Aug. 25, 2012: HMDA reports; chatter on Treasury, Freddie, Fannie, and Basel III; investor updates - an alternative to FICO?
Rob Chrisman
The
MBA rolled out its latest HMDA report book. "Identify
Hot Prospects and Understand Your Local Markets with MBA's
Mortgage Originations Residential DataBook." The MBA goes on
to explain that, "Home Mortgage Disclosure Act (HMDA) data are
the most comprehensive source of loan origination data and an
indispensable market intelligence tool. Learn how MBA’s
research team can provide you with timely and targeted HMDA
data reports to help you formulate your business strategies
through better understanding of your market, enabling you to
discern business strengths, identify market share and target
areas for improvement. MBA's Data On Demand provides critical,
historical and up-to-date data that make a difference to your
business." No, this isn't a paid ad - if your company is
operating in several states, the report gives one origination
totals by state, by state and purchaser type, by state, loan
purpose and loan type and the top 100 lenders for each state
ranked by origination volume. Write to MBAResearch@mortgagebankers.org
for more information.
The industry continues to ruminate on the recent Treasury
announcement on the new Freddie and Fannie arrangement, both
from a global perspective and what it means to small lenders
and borrowers. There are a lot of questions out there,
and one CEO of a small lender wrote, ""Rob, the fact all
profit/income will be swept into the Treasury probably will
eliminate any hope for the existing Fannie/Freddie equity to
ever accrue value. The accelerated portfolio wind-down could
be considered a potential negative for the housing market (the
GSEs will be providing less support). Would the Fed
potentially make up the difference with an MBS-focused QE3? If
BASEL III pushes a sizable percentage of banks from the
residential lending industry, who can handle this volume? Most
of the hedge funds I know do not trust the potential for a
lack of liquidity or a frozen market that could pop up at any
time. Nor have I seen the Treasury Department offering many
options - I find it odd they are suddenly in concert with the
FHFA."
On the other hand, I received, "The 21-page proposal laid out
steps to slowly transfer Fannie and Freddie off the taxpayer
dime, shift risk to institutions able to shoulder $100 billion
in new originations each month, and stand up a new
securitization platform separate from federal guarantees.” Who
is right?
(As a quick aside, speaking of Basel III, it is still open for
public comment. Many believe that Basel III is a larger
threat to U.S. residential lending than many other proposals
- it is just that the industry is not aware of it. LO's, and
rightly so, are more concerned with closing loans in their
pipelines. But they need to keep in mind that without investor
demand for their product rates could move dramatically higher.
Basel III proposals significantly increase risk weighting for
banks holding mortgage assets. Prior to the eventual Basel III
implementation, most mortgage assets have been weighted at
50%. Basel III significantly increases risk weightings for
mortgages with less than 20% down, regardless of whether or
not they include private mortgage insurance (PMI). In
addition, it appears that Basel III proposals increase risk
weighting for any loans that are not fully amortizing. These
features have been important for first-time homeowners
historically, even before the over-heated housing market of
2003-2007.)
Returning to Fannie and Freddie, and the Treasury, the market
is waiting with bated breath for the g-fee hikes. Remember
that, given buy-up schedules, a 10 basis point g-fee hike
translates into a 40 or 50 basis point price hike for
borrowers, industry-wide. How aggressively and on what
timeline do the GSEs limit counterparty risk? The talk of
limiting newly approved Fannie & Freddie sellers to
volumes based on net worth is increasing since it was first
discussed in April. Neither g-fee hikes nor sales volume caps
are good for small mortgage banks in the short-run. Hopefully
this plan eventually leads to more competition in the
industry, because right now it looks like we’re due for more
contraction.
Many
believe that the Treasury move was a clear sign the GSEs
(government sponsored enterprises) will not be back as they
were before, but now the government has a piggy bank for the
next 5 years. It can tax via the guarantee fee (remember how
we’re paying for a short term extension in the payroll tax
credit with 10 years of higher g-fees?), prompting on person
to ask, “Where is the Taxpayer Financial Protection Bureau
(TFPB)?”
At
this point the agencies are providing two basic functions:
guaranteeing mortgages for investors, and holding loans in
their portfolios. The Treasury is requesting that the
portfolio be wound down, which is okay for Freddie since it is
already doing that at the desired pace. But Fannie must
accelerate. The reduction in the portfolio works fine in a low
origination market, which many believe we will have soon
enough.
Up
until this change both F&F were required to hand over 10%
of their profits to the Treasury (as a dividend). Following
this announcement, both are now required to hand over 100% of
their profits. In addition, both will have to reduce their
investment holdings ($1.2T combined) at a 15% annual rate vs.
the 10% required since conservatorship. Those are the big
pieces of this announcement, but what does it really mean
for community banks? First, it means you don’t have to
worry about their capital position getting any weaker, since
this move effectively (although not explicitly) absorbs them
into the Treasury. Taking this capital concern off the table
instantaneously improved the credit risk profile of both
agencies, as their “rich uncle” has now become their “rich
dad.” It would appear we are done implying that F&F have
Treasury support and have now made it clear. Given this full,
explicit backing should translate into a change in capital
risk weight on their debt from 20% to 0% for banks. This might
counteract some of the Basel III changes – a good thing.
In
future years, as these two wind down their portfolios, they
will issue fewer bonds. Since community banks buy lots
of callable and bullet agency securities and so many already
sit in their investment portfolios, this piece is important to
understand. As supply issued and outstanding declines, spreads
should get even tighter to Treasuries. In fact, given the
current maturity profile, 90% of all Freddie and Fannie
outstanding debt (not MBS’s, but debt issued to finance their
activities) will mature in the next 6 years. As this happens,
returns will decrease, giving community banks a less
attractive investment alternative. Perhaps money will move
from this debt into debt issued by Federal Home Loan Banks
(remember them?) or Farm Credit.
As
for the mortgage-backed securities (MBS) world, things are
mostly status quo.
This announcement does not mean F&F will no longer
guarantee new issuance (they will), it just means that
guarantee is 100% rock-solid (as it is effectively backed by
Treasury now) and they cannot buy their own paper (to hold as
an investment). This could increase MBS supply in the market
slightly. It is not viewed, however, as having an impact since
neither has purchased any of their own securities since being
placed into conservatorship in 2008.
Speaking
of MBS, recently UBS AG has stopped trading in subprime
and other riskier residential mortgage-backed securities
in its latest effort to ease capital needs under new
international banking regulations. It doesn't affect the Swiss
bank's plan to participate in new RMBS issuance, even as that
market has yet to see any significant volume since the
financial crisis. But this returns us to Basel III as banks
are preparing for new bank standards that require costly
increases in capital for holdings of risky securities.
Non-agency RMBS are among those that would take more capital
because most are rated below investment grade, and their
idiosyncratic nature means broker-dealers most often have to
hold the assets in inventory as they seek out buyers. The
non-agency RMBS market is about $1.1 trillion but shrinking as
new issuance has been virtually nil – banks are holding on to
jumbo loans, and non-prime paper is sitting in private hands.
On to some somewhat recent vendor, conference, agency, and
investor news!
Congrats to vendor Digital Risk who made the
Washington Post in a write-up about its alternative to credit
scores. "It argues that credit scores such as FICO failed to
predict large numbers of defaults during the mortgage bust
years — most notably thousands of “strategic” walkaways by
borrowers with high scores — because they could not anticipate
homeowners’ reactions to economic stress." Here is the story:
http://www.washingtonpost.com/realestate/an-alternative-to-credit-scores/2012/08/15/0b7274f4-e6ea-11e1-936a-b801f1abab19_story.html.
Boy
there sure are a lot of conferences coming up. I can't
list them all, but here is a smattering just in September: The
MBA is hosting, in Dallas, the MBA's Risk Management &
Quality Assurance Forum 2012 from September 9–11 (visit www.MortgageBankers.org).
The
Mortgage Bankers Association of the Carolinas is having theirs
in Hilton Head, SC. From the 19th through the 21st the New
England Mortgage Bankers are having theirs in Newport, RI (www.MassMBA.com).
And
from 9/30-10/2the MBA is having its Regulatory Compliance
Conference (that sure sounds like a barrel full of monkeys -
but I guess it has to be done) in Washington D.C. – go to the
address above.
Clients are reminded that Freddie requires
verification of insurance policies for PUDs in the form of an
Insurance Certificate or a completed US Bank Request for
Insurance information form, both of which can be completed and
issued by the insurance agent. The policy must be in the name
of the HOA, provide for loss or damage settlement at
replacement cost, and cover the entire project, which includes
common areas, public ways, commercial space, and the like.
Flagstar has updated its list of eligible settlement
agents in Bronx, Kings, and Queens Counties in New York, all
of which are considered restricted in that an agent from the
list must be used or the loan will not be funded. The
restrictions are in effect for all broker transactions and any
loans funded by a Flagstar Warehouse Line of Credit;
correspondent loans that aren’t funded by a Flagstar Wholesale
Line are exempt.
United Guaranty will be updating its Performance
Premium pricing, the changes of which will affect all MI
applications and rate quote requests received on or after
August 20th. The updated pricing will primarily affect rates
for self-employed borrowers, loans with DTI ratios of 37% and
over, third-party originations, rate/term refinances, and
borrowers with FICO scores of 640-700. The Geographic
Quality Index will be updated for August 20th as well.
GMAC has announced that LPMI Conforming 5/1, 7/1, and
10/1 LIBOR ARM products now permit assumptions and may be
assumed by a qualified borrower after the initial fixed-rate
period.
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.
