May 24, 2013: Government furlough days; H.R. 1077's impact on QM and the 3% limit; the MBA weighs in on GSE risk sharing
Rob Chrisman


Here is something that is a little unusual: the IRS, furlough days, and the possible impact on 4506 transcript processing. I first heard about it through a Mountain West Financial e-mail: “The IRS announced the first 5 furlough days for 2013. All services will be shut down as they would be if it were a federal holiday. The furlough days currently scheduled will take place on May 24, June 14, July 5, July 22, and August 30. All public-facing operations will be closed on these dates, including the toll-free operations and Taxpayer Assistance Centers. The IRS will not accept nor return any orders on those days, however Equifax will continue to receive and prepare request for submission. Transcript receipt and turn time delays normally associated with holiday closures can be expected.”


No one is arguing that the value of servicing is still dropping. Folks on that side of the biz know that the value of servicing (created by collecting the monthly payments, earning income on float, handling the payments, collecting late fees, etc., over the years a loan is typically on the books) hit bottom last year but has been steadily rising. Without becoming too mired down in the technicalities, servicing trades as a multiple. So if the minimum servicing on a Freddie or Fannie loan is 25 basis points (.25%), a 4x1 multiple would mean that the servicing is worth .25x4, or 1 point in the market. And the value has indeed been creeping back toward 1 point.


I mention this because Bloomberg is reporting that Michigan’s Flagstar Bancorp is considering a sale of the collection rights on more than $70 billion in mortgages. Flagstar interviewed banks in recent weeks to manage the sale of its mortgage-servicing rights because of new rules that make them costlier to own, per the article, per inside sources. Such intrigue!


Flagstar might have to wait in line behind other sellers such as Bank of America and Wells Fargo, although there appears to be non-depository buyers such as Ocwen, Nationstar, and Walter Investment Management. The industry is indeed seeing a shift in servicing, and this could be another chunk. Flagstar had servicing rights valued at $727 million on mortgages with an unpaid principal balance of $73.9 billion at the end of March, according to a statement last month. “Last year Flagstar posted its first annual profit since 2006, following $1.33 billion in losses…MatlinPatterson, based in New York, has invested at least $1 billion in the company since 2009, according to regulatory filings. It held about 64 percent of Flagstar as of March 31, according to data compiled by Bloomberg, valuing its stake at more than $470 million based on yesterday’s close.”


The sale of servicing is pretty cut and dried, unlike opinions of whether or not some pieces of legislation are good for the industry or not. In this particular example, The Consumer Mortgage Choice Act (H.R. 1077) is causing some conflict between different groups. The MBA’s Mortgage Action Alliance (MAA) members received a note, “The Consumer Mortgage Choice Act (H.R. 1077) is bipartisan legislation introduced in the House that would make important changes to the way points and fees are calculated under the ‘qualified mortgage’ (QM) definition in the Dodd-Frank Act. (It) clarifies that affiliate title fees, certain loan originator compensation, escrow payments, and loan level price adjustments are not included in the calculation. Importantly, a Senate companion bill was introduced just this week by Senators Joe Manchin (D-WV) and Mike Johanns (R-NE). This legislation (S. 949), closely mirrors the House proposal with the exception that loan level price adjustments are not included in the list of items excluded from the calculation.”


The bulletin explains, “Dodd-Frank provides that a qualified mortgage under its ‘ability to repay’ standards cannot have points and fees in excess of three percent of the loan amount. This three percent limit on points and fees could have the unintended effect of limiting the availability of affordable mortgage credit, particularly for loans under $150,000. Proper implementation of the ability to repay and qualified mortgage requirements is crucial to allowing credit-worthy consumers purchase or refinance a home at affordable rates. MBA is asking you to please contact your Representative and Senators to urge them to cosponsor this important legislation.” It ends with, “This advertisement is brought to you by the Mortgage Bankers Association (MBA).”


We still live in a democracy, at least by name, and others have differing opinions. In this case, The Center for Responsible Learning is telling Congress that H.R. 1077 will create new incentives for abusive lending, per NAMB. (Here is the link to its stance on the legislation: NAMB wrote, “Do NOT let these groups get away with telling lies about your profession...Get involved today and call your Congressman and Senator and educate them on the facts as to why and how H.R. 1077 and Senate Bill 949 are important to consumers, small businesses, and the overall health of our economy.” Go to and look for any information, such as the video, on “NAMB GA Update: HR1077 Consumer Mortgage Choice Act.” John Hudson writes, “Less (fewer) borrowers will have access to credit and home ownership if the 3% cap on points and fees (as currently written) takes effect. I stand firmly by my testimony to Congress last year that this ‘cap’ will have the largest impact of the QM and will cause irreparable harm to thousands of consumers and small businesses.”


And speaking of the lobbying efforts of the MBA, earlier this week it released a white paper on GSE risk sharing – important to many in the industry trying to move toward more “private money” entering the industry in spite of the expected impact on rates. The document is proposing up-front risk-sharing between the GSEs and lenders, which would provide deeper private credit enhancement to the GSEs in exchange for lower guarantee fees. The goal of the program would be to bring more private capital into the mortgage market while increasing access to mortgage credit for consumers. While the proposal is consistent with FHFA's earlier mandate that the GSEs execute at least $30 billion each in risk-sharing transactions, the offsetting reduction in guarantee fees is potentially not consistent with FHFA's goal of moving the guarantee fee toward a market rate.


Yes, remember that the FHFA had previously announced that the GSEs would be targeting at least $30 billion of risk-sharing transactions in 2013. The MBA’s proposal, however, recommends the use of up-front risk-sharing, as opposed to back-end risk-sharing (i.e., private capital coming in after the loans are sold to the GSEs). Under the MBA proposal, the GSEs would charge reduced guarantee fees and loan level pricing adjustments (LLPAs) if lenders secure credit enhancement for loans with LTVs below 80%, or deeper credit enhancement for high LTV loans. In this way, the risk-sharing benefits the borrower, not just the GSEs.


Although the credit enhancement could be through private mortgage insurance, lender recourse, or capital markets, analysts believe that the most likely form of credit enhancement would be mortgage insurance. The mortgage insurers (UG, Essent, MGIC, Radian, etc., here is Freddie’s approved list: are already set up to write this business, so no structural changes would be needed. Lender recourse is unlikely to be popular and capital markets solutions need to be created. In an interesting twist, this plan should not hurt the liquidity of the mortgage market. The GSE risk-sharing plans have struggled with the issue of market liquidity since many of the structures being contemplated would make MBS ineligible for the to-be-announced (TBA) market, leading to reduced liquidity and thus worse pricing for borrowers. Loans with deeper MI coverage would likely still be eligible for MBS pools that are TBA eligible so there would be no negative impact on liquidity.


There is a lot of individual, agency, and investor news lately.


Congrats to Steve Abreu, the ex-president of GMAC Mortgage, who has joined Ellington Management Group in a new role as Head of Mortgage Originations. Abreu will lead the firm’s efforts to acquire one or more mortgage originators – there are sure plenty for sale. “It is anticipated that any such acquisitions will be made by Ellington Financial, and that post-acquisition Abreu will oversee both agency and non-agency mortgage originations, including refinancings, purchase loans, and retention of servicing rights.” For those who haven’t heard of Ellington Management Group, it is an “investment and advisory firm dedicated to generating attractive, risk-adjusted total returns for our investors.  Ellington manages portfolios of agency and non-agency residential mortgage-backed securities and opportunistically invests in other target assets, such as commercial mortgage loans, commercial mortgage-backed securities, other asset-backed securities, and direct investments in single-family and multi-family real estate.”


The Wall Street Journal reported that Fidelity National Financial (FNF) and Thomas H. Lee Partners are in advanced talks to purchase Lender Processing Services (LPS) for $33 a share, which would equate to $2.9 billion. LPS shares closed at $29.11. LPS would become a subsidiary of FNF, with Thomas Lee owning a 19.9% equity stake. Like FNF, LPS is located in Jacksonville, Florida. It was spun out of Fidelity National Information Services (FIS) in 2008, FIS also used to be part of FNF until 2008 so FNF management should be very familiar with the LPS business model.


PHH reminds lenders that they are responsible for determining that all debts incurred or closed by the borrower up to and concurrent with the settlement on the subject loan are properly disclosed on the final loan application.  In cases where debts are not adequately disclosed or factored into the DTI, PHH may require the loan to be repurchased.


Any loans delivered to Affiliated Mortgage that are closed on or after May 15th will need to be accompanied by 2012 tax return transcripts to be considered eligible for purchase.  For borrowers that have filed extensions, AMC requires evidence that the extension was filed, a 2012 Tax Transcript showing “no record of return filed,” a 2011 transcript, a current paystub, and a 2012 W-2.  Self-employed borrowers need to supply a 2011 transcript and P&L for 2012, while retired borrowers must provide transcripts even if they weren’t required to file.


The markets seemed to take a little breath yesterday, perhaps becoming accustomed to these new levels, or perhaps preparing for prices to improve and for rates to slide back down. The Fed debate has reached the exhausted (and exhausting) stage at this point, but officials have made clear that so long as economic growth continues along its present recovery path then “tapering” would commence sometime in the second half of 2013. And don’t we want an improving economy to allow the phase out of Fed purchases, returning things to a normal market? Few would disagree with the statement that if growth continues we will probably see monthly purchases of less than $85B by the fourth quarter of this year.


Housing and jobs, jobs and housing…yesterday not only did we have a decent Jobless Claims number, but we also learned that New Home sales rose 2.3% percent on a seasonally adjusted basis in April, and that the Census Bureau and HUD revised the March estimate of new home sales. Not only are sales numbers higher, but the median price of a new house sold in April was a record $271,000 compared to a median of $236,400 one year earlier. (And for those of you who really like numbers, the average price in the two periods was $330,800 and $287,900.  Of the estimated 45,000 homes sold in April 2013, 12,000 sold for less than $200,000 and another 14,000 sold between $200,000 and $300,000. Six thousand homes sold nationwide for more than $500,000.)


So the jobs market appears to be okay, and housing is on a tear, and both pieces of news hit the fixed income markets on Thursday. Traders reported that mortgage banker selling was higher than recent averages (nearly double, per Tradeweb) which helped to push prices down and rates higher: prices on 30-year agency current coupon MBS were worse about .250 and the 10-yr closed at 2.02% in spite of the Fed still buying at a pace of about $75 billion per month between outright purchases and reinvestment of paydowns.


We have an early close today, which rarely results in any kind of improvement on rate sheets in the afternoon. Before that we’ll have the always-volatile Durable Goods report, this time for April, at 8:30AM EDT. It is expected at +1.5 percent from -5.7 percent on the headline and at +0.5 percent versus -1.4 percent ex-Transportation.



Although tomorrow there will be a commentary, with a little humor (some would say there is always little humor), for today please remember that Memorial Day is a day of remembering the men and women who died while serving in the United States Armed Forces. It began after the Civil War, and has since been extended to honor all Americans who have died while in the military service. Please take a moment to think of them.



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