Jun. 3, 2011: E-signatures for FHA? Maybe. Employment data push rates back down; One week to go for QRM comments - 'nuff said
Rob Chrisman

Here we are on June 3^rd, which means we have 7 days left to comment on the Qualified Residential Mortgage (QRM) provisions. If you thought that the industry had forgotten, no way. Lobbying efforts have continued. In recent news, a letter signed by 163 congressmen urges federal regulators to loosen the definition of a "qualified residential mortgage," allowing single-family loans with low down payments and private mortgage insurance to be exempt from pending risk retention rules. In the other chamber, over one-third of the U.S. Senate (a bi-partisan group) have written a letter to the FDIC, OCC, Fed, and other federal regulators urging they adopt a less restrictive definition of a qualified residential mortgage than has been formally proposed. To comment: http://www.federalreserve.gov/generalinfo/foia/proposedregs.cfm.
 
The folks in the trenches are watching this closely. The proposed risk-retention rules permit “securitizers” to allocate a portion of the credit risk which must be retained to the originators of the securitized assets. Because this definition of “originator” refers to the person that creates a loan, only the original creditor of a loan (not a subsequent purchaser) is an originator for the purpose of this rule. But anyone in the industry knows that there is absolutely no way that an originator can set aside 5% in capital for every loan that doesn’t fit into the guidelines, with the result being that few institutions will continue to offer various products. There are some clever ways around the provisions, but really, do regulators want to encourage that kind of thinking?
 
Here are a few key points regarding the proposed definition of a “Qualified Residential Mortgage” which, since no risk will be allocated to the originator of such assets, is of particular concern to creditors seeking to avoid risk-retention altogether. QRM eligible loans must be a closed-end, first lien mortgage or refinance of a one-to-four family property (at least one unit must be the borrower’s principal dwelling). A mortgage loan may qualify as a QRM only if the originator verifies and documents within 90 days prior to closing that the borrower satisfies the following credit history requirements: not currently 30 or more days past due on any debt obligation; not 60 or more days past due on any debt obligation within the preceding 24 months; and, not a debtor in a bankruptcy proceeding, not subjected to property repossession or foreclosure, not engaged in a short sale or deed-in-lieu of foreclosure and not subject to a federal or state judgment for collection of unpaid debts within the preceding 36 months. QRM eligible loans may not contain any of the following payment terms: terms allowing interest-only payments or negative amortization; any balloon payment; terms allowing the annual rate of interest to increase in excess of 2% (200 basis points) in any twelve month period and 6% (600 basis points) over the life of the mortgage transaction; and any prepayment penalty. QRM eligible loans’ LTVs may not exceed a proposed ratio cap of 75% on rate and term refinances and 70% for cash-out refinances.   For purchase transactions, the proposal requires borrowers to provide a cash down payment in an amount equal to at least the sum of: closing costs payable by borrower; 20% of the lesser of estimated market value determined by appraisal or the purchase price; and if the estimated market value determined by appraisal is less than the purchase price, the difference between those amounts. 
 
But wait, there’s more! QRM eligible loans’ front-end ratios may not exceed 28% and back-end rations may not exceed 36%.  Originators must verify and document a borrower’s monthly gross income, monthly housing debt and monthly total debt in accordance with the verification and documentation standards of the HUD Handbook. QRM eligible loans’ total points and fees payable by the borrower in connection with the mortgage transaction may not exceed 3% of the total loan amount. QRM eligible loans may not be assumable by any person who was not a borrower under the original mortgage transaction. QRM eligible loans’ documents must contain a provision obliging the creditor to have servicing policies and procedures to promptly initiate activities to mitigate risk of default on the mortgage loan and to take loss mitigation actions.
 
Granted, there are more provisions, and most, if not all, well-intended – but what will the consequences be on the mortgage & housing industry, as well as the economy?  Senators & Congressman ended the letter by stating that “Congress included the QRM to exempt safe, well-underwritten mortgages that have stood the test of time from the risk retention requirement. We urge you to follow our intent as you modify the proposed risk retention rule.”
 
In other news, the MBA sent a letter to the FHA this week requesting the use of electronic signatures for all mortgage origination forms. Most lenders already allow borrowers to apply online and send information electronically while appraisal orders, credit reports and the verification of deposit balances also are performed automatically and online. Freddie & Fannie have allowed electronic signatures for years, and RESPA and the TIL Act allow the use of electronic records – so why not FHA & VA? The MBA argues that allowing e-signatures on all forms would result in less paperwork lost, fewer possibilities for fraud, a reduction in the time it takes to close a loan and even lower costs for borrowers – especially if they move from a conventional loan to an FHA loan during processing.

Earlier this week I noted a letter saying, "Six years ago underwriting was 'anything goes' to 'nothing doing' now, which reflects banks attitudes that they are not willing to take the risks that they did prior to the housing crash and subsequent decline in economic growth. The private market for funding mortgages is broken and will take a long time to fix and the government is not helping by the talk that the FHA should tighten up when they are almost the only game in town...." But I received this note from an executive of a leading MI company: "After three FHA pricing increases and countless MI guideline changes in the direction of becoming less restrictive, I'd have to respectfully disagree with the above comment that the FHA is 'almost the only game in town.'  At 97% LTV, 45% DTI, 90% LTV Jumbos to the FHFA limit, and FICOs down to 660 and while you're at it, throw in 2nd homes to 90% LTV and even cashouts for some MI's, the landscape has changed dramatically.  There are some market restrictions with some of the MI's to the guidelines mentioned above but not nearly as many as some might perceive.  From a pricing standpoint, there is typically a 40-60% premium savings over five years on a higher quality loan relative to the FHA MIP.  We are accountable, of course, to get this message out to lenders but my belief is that the combination of guideline and pricing changes has resulted in the private MI's going about as far as they could/should to provide sustainable homeownership for low down payment borrowers.
 
For some other lender/investor bulletin points:

NexBank rolled out a program for buying jumbo loans of more than $2 million, under which it will do all of the underwriting and processing.

New Penn Financial has been acquired by Shellpoint Partners, an investment firm owned in part by Ranieri Partners. New Penn is indeed a new company since it was founded in 2008, but has 24 offices and more than 400 employees who originated $1.2 billion in conventional and FHA/VA mortgages last year.

Many smaller institutions, especially depositories, resent selling loans to the large servicers of the world, believing that they are "losing a client." Quicken Loans rolled out “Rate Drop Advantage,” a program that will pay most of a borrower's closing costs if they take out a purchase money mortgage or refinance loan with Quicken and then refinance with Quicken again within seven years.
 
Prices were better by .625-.750 on Wednesday, and then on Thursday they sprang back and were worse by .5. The 10-year note was down about .5 in price to a yield of 3.03%.
Mortgage volume has really picked up recently – all those fence-sitting refi’s locking and being sold? The markets certainly took notice of a warning from Moody's that it would put the US on its watch list for a possible downgrade if lawmakers didn't make some progress on budget talks by July. (By the way, Moody's, one of the top rating agencies that many believe mis-rated billions in mortgage debt in the last 10years, had already placed the senior debt of BofA, Wells Fargo, and Citi on “review”.)
 
Today’s employment data, expected to show Non-farm Payrolls +170k, were only up 54k, the smallest increase since September, with a Unemployment Rate of 9.1%. This compares to April’s +232k. As one would expect, these disappointing numbers are pushing stocks down, as well as rates… soon after the numbers we find the 10-yr back down to 2.97% and MBS prices better by .250 or more.


(Parental discretion advised.)

The madam opened the brothel door and saw a rather dignified, well-dressed, good-looking man in his late forties or early fifties. "May I help you sir?" she asked.
"I want to see Valerie," the man replied.
"Sir, Valerie is one of our most expensive ladies. Perhaps you would prefer someone else," said the madam.
"No, I must see Valerie," he replied.
Just then, Valerie appeared and announced to the man she charged $5,000 a visit. Without hesitation, the man pulled out five thousand dollars and gave it to Valerie, and they went upstairs. After an hour, the man calmly left.
The next night, the man appeared again, once more demanding to see Valerie. Valerie explained that no one had ever come back two nights in a row as she was too expensive. But there were no discounts. The price was still $5,000. Again, the man pulled out the money, gave it to Valerie, and they went upstairs. After an hour, he left.
The following night the man was there yet again. Everyone was astounded that he had come for a third consecutive night, but he paid Valerie and they went upstairs.
After their session, Valerie questioned the man, "No one has ever been with me three nights in a row. Where are you from?" she asked.
The man replied, "Ontario."
"Really?" she said. "I have family in Ontario."
"I know," the man said. "Your sister died, and I am her attorney. She asked me to give you your $15,000 inheritance."
 

If you’re interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com . The current blog takes a look at the QRM proposal’s impact on our industry. If you have both the time and inclination make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.