Apr. 22, 2013: CA's Bill of Rights; the confusing world of FHA & Section 35 loans, QM, HOEPA violations, APOR, and Freddie's rate survey
Rob Chrisman

Sometimes expansion is a good thing, sometimes it can come back to bite you on the rump. (Remember that little, uh, public relations issue that the MBA had a few years ago when it expanded into a flashy new building, but then sold it for much less money? Here’s a reminder: http://online.wsj.com/article/SB10001424052748704829704575049111428912890.html.) Wells Fargo has decided that it time to embark on a $100 million expansion in Iowa: http://www.startribune.com/business/203866021.html. This is in spite of the industry concerned about less volume and lower margins, and Wells’ market share sliding.


Meanwhile in California…..according to Barclays, “recent loan-level data suggest that foreclosure-to-REO roll rates and short sales have dropped sharply since the start of the year.” They attribute much of the decline to the implementation of the California Homeowner Bill of Rights, which was signed into law in mid-2012 but became effective only on January 1, 2013. The new legislation adds responsibilities and restrictions to the foreclosure process in California, including prohibitions against dual-track foreclosures, required notice periods, civil penalties against robo-signing, and requirements to provide a single point-of-contact for the homeowner. In addition to introducing further delays in the foreclosure process, the law also increases the litigation risk for servicers by giving borrowers the ability to pass off their legal costs to the servicer if the borrower is able to secure an injunction against the foreclosure. They go on to write, “…we believe that servicers have become significantly more cautious when carrying out foreclosure sales in California as a result of the Homeowner Bill of Rights. Not only will the new legislation likely extend timelines in the state significantly, we also believe there is a possibility that judicial foreclosures become much more common in California.”


For any FHA experts out there, or those that enjoy reading about possible unintended consequences, I received this note from Scott G.: “I was on our weekly production call. It seems that the new FHA MIP factors lasting for the life of the loan were causing nearly all of the loans that they tested with under $200K loan amounts to trigger a Section 35 warning. I'm not extremely well versed on section 35, but I do understand the basic concept that it is a high priced mortgage loan defined as a loan with an APR that is more than 1.5% above the average prime rate.  WSJ prime rate is 3.25% right now, so we are talking about loans with an APR of over 4.75%.  If a 1.3% MIP factor carries for the life of an FHA loan and you have a 3.5% note rate... you've got a section 35 loan before any other closing costs are factored into the APR. On the surface, it looks like nearly all FHA loans will be section 35 loans? I have heard that most warehouse lines do not accept section 35 loans but I'm not well schooled on such matters, so that may be bunk. One person thought that FHA loans may become the bastion of only the largest banks (BofA, Wells, etc.) - an interesting way to increase market share.  I'm just cynical enough to believe that the banking powers are pushing for the life of the loan MIP change for just this reason.  Maybe I shouldn't be so cynical but it’s difficult to believe that this change was made without an understanding of this implication by the really smart guys that are setting rules and/or running the big banks.  Any rumblings going on related to this?” Here is a refresher on Reg. Z for higher priced loans: http://www.bankersonline.com/regs/226/226-35.html.


“Rob, what is the Freddie Mac posted rate that it calculates in a survey every week? Our borrowers see it, our LOs see it, and it is a real problem when it doesn’t match our rate. How do I explain this?” Good question. In the past Freddie would poll its clients to obtain rates and then calculate averages. (It would even be done regionally.) I think that you’re referring to the PMMS (http://www.freddiemac.com/pmms/), the Primary Mortgage Market Survey quoted every week in the press. Aside from LO and borrower confusion, this rate is at the heart of potentially serious lender violations under current CFPB rules.


Let me explain. The PMMS is primarily purchase-money. Freddie Mac collects most of the sample data directly from lenders' websites. Most sites ask whether the quote is for a refi or a purchase. When the data gatherers from Freddie are presented with the choice, they always pick "purchase".  Some sites do not offer a choice, and some lenders in Freddie’s survey e-mail their data without indicating whether it's for purchase or for refi. I understand that Freddie’s estimate is about two-thirds to three-fourths of the quotes are for purchase, and the rest is unknown. Thus, some refi is in the sample, but the sample is primarily purchase.


There is chatter out there that recently some lenders have become “gun shy” about providing rates, thinking that the CFPB might hold them accountable for rates, and asking why their borrowers weren’t given those rates on those days. Also, there is confusion due to the unintended consequences from changes in Fair Lending, QM, HOEPA, and HMDA. Some surveys look at purchase rates while others look at refinance rates – and the two are different on many rate sheets – usually the rates on a purchase, if there is a differentiation, are better than on a refi. So if a survey looks at rates for purchase applications it will sometimes understate rates being offered on refi’s. If this continues, it makes refi’s more likely to violate the 150 basis point ceiling the “prime offer rate” - the Freddie Mac rate – when the rules kick in on January 10, 2014. (Here is the final rule from the CFPB: http://files.consumerfinance.gov/f/201301_cfpb_final-rule_high-cost-mortgages.pdf.)


Or does it? Enter the “APOR”, which is the Average Prime Offer Rate: http://cdn.s3.webcontentor.com/OFFICE/BANKER01/files/misc_files/100613055614_9.29.09.Understanding.HPML.And.APOR.pdf.


Yes it does, since the Federal Reserve, in footnote 17, for APOR notes, “Contract interest rates on commitments for fixed-rate first mortgages. Source: Primary Mortgage Market Survey data provided by Freddie Mac.” Although I am not an expert on these issues, it seems that QM has influenced potential HOEPA violations, which in turn use a spread off of APOR, which in turn is calculated off of Freddie’s rate survey, which in turn is mostly made up of purchase rates which are lower than refi rates. Stop the madness!


But don’t take my word for it, as there are plenty of links to support the confusion that lenders are feeling out there, including the Federal Reserve link (http://www.federalreserve.gov/releases/h15/update/), an explanation in English of some of the Dodd Frank implications on HOEPA (http://www.williamsmullen.com/news/cfpb-publishes-final-rules-dodd-frank-requirements-hoepa-loans), the HMDA rate spread calculator (http://www.ffiec.gov/ratespread/aportables.htm), and proof that the MBA has been, and is, very aware of the issues and the potential disarray they may cause in the industry (http://www.mortgagebankers.org/tools/FullStory.aspx?ArticleId=33820). All of this certainly adds to the job security that compliance personnel are currently enjoying, and lenders allocating resources to deciphering it adds to the cost paid by each and every borrower.


On to something equally as hard to track: investor updates. I don’t know underwriters do such a good job of keeping track! For full details read the actual bulletin.


PennyMac has removed a number of overlays for VA loans, including the requirement that non-IRRRL loans be approved by DU or LP and receive an Approve/Accept recommendation.  Effective immediately, non-IRRRL transactions may be manually underwritten provided that the FICO is 660 or above (700 for cash-out refinances), the borrower hasn’t made any late payments in the last 12 months, the DTI is 45 or below, and the loan complies with all VA requirements for manual underwriting.  PennyMac has also lifted its prior ban on borrowers with a compromised entitlement; such borrowers are now allowed in cases where the event that caused the compromised occurred more than three years before the application and the loan conforms to all GNMA secondary marketing guidelines.  VA borrowers no longer need to be screened by the HUD Limited Denial of Partnership and the General Services Administration lists as per new PennyMac guidance; however, the VA itself still requires that all borrowers be screened by CAIVRS.


As per Fannie’s policy on large deposits, PennyMac issued a reminder to lenders earlier this month about obtaining documentation of and written explanations for the source of funds that exceed 25% of the total monthly qualifying income.  After having received questions on large deposits that aren’t used for down payment or reserves, PennyMac has confirmed that large deposits must be included in the analysis for all conforming DU loans, regardless of what the funds will be used for.


Kinecta has teamed up with Essent Guaranty to offer a new product that allows borrowers to take out up to $1.25 million with 89% LTV and FICO scores as low as 720.  The product is available with lender-paid mortgage insurance for 5/1, 7/1, and 10/1 ARMs on purchase and rate/term refinances on primary residences, second homes, and investment properties.  Loan amounts up to $1 million, which usually require two appraisals, are eligible for just one appraisal and one field review, and refi's paying off a non-purchase money second, typically considered to be ineligible cash-outs, can be considered rate/term refinances in cases where there are no draws for 24 months.


United Wholesale Mortgage has launched a web portal that allows brokers to produce customized flyers that can be designed with the intention of marketing to borrowers and realtors.  The portal is free and provides users with the capability of generating PDFs that feature their company name, logos, and photos, which can also be ordered as hard copies for mailer campaigns.  To get set up in the system, email signup@uwm.com.


There were some bank closures on Friday. In Florida Chipola Community Bank, Marianna, was closed and a purchase and assumption agreement with First Federal Bank of Florida, Lake City, was set up. And Heritage Bank of North Florida, Orange Park, was closed and the deposits, in a like fashion, moved over to FirstAtlantic Bank, Jacksonville. And to the north, First Federal Bank, Lexington, Kentucky, was closed and the deposits moved to Your Community Bank, New Albany, Indiana.


Is it really Monday…again? Looking at last week, while most economic data released during the week were better than expected, gold prices on Monday showed the largest one-day drop in 30 years. With gold prices plummeting, some observers are questioning the path of monetary policy and inflation – but do the markets even care? Gold doesn’t seem to have the same “inflation hedge” properties it had decades ago, especially if countries sell it to support their banking systems; forward-looking indicators, such as bond yields, consumer expectations and the TIPS spread (the difference between the yield on a Treasury security and the yield on the Treasury Inflation- Protection Security), are far better gauges of inflation. But at this point inflation is not present (just look at last week’s CPI numbers). And if inflation is not a problem, although it could be in the future, for now the Fed will continue to have a favorable environment to continue current monetary policy.


The biggest economic report this week will be Friday's release of first quarter GDP, the broadest measure of economic growth. But let’s not ignore the other four days! Today we’ll have Existing Home Sales (7AM PST) and New Home Sales & the FHFA Housing Price Index tomorrow. Durable Goods is Wednesday, and Jobless Claims Thursday. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. Rate-wise, the 10-yr. closed Friday at 1.70%, and it is currently at 1.71% - and we shouldn’t look for much change on agency MBS prices or on rate sheets.



Here – put on your thinking caps for part 1 of 2 of some puns:


I tried to catch some fog. I mist.

When chemists die, they barium.

Jokes about German sausage are the wurst.

A soldier who survived mustard gas and pepper spray is now a seasoned veteran.

I know a guy who’s addicted to brake fluid. He says he can stop anytime.

How does Moses make his tea? Hebrews it.

I stayed up all night to see where the sun went. Then it dawned on me.

This girl said she recognized me from the vegetarian club, but I’d never met herbivore.

I’m reading a book about anti-gravity. I can’t put it down.

I did a theatrical performance about puns. It was a play on words.

They told me I had type A blood, but it was a Type O.



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.


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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.)



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