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Jul. 29, 2011: New BofA lawsuit; poor MI & investor earnings; LO comp issue has not gone away; at least rates are good
Rob Chrisman
“Why
do chicken coops have two doors? Because if they had four doors
they'd be sedans.”
And
thus starts Friday, with very
good rates but a lot of news for folks in the mortgage banking
and real estate business to be watching. First, of course,
the debt crisis continues on in Washington – more on that below.
Second, Monday is August 1st, which is the end of the
public comment period for the nearly universally dreaded QRM
provisions. Those “in the know” believe that, as proposed, the
restrictions are unlikely to fly. (There is more at http://www.stratmorgroup.com/RobChrismansBlog.aspx.)
Third,
regulators
say they've identified conflicts
between
Basel III and parts of the Dodd Frank Act relating to credit
rating agencies. (Yes, those rating agencies that
mistakenly rated billions of mortgage debt several years ago,
and which are providing information about downgrading government
debt now.) Representatives from the SEC, the Federal Reserve
Bank, and the OCC gave evidence to the House Financial Services
Subcommittee on credit rating agencies in Washington on
Wednesday. Federal Reserve Board associate director of banking
supervision Mark Van Der Weide told the panel the Reserve Board
plans to remove mentions of credit rating agencies from its
rules "in the near future" but he said the process was being
complicated by Basel III, which does mention credit ratings
agencies. Section 939 A of the Dodd Frank Act requires all
federal authorities to review and replace references to credit
ratings agencies in their regulations, with "alternative
measures of credit worthiness". Van Der Weide said the Fed had
received feedback from the public and commentators saying the
act "could lead to distortion in the market". Great.
Fourth,
Bank of America is facing
a new securities-fraud lawsuit filed by former Countrywide
investors (including BlackRock and the California Public
Employee’s Retirement System) that opted out of a $624 million
settlement last year. According to the suit Countrywide misled
shareholders about its finances and lending practices. For more
go to: http://www.bloomberg.com/news/2011-07-28/bank-of-america-is-sued-by-countrywide-financial-investors-alleging-fraud.html.
Returning to the debt crisis, and the apparent inability for our
elected officials to send a budget to the president, the bond
market seems focused on three developments: “(1) A downgrade of
Treasuries by at least one ratings agency. (2) A more prolonged
downdraft in economic activity, caused in no small part by the
uncertainty raised by the debt issues. (3) Clinging to the
notion that a full-scale Treasury default will be avoided,
mostly because it’s too painful to think otherwise.” Paul Jacob,
with Banc of Manhattan,
points out that although these issues would normally cause the
yield curve to steepen (leading to higher mortgage rates), but
there are a few reasons why rates have not done much of
anything. “For one thing, markets are supposed to look past
labels and truly assess risks - has the U.S. long-term deficit
outlook really changed over the past 6 or 12 months? Then
there’s the state of the economy – things are slow, which would
keep rates low. And lastly, China, a major world economic
influence, continues to hold US dollars and securities, helping
prices. Very good points.
Corporate
earnings
for mortgage-related companies took a turn for the worse in the
last day or two. Old
Republic International (RMIC) swung to a $66 million loss
in the second quarter on worsening claims costs in its troubled
mortgage guaranty business. The insurer said Thursday it would
likely place the mortgage guaranty unit into run-off mode if it
does not manage to transfer the unit to a separately capitalized
subsidiary before the end of August. CEO Aldo Zucaro in January
predicted the mortgage guaranty industry won't be profitable
until 2013.
PHH lost $41 million,
in part due “fair value charges on mortgage servicing rights
(MSR)” of $117 million. During the 2nd quarter the
investor saw interest rate lock commitments (IRLCs) of $7.5
billion, compared to $8.4 billion in the second quarter of 2010.
Its mortgage loan servicing portfolio increased to $174 billion
as of June 30, 2011, up from $156 billion at June 30, 2010.
“While our servicing portfolio delinquencies rose slightly to
3.22% at quarter-end from 3.15% at the end of the first quarter,
they are still approximately half those of most other large
servicers. Foreclosure costs remain elevated at $24 million,
compared to $20 million in the second quarter of 2010, driven by
increased repurchase requests. As we expected, our mortgage
origination market share declined from 4.3% in the first quarter
of 2011 to 3.7% in the second quarter.”
Genworth
Financial
lost $96 million in the 2nd quarter. The company said
its U.S. mortgage insurance unit's operating loss worsened to
$253 million in the quarter, compared with a loss of $40 million
in the same period last year. The wider loss came after the
company set aside $300 million in reserves to cover bad loans.
Genworth noted that the total flow of delinquencies declined 2
percent from the previous quarter, however.
One
bright spot, if there is one, is that D.R. Horton, the
largest U.S. homebuilder, reported a bigger-than-expected
quarterly profit, helped by cost cuts. The company managed to
cut its selling, general and administrative expenses to less
than 12% of revenue.
One
issue that seems to have quieted down is LO compensation. But it
is in no way a dead issue as companies continue to adjust and
fine tune the rules and regulations. National Mortgage News came
out with a list of “Ongoing
Reminders About Compensation Under the Dodd-Frank Wall Street
Reform and Consumer Protection Act” worth noting. Lenders
are encouraged to remember that payments made by creditors to
loan originators are not payments made directly by the consumer,
regardless of how they might be disclosed under HUD's Regulation
X, which implements the Real Estate Settlement Procedures Act.
Because the long-term performance of the loans is not a term or
condition of a loan it is permissible to go back and “ding,” or
take back part or all of the commission on a particular loan
from a loan originator, if the loan has an early default because
that's not a term or condition. “However, you should be certain
you are not violating wage and hour laws of the Fair Labor
Standards Act and not violating state wage and hour laws as set
forth by the Division of Labor Standards Enforcement in
California or for that matter, any other state.”
The third item on this list is a reminder that compensation to
originators can vary based on how the loan application was
produced, for example, commissions may be higher for leads
generated by the originator versus the company. Federal Reserve
Board staff states that as long as compensation is not based on
loan terms or conditions, or a proxy, it is acceptable. If
pricing of two loans differs, there may be a concern that
channel is being used as a proxy for loan terms or conditions
but other factors may justify differences. Be certain you can
prove it in the event of an audit. Fourth, a mortgage loan
originator is a person who arranges, negotiates or obtains a
loan for a consumer and whose compensation is based on whether
any particular loan is originated. Thus there are two sets of
requirements to be a loan originator: (1) arranging, negotiating
or obtaining a loan for a consumer and also (2) having
compensation based on any particular loan. Both sets of
requirements must be met for a person to be a loan originator,
and this person may not pay some or all of the third party fees
of a consumer or otherwise credit the consumer out of his own
pocket. Lastly, it appears that for purposes of the Dodd-Frank
rule affiliates are treated as a single person, so that when a
lender acts as a mortgage broker and is thus, a loan originator
for purposes of the rule where there is a party that is an
affiliated settlement service provider, such as a title company,
the bona fide and reasonable charges received by the affiliated
settlement service provider are also considered part of the loan
originator compensation.
At
least rates are behaving. Thursday rate-sheet MBS prices (Fannie
4's, which contain 4.25-4.625% mortgages) rallied nicely,
resulting in some intra-day price improvements. Treasuries
opened higher following a mixed session overnight on poor
earnings and weak economic news, as well as, on the uncertainty
regarding the U.S. debt ceiling. The 10-year note closed with a
yield of 2.95%.
We
opened this morning with the 10-yr at 2.92%: Spain's credit
rating (remember Europe? It isn’t going away.) was put on
downgrade watch by Moody's, and the PM announced they would
dissolve the parliament and hold early elections in November.
(Maybe the US should try that.) China may lend money to Greece.
Over here, the Tea Party resistance sunk Boehner's bill before
it ever made it to a vote. Republican officials will try to push
something through again this morning, but all I see in the press
is more jawboning.
GDP
for the 2nd quarter came out at +1.3%, worse than
expected, and the Employment Cost Index also came out, but as
one would expect, stocks are selling off again, and the 10-yr yield is down to
2.88%, and MBS prices are better by at least .250 depending on
coupon. Later we have the Chicago PMI and the final July
Michigan Sentiment, seen slightly higher to 64 from 63.8.
WIFE'S DIARY:
Tonight, I thought my husband was acting weird. We had made
plans to meet at a nice restaurant for dinner. I was shopping
with my friends all day long, so I thought he was upset at the
fact that I was a bit late, but he made no comment on it.
Conversation wasn't flowing, so I suggested that we go somewhere
quiet so we could talk. He agreed, but he didn't say much. I
asked him what was wrong; He said, 'Nothing.' I asked him if it
was my fault that he was upset. He said he wasn't upset, that it
had nothing to do with me, and not to worry about it. On the way
home, I told him that I loved him. He smiled slightly, and kept
driving. I can't explain his behavior I don't know why he didn't
say, 'I love you, too.' When we got home, I felt as if I had
lost him completely, as if he wanted nothing to do with me
anymore. He just sat there quietly, and watched TV. He continued
to seem distant and absent. Finally, with silence all around us,
I decided to go to bed. About 15 minutes later, he came to bed.
But I still felt that he was distracted, and his thoughts were
somewhere else. He fell asleep - I cried. I don't know what to
do. I'm almost sure that his thoughts are with someone else. My
life is a disaster.
HUSBAND'S DIARY:
Boat wouldn't start, can't figure it out.
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