Speaking of bright folks, fair lending enforcement has taken a dramatic new turn. Things are heating up in the courts, with the traditional "price discrimination" and "red-lining" suits being replaced by the "disparate impact" theory: the idea that even if lenders don't actively discriminate, they can still be sued if the cumulative effect of their actions implies discrimination. The MBA is holding an all-day, in-depth workshop covering this, titled, “Prepare Now for Fair Lending Reviews and Enforcement” in Washington, D.C. on January 24^th. There will be reps from the DOJ, CFPB and HUD, as well as attorneys and consultants: http://www.campusmba.org/products/default.aspx?product_codeâ121701D/REGIS.

Some mortgage companies are scaling back (MetLife comes to mind) while others continue to expand. Kinecta Federal Credit Union is continuing to grow its business and is hiring Retail Mortgage Loan Consultants and Sales Associates throughout Southern California, and is also growing its Wholesale/Correspondent lending with AE positions open in California, and in territories covering the Northwest, Southwest, Central, Northeast and Southeast. “Kinecta FCU is one of the nation’s leading credit unions, with more than $3.5 billion in assets and serving over 220,000 member-owners across the country.” If you are interested, please send a resume to Sue Ann Smith at ssmith@kinecta.org.

One of the big trends in the industry is the increased documentation, especially with regard to appraisals and collateral, and occasionally I am asked about companies who can help. Mortgage technology company FNC Inc., given what I am hearing, seems to be gaining market share in that space: its clients include the largest mortgage industry lenders and industry leading appraisal management companies. The website notes that, “FNC delivers deep expertise in appraisal compliance, workflow best practices, and process efficiency to: mortgage lenders, servicers, appraisal management companies, secondary & capital markets, property & casualty insurance companies.” Check it out at: http://www.fncinc.com/.

Here's a Friday puzzle: What is about $400 million, filled with loans whose balances average $932,000, have CLTV's of 65% and borrower credit scores average 770? How about Redwood Trust's next jumbo residential mortgage-backed security? Fitch Ratings and Kroll Bond Ratings are grading the deal, reportedly, backed by Credit Suisse:
http://www.bloomberg.com/news/2012-01-12/redwood-trust-said-to-plan-fourth-mbs-sale-since-market-seized-up-in-2008.html.

The recent Fed Paper, and Fed speeches, on suggestions on curing the housing woes, elicited this note from a reader: “We were struck by how little effort the Fed put into identifying areas where regulatory action by the Fed and others could contribute significantly to alleviating the problem.  In the policy recommendations portion of the 28 page paper, the Fed offers just two paragraphs which I quote. ‘Credit Access and Pricing: as noted earlier, mortgage credit conditions have tightened dramatically from their pre-recession levels. Lax mortgage lending standards in the years before the house price peak contributed to problems in the housing market, so some tightening relative to pre-crisis practices was necessary and appropriate. The important question is whether the degree of tightness evident today accurately reflects sustainable lending and appropriate consumer protection.’ And, ‘Financial regulators have been in consultation with the GSEs and originators about the sources of the apparent tightness in lending standards. Continued efforts are needed to find an appropriate balance between prudent lending and appropriate consumer protection, on the one hand, and not unduly restricting mortgage credit, on the other hand. In particular, policymakers should recognize that steps that promote healthier housing and mortgage markets are good for safety and soundness as well.’ That's it???  No mention of the QM and the need for a true compliance safe harbor, rather than a rebuttable presumption of compliance?  What about the QRM?  Does the Fed really think that a 20% or 10% minimum down payment requirement for the QRM will help re-center the credit pendulum?  These are rules that the Fed drafted (in the case of the QM proposed rule) or participates in the drafting (in the case of QRM).  The Community Mortgage Banking Project urges everyone to stay involved to keep the pressure on the regulators for balanced and reasonable QRM and QM rules.” So wrote Pete Mills with Mortgage Banking Initiatives, Inc.

Also regarding last week's Fed white paper on housing, The Shirmeyer Report noted, "This is the first time since our current economic crisis began that the Fed has reported so comprehensively on how to help the housing and credit markets although they have made recommendations to policymakers before. As we have repeatedly said for the past few years, as the smartest people we know have said for the past few years, you must fix housing and credit or our own economic recovery will be limited and long. The Fed recommended boosting the role of Fannie and Freddie as opposed to reducing their role in the housing recovery as Congress and the Administration has been insisting. Now is the time to address housing; after all we have already addressed corporations and banks. What better way to do so than with the existing entities, Fannie, Freddie and Ginnie?"

On a slightly different topic Michael Frotten wrote, “There were two recent stories in the news that have interested some people in the industry. One story regarding the new head of the CFPB, Richard Cordrey reported that one of his first initiatives involving consumer protection is called, ‘Know Before You Owe!’ The second story was that the Federal Government is mandating that top servicers figure out how to improve communications with borrowers. For many of us in the mortgage industry I'm sure the first reaction after reading those stories in the news was to reach for the closest bottle of Tums! However, there is an underlying issue that can be improved upon since both of these issues are connected. ‘Know Before You Owe’ is designed to improve the experience for consumers before they take out a mortgage loan, and the Fed's mandate is designed to improve communications with consumers after they have closed on the same mortgage. The real issue and challenge isn't just improved communication – its enhanced consumer comprehension through the entire process! (Anyone with teenage children like me knows the difference between the two.) We created a company to help the mortgage industry improve the consumer experience through the use of video and achieve a higher level of consumer education and comprehension. Vidverify will help mortgage bankers enhance the level of compliance, consumer education and comprehension, grow relationships, reduce errors, and deliver communication that is consistent and easy to understand.” If you’d like to hear more contact Mike at mfrotten@vidverify.com.

Maybe Chase will offer it to help their bottom line mortgage profits. The company reported its 4^th quarter earnings and revenue (close to expectations): net income was $3.7 billion, or $19 billion for the year, while revenue was $22.2 billion, or nearly $100 billion for 2011. For Basel fans out there, Basel I Tier 1 came in at 10.0%, and estimated Basel III Tier 1 at 7.9%. Chase’s credit reserves stood at $28.3 billion, with loan loss coverage ratio at 3.35%. Turning to mortgages, the picture is not so rosy. “Mortgage production and servicing reported a net loss of $258 million, compared with net income of $330 million in the prior year. Mortgage production pretax income was $161 million, a decrease of $392 million, or 71%, from the prior year. Production-related revenue, excluding repurchase losses, was $1.1 billion, a decrease of $269 million, or 20%, from the prior year, reflecting narrower margins and lower volumes. Production expense was $518 million, an increase of $82 million, or 19%, reflecting a shift to higher-cost originations within the retail channel as well as enhanced underwriting processes. Repurchase losses were $390 million, compared with repurchase losses of $349 million in the prior year. The higher losses were primarily driven by an acceleration of Agency demands.”

Chase’s servicing numbers showed a pretax loss of $586 million, compared with pretax income of $14 million in the prior year, largely due to mortgage servicing rights ("MSR") risk management loss. The prior-year servicing expense included $374 million related to foreclosure-related matters. MSR risk management was a loss of $377 million, down $667 million compared with the prior year. The current-quarter MSR risk management loss included an $832 million decrease in the fair value of the MSR asset, partially offset by $460 million of net gains on the associated derivative hedges.” What a great business…

On the trading side, JPMorgan Chase alerted its broker-dealer clients of a change in respect to its trading in several securities types including mortgage-backed securities. Specifically, “the Treasury Market Practices Group (the “TMPG”) and the Securities Industry and Financial Markets Association (“SIFMA”) have published the “U.S. Treasury Securities Fails Charge Trading Practice” and the “Agency Debt and Agency Mortgage-Backed Securities Fails Charge Trading Practice” at http://www.sifma.org/services/standard-forms-and-documentation/securitized-products/securitized-products-fails-charge-trading-practice/. J.P. Morgan Securities LLC and its affiliates have decided to adopt these Fails Charge Trading Practices for purposes of our transactions starting February 1.” For those not involved in the securities trading, (very) basically these practices standardize what happens when a client fails to deliver a security after they agreed to deliver it. Just don’t let it happen…

Fortunately volatility in the interest rate markets continues to be minimal. Thursday the markets were nudged by successful bond auctions in Spain and Italy, and here in the U.S. by weak Initial Jobless Claims and Retail Sales reports. When the day finished the 10-yr settled at 1.94% and MBS prices were a smidge better. Things don’t appear to be changing much today: the only news out so far were some trade balance figures (which rarely move markets) that showed import prices dropped .1% and that the trade balance’s deficit increased slightly to $47.8 billion. Later on we have a preliminary January Michigan Sentiment Index at 9:55AM EST. After the trade numbers the 10-yr is at 1.90% and MBS prices are, once again, a smidge better.