Jun. 15, 2011: Financial literacy important; changes at Chase; VA IRRL feedback; more on Freddie & Fannie prepay speeds
Rob Chrisman

As California goes, so goes the nation? If that is still mostly true, here is a shift in housing demand that may be worth noting: http://www.latimes.com/business/realestate/la-fi-econ-forecast-20110615,0,3144669.story.

One of the reasons I began writing this commentary many years ago, during the Coolidge Administration as I recall, was the repeated puzzlement among folks in the business when I would explain bond market mechanics. (Namely, when fixed-income prices fall, rates go up, and vice versa.) I continue to hear stories about how little consumers know about their mortgages, and how it almost seems that Congress expects all the regulation to teach them about mortgages and finances. Last year a study conducted by Dartmouth University, and any survey of telemarketers, showed that many home owners don't know the terms of their mortgage or the interest rate that they're paying, or how compound interest works. Unfortunately now, more than ever, people have to take so much responsibility for their financial lives. Pensions have been replaced by 401(k)'s, health insurance decisions are left to the employee, etc.

Of course, the less consumers know, the more they run into trouble - like refinancing low interest mortgages or buying overpriced credit insurance. Financial illiteracy is an example of "rational ignorance" where the costs of paying attention outweigh the benefits. On top of that, LO's have seen clients where the less people know, the more overconfident in their abilities they tend to be. It even has a name: the Dunning-Kruger effect where people who don't know much tend not to recognize their ignorance, and therefore fail to seek better information. Less knowledgeable borrowers are usually less likely to do research before obtaining a mortgage. Well informed borrowers are more likely to ask for help. So it seems that not only do we need regulations to protect the consumer, but also proper financial education - the financial equivalent of driver's ed!
 
A few weeks ago the head of Bank of America’s correspondent group left, and yesterday it was JPMorgan Chase mortgage group’s turn to make some news. Gone is mortgage chief David Lowman (“Dave Lowman and I have decided he will leave the firm,” Frank Bisignano, the head of home-lending, said…) It seems no mortgage lender is immune from criticism, but Chase has been in press in recent months after it overcharged active-duty military personnel on loans and improperly foreclosed on other borrowers. Per Bloomberg, its mortgage unit posted at least $3.3 billion in losses during the first quarter. JPMorgan made over $5 billion in profit in the first quarter, even with the mortgage issues – remember that Chase acquired WAMU and Bear Stearns. Lowman came over from Citi in 2006, with Chase also hiring Cindy Armine, Citigroup’s chief compliance officer, last month to increase oversight as chief control officer of home-lending.
 
"Rob, your reader's comments about Freddie's Relief program are similar to what is happening with the VA IRRL program. My company services the largest VA loan market in the country, North Carolina. For decades veterans were able to refinance using the streamline IRRL program (low doc, no credit, no appraisal, low fee loan). However, investor overlays have all but killed this program. For a program that did not require credit report, investors require a 640+ score. They also require income docs, too. Here is the deal killer: appraisals! Now, VA loans are 100% purchase loans. So if a veteran bought a house 4+ years ago, financed 103% of the purchase price, including funding fee, do you think the house will ever appraise in this declining market? Why do you think the VA does not require an appraisal? So we have thousands of soldiers with mortgages rates above 6%, who could benefit from a refi, but who cannot refinance due to investor overlays! This is not what the VA intended with this program. Do you know of any investor who will do a VA streamline with no appraisal?"
 
No one knows where the value of conventional servicing will settle (“should servicers be paid more or less for delinquent loans, and more or less for processing on-time payments?”), but yesterday there was a little clarity on the HECM side. “Ginnie Mae is changing the Servicing Fee Margin for the HMBS program. Currently, issuers must select a Servicing Fee Margin of 6-75 basis points (bps) for participations related to HECMs for which the servicing compensation is paid as a flat monthly servicing fee, or 25-75 bps for participations related to HECMs for which the servicing compensation (the basis point servicing fee) is paid as a portion of the mortgage interest rate.” Starting 7/1, “Issuers must select a Servicing Fee Margin of at least 36 bps and no more than 150 bps, which includes Ginnie Mae’s guaranty fee of 6 bps.”

A week or two ago the commentary discussed how Fannie & Freddie loans were prepaying at different rates than they had been historically. Yesterday Banc of America Merrill Lynch released a good research piece on the subject. (I am traveling today, so please don't ask for a copy - contact your BofA rep.) "There has been a sharp reversal in FN/FH speed differences over the past 6 months. Freddie speeds used to be 2%-3% CPR faster relative to Fannie in January 2011, for 2009/2010 vintages. However, speeds for the two GSEs have converged now. Seasoned Fannie pools, 2008 and earlier, are now 1-3% CPR faster than seasoned Freddie pools while they used to be 1%-3% CPR slower in the past.”
 
The BofA/ML document notes, "Prior to March 1, Fannie and Freddie charged fairly similar LLPAs. Fannie Mae had two different LLPA grids, one for HARP borrowers and the other for non-HARP borrowers. Freddie, on the other hand, had one common LLPA matrix for both types of borrowers. As a result, Freddie LLPAs for non-HARP borrowers were 25 bps lower for some low FICO/high LTV buckets, and were marginally higher for HARP borrowers in some cases. In December, Freddie Mac revised their LLPA, and as a result, fees went up across a number of FICO/LTV buckets for both HARP and non-HARP borrowers. Subsequently, Fannie Mae increased their LLPAs for non-HARP borrowers and brought it in line with Freddie, while keeping the LLPA matrix for HARP borrowers unchanged. After the revision, Fannie and Freddie LLPAs were fairly similar, although higher, for non-HARP borrowers, while Freddie LLPAs were much higher for HARP borrowers.”
 
But then in March FHFA made some additional changes (extending the program, adjusting the Freddie’s LLPA for HARP borrowers) but leaving enough of a difference that it may have impacted the borrower’s ability to refi. “The two key differences arose because the Freddie Mac roll back of LLPA increase was effective starting July 1. As a result, HARP LLPAs for loans
delivered to Freddie Mac between March 1 and June 30 are much higher relative to Fannie Mae. An additional nuance of the roll back was that HARP LLPAs were rolled back only for loans with LTV greater than 80%. Consequently, Freddie HARP LLPAs will continue to be higher even after July 1 for some FICO/LTV combinations. In our view, the increase in Freddie HARP LLPAs starting March 1 is the single biggest reason for the dramatic slowdown in Freddie speeds relative to Fannie for seasoned vintages.”
 
But the plot thickens! Per the BofA/ML report, different servicers are more or less efficient in using the HARP program. Chase is the most efficient servicer, with gross issuance, as a percentage of their total issuance, almost 12% more than the closest competitor. “The credit box for Chase is wider, as the DTI and the LTV is higher for loans originated by Chase. Although Wells Fargo is fairly aggressive at refinancing and using the HARP/streamlined refinancing program, the credit box for Wells Fargo is also the strictest, as can be seen by the DTI for loans originated by Wells.”
 
Yesterday rate sheet watchers and lock desk folks noticed two “clunks” down in market prices. The first happened before our markets even opened after hawkish comments from Fed President Fisher, stronger than anticipated Chinese industrial output, and a Chinese report signaled accelerated inflation inciting the PBOC to raise reserve requirements by 50bps. And then in the latter half of the day Fed Chairman Bernanke was on the tape commenting on the U.S. debt ceiling, stating it should not be used as a mechanism to force budget cuts. Equities, which technically have been “oversold” and therefore looking for a reason to rally, improved, the 10-yr was worse by nearly 1 point ending up at 3.10%, and MBS prices ended worse by .625-.750. As is typical in a sell-off, originator supply picked up and was reportedly around $2 billion. 

Speaking of mortgage banker supply, today’s MBA application data for last week showed that apps were +13%, with refi’s up 16.5% and purchases +4.5%. As of last week, per the survey sample, the refinance share of mortgage activity is up to 70%.
 
We’ve also had the Consumer Price Index numbers and Empire Manufacturing. CPI came in at +.2% (+3.6% for the year), ex-food & energy +.3%, and Empire Manufacturing was -7.79. Later we have Industrial Production and Capacity Utilization – not usually big market movers. But after this news we find the 10-yr back down to 3.07% and MBS prices are better by roughly .125 than Tuesday’s closing levels.
 

I feel like my body has gotten totally out of shape, so I got my doctor's permission to join a fitness club and start exercising.
I decided to take an aerobics class for seniors.
I bent, twisted, gyrated, jumped up and down, and perspired for an hour. But, by the time I got my leotards on, the class was over.
 
 
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