Apr. 4, 2013: MBA 4th quarter profit numbers study; government plan for those with weak credit; MERS is alive and well
Rob Chrisman


I receive questions all the time like, “Do you know any wholesalers who do 5th story condo non-warranted 90% LTV…” and I usually reply, “No - it is too hard to keep track of.” Well, here’s a loan program finder for brokers, LOs, product desks, and correspondents.  It also is a way for brokers, product desks, etc., to search investor requirements, find new investors, find products, etc. and its design is based off the periodic table of elements. It's pretty easy to use – click on the program and state and away you go: www.mortgageelements.com. (And no, this is not a paid ad, just a public service. I wish the developer luck in maintaining it.)


Here is what the public sees: a story from Bloomberg noting, “More American homeowners will be able to use their properties as cash machines again after real estate equity jumped last year by the most in 65 years.” Haven’t we learned anything? Cash machines? The story went on: “Property owners recaptured $1.6 trillion as home values climbed to the highest levels since 2007. The amount by which the value of the houses exceeds their underlying mortgages rose to $8.2 trillion last year, a gain of 25 percent, according to Federal Reserve data. An expanding group of homeowners is able to get cash from their properties as banks show more willingness to make home equity loans with the market’s recovery. Originations for so- called junior, or second, mortgages should rise 10 percent to almost $83 billion this year, from about $75 billion in 2012, said Shaun Richardson, a vice president at Icon Advisory Group, a mortgage analytics firm in Greensboro, North Carolina. About 6 percent of lenders eased equity-mortgage standards at the end of 2012, the most in 18 months, according to the Fed. Americans went on a spending spree in the five years before the 2006 peak of the real estate market, tapping about $800 billion of their rising equity to spend on everything from cars and televisions to debt consolidation and college tuition.”


There are many who staunchly believe that the government’s insistence, 10-15 years ago through various channels, that its agencies move down the credit curve and provide home loans to higher risk borrowers helped create the credit mess. Of course, those who forget the past are doomed to repeat it – can the government keep itself from making credit decisions for home loans? Maybe not, as evidenced by Obama’s push to have banks lend more to those with weaker credit:

http://m.washingtonpost.com/business/economy/obama-administration-pushes-banks-to-make-home-loans-to-people-with-weaker-credit/2013/04/02/a8b4370c-9aef-11e2-a941-a19bce7af755_story_1.html. "For many potential homebuyers, the lack of cash available to accumulate the required down payment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership." This was from HUD's 1995 National Homeownership Strategy. As Dick L. wisely points out, while this was not responsible for most bad lending, this was what did in the GSE’s.  Interestingly, tightening of their lending standards had led to significant profits.


Continuing on, the recent streamline news (the FHFA announced a new initiative to help streamline modifications for eligible borrowers - the loans must be first liens, between 90 days and 24 months delinquent, at least 12 months old, and with an LTV >= 80…) led one reader to note, “You really have to hand it to the FHFA guys. Once again they ‘reward’ the borrower who has proven that he/she cannot meet their obligation (or has elected not to), while the homeowner who struggles to maintain their obligation and not hurt their credit, is left out.



It is interesting to note that borrowers are – supposedly – no longer required to be delinquent in order to qualify for a loan modification (although many lenders basically require this to be true in order for any action to take place), and yet the government creates a new, revised plan that requires this to be true. So, I guess the moral (ironically) of the story is, if you want to get your rate lowered in order to secure long term security and lower payments, simply stop making your mortgage payment for 90 days. And we still think government can properly handle health care too?”


Has any of this talk about affordability impacted builders? You bet it has. Inclusionary housing policies (those which either require or encourage developers to provide low-priced housing within market-rate developments) have largely survived the recent housing downturn. However, several obstacles now stand in their way, preventing them from reaching their full effectiveness, including shifts in development pattern, new restrictions regarding rental housing, and rising homeowner association fees, among others. Inclusionary housing policies are often enforced through zoning codes, although some are voluntary and offer incentives for participating developers. These policies are good for harnessing the energy of the private market to create affordable homes while enabling economic integration and social inclusion as well as their ability to produce affordable homes without the need for public subsidies. While most policies survived the housing downturn nationwide, few saw much inclusionary housing production over the past five years. Shifting development patterns account for part of the lull. Suburbs remain the predominant location for new housing construction, and development patterns are shifting toward compact, transit-served neighbourhoods closer to the regional core. This shift poses a challenge because land in these densely-populated areas tends to be much more costly, and there are several stipulations for buildings in these areas that can also increase the cost of construction. Rising homeowner and condo association fees also present challenges for inclusionary housing policies. While initial costs might be affordable to lower-income families, when associations raise their fees in later years, some homeowners find themselves with substantial fees that can sometimes rival mortgage payments. We’ll see how inclusionary policies in the future play out as HUD has begun to draw increased attention to the issue of affordable housing across the nation.


Yes, loan originators and mortgage lenders were swimming in profits last year. Woe to any residential lending institution that only broke even on its new production in 2012 – do you think 2013 is going to be better? The MBA announced the results of its survey which showed what many hope is not the first quarter of a trend: a dip in profit per loan in the 4th quarter. The MBA’s Marina Walsh reported, “Per-loan profits decreased in the fourth quarter, primarily driven by rising costs. Historically, production costs have dropped with rising volume. In this quarter, however, despite high origination volumes, per-loan costs reached the highest levels we have seen in this study, other than during the first half of 2011, when origination volume was 60 percent lower.” Independent mortgage banks and mortgage subsidiaries of chartered banks made an average profit of $2,256 on each loan they originated in the fourth quarter of 2012, down from $2,465 per loan in the third quarter, as increasing costs outweighed higher revenues. The average production profit (net production income) was 107 basis points in the fourth quarter, compared to 120 basis points in the third quarter. The refinancing share of total originations, by dollar volume, was 61percent in the fourth quarter, up from 57 percent in the third quarter for the survey population. For the mortgage industry as whole, MBA estimates the refinancing share at 75 percent in the fourth quarter of 2012, up from 73 percent in the third quarter. Secondary marketing income improved to 279 basis points in the fourth quarter, compared to 271 basis points in the third quarter. The MBA’s item has all kinds of other metrics – check it out at http://www.mortgagebankers.org/NewsandMedia/PressCenter/84043.htm.


For example, speaking of profits, there was a story in the Wall Street Journal that goes something like, “Wells Fargo is enjoying the benefits of charging forward in the mortgage market while its rivals have retreated, with the bank accounting for 28.8% of all home loans issued last year as ‘production’ hit a record $524B. The strategy has brought massive profits, although questions are being asked about what Wells will do once the refinancing boom, which has driven its growth, drops off.” Every astute lender is wondering the same thing, and formulating plans addressing it – most have plans already. Of course, “pulling the trigger” on plans is an entirely different skill set.


“Rob, last year we heard a lot about the legal standing of MERS in the mortgage process, and the possibility that any title issues involving MERS may be suspect. What do you hear about all of this?” MERS is definitely holding its own, which most believe is fortunate for the industry and the stability of buying and selling loans. To give you a flavor for why MERS has so many attorneys on its staff, and hires so many, here is March’s summary of major legal decisions involving either the use of the MERS® System database or Mortgage Electronic Registration Systems, Inc. (MERS) and its role in the mortgage process. Every case was a judgment for the defendant: Arizona – Cardin v. Wilmington Finance, Inc., Colorado – Claypool v. Bank of America, Florida – Dabbelt v. RALI Series 2007-QH6 Trust, Georgia – White v. CitiMortgage, Inc., Idaho – Mulvey v. Aurora Loan Services, Kansas – Hamilton v. CitiMortgage, Inc. (In re Kunze), Michigan – Barber v. Bank of America, Michigan – Goryoka v. Quicken Loans, Inc., Michigan – Kumar v. U.S. Bank National Association, Michigan – McLaughlin v. Chase Home Finance, Michigan – Vanderhoof v. Deutsche Bank National Trust, Minnesota – Cozad v. Litton Loan Servicing, Ohio – Slorp v. Lerner, Sampson & Rothfuss, Ohio – Stanton v. Countrywide Home Loans, Inc., Texas – Kelly v. J.P. Morgan Chase Bank, Texas – Kimber v. GMAC Mortgage, Inc., and Texas – Rickard v. Bank of New York Mellon. (Slorp?)


As a quick investor note, on March 23 the commentary mentioned, “Fannie will be replacing its existing cap structure for short-term DU Refi Plus ARM products with a 2/2/6 structure, effective as of April 5th.” As it turns out, this is a change for Freddie Mac, not Fannie Mae. At this point Fannie has no changes planned for its existing ARM cap structure for the DU Refi Plus ARM program, with 2/2/5, 2/2/6, and 5/2/5 eligible through Fannie’s selling guide. Investors have alerted their clients. For example, Affiliated sent out, “Freddie Mac announced the retirement of the 5/1 ARM with 5/2/5 cap structure in Bulletin 2012-21. In response to this change, all Freddie Mac Loan Prospector (LP) 5/1 ARMS must be delivered in fundable condition and purchased by Affiliated Mortgage on or before April 15, 2013.”


Well, the bond markets made a move yesterday, and fortunately it was toward the downside for rates. Basically the ADP’s weaker-than-expected jobs data, along with the ISM number and a little North Korea nervousness, rallied prices and encouraged better buying in lower coupon MBS. Volume shot up above normal as the 10-yr hit its lowest yields of the year and Fannie 3% security prices went back to where they were a month ago. By the end of the day current coupon (impacting rate sheets) MBS prices were better by .250 in price, and the 10-yr closed at 1.81%.


This morning we had the weekly Initial Jobless Claims. The number was expected at 350k versus 357k, and came in at 385k, up 28k – a big number! This, combined with moves from the Bank of Japan driving its 10-yr bond down to .44%, has pushed rates even farther down: the 10-yr is at 1.79% and look for MBS prices to improve another .125-.250.



Instead of some humor, let’s have a little trivia today and tomorrow! (And no, I have not verified these – too busy preparing for a speech here in Colorado today.)

Q. Why do X's at the end of a letter signify kisses?
A: In the Middle Ages, when many people were unable to read or write, documents were often signed using an X. Kissing the X represented an oath to fulfill obligations specified in the document. The X and the kiss eventually became synonymous.
Q: Why is shifting responsibility to someone else called 'passing the buck'?
A: In card games, it was once customary to pass an item, called a buck, from player to player to indicate whose turn it was to deal. If a player did not wish to assume the responsibility of dealing, he would 'pass the buck' to the next player.

Q: Why do people clink their glasses before drinking a toast?
A: It used to be common for someone to try to kill an enemy by offering him a poisoned drink. To prove to a guest that a drink was safe, it became customary for a guest to pour a small amount of his drink into the glass of the host. Both men would drink it simultaneously. When a guest trusted his host, he would only touch or clink the host's glass with his own.

Q: Why are people in the public eye said to be 'in the limelight'?

A: Invented in 1825, limelight was used in lighthouses and theatres by burning a cylinder of lime which produced a brilliant light. In the theatre, a performer 'in the limelight' was the center of attention.



If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog is, “How Changes in FHA Loan Pricing Will Lead to Changes in Investor Demand." 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.


(Check out
http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx or www.TheBasisPoint.com/category/daily-basis. For archived commentaries or to subscribe, go to www.robchrisman.com. Copyright 2013 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)



Copyright - Rob Chrisman