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Apr. 19, 2011: A "solution" to QRM issues for smaller companies? % of recent production meeting QRM standards; MERS in the clear? Covered bond update
Rob Chrisman
We now
have another world of higher annual FHA premiums. Private MI
companies, of course, are understandably quick to point out the
price difference with the change. RMIC, for
example, noted that “With this change, RMIC offers equal or
lower monthly premium rates on all LTVs with no upfront premium.
While FHA has been the choice of many lenders in the last few
years, this rate increase and other recent FHA changes make this
the ideal time to consider whether Private Mortgage Insurance
(MI) is a better option for your high LTV borrowers.” RMIC, and
other MI companies, offers a site to compare premiums. http://www.rmic.com/ratesguides/premiumrates/MIvsFHAcalc/Pages/default.aspx
Auditing has become so bad that many large companies set aside a
room, or block of them, for revolving teams of auditors from
investors, Fannie, Freddie, the OTS, OTC, the FDIC, FRB, AA.
(Ok, just seeing if you were really reading that list.) Last
week the servicing biz was in the headlines, with the first
official "enforcement." But in addition to those 14 servicing
companies, LPS and MERS were both cited for
"significant compliance failures" and "unsafe and unsound
business practices" related to foreclosures. Regulators
are requiring both companies to hire independent consultants,
take remedial steps to address past failures and hire additional
staff. LPS “faces the possibility of having to reimburse
servicers and borrowers if an independent review finds anyone
was financially harmed by its failure to properly execute
mortgage documents” per an article by Kate Berry of American
Banker. MERS said it is “already implementing changes to
tighten corporate governance, improve internal controls and
address quality-assurance issues identified by federal
regulators.”
A few months ago
MERS, with its 31 million residential mortgages on its system,
told members not to foreclose in its name since borrowers have
filed so many suits claiming the company has no standing to
foreclose even though MERS has been listed as the lienholder in
many foreclosure filings. MERS has 30 days to hire a third party
to analyze and assess its directors, officers, management and
staffing needs, and 90 days to create a plan to establish
adequate internal control, risk management, audit and reporting
requirements. But regulators never questioned the underlying
business model of MERS, or attempt to answer the question, “Does
MERS have the legal right to foreclose on a borrower?” This has led industry watchers to suggest that MERS
has, in effect, had its procedures and processes validated.
For the 14 servicers,
the implementation of the steps necessary to comply with the
consent orders will further weigh in on timelines and increase
servicing costs. Companies already have to
reallocate resources away from production and into developing
and implementing the plans. The order contained more than
25 action items and detailed over 50 sets of new policies,
processes, and measures that need to be developed and
implemented over the next 120 days. The biggest change will be
the establishment of a single point of contact for borrowers. In
addition, servicers will need to hire and train additional
staff. Longer term, the additional staff should help to work
through the backlog of foreclosures in the pipeline. And the
state attorneys general are still negotiating with servicers
over a potentially more far reaching agreement. The consent
orders may give servicers some leverage in their negotiations.
However, until an agreement with the AGs is completed, a cloud
is expected to remain over the foreclosure process.
The public comment
period for the QRM rules continues at the Fed’s website. But
I've been asked what percentage of loans would pass
QRM muster. Here is one report, straight from the
regulator of Freddie & Fannie, thanks to Bill R. of
Homeowners Financial Group in Arizona: http://www.fhfa.gov/webfiles/20686/QRM_FINAL_ALL_R41111.pdf.
And this from a self-described "a humble sales guy trying to
scratch out a living": “Rob, what am I missing? An independent
mortgage banker makes $100 million of non-QRM mortgages….let’s
say 95% LTV FRMs. The loans are securitized with Fred/Fan, but
since they are out of conservatorship, the originator has to
retain $5 million of ‘skin in the game.’ This would obviously
constrict the balance sheet leverage of the mortgage banker. It
seems that someone could approach the mortgage
banker, and offer to have the $5 million transferred to their
balance sheet in exchange for a fee. The mortgage banker
could collect a fee on a prorated basis from the borrowers as he
is originating the $100 million, a party still has skin in the
game so the regulators should be indifferent and could dictate
who is eligible to sell such ‘capital replacement certificates’
or whatever they will be called. In essence, instead of selling
MI on a loan by loan basis, an entity could take on
the QRM risk on an aggregate level, and new secondary market
trading ‘QRM positions’ will be created with cash flows,
credit risks, product risks, geographic risks, counterparty
risks, duration risks….all those things the quants love to
measure, price, trade, re-trade, etc.
“There will be some
creative new ways to meet the QRM regulations while bringing
private capital to the market (good), providing product choices
to the consumers (good) while keeping pricing to the consumers
as low as possible (good) through the market based pricing of
the risk of the transaction (good). I would guess that the MI
companies or Wall Street firms are working on something ahead of
the final rules being created – it is a form of the current
guarantee fee structure.” For more on QRM implications visit http://www.mortgagenewsdaily.com/04142011_qrm_regulations.asp
or http://www.housingwire.com/wp-content/uploads/2011/04/FINAL-QRM-white-paper-.pdf.
Occasionally, while
out speaking to groups, I am asked, "How safe is the
mortgage deduction?" In the past I was much surer of my
answer ("Safe - what politician wants to take away even one of
the advantages of home ownership?), but the noise in the press
is growing too loud to ignore with articles every week on the
subject. Whether eliminating it for 2nd homes, lowering the cap,
or whatever, one can smell gradual change in the wind: http://blogs.wsj.com/deals/2011/04/12/budget-deal-could-the-mortgage-deduction-get-chopped/?KEYWORDSmortgage.
REIT’s are garnering
much of the press in the mortgage world right now. But we have
other capital market “ideas” that companies are watching. One of
these is the drive to restart Wall Street’s securitization
machine with instruments known as “covered bonds”
which some feel will give private investors the comfort they
need again. Covered bonds aren’t new, and they’re used
extensively in other countries. They are pools of debt
obligations that have been assembled by banks and sold to
investors who receive the income generated by the assets. The
bank that issues the bonds, meanwhile, retains the credit risk.
If losses arise, the bank that issued the covered bonds must
offset the loss with its own capital, letting investors sleep
better at night but making banks “near the edge” that much more
nervous. If an asset in the pool defaults, a separate entity
would be required to remove the assets from the bank’s control.
The assets would then be out of reach of the FDIC should the
bank fail and the agency step in as receiver. The investors who
bought the covered bonds would have first call on the assets,
ahead of the FDIC. Banks bypassing the FDIC? Don’t bet on that
happening in the US.
Today we’ve had
Housing Starts and Building Permits, expected to improve but
still provide more reminders about the slow state that housing
is in. Housing Starts dropped sharply in February, led by a 46%
drop in multifamily starts, and Permits hit a historical low.
Why build more houses when there are so many old ones available?
But expectations are for a rebound in March – how
can we possibly have a healthy economic recovery without an
improvement in the housing market? Yesterday’s NAHB's
Housing Market Index showed homebuilder sentiment remained low –
surprising no one.
The pundits are still
cogitating on Standard & Poor’s statement on US debt,
affirming its AAA long term rating but revising its outlook on
the long-term rating from stable to negative. S&P stated
that more than two years after the beginning of the recent
crisis, U.S. policymakers have not agreed on a strategy to
reverse recent fiscal deterioration or address longer-term
fiscal pressures. Optimists believe that this rating change will
give politicians a warning; pessimists feel that this doesn’t
change anything, and that the political bickering will continue.
The negative outlook creates a steeper yield curve (the
potential problems and uncertainty cause long-term rates, like
30-yr bonds, to move higher).
The problem is that any meaningful reduction in the deficit leads to the
potential for greater fiscal drag on the economy, whether it
is higher taxes or lower spending. These thoughts all went
through the market yesterday, as interest rates actually
dropped. The Treasury’s10-yr closed better by about .250 and at
a yield of 3.37%, and agency MBS prices improved by about .250.
Stocks dropped, but Moody’s reaffirmed its positive outlook on
the United States. Today, as mentioned, we had Housing Starts at
549k, up from a revised 512k, and Building Permits for March
went from a revised 534k to 594k, both higher as expected. And
we already had Goldman Sachs’ earnings, stronger than expected
pretty much all the way around. The 10-yr is
slightly worse at 3.39% and MBS prices are roughly unchanged.
“The most effective
way to remember your wife's birthday is to forget it once.”
Ogden Nash
“I had some words
with my wife, and she had some paragraphs with me.” Sigmund
Freud
“Some people ask the secret of our long marriage. We take time
to go to a restaurant two times a week - a little candlelight,
dinner, soft music and dancing. She goes Tuesdays, I go
Fridays.”
“There's a way of
transferring funds that is even faster than electronic banking.
It's called marriage.” Sam Kinison
'I've had bad luck with both my wives. The first one left me,
and the second one didn't.'
James Holt McGavra
“A good wife always forgives her husband when she's wrong.”
Rodney Dangerfield
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