Jun. 16, 2011: Feedback on VA IRRL's; HUD job site; Europe's problems continue to roil our markets
Rob Chrisman

The idea of Father's Day was conceived slightly more than a century ago, not by Hallmark Card or Weber Grills, but by Sonora Dodd of Spokane, Wash., while she listened to a Mother's Day sermon in 1909. Dodd wanted a special day to honor her father, William Smart, a widowed Civil War veteran born in June who was left to raise his six children on a farm. The first Father’s Day celebration was June 19, 1910, but the presidential proclamation didn’t come until 1966 when President Lyndon Johnson designated the third Sunday in June as Father's Day. The US Census Bureau says that there are over 70 million fathers across the nation (and about 25 million fathers who were part of married-couple families with children younger than 18 in 2010).
 
Yesterday the commentary had two items (financial education and VA IRRL’s) which brought a good-sized number of replies of varying perspectives. I will have the financial education letters tomorrow, and look at the VA IRRL program’s today.
 
On the VA IRRL program, I am not going to replace the Scotsman Guide for programs, but it appears that Plaza, Guild wholesale, WestStar, and a few others offer a program with no appraisals, and Icon will do it if the loan is serviced by Wells Fargo. (Icon runs an AVM on VA IRRLS that are not serviced by Wells through an AVM system.  However, if they are serviced by Wells, Icon does not run an AVM.) I received this note: "Explain to this person that if VA really does want originators to produce more VA IRRL's - then it would get rid of the no-bid option and Ginnie would exempt IRRLs from their servicer Tier rankings.  If they did that - every originator/conduit in the nation would immediately open the program up full throttle. Until then - an issuer/servicer would be insane to write/buy IRRL's without appraisals because the losses they will bear will be huge."

"You need to explain Delinquency Compare Ratios. If a lender has a compare ratio of 150%, it means their VA delinquencies are 150% of national VA delinquency average.  This is what VA monitors and is one of the ways VA can pull your entire VA ticket. There is no way to know what is driving it, but not requiring appraisals when most lenders do leads to adverse selection, which in turn leads to higher delinquency ratios.  When selling loans into GNMA pools, the result is you have to buy the loans back out of the pools or GNMA gets mad because the delinquency in your pools is too high, and/or they can stop supporting the issuance of the pools.  Furthermore, if too high, you can lose your entire VA ticket. This is why lenders have overlays, otherwise everyone would be doing VA streamlines with no appraisals and FHA loans with no minimum credit scores."

Another wrote, "The overlay issues with the VA IRRL guidelines that require no appraisal aren’t new. The VA guaranty is only 25% of the loan value.  Many of our real estate markets have fallen more than that over the last three years, so who would fault a new investor for their concerns about taking on a new borrower who has been current (one of the conditions of a VA IRRL), but whose actual LTV could be 150% or more?  That’s a risk that the investor didn’t have last year (or month).  If that borrower goes delinquent, walks away, whatever, the lender can now stand to lose the amount of the loss above and beyond the 25% VA guaranty.  So if they bought a VA IRRL from a correspondent lender, for $150,000, and the value of the property is actually $100,000, and the borrower walks, the investor gets probably $75,000 from the sale of the home after going through foreclosure and dealing with the discounted price of a foreclosure sale, plus the 25% VA Guaranty amount of $37,500, for a total of $112,500.  Their loss is $37,500 on a loan that they just bought, and didn’t formerly have the risk.  Most correspondent investors who have been around a long time first learned the brutal truth of these numbers the hard way with the real estate value downturn in Southern California in the early 1990’s. With loss mitigation numbers like that, if your writer was investing their own funds in VA IRRLs, I dare say that he would probably want to know that the house they are lending on is actually worth $150,000, before he lends $150,000, and then loses $37,500.  This is also the reason that you will usually find the VA IRRL programs with no appraisals captive to the existing investor’s borrowers.  The investor already has the risk, so at that point it becomes smart for them to better the borrower with a lower rate."
 
If you’re looking for a job, most often for underwriters and program support positions around the nation, HUD-FHA has new career opportunities for qualified individuals. The vacancy announcements are posted at www.usajobs.gov.

(By the way, anyone looking for a secondary marketing position take note. USAA is hiring a pipeline hedge trader, so if you know of people who would be interested send them this note. The position requires location in San Antonio, Texas, of Alamo, River Walk, and Spurs fame. The contact at USAA is Kevin Skinner at kevin.skinner@usaa.com.)
 
ClearPoint Funding is offering a Broker Training Session today. The topic is “Fundamentals of FHA.” “This web based training will be hosted by Jayne Schumann, VP of Credit for ClearPoint Funding. The completion of this training session is accepted for CPF's education requirement for FHA Sponsorship.” It is today, starting at 12PM EST/11AM CST/9AM PST Location: WebEx. To register, please email Jayne Schumann; jschumann@clearpointfunding.com  Training Sessions have a restricted number of attendees as space is limited.
 
If you want good news, skip the next few paragraphs, but they do say something about the state we’re in. US Bank quietly announced it will do away with free checking. That makes the top 6 of the largest banks that will no longer offer the product. PNC and Capital One are the notable holdouts in the remaining top 10 largest banks. A National Federation of Independent Business poll shows that more small businesses are planning to shrink their payrolls than expand them. As of the end of May, the NAR reported the inventory of unsold homes would take 9.2 months to sell - about 50% higher than what is normally considered healthy. Summer Travel Inflation: Compared to last year, the cost of hotel rooms is up 2%, airfare is up 14% and gas is up 40%.
 
The National Association of Homebuilders (NAHB) reported that its Housing Market Index, a measure of builder confidence done by survey, fell to “13” after standing at “16” for six out of the last 7 months seven months. (A score over 50 indicates that more builders view sales conditions as good rather than as poor – it has not had a score over 50 since late in 2006.) It is not news that builders are being squeezed by the continuing weakness in existing-home prices and rising material costs. It also doesn’t help that potential new-home buyers are being constrained by difficulty selling their existing homes, stringent lending requirements, and general uncertainty about the economy.
 
The Chinese curse “May you live in interesting times” seems to be true – even my 88-yr old Dad called me yesterday to tell me that Greece is “on the ropes.” The markets reacted to an escalation in Greece's debt woes with no deal yet, riots, talk of the prime minister offering to resign and then announcing he would form a new government, and warnings of potential downgrades to some euro zone banks with exposure to Greece. This was on top of weaker than expected U.S. economic data. MBS volumes shot up, as did other US fixed-income volumes, and prices moved higher/rates dropped on a flight to safety largely related to events in Greece. US 10-year notes rallied more than 1 point with the yield moving down to 2.97%, and much to the regret of anyone who locked earlier in the week, MBS prices improved by more than .5.
 
Overnight the markets continued to focus on Greece, and the implications for the rest of Europe. The Euro aid package may need to be doubled, while Germany is reportedly looking to push any rescue package for Greece to September. Meanwhile, the Greek PM said he would retool his cabinet and look for a vote of confidence to come early next week. That's important as any aid package is dependent on Greece's willingness to play along. Ireland, Portugal, Spain, the list goes on…are a weekly jobless claims number, monthly housing starts, or “Philly Fed” survey here in the US really important compared to entire countries’ financial futures?
 
So this morning Jobless Claims came in at 414k, down 16k, with the 4-week moving average unchanged, and Housing Starts for May actually were up 3.5%. Building Permits were +8.7%. Later we’ll have the Philly Fed number, but the focus continues to be on Europe and the resulting “flight to quality” for our markets. Stocks are pointing to another down day, the 10-yr is down to 2.92%, and MBS prices are all over the place but better by .125-.250.
 
 
A mechanic who worked out of his home had a dog named Mace. Mace had a bad habit of eating all the grass on the mechanic's lawn, so the mechanic had to keep Mace inside. The grass eventually became overgrown.
One day the mechanic was working on a car in the backyard and dropped his wrench, losing it in the tall grass. He couldn't find it for the life of him, so he decided to call it a day.
That night, Mace escaped from the house and ate all the grass in the backyard. The next morning the mechanic went outside and saw his wrench glinting in the sunlight. Realizing what had happened he looked toward the heavens and proclaimed, "A grazing Mace, how sweet the hound, that saved a wrench for me!"
 
 
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 opinions on QRM’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.