It takes less than three minutes to break into a house – just ask my cousin in San Quentin. But if the company servicing a loan breaks into a vacant house in order to maintain it, is it a legal obligation, or breaking the law - yet another unintended consequence of all the rules and regulations sitting on the shoulders of mortgage companies? Law firm K&L Gates has been following the issues regarding mortgage companies being required to maintain vacant properties, and sent out an update on, "Amendments to Chicago Ordinance Continue Trend of Forcing Lenders to Maintain Vacant Property Even Before Assuming Title." "In Chicago, and in an increasing number of jurisdictions around the country, mortgagees and servicers of residential loans are required to monitor and maintain vacant properties before they obtain legal title.  The Chicago City Council recently adopted a controversial amendment to the Chicago Municipal Code that significantly expanded the definition of an 'owner' of vacant property. Specifically, the definition of 'owner' includes, among other institutions, 'mortgagees,' 'assignees,' and 'agents' that have yet to take actual possession of vacant property or legal title to such property.”

This first amendment drew so much criticism that the Council subsequently proposed and passed a second, alternate amendment which agreed to remove mortgagees from the definition of owner and instead created a separate code section setting forth specific maintenance requirements for mortgagees, and is expected go into effect on November 19. It continues to make mortgagees liable for some maintenance requirements on properties that are vacant and unregistered, but removed mortgagees from the definition of owner and created a separate code section setting forth specific maintenance requirements for mortgagees. The Second Chicago Amendment still requires mortgagees to register, inspect, and maintain vacant property or face fines. Mortgagees do not need to register a vacant property if the property is already registered by the mortgagor or another mortgagee of the property.  When registration by a mortgagee is necessary, it would be required every six months, but the registration fee of $500 is required only once. Are we having fun yet?

In Las Vegas, which certainly has seen its share of foreclosures and vacancies, and budget deficits, the City Council is expected to vote (in the next few weeks) on an ordinance that would make lenders maintain vacant properties in default or foreclosure.  It would require a lender to inspect properties in pending or actual default and, if vacant, register them with the city for $200. The bank/servicer must then choose a property manager for the home, and then maintain the property (regular watering and mowing, along with other landscaping up to neighborhood standards). And if they didn’t, there could be a $1,000 fine or six months in jail for each offense, though an amendment to the bill added a provision to enforce the ordinance through civil action in court. The amendment also changed the timetable on the property inspection from 10 to no later than 15 days after notice of default as well as appointment of a property manager from five to 10 days after inspection.

With all the laws, rules, regulations, and so on, there continues to be questions of states’ rights over the Federal Government. Over in The Great State of Texas, the Department of Savings and Mortgage Lending revised various regulations applicable to “Loan Originators, Mortgage Brokers, Regulated Lenders, and Registered Bankers.” A few weeks back it, and the Texas Office of Consumer Credit Commissioner, amended various regulations affecting lenders to implement Senate Bill 1124 and House Bill 2594 which cover the Texas Secure and Fair Enforcement (SAFE) for Mortgage Licensing Act of 2009. The Texas SAFE Act contains tighter rules than the federal version, and some of the amendments were designed to bring them closer in line. The amendments include an exemption for owners who sell five or less properties in a 12 month period. The amendments also include, among others, changes affecting licensing, registration, investigations, reporting, and professional conduct, which are effective on November 13. Further amendments include changes affecting licensing and reporting, which are effective on November 10. For a copy of the amendments, please see http://www.sos.state.tx.us/texreg/pdf/backview/1104/1104adop.pdf.

Every day mortgage companies pump out an average of $1-1.5 billion of mortgages. But every day people pay off their mortgages. Believe it or not, the outstanding balance of agency MBS has increased by only $28 billion over the first 10 months of 2011 versus annualized growth of $440-540 billion over the three-year period of 2007-09. And in 2010, outstanding mortgage-backed securities dropped by $150 billion, mostly due to the $330 billion delinquent loan buyouts by Fannie and Freddie (remember that?). Some analysts believe that the decline in the rate of growth of the agency MBS market over the past two years will continue on in 2012, which makes investors happy but originators grumpy.

In fact, some believe that net issuance (new securities versus loans paying off) of MBS’s will actually be negative next year. The Fed is now reinvesting MBS paydowns, the Treasury’s selling of agency MBS will near completion, and the refi activity is likely to stop increasing further. So if supply drops, and demand continues, we remember from Econ 1A that the price will go up. And if you remember your bond math, when fixed-income prices go up, rates go down.

Besides the Feds, who are purchasing about $1 billion a day of agency mortgage-backed securities, REIT’s (also known as REITs) have had plenty of publicity this year surrounding their appetite for agency residential paper. But their stock prices, often more volatile than the rest of the market, have been in the doldrums for 2-3 months. Wassup with that? Investors are now assigning REIT’s more risk than in the past. This has been due to the risk of prepayments picking up, and REITs don’t perform as well when their portfolios of higher-interest rate loans pay off early and they have to invest the money in lower coupon product. The market is seeing increased prepayments driven by low mortgage rates and from HARP and now HARP 2.0. Other risks are seen from the drying up of repo lines (the main source of borrowed funds is repurchase agreements) and the possible loss of the SEC exemption from the Investment Company Act of 1940. (This would impact the favorable tax status that REIT’s have.)

Experts are quick to point out, however, that some of this can largely be avoided/mitigated with appropriate RMBS selection. Think about it: any REIT buying recently minted residential securities are buying pools filled with loans to credit-worthy borrowers due to tighter underwriting standards, and at current rates. It is easy to make the argument that loans made recently have rates that may be as low as they go, and is it worth the cost and effort for recent borrowers to refinance?

HARP 2.0 has thrown REIT’s a curveball, however, since a REIT with substantial holdings of RMBS backed by pre-2009-vintage mortgages with high coupons and no prepayment "protection" (such as low balances) will see increased prepayments. (A REIT focused on ARMs is a different matter, since agency ARMs with LTV’s above 105% are not eligible under HARP 2.0 to refi into another ARM.)

In a recent research piece Cantor Fitzgerald noted that “the main risks for mortgage REITs as interest rate risk, prepayment risk, liquidity risk, government/regulatory risk, and (for non-Agency mortgage REITs) credit risk. We note that mortgage REITs hedge to some degree against interest rate risk and prepayment risk.” For example, in mortgage rates slide higher, and few expect that until later in 2012, “it is possible that (a) the spread could narrow between yields on mortgage REITs' RMBS and the cost of mortgage REITs' repurchase agreements, thereby lowering net interest income, and/or (b) the net change in fair value of mortgage REITs' assets and liabilities could be negative.”

And if rates go the other way, it is possible that mortgage REITs' RMBS could prepay faster than the speeds reflected in the prices that mortgage REIT’s paid for those securities, thereby (a) accelerating the amortization of the premium paid for those securities, and (b) lowering the yield at which the proceeds of the prepayments could be reinvested. But people smarter than the rest of us believe that mortgage rates are not heading down from these levels.

A man and his wife were having some problems at home and were giving each other the silent treatment. Suddenly, the man realized that the next day he would need his wife to wake him at 5:00 AM for an early morning business flight.
Not wanting to be the first to break the silence (and LOSE), he wrote on a piece of paper, “Please wake me at 5:00 AM” and left it where he knew she would find it.
The next morning, the man woke up, only to discover it was 9:00 AM. And he had missed his flight. Furious, he was about to go and see why his wife hadn't wakened him, when he noticed a piece of paper by the bed.

The paper said, “It is 5:00 AM. Wake up.”

Men are not equipped for this kind of contest.