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Aug. 26, 2011: Clarification on UAD rollout dates; odds of mass refi plan actually happening
Rob Chrisman
Don't
you always wonder how much the guys standing at the stoplights
take home, tax-free? It is a little farcical, but: http://biggeekdad.com/2011/08/window-washer-gets-rich/.
A
doctor examining a woman who had been rushed to the Emergency
Room took the husband aside and said, “I don't like the looks of
your wife at all.” “Me neither doc,” said the husband. “But
she's a great cook and really good with the kids.” Life often
involves dealing with misunderstandings and confusion, and the
rumors surrounding a mass refi plan certainly fit into that
category. In general markets trade off of future prospects and
the prospects of a huge government-sponsored refi plan is
roiling the markets. (I even set out some more in-depth thoughts
at http://www.stratmorgroup.com/.)
Any
plan must help a broad group of homeowners, stimulate the
economy, and cost next-to-nothing.
One
trader mentioned that, “after HAMP and HARP the U.S. is now
ready to launch a new program called Helping Underwater Mortgage
Performance” and that the market “went toxic after it heard that
Obama was getting "REFI.GOV"
vanity plates for his new limo.” As one would expect, the prices
of premium/older production are suffering compared to
current/rate-sheet production. Yesterday, for example, Fannie
6’s (containing 6.25-6.625% 30-yr mortgages) were down .5 in
price versus Fannie 4’s which improved nearly .250.
One
proposal
would allow millions of homeowners with government-backed
mortgages to refinance them at today’s lower interest rates,
which in turn would lower their mortgage bills and, in theory,
help the economy since they’ll take the money and spend it
elsewhere. Homeowners who have been unable to refinance their
loans either because they owe more than their houses are now
worth or because of bad credit. Other suggestions include a
large-scale home rental program that would keep foreclosures off
the market. What is lacking, of course, are any concrete details
about any of this. Items such as how delinquent borrowers would
be treated versus on-time borrowers, who would administer the
program, and how would investors be made whole are immense
issues.
In
the meanwhile teams of researchers at all the investment banks
are sending out educated guesses as to the pros and cons of
various plans. (I bet this is what they really live for!) How
are reps and warrants for existing loans handled? What about
non-government loan borrowers? If borrowers who have their loans
modified, or refinanced, stop making their payments, can
investors go back to originators under buy back provisions? When
did HARP become a verb? (“If you HARP these seasoned loans you
are exposed to new put-back risk. If these borrowers default in
their current form, it is very difficult for the agencies to put
them back given servicers can argue the loans have been paying
for 3+ years and therefore were issued as clean loans. However,
once its HARPed that argument is no longer applicable and
they are exposed to new put-back risk.”) And with Republican
control, what are the odds of anything like this happening?
It
seems that conjecture is focusing on basic plans. One is to make
a low mortgage rate available to all borrowers. Another is a
blanket settlement between originators and FHFA that settles all
existing and future reps and warranties liabilities, and the
originators will just be agents for the GSEs and will not be
responsible for the credit performance of HARP refied loans.
Another option is an expansion of HARP which will remove the
origination date restriction for HARP eligible loans, thus
allowing borrowers to do HARP multiple times and will make
recent production HARP eligible. And the last seems to be
implementing parts or all of the changes in Senator Boxer’s
bill.
An
analyst wrote, "I'm not sure I understand the economics/logic of
a streamline refinance program. Assume for the moment that
borrowers with high LTV's, i.e., LTV's >100%, a result of
home price decline, could do a rate and term refinance from say
6% to 4.25%. Assuming an average remaining term of 25 years, the
monthly P&I payment would drop by 16%. So, in real economic
terms, how worse off is FNMA or Freddie? Before the rate/payment
drop, the lender/investor has a loan on the books that is
underwater and at high risk of default. After the drop, while
the loan is underwater by the same amount, cash flow has dropped
but the probability of default has arguably declined. Now I know
that studies show that negative equity is the key driver of
default, but I would argue that although the borrower's equity
position has not change the borrower's perception of the
situation has. Once a borrower is in a deep negative equity
position, they probably view their monthly payments (after tax)
as rent, not as payments on an investment. So, a drop in monthly
payments is like a drop in rent which improves their likelihood
of continuing the lease. Does the reduced likelihood of default
compensate for the reduced cash flow? I haven't analyzed this
but I bet it's significant and for some borrowers actually
increases the economic value of the loan. And, the same argument
would apply to loans in securities."
Yesterday's
commentary
discussed HUD's note
about the implementation of UAD. I should clarify that this is
from HUD (mostly FHA), not Fannie & Freddie. I
received a few notes: "In the newsletter you mention that UAD
has been pushed back to Jan 1, 2012 per HUD mortgagee letter
2011-30. Although HUD has pushed the implementation to 1/1/12,
to the best of my knowledge FNMA and FHLMC are still
implementing UAD as of Sept 1, 2011." "The UAD implementation
date for the GSE’s is still September 1, 6 days from now.
Everyone managing this process, including the aggregators, has
been waiting on HUD’s policy concerning UAD. The word from HUD
was that they were going to adopt UAD requirements, but didn’t
specify when. The mortgagee letter addresses HUD’s acceptance
of UAD and their requirement for appraisals with a case number
assignment date of January 1, 2012. This doesn’t push back the
GSE implementation date."
Yesterday the commentary noted a memo from Flagstar regarding
4506-T requirements. In turns out that Flagstar sent out another
memo: "Effective with underwriting submissions on or after
September 1, 2011 the
4506-T Execution Criteria have been updated for conventional
loans to reflect that one year of tax transcripts results are
required, or the most recent two years results if required per
AUS findings. For Delegated underwriting customers, these
requirements are for all loans delivered on or after September
12, 2011. Please note this excludes Freddie Mac Relief
Refinance, Doc. #5354, which does not require results."
But while we're on Flagstar, it announced that on August 18 the
NYSE provided notice to the Company that it did not satisfy one of the
NYSE's standards for continued listing applicable to the
Company's common stock. More information on the status, and how
it can be repaired, can be found at: http://investors.flagstar.com/phoenix.zhtml?c'343&pirol-newsArticle&ID00114&highlight.
The
stock and bond markets had plenty to chew on yesterday, between
Steve Jobs leaving, Berkshire Hathaway’s purchase of $5 billion
of BofA equity, and the conjecture on everyone with a government
loan suddenly ratcheting down their mortgage rates. (Would we be
talking about this if the employment picture was better? MBA's
chief economist Jay Brinkmann stated in a press call on Monday
that increasing employment was the most important thing that the
government could do to help the housing market.) Thursday we
were reminded that hedging "like for like" makes sense: Fannie
3.5's were better by about .375 in price, but Fannie 4's (with
4.25-4.625% 30-yr mortgages) were only better by .125. The 10-yr
ended the day around 2.22%.
This
morning
talk seems more focused on Hurricane Irene, and a stormy weekend
along the Eastern Seaboard. But we did see GDP for the 2nd
quarter which came in at +1.0% versus a prior estimate of +1.3%.
We also have Chairman Bernanke's much anticipated speech at the
Fed's annual Jackson Hole, Wyoming symposium. His topic is
"Near- and Long-Term Prospects for the U.S. Economy" and
investors will be tuned into actions the Fed may take to help
economic and jobs growth. Last year, he introduced QE2 at this
meeting. In the early going stocks are pointing lower, the 10-yr is at 2.17% and
MBS prices are better by roughly .250.
You're An EXTREME Redneck When… (Part 1 was yesterday; part 2
today)
9. Your junior prom offered day care.
10. You think the last words of the Star-Spangled Banner are,
“Gentlemen, start your engines.”
11. You lit a match in the bathroom and your house exploded
right off its wheels.
12. The Halloween pumpkin on your porch has more teeth than your
spouse.
13. You have to go outside to get something from the fridge.
14. One of your kids was born on a pool table.
15. You need one more hole punched in your card to get a freebie
at the House of Tattoos.
16. You can't get married to your sweetheart because there's a
law against it.
17. You think loading the dishwasher means getting your wife
drunk.
If
you're
interested, visit my twice-a-month blog at the STRATMOR Group
web site located at
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