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Aug. 3, 2011: RMIC's troubles continue; good input & explanation of title company claims; gotta love these rates
Rob Chrisman
Lots
of folks take vacations during the summer, and many have to
ration out their days-off during the year. How does the amount
of vacation you have stack up to the rest of the world? Although
there is no corresponding chart of GDP per person, the chart is
at http://www.cnn.com/2011/WORLD/asiapcf/07/29/country.comparisons.vacation/index.html.
Lock Desk personnel will wish they had a vacation after the last
few business days. Beginning last Friday, mortgage prices have
been on a tear, with locks
prior to Friday now being way out of the market and everyone
reviewing renegotiation policies and talking about a mini-refi
boom. Now, all we need is some equity and borrowers that
qualify!
Current
coupon
30-yr Fannie 3.5%'s (containing 3.75-4.125% mortgages) are
around a price of 99. Throw on a little servicing, and suddenly
4% mortgages are above
par (100). As a result of the horrible GDP numbers and a
debt ceiling package that will do nothing to support growth, the
market over the last week has shifted from eventual Fed exit
strategies to potential for what the Fed could do to provide
further stimulus.
As
investors
continued to cut off RMIC (see below), Radian Group (#2 MI
company) swung to a second-quarter profit from a year-ago
loss and said it expects claims to trail down after it reached
its peak this quarter. Radian also reported a decline in
mortgage insurance delinquencies for the sixth straight quarter.
Monday
the commentary discussed claims
with title companies. "I just wanted to comment on the
subject of claims with the title companies. I can tell you I
had a personal claim against a national title company that
missed some back taxes owed by the previous owner on a short
sale. The county contacted me and said I was responsible for
these back taxes, but that it was the title company’s fault and
I should contact it. Even though it was a clear case of the
company being at fault the claim was denied. I had to
eventually hire an attorney and threaten a lawsuit before
getting them to settle. It took a lot of time and resources to
get it to admit fault even though I had clear documentation from
the county etc. I just thought I would share as this seems to
back up what you are hearing."
One
reader wrote, "As far as I can tell, from over 20 years of
experience in this business, rejection of virtually all
title claims by the insurer has been standard operating
procedure. This is not a new phenomenon. In fact, a
similarly jaded former Chairman of a small Midwestern thrift
(long since deceased) once was heard to say that title insurance
is “insuring pig iron underwater…with a rust exclusion”. The
economics of title insurance are vastly different from ordinary
insurance with upwards of 80% of all premiums being paid to
title agents merely for delivering the business. Only about 5%
of all premium income is allocated to paying losses (the rest is
administrative expense-such as lawyers to fight claims). The
economics of casualty insurance, on the other hand, are
reversed. There is rarely accountability between the purchaser
of title insurance and the person making a claim (consider in
many states the seller buys the insurance), but it’s the buyer
(or lender) who will have to pursue the claim. As a result,
there is no need to have a good claims paying history since the
buyers of their insurance never have to deal with a claim
denial. In fact, if you think about it, if the title company
does a proper search and knows the applicable law, the risk of
loss should be zero. It is not as if a random occurrence like a
tornado can hit your title and cause it to change. Title insurers are really
just insuring their own negligence (and malfeasance) on the
front end. Title losses were covered up by rising real
estate values generally during the first half of the 2000’s.
Now, mortgage holders are seeking to hold title insurers liable
for title losses whenever possible, many of which are really the
result of fraud. Title claim volume has no doubt increased, so
title insurers are just continuing their business model (of not
paying claims easily) in more visible fashion."
And
Brian Levy from Katten
& Temple, LLP, wrote, "The title issue is quite
similar to the mortgage repurchase discussions that have been
occurring over the past few years. Mortgage losses drive
repurchases much in the same way that fraud can drive up title
claims and rising real estate values can mask the underlying
liability for both. Nearly 50% of my current work is in
defending mortgage originators from repurchase claims that range
from legitimate fraud by the borrower to immaterial claims that
the originator failed to verify the source of $50 of closing
funds or failed to properly document something that was
self-evident. One of the basic problems I face is that once a
position is taken by an investor that a representation or
warranty violation has occurred, there is no room for
compromise; only a full repurchase will resolve the problem
regardless of any connection between the violation and the
loss. That is a recipe for litigation unless high level
strategic negotiation can be implemented.
"Title insurance, however, is a bargained for risk transfer.
Mortgage loan sale agreement rep and warrants, on the other
hand, were never intended to be used to pass the entire risk of
loss back to the originator except in extreme cases. In fact,
true sale opinions demanded that be the case, lest sale
agreements were viewed with the dreaded “recourse”. Rather, the
intent of the representation and warranties was to insure that a
properly underwritten loan was delivered. The difference is
subtle, but critical from a risk allocation standpoint. Case in
point: stated income loans. How can investors that desired to
purchase loans without income verification come back to
originators for losses based on the fact that the income was
inaccurate? Clearly, that risk transfer was not bargained for
and, I would argue (and have in many instances), was
specifically waived by the investor. Title insurers will likely
take the position that many of the claims being brought today
are really fraud issues for which they should have no liability
(straw buyers, id theft etc.). So, they need to fight all
claims to separate the wheat from the chaff. Likewise, the
standoffs on repurchase issues generally are not resolved
between investor and originator without escalation to a third
party or legal counsel. Today, everyone is playing a game of
“hot potato” by trying to pass losses to someone else, but there
is a paucity of people with authority or skill to find a
reasonable compromise and there is no generally accepted roadmap
to follow to reach those resolutions. Nevertheless, I have found
that with patience, clever and principled negotiation skills and
a healthy dose of persistence that negotiated resolution of
these disputes is possible both on the title front and the
repurchase front." (http://kattentemple.com/bri.html)
Commercial
mortgage delinquency rates moved up in July. Per analytics provider Trepp, “the delinquency
rate on commercial mortgage-backed securities spiked 51 basis
points to an all-time high of 9.88%.” The news was better in
recent months, but the delinquency rate is certainly higher than
where it was a year ago at 8.71%. Trepp flags a loan as
delinquent once it sees a servicer pursuing a foreclosure
although there had always been a small percentage of loans that
were current but heading toward foreclosure.
To
the surprise of few, the MBA
reported that home mortgage apps were up about 7% last week.
Refi’s were up almost 8% and purchase apps up about 5%. (Watch
what happens next week!) But applications are still about 30% lower than last
year’s levels.
The
fun continues for
RMIC. "Effective immediately, Freddie Mac is suspending
Republic Mortgage Insurance Co. and RMIC of North Carolina
(collectively, “RMIC”) as approved mortgage insurers. With this
suspension, mortgages insured by RMIC with note dates before May
1, 2011, and on or after September 1, 2011, will no longer be
eligible for sale to Freddie Mac. To help manage your pipeline,
mortgages insured by RMIC with note dates on or after May 1,
2011, and before September 1, 2011, must be delivered to Freddie
Mac on or before November 30, 2011, whether for borrower-paid or
lender-paid insurance. Please also note the following critical
information as a result of the suspension: As an exception,
mortgages with existing RMIC certificates of insurance will
continue to be eligible for sale to Freddie Mac if they are
refinanced under the Freddie Mac Relief Refinance Mortgages
offering, and the coverage is continued through modification of
the existing mortgage insurance certificate. The suspension does
not impact mortgages already sold to Freddie Mac that are
insured by RMIC. There are no changes to the servicing
requirements for mortgages insured by RMIC. Freddie Mac
Servicers do not need to take action on mortgages that have
already been sold to us, whether at renewal of the insurance or
otherwise." Fifth Third
Mortgage Company has temporarily suspended RMIC for any
loan, excluding 5/3 to 5/3 DU RefiPlus loans.
As
you can imagine, no one is complaining about mortgage rates! The
focus is back to the slow U.S. economy (as one trader put it,
“Low rates don’t help too much when the economy is
flat-lining”), the global economic outlook, and debt worries
associated with Greece, Italy and Spain. 10-year notes rallied a
point and closed at 2.64% - its lowest level since early
November 2010. MBS prices jumped 28 and 20 ticks, respectively,
on 30-year 3.5% and 4.0% coupons; similar coupon 15 yrs. were up
10+ and 6+ ticks.
It
was quiet over night, but this morning we learned that the ADP
employment numbers showed the 18th straight month of
job growth, +114k. Later we have Factory Orders and the ISM
Nonmanufacturing Index. But the next big events are NFP this
Friday and FOMC next Tuesday – but don’t look for anything too
different out of the FOMC. We find the 10-yr slightly
lower at 2.62% and MBS prices pretty much unchanged.
Two Minnesota mechanical engineers were standing at the base of
a flagpole, looking up. A woman walks by and asks what they were
doing.
"Ve're
supposed
to find da height of da flagpole," said Sven, "but ve don't haff
a ladder."
The
woman took a wrench from her purse, loosened a few bolts, and
laid the pole down. Then she took a tape measure from her
pocketbook, took a measurement, announced, "Eighteen feet, six
inches," and walked away.
Ole
shook his head and laughed. "Ain't dat just like a voman! Ve ask
for da height and she gives us da length!"
Sven and Ole are currently serving in the United States Senate!
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