Jul. 12, 2011: Are we back to negotiating underwriting guidelines? Largest REIT becoming larger; the latest from Freddie & Fannie
Rob Chrisman

Born in the 1800's in California and Tennessee, my grandparents are long gone - and I never lived with them. But over the last 20 years, reports the Census Bureau, the number of children living with a grandparent has increased 64%. Trends like this are useful demographics for loan agents. In 2009, 7.8 million children lived with at least one grandparent. Among children living with a grandparent, 76% also were living with at least one parent. An ethnic breakdown from the Survey of Income and Program Participation points out that 9% of white, 17% of black, and 14% of Hispanic children lived with at least one grandparent. More than half of the children living with no parents were living with grandparents. Turning to parents, 69% of the 74.1 million children under 18 lived with two parents.

When one hears about a particular lender claiming, "’ABC Mortgage’ is now doing FHA loans with a 620 score!!!" the odds are that it is a negotiated deal with a larger investor. Yes, there are some cases where it is a portfolio lender or direct Ginnie Mae issuer, but for the typical conventional or government products, if something falls outside the overlay guidelines usually some negotiation has taken place. What is Ginnie Mae's minimum FICO for a FHA loan? A trick question - there is none. All Ginnie requires is that the loan be insured for final pool certification which must occur within a given period. So in effect, typically whatever minimum FICO overlay levels that are out there are a combination of FHA loan delinquency studies by servicers and negotiations with the companies that sell to them.
 
But before you go calling the Wells’ & Chase’s of the world trying to wangle 500 FICO borrowers for condos, remember that investors are unlikely to disregard their underwriting and overlays entirely. It is a give & take process, and benefits accrue to high volume, loyal, well capitalized counterparties who know what they’re doing – but there are rumors of cracks in the ice in certain underwriting areas IF they make sense - and you didn't hear this from me.
 
Speaking of large investors, JPMorgan Chase, Bank of America, Citigroup and other major banks are preparing to report second-quarter results, which analysts expect will be down from the previous quarter. CSFB expects core trading revenue at major Wall Street banks to have declined by as much as 25% on average, much of it due to lower levels of activity/volume.
 
Volume is important for Annaly Capital Management, the largest U.S. mortgage REIT. It spread the word that it plans to sell 100 million shares in its third public stock offering this year. The proceeds will be used to buy mortgage-backed securities, adding on to 150 million shares it has already sold this year for a total of about $2.6 billion. Annaly has expanded from investing in government-backed mortgage bonds to overseeing distressed-debt buyers and a securities firm, along with financing middle-market companies and home lenders, and entered ventures to make commercial real estate loans: http://www.bloomberg.com/news/2011-07-11/annaly-to-sell-100-million-shares-in-mortgage-reit-s-third-offer-this-year.html.

In somewhat dated news, a report in the Wall Street Journal said two Representatives plan to introduce legislation to merge Freddie & Fannie and restructure the company into a government-held corporation. Most doubt that anything will happen until after the 2012 elections, and until then much of the talk may be political grandstanding and sound bites for the folks back home. It is one idea out of many competing plans for housing finance, and there is certainly no consensus on whether or not the government should offer a guarantee. But the plan has some genetics that we may see in future proposals. "Frannie" would be a utility-like entity and phase out government-controlled Fannie Mae and Freddie Mac, would purchase mortgages and repackage them as government-backed securities, and have no shareholder investors. But as you might recall back in May, another duo of politicians introduced legislation that would create at least five private companies to replace the two co-called government-sponsored enterprises, or GSEs. Not much has happened with that one.

Like most other things, figuring out Freddie & Fannie seems to have paralyzed our elected officials. The dividing line among many lawmakers is whether or not to provide a government backstop for mortgages and, if so, on what terms to provide the guarantee. Any bill that is crafted by anything related to the Republican-led House would likely still be in jeopardy once it reaches the Democrat-controlled Senate. All of them want to stop the "taxpayer bailouts," an easy term for the folks back home to understand, but it is easier said than done. According to experts, none of the plans are confronting the key decision, which is the role of the government in the system. And as mentioned above, with the housing market still in the doldrums, any final decisions on housing finance reform are expected to be put off until after elections in 2012.

What is new with the agencies? For one thing, currently Fannie Mae requires a minimum of six months to elapse between the time a borrower purchases a home and subsequently applies for a cash-out refinance. Its Selling Guide has been updated to allow a cash-out refinance within six months of a purchase transaction when no financing was obtained for the purchase transaction. There are of course all kinds of parameters, including maximum LTV (loan-to-value ratio), documentation, arms-length transaction and "all other cash-out refinance eligibility requirements and cash out pricing applies." But this is good news for investors who can now remove equity out of their investments faster, and for home buyers who couldn't compete in the long term with all-cash investors, but who might be able to put down the cash for a few weeks before obtaining a mortgage.
 
Freddie Mac released guidelines for servicer handling of delinquent loans, per a FHFA mandate from April. Fannie Mae released guidelines at the beginning of June and Freddie's appear similar. The bottom line is that servicers will have to devote additional resources to deal with these tightened guidelines to avoid a fine. UBS analysts suggested this could detract from the day-to-day business of originating purchase or refinance loans and lead as well to tighter underwriting standards given the increased costs of complying with the guidelines. As a result, there could be some marginal decline in prepayments. Freddie Mac's guidelines must be implemented no later than October 1 and Fannie's by September 1.
 
Housing and realty lobbies are pushing for a continuation of the $729,750 high-cost area maximum, but banks don’t appear to be along for the ride. As industry folks have seen for a few years now, jumbo loans are valuable items in a portfolio (basically earning that spread versus what banks pay folks on their checking accounts) , and banks are happy to step in for borrowers who are creditworthy and have enough of a down payment. On Oct. 1, the maximum loan at each of the three federal mortgage giants will fall to $625,500 in some areas mostly along the coasts.
 
Fannie Mae released news for servicers. Specifically, it addressed HUD's Emergency Homeowners' Loan Program (the EHLP is designed to provide mortgage payment relief to eligible borrowers experiencing a reduction in income resulting from involuntary unemployment or underemployment due to adverse economic conditions or a medical emergency.)  For details go to https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2011/ll1105.pdf. As mentioned above, the enhanced delinquency management and default prevention policies announced in June via SVC-2011-08 will go into effect September 1. “As part of these requirements, servicers must reach out to delinquent borrowers between the 31st and 35th day of delinquency and again between the 61st and 65th day of delinquency using a Borrower Solicitation Package.”
 
For sellers to Fannie, how far along are you with UMDP implementation? Here’s some help: https://www.efanniemae.com/sf/lqi/umdp/pdf/umdpyardstick.pdf. And an LQI update can be found at https://www.efanniemae.com/sf/technology/commitloandel/loandelivery/loandelreleasenotes.jsp.

Over at Freddie Mac, it sent out its "Uniform Collateral Data Portal (UCDP) Lender Agent Admin User Guide," all 83 pages of it. It can be viewed at http://www.freddiemac.com/learn/pdfs/uw/ucdplenderagentadminuserguide.pdf. In fact, if one wants to learn anything about what Freddie is up to (and what they're doing impacts the large investors, which in turn impacts practically everyone), visit http://www.freddiemac.com/learn/. And there will be a Loan Prospector release coming up on the 17th: http://www.freddiemac.com/singlefamily/news/2011/0706_lp.html. For appraisals sellers are encouraged to register for the UCDP.  As a reminder, it is a single portal for the electronic submission of appraisal data files to Freddie Mac and Fannie Mae and facilitates the electronic collection of appraisal report data. Check it out at http://www.freddiemac.com/sell/secmktg/uniform_collateral_data_portal.html?tab2.
 
This morning we start off with the 10-yr note yield at 2.90% after closing around 2.92% Monday. MBS prices improved by roughly .250 on current coupon products. Rates are being helped by uncertainty over the European debt crisis, what the US will do with its debt ceiling (does it really matter, and isn’t this debt ceiling jabbering taking our eyes off the real problem – the debt?), when Congress will get down to the business of really cutting the budget and what will be cut, and how we will grow our economy moving forward. Most believe that eventually rates will go up because of inflation, or in order to attract investment dollars, but for now we have the “flight to safety” bid.
 
Today starts yet another Treasury auction with $32 billion 3yrs, $21 billion 10yrs, and $13 billion 30yrs. We’ve already had the International Trade numbers for May – usually not a big market mover, and the deficit went up to $50.2 billion – and later we’ll see the minutes from the last FOMC meeting at 2PM EST. The yield on the 10-yr is down to 2.90% and MBS prices are a shade better.
 
Tony was 9 years old and was staying with his grandmother for a few days.
He'd been playing outside with the other kids, when he came into the house and asked her, "Grandma, what's that called when two people sleep in the same bedroom and one is on top of the other?" She was a little taken aback, but she decided to tell him the truth. "Well, dear, it's called sexual intercourse."
"Oh," Little Tony said. "OK," and went back outside to play with the other kids.
A few minutes later he came back in and said angrily, 'Grandma, it isn't called sexual intercourse. It's called 'Bunk Beds.'  And Jimmy's mom wants to talk to you."


If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at