Jan. 23, 2013: Mortgage applications & overall housing prices continue to rally; interest rate movement dead in the water
Rob Chrisman


For you football fans, Stephen Fleming with Phoenix Capital (here in Denver) writes, “Here's a tidbit to give you an idea of how old Ray Lewis is (for a player) and how young Jim Harbaugh is (for a coach): Lewis' first NFL sack came against Harbaugh in an October 13, 1996 game between the Indianapolis Colts and the Baltimore Ravens. ‘Lewis was just a 21-year-old rookie that year, and no one had any idea he'd turn into the player he is today. He barely played in that 1996 season, recording 2.5 sacks in four total games. Harbaugh, on the other hand, was 33 years old and his skills were in decline. He would play four more years before going into coaching.’”


The release of the recent spate of CFPB rules raised the interest, and hackles, of “affiliated” organizations: lenders tied to builders, Realtors tied to title companies, and so on. KB Homes and Nationstar are especially interested in how this story shakes out, since KB Home is teaming with Nationstar Mortgage to offer home buyers loans – but are they really affiliated? The relationship was announced last year, and here is a reminder: http://www.latimes.com/business/money/la-fi-mo-kb-home-mortgage-20130122,0,7495293.story.


And this week we find many Chase employees in the Dallas area looking for jobs: http://bizbeatblog.dallasnews.com/2013/01/chase-mortgage-unit-to-lay-off-121-workers-in-light-of-national-mortgage-settlement.html/.


For many months, arguably years, Realtors and investors had arithmophobia – the fear of numbers. Every index was going down, property values in most regions were dropping monthly, 80 or 90% LTV balances became 120-140%. But we’re in a different part of the cycle now, at least in many areas, which we were reminded of by Zillow yesterday. Zillow’s fourth quarter Real Estate Market Reports show home values increased 2.5% from the third to fourth quarter of 2012 to $157,400. “This quarter marks four consecutive quarters of national home value appreciation. On an annual basis, the Zillow Home Value Index (ZHVI) rose 5.9% from December 2011 levels, a significantly higher level of annual appreciation than what would be considered ‘normal’ in a historical context. For example, in the 1990s the average annual home value appreciation was 2.6%. The housing recovery has become supercharged, especially in markets such as Phoenix and parts of California. Despite strong national appreciation, the housing recovery is uneven across the country with markets such as Atlanta and Chicago still lagging behind. We don’t believe that the current pace of home value appreciation in many parts of the country is sustainable, due in part to the origin of this appreciation, which we believe to be negative-equity fueled inventory shortages. High rates of negative equity continue to keep homeowners locked in their homes thereby limiting the overall supply of for-sale homes and helping to fuel intense price appreciation.


A quick note on yesterday’s list of LOS providers. Every time I publish a list, out comes one or two more. In this case, it was Byte Software’s turn. Shoot Debbie Ingle an e-mail if you need any information: debbie.ingle@bytesoftware.com.


Notes about the wave of CFPB rules and regulations continue. “Rob, in my recent experience, the most egregious side-effect of the Dodd-Frank/CFPB LO Comp Rules is this: the borrower seeking a ‘No Cost Refinance’ is frequently frustrated by the necessity of being required to pay part or all of his settlement charges at a lower note rate since the next higher note rate (by 1/8th) yields a lender credit that exceed the sum of all GFE settlement charges ("A + B < 0"). Further, this problem inordinately impacts borrowers with smaller loans (presumably less well-to-do?) since the lender credit is a percentage of the loan amount and the settlement charges are primarily fixed fees. When taxes are due and payable (e.g., after February 1 here in California), or when hazard insurance is due and payable, ‘excess’ lender credit may be applied by paying those costs through escrow. The problem lies in the fact that this excess credit may NOT be used to reduce the principal balance nor to pay interest on the loan be refinanced, nor of course can it be paid out as cash.”



And on the CFPB’s servicing rules. “Of course the last three (out of nine) rules will cause massive increased costs on all loans serviced: new staff, lawyers, tracking, lawsuits, regulatory action, etc. All new borrowers will pay for the societal support of those few that are not making their payments on time. Am I old fashioned in thinking it is obvious to most rational, ‘personal responsibility’ citizens in this society, if you don’t pay your payments on anything that secures the loan, your lose the item securing the loan? And it’s very hard to get another loan on a similar item any time soon (“Burn me once shame on you, burn me twice…”).  In our societal zest to protect anyone from ever being harmed (mostly by their own decisions, I’d release any borrower that had a gun held to their head to finance their purchase of anything), we are harming all of society greatly.”


NAMB writes, “The CFPB released the 541 pages of the LO Compensation Rule effective June 1, 2013. From the outset, there are several victories in this rule. 1) Allowance for reductions in compensation for tolerance issues. 2) Allows brokers to pay LO's on a consumer paid transaction. 3) Eliminates the "zero-zero" alternative requirement. 4) Sets minimum standards for ALL originators. The CFPB released over 1,300 pages of documents including the 804 page Qualified Mortgage Rule, also known as the Ability to Repay. This rule is effective January 10, 2014. The QM also includes a cap on "points and fees" of 3% which will include LO compensation and affiliated fees. The CFPB is seeking comment on how exactly the LO compensation piece will work, and NAMB looks forward to working with the CFPB to work on the details. NAMB officially is requesting the CFPB to convene a SBREFA Panel to specifically discuss the impact the rule will have on not only small business mortgage professionals, but the consumers they serve.”


When QM was first announced, Brian Levy with Katten Temple wrote, “At the risk of understatement, there’s a lot to digest in the new QM Rule and the unintended consequence ‘fun’ is just beginning.  I’m just getting started in my review. Initially, it looks like the points and fees test is going to cause the most heartburn for the industry.  Retail mortgage originator compensation (both broker and lender) will need to be included in the points and fees test.  That means any LO compensation attributable to the transaction (determined at the time the loan is locked) counts towards the points and fees test even if you are an originator employed by a bank.  I’m not sure everyone understands that yet.  Brokers got the “level playing field” they wanted on that point.  Also, affiliated settlement service providers are not going to like this rule as many of their loans will fail the point and fees tests due to including fees to affiliated providers in the test.”


Continuing, “Meanwhile, speaking of not owing money on your home, here’s a little fact about LTV’s under the new rule: they are completely and utterly irrelevant.  It will probably be addressed in the QRM (‘skin in the game’ rule), but QM disregards most people’s largest asset by assigning a zero value to home equity in the ability to repay calculation.  In fact, you will have a very hard time using any assets as support for ability to repay.  That will create some interesting dynamics and very awkward underwriting discussions for some otherwise very creditworthy borrowers who have managed their credit and home finances conservatively and have either no need for current income or ability to obtain income. Take a retired couple on Social Security at 30% LTV with other investment type assets accumulated for retirement that wants to refinance into a 10 year amortizing loan to get the loan paid off quickly.  If their DTI is over 43%, would the lender force them to take a 30 year amortization to make their payments more affordable under QM or tell them they have to pay it down further at closing?  This concern may be temporarily cured if the loan can be approved by GSE underwriting, but who knows if the GSE’s will cap their DTI at 43% too?”


Finishing with, “If you can stay within the APR and points and fees tests and otherwise demonstrate ability to repay, on the other hand, you could conceivably do a QM loan at over 100% LTV (or a 100% funded plus a HELOC over 100%) with a safe harbor!  In fact, the larger the loan size, the easier it will be to qualify for QM under the points and fees test.  You may not be able to avoid credit risk for such a loan under the QRM, but apparently CFPB doesn’t think it is dangerous to the consumer to have a loan amount in excess of the house value.” (You can contact Brian Levy at blevy@kattentemple.com.)


Rate-wise, there just isn’t much going on out there, and many are enjoying the lack of mortgage rate volatility. But yesterday we did learn that Existing Home Sales slipped 1.0% in December. These numbers are always subject to a revision, but the preliminary annual total for existing-home sales in 2012 was 4.65 million, up 9.2% from 2011, and the highest volume since 2007.  And the national median existing-home price for all housing types was $180,800 in December, up 11.5% from December 2011, and the 10th consecutive month of year-over-year price gains.


And why would MBS prices go much lower (rates higher) with the Fed sopping up $4 billion a day while mortgage originators put out $2.5 billion per day? Sure, eventually rates will go up, but plenty of companies and LO’s are making hay while the sun shines. The yield on 10-year notes, however, has risen some 25 basis points since early December and investors have become very sensitive to increasing originator and convexity-related selling risks if the yield rises above 2%.


Anyway, yesterday MBS prices, and risk-free 10-yr T-note price, barely budged and closed nearly unchanged from Friday’s levels. (The 10-yr. ended the day at 1.84%). For today we’ve had the MBA application numbers for last week. Mortgage applications in the U.S. increased for a third straight week as purchasing and refinancing advanced: the MBA reported that apps were up 7% last week, with refi’s up almost 8% and purchases up 2.5%. The share of applicants seeking to refinance a loan was little changed at 81.6 percent, today’s report showed. Later we’ll have another housing index when we see the FHFA’s Housing Price Index for November (which focuses on Freddie & Fannie markets) with consensus at +0.7 percent from +0.5 percent in October. In the early AM we find the fixed-income markets unchanged from Tuesday, and thus unchanged from Friday.



(Parental discretion advised?)

A man walked into the ladies department of a Macy's, shyly walked up to the woman behind the counter, and said, "I'd like to buy a bra for my wife.”

"What type of bra?" asked the clerk. 
"Type?" inquires the man, "There's more than one type?" 
"Look around," said the saleslady, as she showed a sea of bras in every shape, size, color and material imaginable.

"Actually, even with all of this variety, there are really only four types of bras to choose from." 
Relieved, the man asked about the types. 
The saleslady replied: "There are the Catholic, the Salvation Army, the Presbyterian, and the Baptist types. Which one would you prefer?" 
Now totally befuddled, the man asked about the differences between them. 

The Saleslady responded, "It is all really quite simple. The Catholic type supports the masses; 
the Salvation Army type lifts the fallen; the Presbyterian type keeps them staunch and upright; and the Baptist makes mountains out of mole hills." 


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 role of the IRS and REMIC's in the current credit crisis. 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.


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