Nov. 22, 2010: 2011 loan limits; recent ARM stats, HAMP update; basic bank strategy for Basel III compliance; numerous investor updates
Rob Chrisman

Is it a sign of mortgage dementia to be listening to the oldies station on the radio and hear Martha and the Vandellas singing about Jimmy Mack coming back, and instead hear:
"Hey Indy, Indy, oh Indy Mac, when are you coming back?
Indy, Indy, oh Indy Mac, when are you coming back?"

Was IS coming back for another year are the loan limits. Fannie told folks, "The general loan limits for 2011 remain unchanged from 2010 (e.g., $417,000 for a one-unit property in the continental U.S.). High-cost area loan limits for 2011 remain unchanged from the 2010 high-cost area loan limits ($729,750 for a one-unit property in the continental U.S.) for mortgage loans originated on or before September 30, 2011. For mortgage loans originated after September 30, 2011, revised "permanent" high-cost area limits will apply."
 
Freddie Mac echoed this. “We are announcing that we are maintaining the temporary maximum loan limits for mortgages secured by properties located in designated high-cost areas through September 30, 2011. Our base conforming loan limits will also be maintained at the current 2010 levels through December 31, 2011, with the maximum loan limit for a 1-unit single-family property in the contiguous United States remaining at $417,000. As a reminder, the loan limits in designated high-cost areas are the higher of the temporary limits established by the Economic Stimulus Act of 2008 (maximum of $729,750 for 1-unit single-family properties in the contiguous United States) and the permanent limits established by the Housing and Economic Recovery Act of 2008 (maximum of $625,500 for 1-unit single-family properties in the contiguous United States). Actual loan limits for a specific high-cost area may be lower than the maximum permitted loan limit…There are no changes to our super conforming mortgage requirements as a result of the extension.”
 
What if someone gave a refi boom party, and ARM's didn't come? Prepayment speeds for conventional hybrid ARMs were flat in October since faster speeds for lower rates were offset by slower prepayments for higher coupons. 2008-2010 production continues to prepay the fastest, still showing that credit is still a key determinant for prepayment activity.  According to a report by Sterne Agee, new issuance of conventional hybrid ARMs was $4.6 billion, up $562 million from September. However, net issuance continues to be negative and therefore the Agency ARM market continues to contract. Falling supply and a Fed with limited ability to lower short term rates further should bode well for the mortgage ARM basis.
 
News came out from a study done by Barclays Capital that the top 35 US banks will be short of between $100-150 billion in equity capital (8% of total assets) after the new Basel III global bank regulations are imposed, with 90% cent of the shortfall concentrated in the biggest six banks. The impact on mortgage banks is not lost, and servicing (and the sale of it) is seen as a big wild card. Just last week Chase sold $47 billion in servicing to non-bank IBM. The Basel III reforms will hit banks in two ways: by gradually tightening the definition of what counts as tier one capital and by forcing banks to increase the risk adjustment for certain portions of their businesses. So if you’re a bank, you can respond by increasing your capital through retained earnings or equity issuance, or you can cut your risk-weighted assets through sell-offs and by cutting back on risky business lines.
 
Speaking of banks, on Friday, through the usual state banking regulator and FDIC’s actions, First Banking Center (WI) became part of First Michigan Bank. Allegiance Bank of North America (PA) opened today as part of VIST Bank (PA), and Gulf State Community Bank (FL) is now part of Centennial Bank (Arkansas).
 
HAMP (Making Home Affordable Program, which always confuses some since it that is really MHAP) seems to be rolling along. The report noted that nearly 520,000 permanent modifications were begun, with an average of 37,000 new permanent modifications per month over the last six months. 18 servicers have signed up for the Second-Lien Modification Program (2MP), covering nearly two-thirds of the second-lien mortgage market, and unemployed homeowners may be offered a minimum of three months’ forbearance prior to being considered for a HAMP trial modification. Interestingly, most measures of the program were lower during the latest period, the month ended October 10, than in the period ended in September.
 
CitiMortgage told its clients of several credit policy updates late last week. These included issues on property unit numbers, investment properties (for LP loans if rental income is not used to qualify, PITIA plus operating expenses must be used in calculating the debt ratios, and if the borrower owns more than 1 financed investment property, the product for the subject investment property transaction must be a fixed rate or 7/1 or 10/1 ARM), recovery times for deed-in-lieu/short sale/pre-foreclosures (“the amount of time that must pass before the borrower is eligible for mortgage financing has increased from 24 months to 48 months”), commission incomes, and removing borrowers from Freddie’s Relief Refinance loan. Citi also addressed appraiser independence requirements, higher priced mortgage loans, and several other issues. As with any update, it is best for clients to read the specifics in the bulletin.
 
Starting in January, Flagstar FHA TPO customers (i.e. those without FHA Direct Endorsement or Authorized Agent approval as of January 1, 2011) “must close all FHA loans in Flagstar’s name and they must be table funded. Per the Final Rule, this restriction is regardless of when the case number was originally assigned or the current status of the case (e.g. approved, closed). Please note that customers may continue to close non-FHA loans in their own name where applicable. FHA loans intended to close in your company’s name as a Flagstar-sponsored Loan Correspondent must meet” several deadlines, including being submitted to underwriting prior to December 1.

Pinnacle Capital Mortgage has told broker clients of its underwriting updates. The changes include adding additional non-permanent resident alien status requirements, updating the list of unacceptable source of funds, and adding additional guidance on student loans. Pinnacle also put in updated MI requirements, and updated 1007 requirements when exercising a fieldwork waiver under the standard DU Refi Plus program. On the FHA side, it updated loan terms on High Balance loans, added definition of “Cost to Acquire,” added clarification of outstanding principal balance calculation, added no Cash Out or Streamline on EEM, and added appraisal requirements for declining markets on High Balance loans. There were other changes – it is best to consult the actual announcement.

Mortgage security prices ended Friday about where they started, worse by a few "ticks" (less than .125) on only $800 million of sales. So locks are way down, or everyone sold their pipeline already. Either way, if demand is steady or strong, and fewer mortgages result in less supply, look for mortgage prices to improve relative to Treasury prices. But over the weekend, one interesting thing to note is that apparently Ireland has decided, or is about to, to accept a bailout plan by the International Monetary Fund (IMF), and the euro has improved on the news.

"Markets" around holidays can be fickle creatures. Sometimes they are illiquid, and prone to move dramatically one way or the other. Other times the markets are slow, and just sit, with much of the rate move due to whatever happened in Asia or Europe overnight. Due to the Thanksgiving holiday, all of our news comes out tomorrow and Wednesday - Thursday is a holiday, and Friday may-as-well be. Tomorrow are revisions to third quarter GDP and Existing Home Sales, along with some Fed minutes, and on Wednesday we have Durable Orders, New Home Sales, Personal Income, Consumer Sentiment, and jobless claims in addition to the Treasury auctions today ($25 billion), Tuesday, and Wednesday. Mortgage bond markets will be closed on Thursday and will close early on Friday. With this, and the Ireland bailout news, we find the 10-yr yield at 2.84% and mortgages security prices better by about .125.


A gas station owner in Mississippi was trying to increase his sales. So he put up a sign that read, "Free Sex with Fill-Up."
Soon a local citizen pulled in, filled his tank and asked for his free sex.
The owner told him to pick a number from 1 to 10. If he guessed correctly he would get his free sex.
The citizen, some would say redneck, guessed 8, and the proprietor said, "You were close.  The number was 7. Sorry.  No sex this time."
A week later, the same redneck, along with his brother, Bubba, pulled in for another fill-up.
Again he asked for his free sex.
The proprietor again gave him the same story, and asked him to guess the correct number.
The redneck guessed 2 this time.
The proprietor said, "Sorry, it was 3. You were close, but no free sex this time."
As they were driving away, the redneck said to his brother, "I think that game is rigged, and he doesn't really give away free sex."
Bubba replied, "No it ain't, Billy Ray. It ain't rigged. My wife won twice last week."