Aug. 17, 2011: How borrowers opt out of target lists; big banks shedding assets; will small banks keep originating mortgages?
Rob Chrisman

We’re in the middle of baseball season, and here’s a non-mortgage video that has people saying, “No way”: http://www.sun-sentinel.com/news/nationworld/sns-viral-video-baseball-pitch-back,0,1036340.htmlstory.
 
Small banks can still originate mortgages, but many may stop due to compliance overload: http://www.usatoday.com/money/industries/banking/2011-08-15-small-banks-fear-new-mortgage-regulations_n.htm.
 
Larger banks, on the other hand, seem to be interested in shedding assets. Flagstar Bancorp sold 22 retail branches in Indiana to First Financial Bancorp for $23 million more than the deposits held by the banks. The deal should close in December, and according to Flagstar’s CEO it will allow Flagstar to focus on markets with greater potential for growth such as its home state of Michigan. Moving up the food chain, Bank of America is in exclusive talks to sell the bulk of Merrill Lynch’s real estate investments to Blackstone for up to $1 billion in order to help BofA clear up its balance sheet and bolster capital ratios. (BofA sold its Canadian credit card business to TD Bank, and is also peddling its UK and Irish card units.) The Financial Times reports that the sale would include unwanted property investments in Europe, the US and South America, and is part of the bank’s wider efforts to dispose of non-core assets. “BofA is one of the last of the big investment banks to have pulled the plug on private equity real estate investment, with others such as Citigroup and Credit Suisse already disposing most positions in the sector...US banks are rejigging their balance sheets to comply with the so-called Volcker rule, which restricts how banks can invest their own capital, as well as reducing exposure to assets such as private equity, against which banks will be forced to hold more capital under new Basel III regulatory rules.”
 
Maybe now is a good time to start a rating agency – you’d have none of those messy legacy issues (“You guys blew it five years ago by giving bad pools of residential loans AAA ratings.”) Many wonder when the large rating agencies will pay the price for previous mistakes, and Congress has made noise about holding them accountable for past mistakes. But it may just be noise at this point: The Dodd-Frank financial reform act was thought by many to reduce the influence of ratings houses by deleting references to them in the federal laws governing bank and pension investments. But the task is huge, and rating agencies are not cooperating. So while the SEC has proposed new rules that would require ratings houses (or Nationally Recognized Statistical Rating Organizations as they are called) to submit more documentation of how they arrive at their conclusions on collateralized loan obligations, for example, it wouldn’t require them to reveal all of the data, in real time, on the derivatives they monitor.
 
For newer rating agencies, such as A.M. Best, Kroll, Rapid Ratings, Japan Credit Rating Agency, and Egan-Jones, a 2006 law required firms to have three years’ experience with a particular product before applying for NRSRO status. The rules adopted and being considered by the SEC focus on changing the behavior of the ratings houses, without changing the underlying market for the data that drive securities prices. SEC-licensed NRSROs will have to supply information on how they rate securities, who does the rating and whether they subsequently take a job with a securities underwriter, for example. They won’t have to share the underlying data they use to change a rating, however, which investors and rival analysts could use to determine more than just the default risk on a security. For more go to: http://blogs.reuters.com/financial-regulatory-forum/2011/08/15/start-up-rating-agencies-urge-national-regulators-to-promote-competition-change/.
 
Last week I mentioned a question that someone had on "What is the best way to stop the selling of leads by credit agencies?" "Trigger leads" are a problem for many in the industry, where after the credit report is run, suddenly a borrower hears from other lenders. One industry vet wrote, "One thing that will reduce this problem is do not put in any borrower phone numbers when pulling a credit report. I always delete my borrower’s phone numbers before I pull the report. The credit agencies do not need phone numbers to obtain a credit report. This is not full proof ….the repository may have a phone number on file for borrower …or someone might be able to look it up. But my experience is that this has reduced the number of solicitation calls to my customers."

Another wrote: "We always give our borrowers a document that says, 'Important -- Opt-Out Instructions: Credit reporting agencies will put your name on a 'target list' within 24 hours after your credit report is ordered in connection with a mortgage.  They will sell this list. As the result you will receive phone calls and junk mail with offers of loans, insurance, etc. from a variety of unscreened vendors. If you wish to avoid receiving this unwanted solicitation, either call 1-800-567-8688 or go to www.optoutprescreen.com and follow the instructions. It takes 5 business days to process your request to opt out. So, let us know the date you complete the request to opt-out.  We will order your credit report on the 6th day." Great advice!

Lastly, "The problem I am seeing with lenders as a lead generator is that they are too dependent on selling the consumer based on the rate of the loan NOT on the life-changes benefits of a loan. If you live by the rate, you die by the rate- meaning that if the only reason a consumer is refinancing is because of the low rate, if someone with a better rate comes along they will follow the new guy. It’s just like if a woman only dates you because you have a nice car, when a guy with a better car comes along she will probably go off with him. If a broker or lender cannot get someone committed to a loan on a deeper level than just rate, they barely have the fish hooked. If they sell the consumer based on the fact that this loan will better their lives by providing monthly savings to keep their home, pay-off bills, help finance college, etc. then they have a much better chance of keeping the loan regardless of rates. My point is, what are these lenders who are so dependent on selling low rates gonna do when the rates rise?"
 
Face it: there is no quick fix for the problems in Europe, or in this country. The situation in Europe is worsening, and the fear that sovereign debt would spread has done just that: French, German, and Spanish banks are now viewed as vulnerable since they hold a good amount of poor European debt from Greece, Italy, Spain, Portugal, and Ireland. Germany and Holland can’t save the rest of Europe. German Chancellor Angela Merkel and French President Nicolas Sarkozy said they will encourage euro-zone nations to more closely integrate their economies, proposing stricter oversight and deficit rules to tackle the sovereign-debt crisis. The leaders rejected the idea of expanding the region's rescue fund or introducing Eurobonds.
 
Do the problems over there influence our mortgage rates? Well, to be concise and simplistic, European concerns have not pushed our rates higher, and in fact, in a roundabout way, have helped to push US Treasury debt rates lower, and mortgages along with them. But analysts are quick to point out that the trouble there is likely to spread to other economies, especially if austerity measures are implemented. And great rates are only part of the lending picture – the borrower and the property still have to qualify.
 
And the problems there certainly, in the long run, overshadow “small” economic news releases here, although measures of our economy certainly move rates in the short run. Yesterday we had some import & export price numbers, along with housing starts and building permits, and then Industrial Production (+.9% in July, the quickest pace in seven months) and Capacity Utilization (which rose to 77.5% from a revised 76.9% in June). But stocks dropped on disappointment in the results of Merkel-Sarkozy talks, and bonds rallied. 
 
In mortgages, traders reported “a big migration” in MBS investors as they sold higher coupon securities and bought lower coupon bonds. Selling from originators totaled around $1.7 billion and consisted of 75% in 4% coupons and 25% in 3.5%’s. (And there are now actually prices on 30-yr 3% coupons, containing 3.25-3.625% 30-yr mortgages!) MBS prices improved by roughly .5 on current-coupon production, resulting in some intra-day price changes from lenders. But it is a big concern for lenders to close the loans that are locked in their pipelines, and following market price changes does not seem to be paramount.
 
This morning we learned from the MBA that last week’s applications were almost 79% refi’s – not a shock. Overall apps were up about 4%, but while refi’s were up 8% purchase apps dropped over 9%. Much of the slicing and dicing done by mortgage research firms suggest that while supply and prepay risk is increasing, it looks to be "contained", unless the government comes up with some program to stimulate the housing market which odds are deemed very low of this occurring. We also have the Producer Price Index numbers, but currently the 10-yr sitting around 2.24% and MBS prices worse by about .125.
 

"Get this," said one drinker to his friends at the bar, "Last night while I was here with you guys, a burglar broke into my house."
"Did he get anything?" his friends asked.
"Yeah, a broken jaw, two teeth knocked out, and a kick in the groin. My wife thought it was me coming home drunk."


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