And nope, this is not a paid announcement.)
I
mentioned a drop in reverse mortgage business yesterday,
and received, "I think one of the major reasons there was such a
huge drop in the reverse mortgage product is simply a lot of
people use this product to stop the monthly payments on the
existing mortgage(s). If there is not enough equity to pay off
the existing loans, there is no reason for the reverse
mortgage. I have tried to help a lot of people with that
product in Arizona, and about half don't have the equity to make
it work. The drop in reverse volume is not
reflected in desire, but more the property values."
(Here
is some good news: Ginnie Mae announced it is increasing the
net worth requirements and starting to accept new issuers
again. Unfortunately for many would-be issuers, they must
have a minimum net worth of $5 million plus an additional one
percent of the aggregate amount of the outstanding remaining
principal balance, any commitment authority available to issue
securities, and liquid assets of 20% of the agency’s net worth
requirement. Existing HMBS issuers will have until October 1 to
meet the new requirements, which are a change from the $1
million in net worth plus other criteria.)
I also
received a fair amount of mail focused on the Bank of
Internet’s programs and viability in the market place.
"Let me see - the borrower has a 720 FICO and 20 years of PITI
in the bank and the LTV is 70% or less. On the other hand the
US government allows us to lend to the 96.5% LTV borrower with a
620 score, no assets, a job (today), 40 DTI, and the property
was recently flipped. I know where I would put my money."
In fact
the CEO of the Bank spent some time walking me through the
source of the confusion – the use of assets depletion
income. Specifically, BOI’s guidelines state “If a borrower has
an investment portfolio but only draws the income necessary to
meet monthly obligations but additional income could be derived
from that source the underwriter may use a depletion of assets
calculation to offset the monthly debt. Any required reserves or
down payment would first be deducted from the asset balance.
“These guidelines are nearly identical to the Thornburg’s
guidelines on this issue, which many believe is a reasonable way
to approach thinking about the value of assets for wealthy
individuals in a common sense fashion.
Another
wrote, “Dodd Frank does not currently attempt to completely
regulate or define what can or cannot be construed as income.
The product is relatively safe and secure: hard cash and
cash-equivalent liquid assets in the borrower’s verified
accounts, or the borrower’s verified income from last week/last
month/last year. Why is qualifying based on income derived from
employment that could go away the day after the loan closes
deemed to be superior to using cash flow based on withdrawals
from verified cash assets? Let’s be honest, not all
limited-income-doc loans blew up, and many of them were good
loans to good borrowers. A one-size-fits-all approach to
underwriting will squeeze many potential good borrowers out of
the market, which is not good for anyone.”
Lastly,
the income verification verbiage from The Frank-Dodd
legislation: “A creditor making a residential mortgage
loan shall verify amounts of income or assets that such creditor
relies on to determine repayment ability, including expected
income or assets, by reviewing the consumer’s Internal Revenue
Service Form W–2, tax returns, payroll receipts, financial
institution records, or other third-party documents that provide
reasonably reliable evidence of the consumer’s income or
assets.” Notice the “income or assets.”
And compensation
is, and will be, a continuing issue. Glen Corso from the Community
Mortgage Banking Project wrote, “If a loan originator is
compensated by the creditor they cannot be compensated by the
borrower. The opposite is true as well. For purposes of the rule
if YSP is used to compensate the loan originator then the rule
considers the lender to be the source of payment of the
compensation, not the borrower. Therefore the compensation is
subject to the rule. If the borrower pays the loan originator's
compensation out of his/her pocket, or from loan proceeds, then
that is considered a direct payment from the borrower and is not
subject to the rule that prohibits the loan originator's
compensation to vary with the terms and conditions of the loan.
When we questioned the Federal Reserve staff on this issue and
pointed out that at a loan closing a typical borrower will have
a number of charges and credits listed on their loan closing
statement, we were told that the way to determine if the
borrower is paying the loan originator's compensation directly
is to see if compensation being paid to the originator is equal
to or less than the amount of cash the borrower pays out of
pocket, or from loan proceeds, towards the loan closing costs.
If it is, then under the Federal Reserve rule it will be treated
as compensation being paid directly by the borrower.”
The
fortunes of MBIA, a bond insurance company, go up and
down depending on what day it is. Probably the only ones who can
keep track are all the attorneys involved with its actions. Did
MBIA underestimate the risks involved in the mortgages backing
the securities? Or did the banks lie to it about the mortgages,
in which case they owe the MBIA billions of dollars? Any savvy
investor in either company would want to know the real answer.
To complicate things, many of the same banks being sued by MBIA
are trying to persuade a judge that the company is now and has
been insolvent for a couple of years. The trial has been
postponed.
Standard
& Poor’s downgraded MBIA’s bond rating to the lower regions
of junk, warning that the company’s “capital adequacy is very
weak,” although it did have enough assets to meet all claims for
at least a few years. Then the stock went up 35% over five
trading days after it was learned that JPMorgan Chase, Barclays
and Royal Bank of Canada had withdrawn from the suit challenging
the insurance department approval of the MBIA reorganization. It
seems unlikely that that it, by itself, would be very important,
since the other banks seem committed to pursuing the case. The
banks are not seeking damages, just a reversal of the
reorganization, so the number of plaintiffs is important only in
determining who shares the costs of the case. But there also is
speculation that MBIA and the banks that withdrew from the suit
reached other deals that could bolster MBIA’s position. Maybe
the New York Times can keep track of all this: http://www.nytimes.com/2011/01/07/business/07norris.html?srcbusln.
Turning
to rates, once again we had little scheduled news yesterday and
MBS prices finished the day flat. Given that prices started off
the day being worse than Tuesday’s close, some investors issued
price improvements, especially after the Fed’s Beige Book showed
continued economic weakness – especially in housing. One trader
wrote, “We are going to look to get ‘long’ mortgages outright as
we approach the long bond auction tomorrow with 3.5s and 4s our
favorite coupons to express the long in.” Mortgage-backed
security volume picked up a little, although it was still below
“normal,” and the 10-yr, after hitting a high of 3.42% and the
auction, closed the day around 3.36%.
Turning
for a moment to the Fed’s latest Beige Book report on the recent
state of the economy across the 12 districts, it generally was
as expected. The report will be used for the next Fed meeting
during the last week of January. There are signs of further
expansion in the economy and even labor markets since the last
report (which led stocks higher), but the real estate sector
remained weak across all the Districts with a few reporting
further weakness.
For
today’s excitement, we’ve already had Jobless Claims, which were
up 35k to 445k, continuing claims dropped, and the 4-week moving
average was +5,500. December’s PPI came in at +1.1%, about as
expected, and ex-food & energy it was +.2%. (Year-over-year
this number is up 4%, relatively strong.) Lastly the Trade
Balance figures came in at $38.3 billon. Later we have the $13
billion 30-yr auction. All of that has led to…not much. The
10-yr yield is still at 3.36% and MBS prices are roughly
unchanged.
Tony
had just finished reading a new book entitled, “You Can Be THE
Man of Your House.” He stormed to his wife in the kitchen and
announced, "From now on, you need to know that I am the man of
this house and my word is Law. You will prepare me a gourmet
meal tonight, and when I'm finished eating my meal, you will
serve me a sumptuous dessert. After dinner, you are going to go
upstairs with me and we will have the kind of sex that I want.
Afterwards, you are going to draw me a bath so I can relax. You
will wash my back and towel me dry and bring me my robe. Then,
you will massage my feet and hands. Then tomorrow, guess who's
going to dress me and comb my hair?"
His Sicilian wife Gina replied, "The funeral director would be
my first guess."
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