Mar. 21, 2011: Wells, Citi, and Chase have news for stockholders; Should foreclosures be taxed? Fraud stories; investor updates continue
Rob Chrisman

Last Thursday, while on a tour of the Chicago Mercantile Exchange, my son and I met and chatted with Rick Santelli, who many know as CNBC's financial futures reporter at the CME (CBOT). I mention this because when I told him that I was there to speak at a Fannie Mae regional meeting, he launched into a dissertation about how better off the mortgage industry would be if the government ended all of its involvement, specifically supporting the agencies. He feels very strongly about this, and certainly has a media audience.

Businessman Steve Forbes, who also has great access to the media, agrees - he is pushing for a complete and immediate severance of all the government's ties to the GSE's.  (I guess that would turn them from "GSE's" to plain "Mortgage Enterprise's"?) Forbes believes that a sharp wind down of the GSEs and the implementation of 20%-minimum down payments indicates a return to more conservative underwriting guidelines. "Not so long ago it was the norm in this country to put down 20% on a house. Other abandoned customs: limiting a mortgage to no more than four or five times a family's income, with the maturity of that debt rarely exceeding 20 years. Government pressure trashed these standard practices, which had once made the home mortgage the soundest of securities. We're still living with the consequences of the federal government's fecklessness." Forbes believes the quick dissolution of Fannie and Freddie — or at least a break-up of the GSEs — will quickly revive the secondary mortgage market.

But the National Association of Realtors, community banks, and probably practically everyone in the mortgage business tend to believe that a drastic withdrawal of government, or a dismissal of government insured loans, could slow the recovery and shut out deserving borrowers. In addition, although there have been steps made toward having “private money” re-enter the mortgage market, most would agree that it is in no way ready to step into the private and secondary markets quite yet. In fact, the government continues to be involved, as we all know - the Federal Reserve Board held a teleconference late last week to clarify some outstanding issues/questions about the comp issue.
 
At least banks seem to be on sounder financial footing. Wells Fargo’s board has increased its authority to repurchase the company’s common stock, and will pay a special first-quarter dividend on top of its existing dividend. JPMorgan Chase is raising its dividend, and its board has authorized a $15 billion stock repurchase program. And Goldman Sachs said that it will redeem preferred stock that it sold to Warren Buffett’s Berkshire Hathaway in October 2008. Goldman was waiting for the Federal Reserve to sign off on its capital plans before acting. And my 100 shares of Citi just turned into…10 shares. But at least it will be paying a 1 cent per share quarterly dividend.
 
Hey, how about taxing foreclosures? An assemblyman in California has introduced legislation that would bill banks $20,000 for every home foreclosed. The money collected would supposedly be used to cover foreclosure costs, property tax losses, support school districts, police and fire departments. But if this goes through, what will happen to originator and servicing costs, and the value of California servicing? In Colorado, a bill introduced would charge lenders a $250 surcharge for each foreclosure filed at the county courthouse starting July 1. The money collected would supposedly be put into a “foreclosure prevention counseling fund.” Colorado currently ranks #9 in foreclosure activity.
 
How much does the average LO know about 203(k) loans, or helping to renovate properties through the HomePath product? It might be a growth industry – check this out:
 http://www.mortgagenewsdaily.com/03112011_housing_stock.asp.
 
Fraud in the mortgage industry continues to attract headlines, which doesn’t make things any easier for honest originators. Recently the FTC charged a mortgage relief operation with marketing false loan modification services to borrowers, a violation of the FTC Act and the FTC's Telemarketing Sales Rule. The defendants allegedly targeted financially distressed consumers by using direct mail solicitations, telemarketing, and the Internet, and the defendants falsely promised to obtain mortgage loan modifications even where the defendants had been informed that the lender had previously denied a modification or sent the consumer a foreclosure notice. In addition, the defendants allegedly misled consumers to believe that the defendants were affiliated with or approved by the consumers' lenders. Prospective borrowers paid fees of up to $2,600 for the services, much of it upfront. Modifications were not obtained, and the money was not refunded. Details can be found at http://www.ftc.gov/os/caselist/1023146/index.shtm.
 
The former president of U.S. Mortgage is looking at 14 years in prison as a result of him orchestrating a $136 million fraud scheme that bankrupted both U.S. Mortgage Corp. and its subsidiary CU National Mortgage LLC. McGrath pled guilty to mail and wire fraud conspiracy, and money laundering. From 2002 through 2008 McGrath, along with the CEO, conspired to fraudulently sell Fannie Mae hundreds of loans belonging to various credit unions by falsifying records to conceal the fraudulent sales. McGrath consented to forfeiture of the proceeds of his crimes, $14 millions of his assets that the government froze, and the restitution order is expected to require McGrath to pay more than $136 million in restitution to his victims. For a copy of the press release, please see http://www.stopfraud.gov/news/news-02242011.html.
 
Investor updates continue unabated. As always, this commentary tries to point out the trends, rather than go into too many specific details. So for example, three weeks ago Freddie Mac announced the reduction of its maximum LTV, total LTV (TLTV) and Home Equity Line of Credit TLTV (HTLTV) ratio requirements to 95% for all conventional mortgages it purchases. (This doesn’t include Freddie Mac Relief Refinance Mortgages.) One can expect investors that sell loans to Freddie Mac to follow this change.
 
US Bank Home Mortgage (wholesale) provided its brokers with Reg. Z overview documents which break down the US Bank Home Mortgage comp plan and all options. It is extensive, but brokers should take note that last week they should have already sent in two signed originals of the addendum and the completed W9. USB’s new comp plan goes into effect on March 25^th, and any loan that is registered prior to March 25th will still be able to close under the old compensation.  To close under the old compensation the loan must be registered and or locked prior to the 25th AND the request for the early TIL needs to be received by US Bank by March 28th. The “borrower paid” option is only available to companies that have LO’s paid on a salary/wage or salary/wage plus bonus plan. Its brokers will have the opportunity to amend their compensation plan once during the current quarter and quarterly thereafter.
 
For Investor-Paid transactions, USB’s brokers will determine their compensation from U.S. Bank by selecting compensation plan options ranging from 1.25% of the loan amount up to 2.50% of the loan amount, which is “the rate at which U.S. Bank will compensate you for each closed loan registered during the compensation plan effective period, when you are not compensated by the Borrower. This amount is fixed, and does not vary. The plan you select will be the full amount of compensation you receive for each investor-paid transaction. You cannot charge additional fees, i.e. processing or underwriting fees, to the borrower, even if those fees are passed onto a third party.”

Flagstar recently updated its Privacy Policy, changing the privacy disclosure underwriting condition from a prior-to-closing condition to an at-closing condition. In addition Flagstar Bank improved the price on its Jumbo ARM's with LTV 60% or less, and updated its policies on FHA Refi transactions.
 
Fifth Third wholesale spread the word to its brokers about changes to its "Broker Compensation Checklist" (due tomorrow), seller proration of taxes (not considered eligible funds and may not be used for reserves, down payment, closing costs, prepaids), payoff statements, and turn times.

Plaza Home Mortgage reminded its brokers of important deadlines. Today the Broker Compensation request must be completed “or Plaza will default your lender compensated model to 2%.” By the end of the week the consumer and lender paid models will be available for loans registered with Plaza. “Plaza will continue to provide a rate sheet for borrower paid transactions. Lender paid transactions will be priced in PULSE, and you will soon have the ability to download this to a custom rate sheet. Meanwhile, please screen print to retain for your records if you are using Plaza’s price for your Safe Harbor disclosure.” Loans done under the current comp scheme must be received by the 25^th, and March 31^st is the “Submission deadline for loan files under the current compensation rules and must be disclosed by Plaza by end of business.” Plaza told brokers that “GFE(s) for consumer paid transactions should be prepared the same way as today.  The borrower must pay the Broker compensation (i.e. origination, broker fee, processing) from their own funds.  This may be documented savings, gift from relative if allowed per program guidelines, proceeds from the loan amount if refinance, or contribution from seller or other non-lender third party if purchase.  Discount points can be paid by the borrower, the broker or a third party.”
 
EverBank is hosting a couple LO compensation webinars for its brokers on Thursday the 24^th and Wednesday the 30th, both 3-5PM EST, WebEx, https://EverBank.Webex.com, 1-866-846-3997, passcode 520374.
 
Friday ended the day with MBS prices where they started: unchanged from Thursday’s close. For the first time since 2000, the G7 intervened in the currency markets when the Fed, Bank of England, ECB and Bank of Canada committed to concerted intervention in response to the recent strengthening of the Yen. Ultimately the market impact should depend on the total size of intervention over the medium term. It is extremely difficult to put an estimate to this question since it depends on the size of repatriation flows and the G7 commitment to maintain the yen, and the news did not roil the rate markets.
 
For economic news it was pretty quiet over the weekend. This week we have Existing Home Sales today and New Home Sales on Wednesday. Thursday has Durable Goods and Jobless Claims, and then on Friday is GDP & a Michigan Consumer Sentiment number. Existing Home Sales, which will come out at 10AM EST, rose 2.7% last month, the highest level in eight months but due mostly to distressed and all-cash transactions. Look for a big drop this time around. Ahead of that, our 10-yr is up to 3.33% and MBS prices are worse bout about .125.
 
 
(Sorry for the length of the “joke,” but it is relevant…)

FDA Revamps Waitress Compensation Due to e-coli Poisoning
Regulators are proposing a change in how food servers in the United States are paid due to recent e coli poisoning at a local restaurant. E Coli (short for "Escherichia coli" ), can cause serious food poisoning in humans and the bacteria is responsible for occasional product recalls due to unsanitary conditions at slaughterhouses around the country. Clearly though, it is the fault of the food server known as the "Waiter" or "Waitress".
Here is a breakdown of the new regulation and the main components.
Waiters / Waitresses will no longer be able to have their tips or other compensation based on the type of the meal they serve, the server’s experience level, or service levels to the customer. For example: a Waiter or Waitress may not be paid more for a steak dinner than a Shrimp or chicken dinner. A Waiter or Waitress must be paid the same regardless of whether the food comes out hot, warm, or cold or due to any delay in food preparation while the server was on break.
When customers order their meal, they must be presented with a minimum of 3 different menus from competing restaurants in the area.
The customer must wait 3 hours to order their meal after signing a disclosure showing what type of salad, starch and vegetable will be served with the meal. If the restaurant owner provides these "ancillary" items - he may not charge a higher margin on one item over the other.
The waiter/waitress must be either paid by TIPS from the consumer, or by credit card - NOT by BOTH.
***Note that for these purposes, both the Restaurant itself AND the Wait Staff are considered "Servers", thus - if the Credit card option is used to pay the cashier (owner of the restaurant), then NO TIPS may be accepted by the waitress. A "Server" may not "Steer" a consumer into a meal by a certain animal type if they will receive greater compensation from that meal, than in other meals which may have been offered the consumer - unless the offered meal is in the consumer’s best interest.
It is unclear within the proposed law how far this legal definition goes, and the FDA is offering no clarification. If the same steak dinner is available 2 blocks away, is it in the best interest to send the client to the competing restaurant? All questions that have severe penalties will only be clarified during future inspections of the restaurant, by the Food Inspector. Lastly, in another unrelated law that is being considered called QRM, or Qualified Reluctant Meals- certain Restaurant owners should be aware that they may have to eat 5% of the consumers’ meal prior to serving.