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Mar. 30, 2011: Risk retention details no big deal? Who wins, who doesn't; AE jobs, and a new correspondent lender
Rob Chrisman
Harkening
back to the Prius’ brake recall issue, this bumper sticker was
seen: "TOYOTA: Once you drive one, you'll never stop." Pun
aside, I would imagine that some in the mortgage banking
business wonder if “it” (large-scale regulatory change) will
ever stop, while others seem to see some opportunities out there
for mortgage companies that are still around. Just as it seems
that practically all companies have put in place their
compensation plans (get those loans in by tomorrow!), now the industry can turn its attention to what loans
do and don't fall under risk retention guidelines.
(Speaking of compensation, yesterday a judge heard pleadings
regarding the NAMB/NAIHP motion for a temporary
restraining order to prevent the rules from becoming
effective this Friday. The judge's last words, reportedly, were
that they should expect her ruling shortly. If the judge rules
in favor of granting a temporary restraining order, she will
probably also grant a preliminary injunction, which would
prevent the rule from becoming effective until after July 21st,
when the new Consumer Protection Bureau comes into effect.)
Markets don't like
uncertainty. So, on the plus side, at least yesterday's
QRM-related proposals by the Federal Deposit Insurance Corp.
(FDIC) and the Federal Reserve (the Fed) removed some of it. And
it would certainly seem to help the argument of many in the
industry that we're better off with government sponsored
agencies (GSE's) than without them. Qualified
mortgages are defined as those that will not require any form
of risk retention by any entity. The proposal limits
qualified mortgages to below 80% LTV for purchase loans, below
75% CLTV for refinanced loans, and below 70% CLTV for cash out
refinance transactions. Negam loans, IO loans, and loans with
significant rate increases are excluded. Front end/back end DTI
is capped at 28% and 36%, respectively, and for ARMs, these
ratios are calculated at the maximum interest rate attainable in
the first five years after origination of the loan. There is
also a restriction on the timing of prior delinquencies. In
particular, mortgages made to borrowers who have been 60 days or
more delinquent on a prior mortgage at any time in the preceding
24 months do not qualify. Any pools with an
explicit government guarantee or backed by the GSEs, as long
as they are under conservatorship or receivership, is exempt
from risk retention requirements.
In the short run, most experts see no significant
effect on the mortgage origination and funding universe if
what was proposed goes through. This is because more than 90%
of current originations are done through the GSEs and FHA
which are not really affected by this proposal. The remaining
origination volume is being funded through bank balance
sheets, so is not affected by risk retention.
The proposals are out for comments, which are due by June 10th.
Barclays Capital notes that the definition of
risk retention exempt qualified residential mortgages (QRMs) is
slightly stricter than expected (but remember that GSE and FHA
guaranteed loans remain qualified, currently +/- 90% of
production). This hints at tighter credit availability in the
future, especially once the GSEs start pulling back. The risk
retention provisions for non-qualified mortgages are likely to
benefit banks with large balance sheets. The REIT model of
securitization is also likely to benefit. But for
non-QRM mortgages, traditional wholesale and conduit mortgage
origination channels likely become non-viable. Accessing
securitization channels will also become more difficult and/or
expensive for smaller originators and banks for these kinds of
loans. The “premium capture account” removes incentives for
sponsors to profit upfront from securitization, strengthening
the incentive alignment of risk retention. However, in its
current proposed form, it significantly discourages
securitization of any premium non-QRM loans.
For non-eligible
transactions, the proposal calls for minimum 5% risk retention
in several possible shapes - such risk would be retained by the
sponsor of the deal. The sponsor has the ability to allocate
risk to the originator (originator agreeing), provided the
originator has supplied at least 20% of the pool and will retain
at least 20% of the risk. This prevents any risk
retention being forced on smaller originators.
Additionally, the originator is the "original" originator of the
loan, and not an intermediary. Certainly the existing risk
retention proposals benefit two entities - big balance sheet
banks and REITs. Barclays Capital notes that a big balance sheet
bank can originate loans through its retail channel, and
securitize them through its broker dealer while retaining the
risk on its balance sheet. Smaller originators and banks are at
a disadvantage for two reasons. First, due to the 20% floor,
sponsors will have to retain risk on loans originated by these
smaller entities. This implies that sponsors will typically pay
a lower dollar price for these loans. Moreover, smaller
originators cannot circumvent this by selling their loans to big
banks because risk retention guidelines are tied to the original
originator. The only option for these smaller entities is,
therefore, to either aggregate a significant number of loans,
which is expensive, or to sell to a willing sponsor at a lower
price.
The REIT model
benefits because REITs - as sponsors - are ideal candidates to
retain the risk on a transaction while funding the structure by
selling the senior tranches. Given reduced competition from
traditional aggregators and securitizers, the REIT model will
likely get a boost per Barclays.
For more news &
conjecture here’s the latest:
http://www.bloomberg.com/news/2011-03-29/risk-retention-rule-may-increase-government-s-mortgage-role.html
or http://dealbook.nytimes.com/2011/03/29/f-d-i-c-advances-new-rules-for-mortgage-securities/?srcdlbksb.
There are mortgage jobs out there. Nationstar
Mortgage is looking for wholesale AE’s in Northern
California, Oregon, and Idaho. You can view their website at http://www.nationstarbroker.com,
but Nationstar, owned by Fortress Investment Group and servicing
$65 billion, offers Fannie & Freddie products (including
HomePath & Open Access) products in 48 states. AE’s can
contact Tim McAvenia at Tim.McAvenia@nationstarmail.com.
Move over Wells, Bank of America, Chase, Citi, etc... Here comes
Guild Mortgage. After months of planning (I was
sworn to secrecy) it has begun a correspondent lending division
to perhaps add to its $6 billion servicing portfolio. Guild,
which is a mortgage banker and not a depository institution,
will initially target community banks and credit unions. For
more information on positions or signing up contact Shawn
Kirkland at shawn.kirkland@guildmortgage.net.
Here is something that we haven’t seen for a while – like since
2005. Mortgage Bank of California, a Southern
California wholesale operation, appears to offer 100% financing,
doesn’t have to disclose YSP, offers 10 days from date of
submission to loan documents, is a “direct lender” in control of
the appraisal process, and offers a no-cost loan (no points, no
fees for the exception of standard 3rd party fees like title and
escrow). And the marketing piece that I saw noted “we have a
legal way per RESPA to pay out to affiliates” but also notes
that the company sells loans to GMAC, Citi, Wells Fargo, Bank of
America, Chase and Flagstar. Angie West at awest@bankofcalifornia.com
can provide you with her marketing piece.
How ‘bout those
rates? Ok, there is not much going on. Monday’s 2-yr auction was
poor, and yesterday’s $35 billion was bit “sloppy” but not as
bad as the 2-yr. (Today we have $29 billion 7-yr. sale.) Stocks
rose in spite of the economic outlook being whacked yesterday by
a couple pieces of minor news. The S&P/Case-Shiller Home
Price Index, which I don’t think has ever gone up, showed its
20-city index down 1% in January, and down over 3% for the last
12 months. (11 cities saw prices sink to new lows - Atlanta,
Charlotte, N.C., Chicago, Detroit, Las Vegas, Miami, New York,
Phoenix, Portland, Ore., Seattle and Tampa.) And the Conference
Board’s Consumer Confidence Index dropped to 63.4 in March, down
from 72.0 in February.
Yesterday, for the
day 10-year notes lost about .375 and closed at 3.49%. Current
coupon mortgage prices were worse by about .250. This morning we
have already learned that the ADP employment number showed an
increase of 201k jobs, with service sector jobs +164k, and small
business gains positive for 13 straight months. The MBA reported
that apps dropped last week by 7.5%, with refi’s down about 10%
and now accounting for about 64% of all apps. Currently
the 10-yr is yielding 3.47% and MBS prices are roughly
unchanged.
(Warning: parental discretion advised.)
A Russian and Ole the Norwegian wrestler were set to square off
for the Olympic Gold Medal. Before the final match, the
Norwegian wrestling coach came to Ole and said, "Now, don't
forget all the research we've done on this Russian. He's never
lost a match because of this 'pretzel' hold he has". Whatever
you do, do not let him get you in that hold! If he does, you're
finished'. Ole nodded in acknowledgment.
As the match started, Ole and the Russian circled each other
several times, looking for an opening. All of a sudden, the
Russian lunged forward, grabbing Ole and wrapping him up in the
dreaded pretzel hold. A sigh of disappointment arose from the
crowd and the coach buried his face in his hands, for he knew
all was lost. He couldn't watch the inevitable happen.
Suddenly, there was a scream, then a cheer from the crowd, and
the coach raised his eyes just in time to watch the Russian go
flying up in the air. His back hit the mat with a thud and Ole
collapsed on top of him making the pin and winning the match.
The crowd went crazy. The coach was astounded.
When he finally got his wrestler alone, he asked, "How did you
ever get out of that hold? No one has ever done it before!"
Ole answered, "Vell, I vas ready to give up ven he got me in dat
hold, but at da last moment, I opened my eyes and saw dis pair
of testicles right in front of my face...I had nuttin' to lose
so wid my last ounce of strength I stretched out my neck and bit
dose babies just as hard as I could."
So the trainer exclaimed, "That's what finished him off!"
"Vel not really. You'd be amazed how strong you get ven you bite
your own nuts!"
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