Along those lines, I always tell people that the mortgage business is originating the cleanest, best documented paper perhaps in its history. But we're still paying for, and the public sees headlines on, the sins of previous years. The Treasury Department reported, “Mortgage fraud reports by banks rose 88% last quarter as lenders were asked to take back bad home loans sold to investors.” Most of this, apparently, was due to auditors combing through loan files closed in the past: 81% were from loans funded before 2008! Without repurchase requests, mortgage fraud reports would have slid 3%. See the whole story, and not just the headlines, at: http://latimesblogs.latimes.com/money_co/2011/09/reports-of-boom-era-mortgage-fraud-on-rise.html.

And not even the Royal Bank of Scotland is above being probed by the SEC about mortgage-related issues: http://www.bloomberg.com/news/2011-09-28/royal-bank-of-scotland-faces-sec-loan-document-probe-ft-reports.html.

Continuing with the international flavor, who is buying a significant percentage of homes in Florida? NAR, through the Miami Herald, reports that almost 25% of Florida homes sold last year went to an international buyer. The report found that South Florida was a top destination for foreign, non-U.S. resident, buyers versus 3% for the entire nation. “Half of the international buyers planned to use the home as a vacation home, while 21 percent planned to use it as an investment property. Four out of five used all cash for the purchase.”

You can’t pick up a newspaper without seeing news on banks. Banks own huge amounts of mortgage-backed securities, and any large refi program that would allow people with underwater homes to refinance through FNMA and FHLMC would negatively impact banks’ investment performance. The “refinanceable” loans are in MBS’s carried at high premiums, like 106 or 108, and if they pay off the banks get hit with a 6 or 8 point loss. Damned if we do and damned if we don’t. And the Wall Street Journal reports that “the Federal Reserve is taking a cautious stance with U.S. banks that have approached it in recent weeks for permission to buy back more of their shares.” But it depends on an individual bank’s capital situation, and some banks are being told it is too early to use capital that way. Regulators want banks to meet already higher capital standards plus the additional cushion being considered by the Basel Committee on Banking Supervision even after a buyback.

Turning to the agencies, several changes to HUD & FHA’s approved lender requirements came out Friday in Mortgagee Letter 2011-34. Lenders took note of it in that in the past FHA-approved lender branches were restricted by states where they were able to operate. A licensed originator working for an FHA approved lender could only do business in the state where his or her office was located and the states that shared its borders. Now, however, with changes regarding the Single Family Loan Origination Lending Area requirements, lenders are subject to the same rules as non-approved brokers, and can operate in any state where they are licensed. In addition, approved mortgagees may not engage in “net branching,” and must pay all expenses incurred in the operation of their home, branch and direct lending offices directly. Expenses may not be paid by anyone but the approved mortgagee. It is best to read it at: http://portal.hud.gov/hudportal/documents/huddoc?id-34ml.pdf.

HUD also recently sent out two new FHA Mortgagee Letters, one addressing the annual Mortgage Insurance Premium for loans with terms of 15 years or less and a LTV of 78% or less at origination, and the other the elimination of HUD headquarters concurrence of affordable housing programs with borrowers whose household income exceeds 115 percent of the area median income (AMI). To read these mortgagee letters and any attachments in their entirety, please visit: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/.

Citi (#5 originator in the 2^nd quarter) issued one of its “Quality Flash’s” on underwriting retirements accounts. This is important, of course, given the number of folks who seem to be retiring (if they can afford it). “We will accept loans for purchase where the borrower is using funds from an individual retirement account (IRA/Keogh) and/or tax-favored retirement savings account (401k) toward the down payment, closing costs, and reserves. However, because there are severe penalties for early withdrawal (before retirement age), only the net value, after any withdrawal and/or tax penalties are deducted, may be considered in your underwriting decision.” Citi’s update goes on. “No more than 60% of the face value should be used to calculate the amount of funds available. Exception: 100% of the face value can be used only if it can be verified the borrower will not be subject to any penalties or taxes (e.g., if the borrower has already withdrawn the funds and it can be verified in a bank account, or if a statement is obtained from the borrower's CPA or accountant).” Funds should be verified, and the bulletin discusses other aspects as well – as always, it is best to read the bulletin for details.

With 10/1 around the corner, I received this note: "At Mutual of Omaha Bank, we already provide Jumbo mortgages (3/1 arm, 5/1 arm, 7/1 arm, 10/1 arm, and 15 year fixed rates) at up to 80% LTV to $2,000,000. Jumbo loans are alive and well.  Retail originations only - not for wholesale or correspondent."

GMAC Bank (GMACB) Approved Wholesale & Correspondent Clients were told that “Rhode Island House Bill 6103, effective July 1, 2011, provides that in Rhode Island a party to a civil union shall be entitled to the same legal obligations, responsibilities, protections and benefits afforded or recognized by the law of Rhode Island to spouses. Loans submitted to GMAC Bank for underwriting from states that allow civil unions or registered domestic partners must contain either the Addendum to Residential Mortgage Loan Application or a substantially similar form that identifies whether each applicant is in a civil union or is a registered domestic partner.”

Bank of America issued disaster updates from Tropical Storm Lee and the wildfires in Pennsylvania and Texas respectively and also told correspondents about TIL changes. “The Board is revising (the rule) to clarify that creditors must disclosure the maximum possible rate that will apply at any time during the first five years after the date on which the first regular periodic payment will be due, rather than after consummation. Effective with applications taken on and after October 1, 2011, Clients must adhere to this new interim rule for loans delivered to Correspondent Lending for purchase.”

Rates are hanging in there, enough so that yesterday the 5-year note auction was well bid, with a bid-to-cover ratio the best since May. “The 5-year auction stopped at 1.015%.” In other words, tie up your money for 5 years and earn 1% the entire time. Ouch! But that is where rates are. The Dow closed down 1.6%, while 10-year notes were marked .125 higher and closed around 2.00%. Originator supply was reportedly below Tuesday's $3+ billion dump, but remained elevated at around $2.5 billion and MBS prices closed higher by about .125.

This morning we had the final report on 2^nd quarter GDP: +1.3%, which is pretty much old news. Perhaps more importantly Jobless Claims dropped to 391k, the lowest level since early April. Two reports are also out at 10:00: Pending Home Sales Index (Aug), which is expected to deteriorate to -1.8 from -1.3, and Freddie Mac's weekly mortgage rate survey (w/e 9/29). In the early going rates are basically unchanged from Wednesday’s close.

The tribal wisdom of the Lakota Sioux, passed on from generation to generation, says that, "When you discover that you are riding a dead horse, the best strategy is to dismount."
However, in government, education, and in corporate America, more advanced strategies are often employed, such as:
1. Buying a stronger whip.
2. Changing riders.
3. Appointing a committee to study the horse.
4. Arranging to visit other countries to see how other cultures ride dead horses.
5. Lowering the standards so that dead horses can be included.
6. Reclassifying the dead horse as living-impaired.
7. Hiring outside contractors to ride the dead horse.
8. Harnessing several dead horses together to increase speed.
9. Providing additional funding and/or training to increase dead horse's performance.
10. Doing a productivity study to see if lighter riders would improve the dead horse's performance.
11. Declaring that as the dead horse does not have to be fed, it is less costly, carries lower overhead and therefore contributes   substantially more to the bottom line of the economy than do some other horses.
12. Rewriting the expected performance requirements for all horses.
And of course the most common:
13. Promoting the dead horse to a supervisory position.