May 4, 2011: QRM - credit availability & securitization implications; GMAC/Ally results
Rob Chrisman

Last month marked the 151st anniversary of the Pony Express, the communications link from St. Joseph to San Francisco. News and mail took 11 days (with 75 horses and 20 riders), 10 days faster than by stagecoach. The Pony Express system lasted only last 18 months, until it was replaced by the telegraph in October of 1861. I mention this, not because my great-great-great uncle was a rider (nicknamed "Deafy" after being kicked in the head by a horse), but because we seem to become aggravated when an e-mail takes more than 60 seconds to go from New York to Los Angeles, or from New York to Paris.

Things change all the time. Here is a note that I received from a veteran LO: "Way back in 1985, I was part of a local mortgage banking company.  We were called correspondent lenders in those days.  We had 10 or so wholesale lenders that we sold to, plus we could do a portfolio loan that was kept on the books.  If I had the perfect loan, that was underwritten and ready to go, I was allowed a 5 day mandatory lock.  I usually was able to get 1/8th better on the rate for my client.  But, I had to close and deliver that package to my secondary market person in 5 days. It took extra effort and vigilance on my part to make it happen. I work with 1 wholesale lender now that allows me to do a 10 day mandatory.  Again, I get 1/8th better on the rate for my clients, but I have to really push to get docs and close and back to them within 10 days, which of course takes effort and attention. I have always felt that providing the very best for my client was my job.  Whenever possible, I did the mandatory lock.  Not very many originators want the extra work or responsibility. Now, with the new comp rules we are not allowed to give anyone anything special - too bad for the consumer."

One can attribute the abnormal time of this e-mail being sent to the flight schedule out of New York (where the MBA's Secondary Marketing conference was held). The mood of the conference was decidedly upbeat. It seemed well attended with the usual array of investors such as Fannie, Freddie, Wells, Bank of America, Chase, CitiMortgage, PHH, SunTrust, and so forth, along with the usual cadre of vendors. There was definitely a hint that a) firms are still grappling with compensation issues, tweaking the parameters established over a month ago with rumors of companies trying to cheat the system, b) lower expected volumes are gradually becoming a reality, and c) there is continued angst over the Dodd Frank regulations aimed at the biz which will increase the compliance headaches and not necessarily help the borrower.

GMAC was there, a part of Ally Financial, although I have long since given up trying to forecast what it will say on any of their business cards for the company name. (I still have my RFC pen and note pad set.)  Ally earned $146 million in the first quarter compared with $162 million a year earlier when it was known as GMAC Financial Services. "We expect profitability to improve over time," said Chief Executive Michael Carpenter, who cited falling costs for funding and more money from loans that will come as Ally repositions its balance sheet. Mortgage-wise, the company said it lost $39 million, before taxes, in its portfolio of mortgages made before the financial crisis, compared with an $85 million gain in the same quarter last year. As Ally/GMAC's book of "legacy mortgages" gets older, more loans are defaulting and more are maturing, leading to higher credit costs and lower interest income. The Origination and Servicing segment's pre-tax income was about the same as a year ago, with the release stating, "Results were driven by favorable servicing results due to market movement, net of hedge, and a gain from the sale of excess servicing rights, partially offset by a $79 million fair value adjustment due to higher expected future servicing and foreclosure costs and a decline in production due to lower industry volume and higher interest rates." "Total mortgage loan production from the Origination and Servicing segment in the first quarter of 2011 was $12.2 billion consisting primarily of prime conforming loans, compared to $23.8 billion in the fourth quarter of 2010 and $13.3 billion in the first quarter of 2010.  Production decreased on a sequential basis due to the refinance market moderating during the quarter."
 
Recently Barclays Capital opined on "Risk retention implications for non-agency securitizations". Regulators have proposed QRM and risk retention regulations in an NPR that is out for comment until June 10. The NPR covers topics such as definitions of qualified mortgages under Dodd-Frank and what risk retention requirements apply to loans that do not qualify.” Barclays piece states that, “Banks’ traditional origination channels are most affected, since the premium recapture account may make it difficult for banks to get true sale accounting treatment. The fact that this does not take into account costs that push a bank’s basis in originating the loan to above par means that the bank may be left paying out of pocket to fund the premium recapture account, which is worse than just holding the loan on portfolio. The premium capture also raises other issues, especially with pipeline hedging. If rates rally, the bank loses on the hedge but cannot offset it through an immediate gain on loan because proceeds are limited to 95% of par value. The model in which dealers buy loans from the wholesale market and then securitize also becomes more difficult. Dealers being forced to retain risk when the originator is less than 20% of the deal would negate any potential benefits.”
 
Barclays continues, “The REIT model still seems the most viable since the rules change very little for them. REITs have used securitizations mostly as a financing vehicle for levering up on whole loans and would continue to be able to do so. We believe that the premium capture account will be the point that might get the most pushback from banks given that it forces big changes to their securitization model. We think it could be improved substantially by allowing for situations where the originators’ costs basis is above par in some reasonable manner while still enforcing risk retention and gain on sale restrictions. Overall, we believe that most of the new securitizations in the QRM space as it stands now will be from REITs/asset managers/insurance companies who use similar structures. Banks will still be competitive in securitizing non-conforming QRM loans.”
 
Along those lines, the University of Maryland also released a piece on QRM & credit availability. "Determination of what mortgages qualify for exemption of risk retention rules is critical. QRM designation would establish a bifurcated mortgage secondary market built around loans that carry the QRM designation and those that do not. Mortgages meeting the QRM test should be less costly and as greater standardization is set for this segment of the market. "QRMs to be defined no broader than the definition of "qualified mortgage" under Section 129(C) of the Truth in Lending Act” which includes maximum combined LTV 75%/80% for refi/purchase transactions, no negative amortization, no large balloon payment, verified income and assets, DTI based on a fully-indexed rate, 28%/36% front- and back-end ratios, compliance with regulations established by the Fed with respect to back-end DTI, total points and fees not in excess of 3% of the loan amount and maximum term of 30 years.
 
“However, with risk retention exemptions in place for GSEs (in conservatorship only) and FHA, expect limited impact on credit availability in the short-run QRM rules in conjunction with federal actions to gradually lessen GSE and FHA market share could introduce some credit constraints along with higher borrowing costs for non-QRM loans. Some evidence in GSE reform proposal of over time requiring at least 10% borrower down payments will lower the borrower pool.  Lower loan limits, higher fees and tighter underwriting should begin to open the door for private capital. And kind of vibrant mortgage securitization dependent on re-emergence of private label securities. The government today is crowding out potential for private market; dependent on housing stabilization. UoM believes that risk retention and QRM rules are needed, and flexible risk retention structures a positive direction. QRM rules may want to consider allowing for up to 90% Combined LTVs, adequate mortgage insurance required for 80-90% LTVs, or even (and don’t throw tomatoes!) no broker originated loans."

What is going on with the market? It sure seems pretty quiet, although we’ve had some rate improvement. Monday night activity was minimal as a result of the Golden Week holidays, which extend through May 5. Treasuries sagged Tuesday on a stronger than expected Factory Orders print (3.0%), only finding a bottom once foreign “real money” came in. This buying, combined with the prospect of the Fed buying $6-$8bn securities within the hour, propped US Treasuries higher going into the repurchase operation. 
 
Later Wednesday we’ll have the ADP Employment change, always of dubious predictive nature for the Friday employment numbers, and the ISM Non-Manufacturing index.


(There aren't always jokes here...)

Do you know how to determine if a mirror is 2-way or not?
When we visit toilets, bathrooms, hotel rooms, changing rooms, etc., how many of you know for sure that the seemingly ordinary mirror hanging on the wall is a real mirror, or actually a 2-way mirror (i.e., they can see you, but you can't see them)? There have been many cases of people installing 2-way mirrors in female changing rooms. It is very difficult to positively identify the surface by looking at it - how can one determine what type of mirror we're looking at?
Just conduct this simple test: Place the tip of your fingernail against the reflective surface and if there is a GAP between your fingernail and the image of the nail, then it is GENUINE mirror. However, if your fingernail DIRECTLY TOUCHES the image of your nail, then BEWARE! IT IS A 2-WAY MIRROR!
"No Space, Leave the Place."  So remember, every time you see a mirror, do the "fingernail test." It doesn't cost you anything.