Feb. 7, 2011: Structural & product line changes at BofA; Fannie & Freddie update; prepayment speeds; critical documents reminder from Citi
Rob Chrisman

This is on the long side, and I don’t recommend the entire thing, but within 60 seconds you see that PowerPoint caused the mortgage crisis! http://www.youtube.com/watch?vKbSPPFYxx3o

The government has flown past its January 31 deadline for a proposal on the future of Freddie and Fannie, and things may drone on for a while. (For the folks at the agencies, it is probably like knowing your boss and your boss’s boss are talk about you in the office down the hall.) Rep. Scott Garrett, chairman of the House Financial Services Committee’s Subcommittee on Capital Markets, announced that he would hold a hearing Wednesday on Feb. 9 on reforming Fannie Mae and Freddie Mac. “This hearing will be the first in a series of hearings to examine the steps Congress can take right now to protect taxpayers from the ongoing bailout of Fannie Mae and Freddie Mac.” The hearing is titled “GSE Reform: Immediate Steps to Protect Taxpayers and End the Bailout,” and will focus on immediate steps that Congress can take to begin F&F’s transition out of Federal conservatorship and examine ways to end the $150 billion bailout.
 
Speaking of proposals, it is heavily rumored that the Obama administration will recommend reducing the size of mortgages eligible for government backing. If that happens, it will, of course, make obtaining a home loan in high-priced areas more expensive. The $729,750 figure, of course, is only temporary and only available in certain areas. (In the old days, conventional loan limits were set around Thanksgiving, with secondary marketing managers being hounded by producers leading up to the announcement.) “The administration is now likely to suggest that Congress allow the policy to lapse as scheduled in September, lowering the loan limit to $625,500.” http://www.denverpost.com/nationworld/ci_17288390

Not only is Bank of America splitting its mortgage business into two units (with a new division created specifically to handle foreclosures and discontinued loan products), but is also exiting the reverse mortgage business. A recent story in Bloomberg points out that BofA bought Countrywide for $2.5 billion (some figures have it at $4 billion), but that approximately 1.3 million home loans are in some stage of default. In 2010 Bank of America Home Loans list nearly $9 billion, with billions more set aside in reserves. The new “Legacy Asset Servicing” unit will be responsible for resolving servicing issues, mortgage modifications, and buyback claims. The bank reached a settlement last month with Fannie & Freddie on some of Countrywide's loans, but analysts have estimated the bank faces up to $10 billion in claims from private buyers. Bank of America Home Loans will continue to handle new loans and the servicing of current loans, with the grand total being slightly over $2 trillion.
 
In addition, Bank of America said it will exit the reverse mortgage origination business and shift the staff from that business to other mortgage operations. Loans in process will be funded, and existing loans continue to be serviced (about 100,000 of them).
 
If you're an investor who is paying anything above par (100) for a pool of loans, you'd rather they didn't pay off any earlier than expected – you’d like to earn that yield well into the foreseeable future. So investors were watching closely Friday when the prepayment speeds were announced. The aggregate prepayment speeds for Fannie Mae 30-year securities dropped 24%, for example, and speeds dropped much more for recent vintages. For seasoned pools, prepayment speeds came in faster than many had projected. Prepayments are based on many things: age of the loan, maturity, original note rate, potential of using HARP for streamline refinances, etc. Barclays, for example, suggests that over the next few months 30-yr prepayments should continue to slow significantly, and that the “2010 “vintage” will likely prepay significantly slower than its 2009 counterpart, for multiple reasons. One factor that may not have been priced in by the market is that the 2010 vintage has a large concentration of HARP-refinanced loans, which should prepay much slower than average. The biggest risk to prepayments right now is a possible expansion of the HARP program to all GSE loans. That would lead to a sharp rebound in the speeds of 2009 and later production.”
 
The Mortgage Bankers Association sold their D.C. headquarters a year ago to CoStar Group for $41 million, taking a $49 million loss, and now CoStar is selling it for $101 million. (The MBA's transaction falls under the category of "This sounds exactly like something that would happen to me.") This gives CoStar Group a tidy profit of $60 million in one year after its deal closes with GLL Real Estate Partners of Germany, who will lease the building back to CoStar. The MBA purchased the building for $90 million in 2008 before selling it to CoStar for the $41 million.
 
Some companies are indeed expanding. Kinecta Federal Credit Union (currently in 17 states) has opened a Midwest Operations Center in Illinois for its wholesale channel.
 
Wholesaler Stearns Lending weighed in on the compensation issue, echoing much of what brokers have seen from other lenders. For “Lender Paid Compensation” (from Stearns), brokers will select a “compensation plan which will pay a fixed percentage of the loan amount. This percentage will not change (depending on the loan program), interest rate, term or other condition of the loan.” Stearns tabulated originators’ average compensation rate based on 2010 fundings. Stearns tells brokers that, “Your compensation plan will need to cover your origination costs including any in-house processing fees. You cannot receive more or less than your compensation rate. This means that you will no longer be able to credit the borrower for costs at closing. If you elect to be paid by Stearns Lending, you cannot receive compensation from any other party to the loan. This includes being paid by the seller in a purchase transaction.”
 
Stearns, for “Borrower Paid Compensation,” tells brokers that in negotiating with a borrower “you are not limited to your compensation plan and can negotiate your compensation up to the Stearns Lending 4% limit. The borrower can pay your compensation by bringing cash to closing or by increasing their loan amount to cover your costs. Your borrower may choose an interest rate which will give them a credit to pay towards third party closing costs only. The borrower cannot use this credit to pay you. Seller paid compensation is considered borrower paid compensation, not lender paid. If the seller, or any other party, is paying your compensation, they must pay all of your compensation. Your borrower can choose to pay discount points to Stearns to lower his rate. You can reduce your fees, pay for RESPA tolerance violations or offer credits at closing if your borrower is paying your compensation.”
 
Lastly, Stearns is requiring originators, to meet the safe harbor requirements, to provide three options for every loan program in which your borrower expresses an interest. It is best for Stearns’ broker clients to see the details in its bulletin.
 
Companies sometimes need to be reminded of which documents are critical for an investors’ initial loan review. A few weeks ago Citi created such a list for its clients, hoping to increase efficiency and decrease purchase times for conventional, FHA, and VA loans. I am reproducing the list here as a good general guide, but for Citi “The following critical documents must be present prior to reviewing closed loan packages submitted for purchase consideration.” Conventional Loans: note (Copy acceptable initially), final 1003, application, AUS findings (if applicable), 1008, appraisal, final HUD1/HUD1A (preliminary HUD1/HUD1A for Escrow States), and the credit report. For FHA loans: note (copy acceptable initially), final 1003, AUS findings (if applicable), FHA Form 92900LT (Loan Underwriting and Transmittal Summary), appraisal, final HUD1/HUD1A (Preliminary HUD1/HUD1A for Escrow States), credit report (except Streamline Refinance), and Conditional Commitment. For VA loans: note (copy acceptable initially), final 1003, AUS findings (if applicable), VA Form 26-6393 (if applicable), appraisal, final HUD1/HUD1A (Preliminary HUD1/HUD1A for Escrow States), credit report (except IRRRL), and the Lender’s Notice of Value.

For anyone who didn’t lock loans & rates prior to last week, my condolences. On "pretty good" MBS volumes, current coupon mortgage security prices ended Friday worse (down) by about .375, better than our friend the 10-yr T-note which was down .875. It finished the week with a yield of 3.65%, its highest level since May 2010. It was an ugly week: 10-yr notes were down 2.5 points, its yield rose 32 basis points, and 30-yr Fannie 4.5's (which contain 4.75-5.125% mortgages) worsened 1.375 in price.

Friday topped off a bad week for rates with a very confusing Employment report followed by confusing price action. The headline drop in the Unemployment rate from 9.5% to 9% generated some large block selling, but a good percentage of analysts believe deep down this report looks pretty weak with only 36k jobs created and the rate plunge largely based on the unemployed giving up on their job searches. The BLS reported that bad weather kept over 700,000 Americans from work during the survey week, which certainly introduced a negative bias into things. The weather does not have as much of an impact on the Household Survey and the big story is the fact that the unemployment rate plunged 40 basis points to 9.4%. 
 
Most will agree that the labor market is in a recovery but is a distorted piece of data. The Unemployment Rate reflects both smaller companies and larger companies, while the payrolls data captures only larger companies. After examining the details, investors placed more weight on the growth in jobs among the small businesses and self-employed, and they expect the payrolls data to "catch up" in future months.
 
For this week, there is no scheduled economic news until Thursday. In the next few days, one can expect rates to take their cue from Friday's move – don’t expect a move back down. The economic calendar has weekly Jobless Claims on Thursday, and then the Trade Balance and Consumer Sentiment on Friday, along with the Treasury auctions tomorrow, Wednesday, and Thursday ($32, $24, and $16 billion). This morning we find the 10-yr roughly unchanged at 3.67% and MBS worse .125 from Friday afternoon.
 
 
A minister parked his car in a no-parking zone in a large city because he was short of time and couldn't find a space with a meter. Then he put a note under the windshield wiper that read: "I have circled the block 10 times. If I don't park here, I'll miss my appointment. Forgive us our trespasses."
When he returned, he found a citation from a police officer along with this note "I've circled this block for 10 years. If I don't give you a ticket I'll lose my job. Lead us not into temptation."