Jun. 27, 2012: First Horizon's buybacks; buyback legal chatter; Basel III and construction loans; Congress snubs small business?
Rob Chrisman
I
have been subtly warning groups during speeches, and writing in
this commentary, about the implications of Basel III. Most of
the focus is on servicing & the value of it. But did you
know that under the new Basel III rules, construction
lending would likely go into the “high risk commercial real
estate” category and require a 150% risk weighting?
"Lenders would seek deals where a developer would contribute a
substantial amount of cash equity; while banks would be less
likely to let developers rely just on the equity from
appraisals" per American Banker. And the government and the
Fed are asking why banks aren't lending? This is just
another reason.
Last month we sold the house where my kids grew up, and I had a
handyman remove the doorframe where we marked heights on
birthdays. I am not mentioning this to turn the daily into a
Hallmark card, but because it reminded me of one thing that
the press seems to forget: a house is a home and not a share
of stock. And when it comes to that, the popular press
seems to forget that people need a place to live, that people
want a good school district for their kids, a place to get to
know the neighbors, a place to create an emotional attachment. I
could go on and on, but there are very concrete reasons why
people who are underwater on a house still make the payments,
why many who supposedly saw the real estate decline didn't sell
their home, and why so many people don't care about minute
fluctuations in the price of housing based on the latest
metric.
I'll get off my soapbox, and get on with business: I think that
the last time the S&P/Case-Shiller Home Price Index went up
was during the Eisenhower Administration - until now. Seriously,
for the first time in eight months the S&P/Case-Shiller Home
Price Indices rose over levels of the previous month. Data
through April 2012 showed that on average home prices increased
1.3% during the month for both the 10- and 20-City Composites.
Prices are still down 2.2% for the 10-City and 1.9% for the
20-City over figures for one year earlier but this is an
improvement over the year-over-year losses of 2.9% 2.6% recorded
in March. This report followed Monday's news that New Home Sales
jumped 7.6% in May to 369k and was up 19.8% from a year ago, and
last week's Existing Home Sales, Housing Starts and NAHB HMI
which all contained some positive signs.
How’s
this to grab one’s attention: “Congressional Subcommittee
REFUSES Small Business Brokers and Appraisers a Seat at the
Table.” The notice from the NAIHP goes on, “For the second time
in a week, the Subcommittee on Insurance, Housing and Community
Opportunity, Chaired by Rep. Judy Biggert (R-Illinois), refused
small business housing professionals the right to be represented
during Congressional testimony.” Here you go: http://www.naihp.org/.
Yes,
there are plenty of rumors that the agencies are hotly pursuing
buybacks to recoup taxpayer losses, and that the agencies
are losing personnel except for QA & auditing. But that
reasoning doesn't help companies like First Horizon National
Corp. It "cited new information it recently received from
Fannie Mae as the basis for incurring the $272 million charge
this second quarter. About $250 million will go to repurchase
loans made with "inadequate or incorrect" documentation, and $22
million is being charged to address pending litigation." I don't
make this stuff up: http://www.commercialappeal.com/news/2012/jun/26/coffee-break-first-horizon-to-rebuy-old/.
Last
week
I received a legal question about buybacks.
"I was asked by a former customer of a major investor's
correspondent lending group about how others are handling
repurchase/make-whole requests on older vintage loans. His
experience has been that the investor will ask to be reimbursed
for losses associated with loans that have been foreclosed and
disposed of without being given an opportunity to refute the
alleged rep and warrant deficiency. He has had to hire a law
firm to argue each of these requests and the major investor has
backed off each time. Normally, when a correspondent is still
active, there is obviously leverage against the correspondent
under an implied or actual threat of being terminated as a
customer if a make-whole is not made, and when an investor is no
longer in the correspondent business, I've heard rumors of it
being more inclined to back down but sometimes taking a former
customer to court or 'saber rattling'. Needless to say, it is
expensive to have a lawyer prepare a rebuttal to a make-whole
request, just to have the investor ultimately back-off – what to
do?”
I
turned this over to attorney Brian Levy, who wrote, "Your
question about investor willingness to sue originators over
repurchase claims is difficult to answer with specificity. My
clients have been able to settle and/or avoid litigation in
every engagement that I have undertaken in this area. That does
not mean, however, that the threat of investor repurchase
litigation over individual loans is not real or that litigation
is not occurring, but it has been my experience that these
disputes can be resolved (or dismissed) through extensive and
detailed settlement negotiations and information exchange.
Litigation over individual repurchase claims may be fairly
unusual now, but so were repurchase claims entirely prior to
2007-2008. Due to the unique nature of each originator’s
position and the facts around applicable repurchase claim(s),
however, it would be reckless to assume one will not be sued on
specific claims based on what is generally occurring in the
industry or based on what may have been past investor appetite
for litigation (although these are important elements to
consider in one’s strategy).”
Brian
goes on. “For example, much depends on the facts and
circumstances of the loan(s) in question, whether there are any
other relationships between the parties that can be leveraged
(loans in the pipeline, warehouse lines etc.) the overall
quality, stability and reputation of the originator and,
significantly, the parties’ tolerance for risk, availability or
need for reserves and the desire for finality. Moreover,
investor and originator appetite for lawsuits may change over
time as strategies can change in organizations and as the few
cases that have been filed begin to yield decisions that are
more or less favorable to one side or another. Even the tenor of
discussions or lack of attention to the matter can impact a
party’s willingness to file a lawsuit. All of these issues
should be explored with legal counsel as part of an originator’s
comprehensive repurchase management strategy." (If you'd like to
reach Brian Levy with Katten & Temple, LLP, write to him at
blevy@kattentemple.com.)
Here
are some somewhat recent conference & investor updates,
providing a flavor for the environment. They just don’t stop. As
always, it is best to read the actual bulletin.
Down in California, it is time again for the CMBA's Western
Secondary conference. (I've been wandering around that San
Francisco conference since 1986 - if those halls could talk...)
The CMBA has presentations on "QM, QRM, the CFPB, Agency Direct
Delivery - Reviving the Lost Art of Servicing Retained
Execution, Compliance issues Facing State Licensed Mortgage
Banks Today and How Regulatory Change will Impact Your Business
and the Secondary Market, Manufacturing Quality - Steps to
Produce a Quality Loan (Operation Focus)," and several other
topics. Check it out at http://www.cmba.com/new/brochures/WSMC12Reg.pdf.
In
light of the increasing number of non-conforming transactions
where the departure residence is retained by the borrower and is
in a negative equity position, Wells Fargo issued a
reminder that underwriters must weigh any and all risk factors
evident in the loan file. Each case should be weighed
individually, as there are only so many situations underwriting
guidelines can predict. The Wells Seller Guide now states that,
in a case where the departure residence won’t be sold at the
time of closing and is in a negative equity position, paying
down the lien or using additional reserves to cover the negative
equity may be required to reduce overall risk.
Wells has issued another reminder that a signed Borrower
Appraisal Acknowledgement is required for all loans. The
Acknowledgment, whether it’s the Wells-issued form or a custom
document, must include the property address, complete lender
name, borrower name, borrower signature, and borrower signature
date. If the form has checkboxes where the borrower can make a
choice, these boxes must be ticked.
Due to changes to FHA Single Family Annual Mortgage Insurance
and Up-Front Mortgage Insurance Premiums announced by HUD back
in March, one of which requires lenders to determine the
endorsement/insured date of the FHA loan as part of a Streamline
Refinance transaction, Refinance Authorization results will need
to be submitted to Wells with the closed loan package. These
results are necessary to ensure that the accurate MIP was
applied. This applies to all FHA Streamline Refinances with
case numbers assigned on or after June 11, 2012, while loans
purchased through Pass-Thru Express are excepted.
Wells’ government pricing adjusters are set to change on July
2nd. For VA loans with scores between 620 and 639, the adjuster
will go from -0.750 to -1.500. The adjuster for loans with
scores between 640 and 679, currently at -0.250, will change to
-0.500. This affects Best Effort registrations, Best Effort
locks, Mandatory Commitments, Assignments of Trade, and Loan
Specified Bulk Commitments.
How sensitive are our markets to European news? Sure,
instead of buying our 10-yr yielding 1.65% you could buy a
Spanish 10-yr yielding 6.74%. But there is instability,
evidenced by this note from an MBS trader yesterday: "News of
Merkel stating Europe would not have shared liability for debt
‘as long as she lives’ caused Treasuries to immediately surge
higher, only to be met by better real money selling of 7s.
While the selling did help to stall the rally, the true relief
didn't come until Reuters posted a correction to its initial
release, re-quoting Merkel as having said Europe would not have
‘total shared’ liability for debt as long as she lives. The
amendment took Treasuries off the highs ahead of the 2yr
auction..."
Say
all you want about the market, bond prices and yields are
not doing a whole heckuva lot. Tuesday the 10-yr closed at
1.63%, very close to where it’s been all week, although there
was some intra-day volatility blamed on Europe. (European
problems will be with us for years, and paying attention to
intra-day swings can become wearisome after years…) For agency
mortgage-backed securities, volume has been around “average” all
week, with the usual buyers (the Fed, hedge funds, money
managers, overseas parties) absorbing it. Up one day, down
another – yesterday was down/worse by about .250, which was
about the same as the 10-yr T-note. We could have been helped by
the Conference Board’s Consumer Confidence index which dropped
for a fourth straight month, to 62 from a revised 64.4 in the
prior month, but nope.
I
am heading off for a little speaking engagement, and it is
darned early. But coming up today we’ll have the MBA’s
application index with its share of purchase and refi stats. At
7:30AM CST is the volatile Durable Goods number for May,
projected at +0.4% from 0.00% previously, and at 10:00 am is the
Pending Home Sales Index (May) which is expected to increase
1.0% from -5.5%. At 1:00 pm Treasury will auction $35 billion in
5-year notes.
No one is getting any younger... (Part 1 of 2)
I very quietly confided to my best friend that I was having an
affair. She turned to me and asked, “Are you having it catered?”
And that, my friend, is the definition of 'OLD'!
Just before the funeral services, the undertaker came up to the
very elderly widow and asked, "How old was your husband?"
"98," she replied. "Two years older than me."
"So you're 96," the undertaker commented.
She responded, "Hardly worth going home, is it?"
Reporters interviewing a 104-year-old woman:
"And what do you think is the best thing about being 104?" the
reporter asked.
She simply replied, "No peer pressure."
I feel like my body has gotten totally out of shape, so I got my
doctor's permission to join a fitness club and start
exercising. I decided to take an aerobics class for seniors. I
bent, twisted, gyrated, jumped up and down, and perspired for an
hour. But, by the time I got my leotards on, the class was over.
If
you're interested, visit my twice-a-month blog at the STRATMOR
Group web site located at www.stratmorgroup.com.
The current blog discusses the issue of the Freddie Mac &
Bank of America buybacks, and its potential impact on the
industry. If you have both the time and inclination, make a
comment on what I have written, or on other comments so that
folks can learn what's going on out there from the other
readers.
