Sep. 14, 2012: Readers' insightful reactions to Fed move; House passes FHA measure; new warehouse lender or...
Rob Chrisman
This
is kind of exciting... or is it? Fortis, a large Belgian bank,
offering a new warehouse line? Or is it another ewarehouseOne
type company? CFO’s, searching for fresh warehouse talent in
April, remember the mysterious ewarehouseOne, with its lack of
address, contacts, follow through, but with a hefty
application fee. We now have the Fortis Warehouse company.
Sources say that there is no street address, and although the
phone number is from North Miami Beach the firm does not seem
to be registered with the Florida Division of
Corporations. And the process of e-mailing in your application
package (rather than regular mail) and requesting the
application fee upfront sounds eerily similar. Here is the
site: http://fortiswarehouseline.com/index.html.
"Can
you explain the thinking behind HARP 3 when HARP 2 and HARP 1
didn't have the desired effect? If our industrialists and
entrepreneurs and banks have been awash in cash and cheap
money for years yet still won't invest, what does Bernanke
think is so different now?" I don't know.
“Rob,
one part of the government is jacking up gfees, making
agency loans .5 more expensive with more in the future,
one part of the government, through the CFPB, making things
very difficult for lenders of any product, and now we have
another part of the government making agency loans 1 point
less expensive. I don’t see any coordinated effort with
regard to agency loans versus non-agency loans.”
"Rob, I don't care if rates go down to 1%, or near 0 like in
Japan. Why? Because until residential lending loosens up
somewhat, especially on some of these bizarre and unreasonable
underwriting requests, and lenders aren’t terrified of future
liabilities and lawsuits, borrowers who didn't refinance in
this last wave aren't going to be able to do so now. How is
the Fed going to deal with that?" I don't know.
“Are
the same borrowers who paid $2-4k in closing costs and
underwriting hassles this year going to spend it again to
refinance? It can take a year or more to make up the
up-front loan costs – are they going to do that? Are there
that many borrowers who don’t know rates are low, but can’t
refinance because of equity issues, or job & qualification
issues?”
"Rob, yesterday the FOMC's announcement caused agency
mortgage-backed securities to shoot through the roof - better
by one point. Fannie 3's, which have 3.25-3.625% 30-yr loans,
are now above 104. A four point premium! But the 10-yr barely
budged, closing at 1.76%. And the investors' rate sheets
certainly didn't improve by that much. Why not?" That one's
easy. First off, the FOMC did nothing with regard to Treasury
securities, and thus no change. We're seeing “pricing
overlays” in the form of profit margins. You know how
we have underwriting overlays, when the government
will offer some program and accept certain LTV or credit score
guidelines, but the major aggregators don't go along? Well,
the MBS market improved dramatically, but the investors did
not go along all the way. There are too many capacity
issues. Few companies can handle the volume, and would
instead rather increase margins than follow the agency
mortgage-backed security market higher.
But
reaching for the crux of the story, the Federal Reserve
announced the initiation of an open-ended round of
Quantitative Easing (QE3) and extended the period for which it
will keep rates between 0 and 1/4% to mid-2015. "....The
Committee agreed today to increase policy accommodation by purchasing
additional
agency mortgage-backed securities at a pace of $40 billion
per month. The Committee also will continue through the
end of the year its program to extend the average maturity of
its holdings of securities as announced in June, and it is
maintaining its existing policy of reinvesting principal
payments from its holdings of agency debt and agency
mortgage-backed securities in agency mortgage-backed
securities. These actions...should put downward pressure on
longer-term interest rates, support mortgage markets, and help
to make broader financial conditions more accommodative."
Unlike Quantitative Easing 1 and QE2, no dollar amount or
time-limit was placed on the program. The Fed essentially
announced it will be purchasing $40 billion in MBS per
month until further notice.
It
is estimated that QE1 "cost" $1.7 trillion. QE2 was roughly
half a trillion, give or take. The new plan isn't really QE3,
because it's never scheduled to end. “If the outlook for the
labor market does not improve substantially, the Committee
will continue its purchases of agency mortgage-backed
securities, undertake additional asset purchases, and employ
its other policy tools as appropriate until such improvement
is achieved in a context of price stability. In determining
the size, pace, and composition of its asset purchases, the
Committee will, as always, take appropriate account of the
likely efficacy and costs of such purchases.”
So
overnight rates will be near 0% for three more years. Where’s
the unpredictability? The Fed is going to buy about $65-$70
billion agency MBS per month (including pay-down
reinvestments, thus the extra amount) going forward. The
recent monthly gross issuance of agency MBS is around $140
billion and the net issuance is close to $0 billion. Thus, the
Fed will be buying close to 50% of the gross issuance of
agency MBS over the next several months. If it takes until
late 2013 for the unemployment rate to reach 7.5%
consistently, the Fed is likely to continue to grow its agency
MBS holdings until the end of 2013. Will the Fed soak up all
the agency MBS? The Fed’s holdings should increase by about
$650 billion between now and the yearend 2013, which would
indicate that domestic money managers (excluding REITs) who
own about $1.2 trillion of agency MBS, may reduce their MBS
holdings by selling them to the Fed. My head’s spinning…
Over
in FHA-land, the House of Representatives, offering a
relatively rare display of bipartisanship as the bill was
initially introduced in February, passed the Federal
Housing Administration (FHA) Fiscal Solvency Act of 2012.
“The Fiscal Solvency Act seeks to strengthen and broaden the
ability of the U.S. Department of Housing and Urban
Development (HUD) to avoid or recoup losses for loans
originated or underwritten by a mortgage lender that did not
comply with FHA guidelines, as well as expand HUD’s ability to
terminate the authority of poorly performing lenders to
participate in FHA programs. Among the bill’s provisions are
the establishment of a minimum annual premium for mortgage
insurance of 0.55% and a required repayment of losses to the
FHA by lenders who committed fraud. "We cannot afford another
Fannie- and Freddie-style bailout, and mortgage holders don't
need any more market uncertainty driving down their home
values."
But
a story from American Banker noted, “For years,
critics have claimed that the Federal Housing Administration's
$1 trillion Mutual Mortgage Insurance fund would require a
bailout. The fund's required buffer has fallen well below the
mandated level of 2% of the insured portfolio. While the
actual ratio, when last measured in November, stood at 0.24%,
what seems remarkable at all is that five years into the
collapse of the housing market, the fund did not implode and
go the way of Fannie Mae, Freddie Mac and a slew of other
well-known but now defunct mortgage portfolio lenders. It
turns out that the longevity of the fund's solvency is due to
three events: the sharp decline in FHA's market presence
during the housing boom; FHA's countercyclical role during the
housing crisis and flight of private capital; and higher
mortgage insurance premiums in recent years.”
Lenders
know that prior to the peak of subprime lending, FHA products
made up 10-15% of total originations. During 2005-2007 the
agency accounted for less than 4%. In hindsight, that was
great news for the FHA since those years have had abnormally
high loss rates. (Stats show that 59% of seriously delinquent
loans were from the 2005 to 2007 vintages and another 16% were
from 2008-2009. Over at the FHA, 47% of the seriously
delinquent loans are from 2008-2009, and 9% from 2010 or
later. But that was then, and this is now. During the
2008-2010 period FHA’s market share went up to 20%, and more
than 40% of the purchase mortgage market. Today, FHA, the
Department of Veterans Affairs, and other government housing
programs account for more than 35% of the purchase market,
largely due to their insuring of loans with low down payments.
LO’s
know that the FHA has taken actions over the last few years to
shore up its reserves. American Banker reminds us that it raised
premiums as well as tightened underwriting standards in the
years following the crisis. “For example, average credit
scores of FHA borrowers in recent years have been around 700
or about 50 points higher than in 2007 and 2008. And the
performance of successive books of business has continued to
improve, with 2010 better than 2009, 2011 better than 2010,
and 2012 already appearing stronger than 2011.” Let’s hope,
for many reasons but certainly the MMI’s sake, that home
prices are stable or increase!
On
quick conference note: Seattle, WA hosts the 35th annual
Pacific Northwest Mortgage Lenders Conference next week from
September 17th-19th. The program, sponsored by the
Washington Mortgage Lenders Association, will feature panels
of lobbyists from the MBA, Chief Credit Officers, home lending
executives, Fannie Mae economists, and senior bankers of
Northwestern financial institutions in addition to updates on
leadership in the CFPB and DFI. Attendees can also
participate in events that showcase two of Seattle’s most
famous features, its Space Needle and its seafood, and the
forecast calls for sun. To register or find out more, visit http://pnmlc.com/.
I was speaking at a conference yesterday, consisting mostly of
secondary marketing managers and CEO’s, when the news broke of
the FOMC’s announcement. Needless to say, it was the talk of
the town. MBS prices surged higher and tighter to Treasuries –
MBS prices rallied a point while the 10-yr sat, closing around
1.75%. The New York Federal Reserve Bank, which runs the MBS
purchase program, starts today buying about $2 billion per
day. To rehash the numbers mentioned above, if the Fed is
buying $2 billion per day, plus about $1.9 billion per day
from mortgages paying off early, this is about $4 billion per
day for many months. If mortgage bankers can originate about
$2 billion per day, overseas owners of MBS, money managers,
and the GSE’s will have to kick in. Of course, the Fed could
start buying 15-yr securities or non-agency (jumbo?!) loans.
Besides
Kraft Foods being replaced by United Health Care this morning
on the Dow, and not that anything will move rates like
yesterday’s news, but this morning we’ve had the Consumer
Price Index news for August. It was expected higher by 0.6%
from unchanged previously, and it came in at exactly that.
Retail Sales for August, called lower to +0.7% actually came
out at +.9%. Later we’ll have husband wife team of Industrial
Production and Capacity Utilization, and a preliminary
September Consumer Sentiment reading is reported at 9:55 am
and expected slightly lower to 74.0 from 74.3 at the end of
August, and five minutes later Business Inventories (Jul) are
projected at +0.3% from +0.1%. In the early going the
10-yr is up to 1.83% and MBS prices are slightly worse. But
we may see some rate sheets catching up somewhat this
morning and improving a little.
(We'll see if this has you humming the Queen tune this
morning.)
The AE walks warily down the street,
with iPhone carried way down low
Ain't no sound but the sound of his feet,
his iPad ready to go
Are you ready, Are you ready for DU
Are you hanging on the edge of your seat
Out of the Credit team the Underwriter rips
To the sound of the defeat
Another loan bites the dust
Another loan bites the dust
And a Purchase is gone, and a Streamline is gone
Another loan bites the dust
Hey, they're gonna get you too
Another loan bites the dust
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 new CFPB Rule combining TILA
& RESPA disclosures. 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.
