If you think that there is overlap and excess between Freddie Mac and Fannie Mae, you ain't seen nothin'! The Government Accountability Office (GAO) has completed a study on the number of agencies offering housing assistance: 160! "The federal government plays a major role in providing housing assistance to homebuyers and renters and to state and local governments.  It incurred about $170 billion in obligations for federal assistances and forgone tax revenues in FY2010.” Mortgage News Daily reports that, “Current fiscal realities raise questions about the efficiency of multiple housing programs and activities across federal agencies with similar goals, products, and delivery systems.”  Here is the report for a little bedtime reading tonight: http://www.gao.gov/products/GAO-12-554.

Counterparty risk and compliance go hand-in-hand. Here’s a note from Andrew Liput, the president of Secure Settlements, a firm that vets individual closing agents to protect lenders and consumers. “Last week we caught an attorney through our system who was disbarred in NJ and then reciprocally lost his license in PA, but because he had no legal issues in PA, they allowed him to reinstate his license after a time and he is still closing loans for banks! Of course our system rated him ‘High Risk’ and all of our warehouse bank clients were happy to get this information. We also found an escrow agent who had provided insurance confirmation to a large warehouse bank indicating $1 million in coverage, however we confirmed that the certificate was altered and the coverage was only $100,000. Until recently, how would anyone have found this out? This is why better risk management and ongoing monitoring for closing agents are not only a good idea, the process works!” (If you want to reach Mr. Liput he can be found at aliput@securesettlements.com.)

Anyone doing government loans knows that if you are an FHA lender and you are not tracking the details of your Compare Ratio, you may get a big surprise in the mail? And it is not a sweepstakes check or anything that you will be glad to receive. (For those that do not know this term, your compare ratio it is the percentage of FHA originations that are 90 days + delinquent or claim paid divided by the percent of originations that are seriously delinquent/claim for a specific geographic area.) Karen Garner with Collingwood writes, “In our experience working with FHA lenders of all sizes, almost all will know what their corporate Compare Ratio is on a national level. Good information - but not the kind of detailed information you need to improve performance and avoid receiving one (or all) of the following enforcement letters: Credit Watch Termination, Direct Endorsement Termination or Lender Insurance Termination. Any of these actions will have a serious impact on your company finances as well as your reputation as these actions are published in the Federal Register.”

Ms. Garner continues, “So how to avoid receiving notice from FHA? Be proactive and monitor performance from a national level all the way down to a look at every branch office, state and FHA field office jurisdiction. Watch how your performance is trending and if it is heading in a bad direction, do something about it - figure out what the root causes are, increase quality control monitoring of the problem areas and develop a robust corrective action plan. Since FHA uses a two year origination window to evaluate your performance, you cannot improve performance overnight. But if FHA does come knocking at your door - and you have taken an active role in monitoring and correcting performance - you are more likely to be a winner.” (And for a little sales pitch she threw in, “The Collingwood Group has partnered with Motivity Solutions to develop a tool to simplify your use of FHA Neighborhood Watch as well as providing expert analysis. If you'd like a demo with your specific public data and get a glimpse into how HUD is interpreting your key performance data, click www.nw-insight.com.”)

The M&A, investor, and agency updates continued all through September. Here are some recent bulletins; as always it is best to read the original if you have questions.

A month ago, in Florida, C1 Bank and CBM Florida Holding Company announced that they had entered into a definitive agreement with U.S. Century Bank for the acquisition of Doral, FL based U.S. Century Bank. The acquisition will be accomplished through the merger of U.S. Century Bank into C1 Bank.

But mergers continue in banking – why pay for two sets of branches, operations centers, and legal & compliance departments when one will do? In Wisconsin Landmark Credit Union ($2B) has announced plans to buy Hartford Saving Bank ($194mm) for an undisclosed sum. Landmark has taken over 10 credit unions in the last 3 years, but this will mark its first acquisition of a bank. And BNC Bancorp ($2.4B, NC) will buy two branches from Hampton Roads Bankshares ($1.8B, VA).

Keefe, Bruyette & Woods acted as lead financial advisor to First Investors Financial Services Group in its merger agreement with FIFS Holdings Corp., a company controlled by Aquiline Capital Partners LLC, a New York-based private equity firm investing in the financial services sector. Under the merger agreement, FIFS Holdings will acquire all of the outstanding shares of First Investors common stock in an all-cash transaction valuing First Investors at $100 million. Stockholders of First Investors will receive $13.87 for each share of First Investors common stock they hold.

Through KBW, Mile High Banks announced an agreement under which it is to be simultaneously sold and recapitalized with up to $90 million in new capital, positioning the Bank to meet the capital requirements set by its banking regulators and to resume making loans to customers in Colorado. Under the agreement, all of the Bank’s stock is to be purchased by Strategic Growth Bancorp Incorporated, a bank holding company with banking locations in Texas and New Mexico. The agreement calls for a purchase price of $5.5 million, subject to a court-ordered competitive bidding process, in addition to the infusion of up to $90 million in new capital into the Bank. The Bank’s current owner, Big Sandy Holding Company (“Holding Company”), will ask for court approval to sell the Bank’s common stock to SGB, with SGB simultaneously investing the additional capital in the Bank.

And Suffolk Bancorp, parent company of Suffolk County National Bank, announced the sale of a portfolio of non-performing and classified loans with a book value of $51 million for aggregate proceeds of $31 million and the concurrent completion of a private placement of common stock for aggregate proceeds of $25 million. The two transactions together are expected to boost the Company’s capital base, resolve legacy credit issues at the Bank, and strengthen the overall financial position of the Company and the Bank.

Technology provider LendingQB announced that PriceMyLoan, its AUS, can be used with the FHA TOTAL Scorecard platform to decision and sell loans to Ginnie Mae.  Ginnie issuers who already use PriceMyLoan to underwrite all loan types will have automatic access to the new interface, while those who don’t use LendingQB’s platform can access it through certain web services.

The FHA has released details of the “administrative actions” taken by the Mortgage Review Board towards various HUD-approved mortgagees from August 1, 2011 to December 31, 2011, as is required under the National Housing Act.  The full list of settlement agreements, civil money penalties, withdrawals of approval, suspensions, probations, reprimands, and administrative payments has been included in the most recent Federal Register (http://www.gpo.gov/fdsys/pkg/FR-2012-09-10/pdf/2012-22126.pdf), along with a list of “Lenders That Failed To Timely Meet Requirements for Annual Recertification of HUD/FHA Approval” and “Lenders That Failed To Meet Requirements for Annual Recertification of HUD/FHA Approval.”

HUD’s National Servicing Center has released the scores for the delinquent servicing scoring model formerly known as the Service Performance Scorecard through the third quarter of the 2012 fiscal year.  All servicers that have been approved to service single family loans and are currently servicing a delinquent portfolio of five or more loans as reflected in Neighborhood Watch should have already received their scores; qualified companies that haven’t yet received their scores should send a request to sfdatarequests@hud.gov along with their five-digit HUD lender ID.  Interested servicers should be aware that the deadline to submit additional information for extra credit on FY2012 scores is October 31, 2012.

October 9th sees the launch of HUD’s new online automated Home Equity Reverse Mortgage Information Technology system, which one would like to think will become known by its acronym, HERMIT.  HERMIT consolidates the existing systems into one common Home Equity Conversion Mortgage platform, which will allow HUD to better monitor the HECM portfolio and automate the payment of insurance claims.


Understanding Derivatives – an oldie but a goodie.
Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar.
To solve this problem she comes up with a new marketing plan that allows her customers to drink now, but pay later.
Heidi keeps track of the drinks consumed on a ledger (thereby granting the customers loans).
Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit.
By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages.  Consequently, Heidi's gross sales volume increases massively. 
A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern because he has the debts of the unemployed alcoholics as collateral!
At the bank's corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS.  These "securities" then are bundled and traded on
international securities markets.
Naive investors don't really understand that the securities being sold to them as "AAA Secured Bonds" really are debts of unemployed alcoholics.
Nevertheless, the bond prices continuously climb - and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.
One day, even though the bond prices still are climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.
Heidi then demands payment from her alcoholic patrons. But, being unemployed alcoholics -- they cannot pay back their drinking debts.
Since Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and Heidi's 11 employees lose their jobs.
Overnight, DRINKBOND prices drop by 90%.  The collapsed bond asset value destroys the bank's liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.
The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the BOND securities.  They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds.
Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.
Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion dollar no-strings attached cash infusion from the government.
The funds required for this bailout are obtained by new taxes levied on employed, middle-class, nondrinkers who have never been in Heidi's bar.
Now …. Do we all understand?


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 looming fiscal cliff brought on by Washington DC. 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.

Rob

(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx or www.TheBasisPoint.com/category/daily-basis. For archived commentaries, go to www.robchrisman.com. Copyright 2012 Chrisman LLC.  All rights reserved. Occasional paid notices do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)