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Sep. 3, 2010: Comments in favor of flips; fraud is never ok; originator capacity increasing? Employment trivia as rates head higher
Rob Chrisman
If
there is one thing that an investor will never let any
originator off the buyback hook for, it’s fraud. Not only that, but
the penalties can go far beyond merely buying back the loan, and
saying’ “My bad.” Just in the last few days, Laura-Jean Arvelo
and Ronald O’Malley, a New Jersey mortgage broker and former
head of the Bergen County Improvement Authority, was indicted by
a federal grand jury on charges of preparing fraudulent mortgage
applications. Both are charged with wire fraud, bank fraud and
loan application fraud in order to take bogus documents and
falsified applications to trick lenders into making mortgage
loans and benefited from fees they received.
Ryan Miller of
Missouri was sentenced to more than 12 years in federal prison
and pay $6 million in restitution for mortgage fraud, wire
fraud, money laundering, and aggravated identity theft – he
submitted loan applications that contained false statements to
lenders to obtain money.
And Todd Leary, a
former college basketball star in Indiana, may serve up to 3
years on charges that he stole appliances from foreclosed homes.
Leary supposedly paid two other men to move refrigerators and
other appliances out of foreclosed homes and then sold them to
an Indianapolis appliance store, claiming that he worked for a
company that bought, repaired and then resold foreclosed homes.
Leary told police that he picked the homes off an auction
listing on the Hamilton County sheriff's website.
A week ago I wrote about the reasons that lenders continue to
shy away from lending to recent flips. One person wrote,
“An investor takes a property which is vacant, bank owned, most
likely not being maintained in the manner the neighborhood
expects, buys it at auction, short sale, etc. most likely with
their own cash, cleans it up, and probably sells it through a
reputable Realtor. A fully qualified borrower with a minimum 20%
down payment on a conventional FNMA/FHLMC mortgage and who most
likely occupy the property and improve the quality of the
neighborhood and pay the property taxes comes in. They buy
furniture, employ landscapers, housekeepers, babysitters, etc. –
why does the lending industry back away from that?”
Another wrote,
“Consider the bank moving the REO and their motives. When a bank
REO hits the MLS, if priced correctly, it will garner multiple
offers. An end buyer is welcome in this realm, but reality is
that only the cash investors who can play in this game. The
bank knows that
selling REOs to buyers who need financing is laden with
considerable delay (60+ day escrows) and significant risk to
loan qualifying fallout. Furthermore, the property is unlikely
to pass lender property inspections without a call for a long
list of repairs. It's costly, and impractical from an
accounting perspective, for a REO bank to invest more money into
a depreciating asset. Selling to a cash-only buyer, often from
a pool of offers, ensures a quick no hassle close. The multiple
offers create an auction process, often the surest way to define
market value.”
“Properties typically resell to end buyers at market value. The
property is improved and repaired. Typical rehab work includes
not just cosmetic items like paint and carpet, but new kitchens,
bathrooms, roofs (or repairs), foundation repair, plumbing,
drainage, etc. The flips are sound properties, having to meet
strict appraisal inspections and often FHA guidelines. When
priced consistently with sales in the neighborhood, a flip is
more appealing due to the upgrades: in a 50 year old home who
wouldn't want contemporary bathrooms and kitchens? Lastly, the
flip keeps a neighborhood from suffering from artificially
downward price pressure. If the REO sale is not followed with
a resale at a higher price, eventually, after enough REO sales,
the neighborhood is forced to adopt the distressed sales price.”
“The flip investor is
carrying the cost of unoccupied listed property. The key success
factor in this equation is velocity. If the purchase price is
right, and comps hold, the resale price will yield the desired
profit. What happens when the turn takes twice as long and a
price reduction is necessary to finally move the property?
Could be that any illustrious profit ultimately equates to a
loss. It may be that the short-turn cash investor, while seeking
a profit, is an essential player in the overall housing
recovery. After all, in the absence of their participation,
what would happen to our own neighborhood value? And
why do most large investors, except for Wells Fargo, want to
discourage home sale liquidity?”
If an investor buys a
pool of mortgages at 103 or 104, they’d like to have those loans
on their books for a lengthy period of time in order to earn
back that premium. The latest concern for investors has arisen
from a recent announcement by Freddie Mac. (http://www.freddiemac.com/sell/factsheets/pdf/streamlined_refinance_mortgage.pdf
It details a streamlined refinance program that allows "easy
refinance" for "up to 95% LTV." Some market participants have
interpreted this as a fresh step undertaken by Freddie that
could significantly boost prepayment speeds – not desired if you
just paid 5 points above par. Analysts, however, believe that
this is yet another false alarm.
Freddie has always
had a streamlined refinancing program (Fannie discontinued
its streamlined refi program in April 2009), and its current
form has been around since at least early 2009 (with minor
tweaks here and there every once in a while). It
has had little impact, and is viewed as ineffective. Loans
must be manually underwritten under this program – no LP. The
program provides no relief on reps & warrants (any rep and
warranty relief associated with the original LP-underwritten
loan no longer applies to the new loan). The lender retains all
the reps & warrants for the current market value of the
property, which almost ensures that a full appraisal is
obtained, and the new loan has all the standard delivery fees
instead of lower fees like with HARP loans. MI levels remain the
same, and the max LTV is 95% which doesn’t help underwater
loans.
Is originator
capacity increasing?
Perhaps, although anyone with a rate lock may be trying to push
the loan through prior to expiration. Everyone knows that the
prices reflected in the security market for mortgages are not
being passed through to rate sheets. (If a Fannie 4% is trading
at 103, plus a servicing-released premium, why isn’t a 4.5% loan
priced at a 3 or 4 point rebate on the rate sheets?) Rate-sheet prices, however, are beginning to improve
a little, relative to MBS prices, an indication that
originators are possibly creating some capacity and attempting
to grab some refi production volume. It isn’t 2002-2003
yet, for many reasons, but the mortgage market has a long
history of “warming” when rates stay low for an extended period,
finding ways to increase refi volume over time.
Yesterday the markets
were relatively quiet. Most of the price volatility happened in
the early morning. The 10yr rallied off 4.00% early April to
make new rate lows last week 2.42%. That's
a monster move by any measuring stick. Mortgages
wound up Thursday down (worse) between .125-.250 with
origination running at about $3 billion. Stocks rallied
modestly, while the 10-year Treasury note worsened by almost .5
and its yield hit 2.63%. The Pending Home Sales Index for July
rose 5.2% to 79.4 versus an expectation for a 1.1% decline –
somewhat encouraging but no one is expecting a big upswing in
prices.
Here in the US, the
unemployment rate is estimated by a household survey called the
Current Population Survey, conducted monthly by the Federal
Bureau of Labor Statistics. The unemployment rate is calculated
by dividing the number of unemployed persons by the size of the
workforce. An unemployed person is defined as a person not
employed but actively seeking work. The size of the workforce is
defined as those employed plus those unemployed.
Who is the largest private employer in the United
States? Wal-Mart! 2.1 million of us work there. In the
public sector, the US Government employs about 2% of the
nation's workforce. The US Postal Service is the
largest civilian employer, with about 600,000 folks.
Private sector job growth continues to be the key to a
sustainable economic recovery, especially if we expect to see
much of an improvement in housing prices. Economists continue to
believe the probability of a double-dip recession remains low,
but are cautious. Heading into this employment data, most
believe that if private sector job creation does not improve (or
at least hold-up) in the near term, there will be significant
ramifications on the economic horizon ranging from the outcome
of the November mid-term elections to the likelihood that the
Fed proceeds with an additional dose of quantitative easing.
The long-awaited
payroll numbers came out, and Private payrolls rose 67,000 in
August after a 107,000 increase in July. The unemployment rate
rose to 9.6% from 9.5%, but it was a "good" rise in the
unemployment rate since the participation rate rose to 64.7%
from 64.6% and household employment rose by 290,000, the first
increase in four months. Average hourly earnings were +0.3%
month over month, better than consensus expectations. Although
it is not a great number in the big picture, but it was better
than expected. As you’d expect, the bond market had
a bearish reaction, with 10-yr Treasury prices losing a point
and moving up to a yield of 2.74%. Mortgage prices are worse
between .250-.50. Look for things to become quiet and
thinly traded as folks head out for the holiday weekend.
A doctor walks into
his favorite bar and orders his favorite drink.
"I'll have a Hazelnut
Daiquiri." the doctor says.
However, the
bartender had just run out of Hazelnut favoring!
Not wanted to
disappoint a good customer, the bartender used Hickory favoring
instead.
The doctor took one
sip, spit it out and exclaimed, "What the heck is this?"
The bartender
replied, "It's is Hickory Daiquiri Doc."
Have a good holiday
weekend – more on Tuesday.
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