Mar. 8, 2013: Native Americans & the sequester; Uniform State Test info; interesting prepayment info & how it impacts pricing
Rob Chrisman


Andrew Jackson’s portrait is on the $20 bill of the United States – we know that. But what many people don’t know is that for years, and perhaps to this day, many Native Americans will not touch a $20 bill due to the horrendous record Jackson had in dealing with Native Americans. Jackson not only owned slaves but was responsible for, according to one petition, “the cruel and brutal forced” removal of Native Americans from their homelands to Oklahoma known as the Trail of Tears (the goal being moving all tribes from east of the Mississippi to west of the Mississippi).


I mention this because Native Americans now have been impacted by the sequester. Mind you, compensation for Congress and the White House does not change due to the sequester cuts. The Oklahoma Mortgage Bankers sent out, “Hello Fellow Oklahoma Mortgage Bankers: This has been a very challenging week for all us of that originate the HUD Section 184 Native American home loans. As of last Friday when HUD Senior Management decided to put the program on hold as a result of “sequestration”, homeownership dreams also were put on hold. If a lender did not already have a firm commitment in their hands with a cohort number issued by HUD then they were unable to transact their customer’s home loan. To put that in perspective….a firm commitment and cohort number cannot be issued till all underwriting conditions of the loan are met which typically takes place at a minimum 3-5 days outside of a closing date. So think about the number of closings that came to a halt this week across the State of Oklahoma and our Nation and how many consumers lives were affected and not only Native Americans. While we view the situation as temporary, we know this hurts innocent Native American families and all those tied to the closing transaction. It also creates untold pain for Native Americans families that often have the fewest home finance alternatives. There are Native American borrowers that are not able to convert their loan request to an alternative program such as conventional or FHA. As a result contracts were lost and the home they had already started making plans on furnishing and establishing homestead was taken away from them. All of this relates to the so called “sequestration” and is politically motivated; in fact, the FHA and VA programs remain unaffected. The situation won’t change until a new federal budget is passed or there is a new annual continuing budget resolution. As we are all aware, the next deadline for a federal budget is March 27th and we do not expect the program to restart loan closings before that date. While there are efforts underway to get HUD senior management to reconsider their position, it’s most reasonable to assume HUD’s position won’t change in the short-term.”


“In your commentary you mentioned the uniform state testing.  Below is the verbiage and link to all the states that are early adopters of the UST directly from the NMLS for your readers. The following table lists the 24 state mortgage agencies which intend to adopt the Uniform State Test (UST), on either April 1, 2013 or July 1, 2013. The other 34 agencies may elect to adopt the UST at a future date, but are not required to do so. Candidates will need to pass the state-specific test component up until the actual date that state agency adopts the UST:” Thank you to Chris Maturo, Director of Sales with Praedo Institute for sending this.


“Rob, I’d heard somewhere that the Japanese buy a lot of our Ginnies. Is that true, and why?” The answer is that they do and they don’t, depending on market conditions – which is also why prices on rate sheets for FHA & VA loans vary versus prices for Fannie & Freddie loans. For example, in the middle of last year, the entire U.S. agency MBS sector became quite unattractive to Japanese investors. But with recent changes in the Japanese bond markets, currency fluctuations, the rise in US Treasury yields, and the widening of MBS spreads, the Japanese are buying those agency residential securities again. And Japanese investors typically buy GNMA MBS because they need the additional spread offered by MBS over US Treasuries to meet their yield targets on a currency-risk adjusted basis. And if you’d like to be more technical, the spread between current coupon GNMA MBS and the 7-year JGB (Japanese Government Bond) yield had sharply declined from 300-320 basis points in 2010 to only 150-160bp by the 3Q’12 but had recently widened to 220bp. Similarly, the currency risk adjusted spread metric has also come back closer to historical averages. Generally, keep in mind that from 2010 to 2012 a significant portion of the total overseas demand for GNMA MBS came from Japanese banks and insurance companies. Japan’s demand for agency MBS appeared to have been quite weak over the past few months (possibly even negative net demand), but traders report it is picking up again.


Every month prepayment speeds are released, often with a yawn by many except for those that specialize in investing in securities backed by those mortgages that might prepay. Wednesday they really roiled the market, and many besides the usual quant jocks noticed. Originators know that investors call the shots – and what investor wants to pay more than par (100) for a loan that is going to quickly pay off – since they pay off at par? The February prepayment speeds were down about 12% (to a 26 CPR) in Fannies but most "Harpable" buckets slowing down 5-8%. Traders took notice, since investment banker actuarial staffs delve into the numbers to estimate paydowns and make value opinions based on their expectations going forward. They were greeted with prepays that, as one trader wrote, “If real, Ginnie Maes are way too expensive, and if not real, that GNMA has a reporting problem that needs to be addressed.” Given the foreign appetite (see paragraph above) for this product, and given that about 30% of all new issues are from GNMA, this is a major problem for investors.


Speed declines were led by organic refinancing in keeping with higher rates and the declines in refinancing activity.  Longer processing lags for weaker credit borrowers continued to keep speeds relatively elevated. 15-year Fannie speeds decreased 11% to 20 CPR. HARP speeds declined less than implied due to specific servicers but not nearly by as much as implied by the lower day count likely due to shorter lags on streamlined refinancing. “Wells Fargo speeds diverged from the rest with speeds on 2009 4s and 4.5s Fannies increasing over the month compared to speed declines for the rest.  Reversing recent trends is that speeds on Golds are now faster than on Fannies due to Wells Fargo's higher share in the former and marginal slowdown amongst the rest.  Speeds doubled on Taylor, Bean's originations driving speeds higher on higher coupons especially Gold 2007 6s and 6.5s.” So it appears that much of this divergence can be attributed to differences in prepay trends across servicers.


Bank of America prepays in Freddie space increased 3%, while those in Fannie space declined 11% (based on prepays observed on pools with more than 80% concentration for a given servicer). The drop in Bank of America serviced Fannie loans is likely due to the transfer of Bank of America serviced loans to GreenTree – they probably weren’t targeting the transferred borrowers to refi. Based on Freddie loan-level data, there were no transfers to Nationstar for Freddie loans and hence the limited drop in Freddie prepays. Ocwen prepays continued at their elevated levels for the second consecutive month; this pickup can be attributed to the increased origination capacity available as a result of the acquisition of Homeward Residential Holdings. Lastly, the numbers show a sharp increase in prepays of TBW loans. After Taylor Bean’s (TBW) bankruptcy, TBW loans were being serviced by Cenlar, which did not have an origination arm but tied up with Fifth Third to offer HARP refinancing. It is likely that some of these borrowers have been able to refinance recently.


Some lenders are still backed up, with purchases taking priority over refi’s. We all know that is takes too long to close a loan, and it requires too many touches to get it done. In his weekly column for National Mortgage News, my colleague Garth Graham compares our crazy business with the even crazier business of television production.


Recruiting firm Hammerhouse launched its third annual survey for mortgage producers and leaders of producers. (The results are posted on its website.) “It contains 22 questions that focus on the Six Core components of an organization (Leadership, Culture, Business, Operations, Technology, and Geography). The questions center on issues facing the mortgage industry and impacting the production and job performance of producers, leaders and lenders. We are seeking participation to help clarify and validate areas of importance for successful and tenured professionals in the mortgage industry. Participants are eligible to win a new 16GB iPad.” Here you go:


Turning to a couple of relatively recent investor updates:


First, a clarification. Yesterday, in the investor update section, was listed, “Homeward Residential Capital has expanded its guidelines for same-servicer and Ocwen-serviced HARP loans to allow investment properties, unlimited multiple financed properties, and escrow waivers. For new-servicer HARP loans, Homeward will accept unlimited LTVs and CLTVs up to 150% for single family residences with FICO scores about 660 and 12 months' mortgage history. Ten-year amortization terms are now being offered as well, and subject properties in FEMA-declared areas no longer have to be re-inspected.” This information is for the Client select group only – for Homeward Residential Inc.’s Client Select Division (Wholesale).


Provident Funding released a consumer mobile app that caters to its borrowers. The company also noted that it will shortly be launching another mobile app to better service Provident’s private label subservicing borrowers. It appears PF’s technology group has been busy as just a few months ago Provident Funding released a mortgage broker app that has been well received. Here is the link:


Cherry Creek is in the news, but for a non-mortgage related issue. This time it is a lawsuit involving contraception:


If you don’t think that we live in a global economy, think again. Thursday morning all the traders were talking about how, “Treasuries traded firm out of the gates in the Tokyo session, with fast money and Asian real money accounts emerging as early buyers in moderate size…the Bank of Japan announcement, which came in as expected, had practically no impact on the market and flows were relatively think ahead of the ECB and BOE rate announcements…U.S. Treasuries were relatively flat throughout London, as Bunds traded heavy and global equities along with the Euro were better bid…French and Spanish bond spreads tightened and European equity markets were in the green…Comments from the ECB’s Draghi that….” So yes, our weekly Jobless Claims number was stronger than expected, which would nudge rates higher, but we were already set up by the time folks arrived at their desks in New York. The release of the US bank equity stress tests was a non-event (17 out of 18 passed the Depression-like simulation), and the session ended at the lowest/cheapest levels of the day with the 10-yr at 1.99% and agency MBS prices worse .250-.375.


But that was yesterday, and today we’ve had the unemployment data for February. Non-farm Payrolls were expected +160k and the unemployment rate unchanged at 7.9%. It came in at +236k, and the unemployment rate dropped to 7.7%, much of it due to people dropping out of the labor force. December’s numbers were revised higher, but January’s were moved lower, nearly a wash. Nonetheless, the numbers were very, very strong, and the unemployment rate moves toward the Fed’s target. Prior to the release the 10-yr.’s yield was slightly higher at 2.01%, but afterward it shot up to 2.06%, and we can look for MBS prices to be worse another .250-.375.



The Pope & the Rabbi:
Every time a new Pope is elected, there are many rituals in accordance with tradition, but, there is one tradition that very few people know about.
Shortly after a new Pope is enthroned, the Chief Rabbi of Rome seeks an audience. He is shown into the Pope's presence, whereupon he presents the Pope with a silver tray bearing a velvet cushion. On top of the cushion is an ancient, shriveled envelope. The Pope symbolically stretches out his arm in a gesture of rejection. The Chief Rabbi then retires, taking the envelope with him and does not return until the next Pope is elected.
A new Pope's reign was shortly followed by a new Chief Rabbi. He was intrigued by this ritual and that its origins were unknown to him. He instructed the best scholars of the Vatican to research it, but they came up with nothing.

When the time came and the Chief Rabbi was shown into his presence, they faithfully enacted the ritual rejection but, as the Chief Rabbi turned to leave, the Pope called him back.
“My brother," the Pope whispered, "I must confess that we Catholics are ignorant of the meaning of this ritual enacted for centuries between us and you, the representative of the Jewish people. I have to ask you, what is it all about?"

The Chief Rabbi shrugged and replied: "We have no more idea than you do. The origin of the ceremony is lost in the traditions of ancient history."
The Pope said: "Let us retire to my private chambers and enjoy a glass of kosher wine together; then with your agreement, we shall open the envelope and discover the secret at last." The Chief Rabbi agreed.
Fortified in their resolve by the wine, they gingerly pried open the curling parchment envelope and with trembling fingers, the Chief Rabbi reached inside and extracted a folded sheet of similarly ancient paper.
As the Pope peered over his shoulder, he slowly opened it. They both gasped with shock.

“It was a bill for the Last Supper from Moishe the Caterer!"



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