This morning we had the weekly Initial Jobless Claims numbers.
But gosh, think of how much money mortgage banks would make if
they didn’t have any paid employees! The Census Bureau
actually tracks these things. “The majority of all business
establishments in the United States are ‘nonemployers,’
yet these firms average less than 4 percent of all sales and
receipts nationally…Nonemployer Statistics is an annual series
that provides subnational economic data for businesses that
have no paid employees and are subject to federal income
tax…Most nonemployers are self-employed individuals operating
unincorporated businesses (known as sole proprietorships),
which may or may not be the owner's principal source of
income. For anyone interested in learning more: http://www.census.gov/econ/nonemployer/.
I
have a buddy that likes to say, "I always look for a
woman who has a tattoo. I see a woman with a tattoo, and I'm
thinking, ‘Okay, here's a gal who's willing to make a
decision she'll regret in the future.’” (Catchy
quotes are always...catchy. Many liked what Paul Ryan had to
say this weekend: "We promise equal opportunity, not equal
outcomes".)
One
wonders if the decisions regulators and politicians make will
ever be regretted. The Financial Times reported that not
one new, or de novo, bank was created in the U.S. in 2011.
(The FDIC actually lists three new bank charters for 2011 —
the lowest number in more than 75 years — but they all
involved bank takeovers of other failed banks.) What are some
of the possible implications? First, investors are clearly
still gun-shy about banking. The dearth of new small banks is
also a negative sign for small businesses generally, as they
are particularly dependent on small banks for loans. Since
most employment growth in the U.S. comes from small businesses
that use external finance to grow into large businesses, a
decline in these businesses’ access to loans could limit
future employment growth as well. The dominant narrative in
2011, like the 2010 version, was one of bank failures and
distressed acquisitions. The FDIC reports that about a hundred
banks failed and another hundred were absorbed in 2011. But
industry consolidation has been prevalent since the 1990s, and
overall, the number of banks declined by 15 percent in the
past five years, to 7,357, while revenues decreased for the
fourth consecutive year, to $737 billion. Although this is
partly due to the Federal Reserve’s low-to-zero interest-rate
policy, which reduces interest income, non-interest income
also fell in 2011 for the second consecutive year.
The
CFPB
has not issued underwriting guidelines for loans yet (in the
form of QM), and it is moving on to appraisals. Yesterday the CFPB, the Federal
Reserve Board of Governors, the FDIC, FHFA, National Credit
Union Administration, and the Office of Comptroller of the
Currency proposed rules that would ban the practice of
“drive-by” appraisals and require a physical inspection of the
home. But the rules, required by the Dodd-Frank financial
overhaul of 2010, would only apply to a small slice of the
mortgage market – loans defined by regulators as “higher
risk.” Regulators define high risk ones in which the rate
is at least 1.5 percentage points above a market average.
Yes,
lenders don’t make many loans above this threshold. In 2010,
for example, using this definition such high-risk loans made
up only 3.2% of the overall lending market, according to the
Federal Reserve. And on the surface many of the proposals make
sense, especially when presented to the public. But once again
it is a slippery slope, like the potential of eminent domain
usage moving from private-label securities into government
agency loans, or the Fed setting LO comp standards and then
setting compensation levels for all jobs.
The
regulators also said they aim to combat fraudulent property
flipping schemes in which a developer or individual buys a
property, makes minimal repairs and tries to sell it at an
inflated price. In an effort to combat this property flipping,
the regulators propose to require lenders making higher-rate
mortgages to obtain an additional appraisal at no cost to the
borrower. In addition, lenders will be required to provide
consumers a free copy of their appraisal no later than three
days before the property sale closes – apparently this has
already become a standard around the industry. The rules which
will be published in the Federal Register" allow for a
mandatory 60 day comment period.
For
the origins of this we can thank the Dodd-Frank Wall Street
Reform and Consumer Protection Act. It established a new
section in the Truth in Lending Act (TILA) which does not
permit a creditor to extend credit in the form of a
higher-risk mortgage loan to any consumer without first
obtaining a written appraisal performed by a qualified
appraiser who conducts a physical interior inspection of the
property. Many argue that using interest rates to determine
risk, while practical from a theoretical viewpoint, does not
include the whole scenario. Regardless, the new section
defines a "higher risk" mortgage with reference to the annual
percentage rate (APR) of the transaction with thresholds
substantially similar to rate triggers in Regulation Z. In
general the definition includes loans where the APR exceeds
the average prime offer rate (APOR) by 1.5 percent for
first-lien loans, 2.5 percent for first-lien jumbo loans, and
3.5 percent for subordinate-lien loans. The proposal
would exclude "qualified mortgages" from the definition when
the rules for that category are finalized. The
regulatory agencies also propose to rely on their exemption
authority under Dodd-Frank to exclude reverse mortgage loans
and loans secured solely by residential structures such as
many types of manufactured homes from the requirements.
The proposed rules also require a second appraisal by a
different qualified appraiser if the property will be the
consumer's principal dwelling or if the seller acquired the
property within the previous 180 days at a lower price than
the sales price at which it is currently being sold. The
second appraisal must include "an analysis of the difference
in sale prices, changes in market conditions, and any
improvements made to the property" between the two transaction
dates. Other proposed parts of the new rules include a
provision requiring the applicant be provided a statement
regarding the purpose of the appraisal at application and
receive a copy of any written appraisal at least three days
before closing. The applicant may also choose to have a
separate appraisal conducted at his/her own expense.
While
we’re on the appraisal issue, a while back I received a few
comments that I am overdue in repeating. On June 12th, in
reaction to the input, “My chief complaint about the new
appraisal environment is that we the lender are not permitted
to order a second appraisal for a unhappy client BUT the
client can go to another lender and get another appraisal and
that happens a lot” I received, “This may be true when going
through wholesale channels, where the lender orders the
appraisal; however there are still options available. One
option would be to pull the loan and submit it to another
lender. Sure, it is a headache to do, but if you are confident
in the value, it might be worthwhile after all, the borrower
would have to go elsewhere and start all over again anyway ---
only with you, all of the documentation has already been
provided). On the mortgage banking side, I have had issues
over value in the past where I have provided valid sales comps
that were not used that, at least in my estimation, were much
better than the choices made by the appraiser. I followed
protocol with the AMC and filed a dispute which went through a
review process and, surprisingly – not! – they elected to
stand by the appraiser’s initial report. However, they did
offer me the option of ordering a new appraisal which would be
assigned to a different appraiser. Confident in my value, I
took them up on it and, lo and behold, the new appraisal came
back with over $100K improvement in value (of course, my next
argument was with the AMC for charging my client for another
report when the initial one was so bad….to no avail). So, for
Amy to say or imply that the only option is for the client to
be able to go to another lender for another appraisal because
she is not ‘permitted’ to order another one….I am not sure if
that is completely accurate. So noted Steve Kaye with Catalyst
Lending.
Joe S wrote, "You had some really interesting commentary about
appraisers and the role of the Realtors to police themselves
as far as what’s put on the listing that appraisers will, at a
later date, use for comparable purposes. Those were great,
yet very subtle points and speak to the anonymous process of
some appraisals. I have quite a few of my brokers whom also
receive your blog and it was quite a talking point
yesterday…. The question arose however, that didn’t seem to
have a definitive, real world answer: To use a technical
mortgage term, If there is a “piss poor” appraiser who is just
rouge and or unethical, who would police that appraiser?...It
used to be the OREA and I recall hearing of them taking swift
action before AMCs, but now they seem sheepish and
non-committal. The AMCs don’t give a poop as long as they get
paid, but who over sees the individual appraiser since free
market conditions have been set aside? Is it the CFPB? HUD?
NMLS? Sherriff Joe in Arizona? Who? We used to have a
capitalistic market place for appraisers where if they didn’t
do a good job, people wouldn’t use them, but now it seems to
be Halloween every day and they can hide behind different AMC
masks and have no accountability to do a thorough job.”
Yesterday
a noticeable percentage of my e-mails were made up of price
worsenings. And Lock Desks saw volumes shoot up – “panic
locking”? One trader noted, “The GNMA market traded like it
was seeing more Bonds than the receptionist as a 007
convention.” We went out on the worst levels of the day with
the 10-yr at 1.80%. (Three weeks ago it was 1.40%.) On the
hedging side, a week or two ago Fannie 2.5’s (3% loans) were
above 100. Now they are two points worse, and pipeline hedgers
have gone from using 3% securities and gone back to using
3.5%’s. Agency MBS prices worsened by .625.
What
gives? Europe has been relatively quiet. But there is
increased uncertainty that the FOMC will implement additional
QE measures at its September meeting given the recent decent
economic news here. Yesterday’s CPI and Empire Manufacturing
both came in lower than expectations, causing a small jump in
prices. But that didn’t last long before a decent print in
industrial production pushed us back lower in price, and then
the buyers were nowhere to be found as sellers starting
unloading.
Today
we’ve had Jobless Claims (+2k to 366k, but the moving average
is the lowest it’s been since March), Housing Starts
(falling), and Building Permits (a four year high at +6.8%),
and we’ll have a Philly Fed number. In the early going the
10-yr’s yield is at 1.79%, and MBS prices are roughly
unchanged.
After
35 years of marriage, a husband and wife came for counseling.
When asked what the problem was, the wife went into a tirade
listing every problem they had ever had in the years they had
been married. On and on and on: neglect, lack of intimacy,
emptiness, loneliness, feeling unloved and unlovable, an
entire laundry list of unmet needs she had endured.
Finally, after allowing this for a sufficient length of time,
the therapist got up, walked around the desk and after asking
the wife to stand, he embraced and kissed her long and
passionately as her husband watched - with a raised eyebrow.
The woman shut up and quietly sat down as though in a daze.
The therapist turned to the husband and said, "This is what
your wife needs at least 3 times a week. Can you do this?"
"Well, I can drop her off here on Mondays and Wednesdays, but
on Fridays, I fish."
If
you're interested, visit my twice-a-month blog at the STRATMOR
Group web site located at www.stratmorgroup.com.
The current blog discusses the CFPB’s servicing proposals, for
better or worse. If you have both the time and
inclination, make a comment on what I have written, or on
other comments so that folks can learn what's going on out
there from the other readers.
