For
some easy stats to remember, there are roughly 70 million
homes in the U.S. and 50 million have a mortgage on them
(average of roughly $200k). That puts the overall housing
market at about $10 trillion. The amount of equity
homeowners had in the 2nd quarter climbed by $406
billion to $7.3 trillion, the highest level since 2007.
(Thanks to the Pacific Coast Bankers Bank for this one.) And
we have to figure that this increase in “national LTV”
continued to climb in the 3rd and 4th
quarters given values and the number of “cash in”
refinancings.
Costs,
and revenue, are in the forefront of many lenders minds as
they look back on 2012 and project for 2013. Practically every
mortgage originator has computed (and reported for public
companies) 3Q12 earnings, and as an industry mortgage
banking results, title insurers, and vendors have been
strong driven by increased origination volume and generally
higher gain-on-sale margins. Negative MSR (mortgage
servicing rights) marks were largely offset by hedge gains.
While rep & warranty losses remain elevated, this was
largely in line with expectations of many research firms, and
as mentioned yesterday buybacks are continuing.
Looking
at publicly traded stocks, financial stocks are up over 20%
through November versus about 13% for the S&P 500. If this
holds true through December, it will have been the first time
since 2005 – are banks (which also represent the lion’s share
of mortgage originations) really that healthy, and will the
net worth of mortgage companies continue to grow? Joe Garrett
of Garrett Watts reminds us, “It seems that a $10
million net worth is the new $2 million, and that $500 million
a month in volume is the new $100 million. But before you get
too giddy, remember
that trees don't grow to the moon, and all bubbles
eventually burst…Have your controller or CFO show you
what your financials would look like with volume off 50% and
margins down by at least 25%. Once you have these new
projections, build a plan to at least break even when this
happens.”
Any
business person knows that when volumes begin to drop,
margins are the first things to be cut in order to keep
business coming in the door to support the overhead (and
this is for any business, not just mortgage lenders or
vendors). But although this will certainly happen, the 1st
quarter of 2013 is appearing to be much like a continuation of
2012 with strong mortgage banking results. For the 3rd
quarter, most companies reported moderately higher origination
volumes over 2Q12, and analysts expect mortgage volumes over
the next several quarters to remain strong supported by refi
volume, given the low interest rate environment and strong
production through HARP. Also for the 3rd quarter
gain-on-sale (GOS) margins were up sequentially for most
companies. Margins remain elevated driven by industry capacity
constraints and strong investor demand for HARP mortgages –
the easiest way to slow volume is to jack up your prices. And
the industry sees, and the Fed noted last week, the spreads
between primary and secondary mortgage rates remained wide
through 3Q and widened after the announcement of QE3, which
bodes well for gain-on-sale margins in 4Q12.
But
what is happening with servicing values in this low
rate environment? Mortgage companies generally took negative
marks on their MSR as rates declined. Negative marks were
largely offset by hedge gains, which for many companies is
merely the boost in lending activity and/or refinancing their
own portfolios. One can pretty much expect the negative marks
to continue in 4Q as the primary borrower rate declines – but
just think how much this new servicing will be worth!
It
is interesting to watch lenders expand into new states – in
many cases it is not an easy task for licensing, regulatory,
compliance, or Ops personnel to merely start working on loans
in another state. In fact, though the issue doesn’t generally
take precedence in discussions of the housing crisis, the
goings-on of the past several years have cast light on just
how much consumer protection, foreclosure, professional
licensing, and other mortgage and real estate laws vary from
state to state. The MBA’s Research Institute for
Housing American, after having studied the situation, has
released a report entitled “The Historical Origins of
America’s Mortgage Laws” that analyzes the variations in
legal frameworks and how exactly they came to be that way. It
cites a few examples of major differences between states. One
is what distinguishes title theory and lien theory varies
across the board. Lenders in states that follow title theory
retain title to the property until the borrower pays off the
mortgage, whereas in states that adhere to lien theory, the
borrower owns the property for the length of the loan term,
and lenders’ interests are limited to cases where the borrower
defaults.
Another
is that in some states, the standard real estate security
instrument is a mortgage, while in others it’s a deed of
trust. With a mortgage, the legal title to the property
is entrusted to a third party trustee. Deed-of-trust
transactions, on the other hand, involve three parties instead
of two and resulted from judges’ concern about lenders
including power-of-sale clauses in mortgages. This also gave
rise to laws that require lenders to go to court and receive a
judge’s approval to foreclose in certain states, while in
nonjudicial foreclosure states, the inclusion of a
power-of-sale clause will suffice to authorize either the
lender or the trustee to sell the property. As a rule, the
foreclosure process drags on longer in judicial foreclosure
states.
(As
a quick history lesson, the Deed of Trust was initiated
“out West” to encourage “back East” money to lend out West.
The Deed of Trust was simple and fast for foreclosure. The
mortgage system on the East Coast and Mid-West took much
longer, so it has been that way for centuries. States all have
their own foreclosure laws (states rights!). And many point
out that this is one thing the big banks and Wall Street did
not accept when they started MERS, and more specifically how
Wall Street, in many cases, seemed to sometimes ignore
individual state laws when rushing to create huge residential
securities.)
A
third is foreclosure laws, which were originally put
in place in an effort to protect consumers from the
possibility of losing both their property and owing a
substantial deficiency judgment when making below-market bids
on foreclosures, also vary. The different laws can be traced
back to the Great Depression, when much of the country enacted
anti-deficiency rules, which certain states later deemed
unconstitutional.
There
are many advocates, inside of the MBA, and outside, for creating
a
uniform mortgage code that would save the industry a
considerable amount of time and effort, especially as the
industry continues to integrate across state borders. But as
we know mortgage laws (not the CFPB kind) are exceedingly slow
to change, however, and up to this point, all of the attempts
at standardization have failed. No one has formulated any
definitive theory of the economic reasons for the disparate
way mortgage law has developed across the US, either; rather,
the MBA’s report puts it down to “the outcome of
path-dependent quirks in wording of various proposed statutes
and decisions of individual judges.”
Okay, enough chatter about general mortgage aspects, and on
to some real-life agency, investor, and vendor updates from
over the last few weeks. As always, read the actual
bulletin for full details.
As
a reminder, in compliance with the Loan Delivery business
rules, Fannie Mae is now requiring all loan deliveries
with Application Received Dates on or after August 1, 2012 to
include the new SEC Mortgage Funder field in addition to the
Appraiser’s State License Number, Loan Origination Company
Identifier, and Loan Originator Identifier fields.
Fannie has announced plans to update the Lender Record
Information form (Form 582) in the coming months. The revised
form will be available in January and should be completed and
submitted by lenders 90 days after the respective ends of
their fiscal years.
Lenders are encouraged to prepare for the activation of the
proprietary Fannie Appraisal Messages in the UCDP by reviewing
the Appraisal Findings Reports that are currently available.
In late November Fannie released the UCDP User Guide for
Fannie Mae Messaging, accessible here https://www.fanniemae.com/content/news/appraisal-messaging-notification.pdf
to
help users with the transition.
Fannie has announced that it will be implementing new
requirements for its FNMA Mortgage Release deed-in-lieu
processes. Borrowers will be able to opt for a Mortgage
Release-immediate move, a three-month transitional arrangement
with no required rent payment, or a twelve-month lease with
market rent payment.
Servicers no longer need written approval from Fannie to
postpone foreclosure sales for loans more than 12 months
delinquent, as the requirement has been eliminated.
Freddie Mac has rolled out a new website to aid
servicers in selecting and managing law firms to handle
default-related legal matters as per the recently announced
policy change, which takes effect next June. Servicers can
access fact sheets, FAQs, links to current DCP law firms, and
training opportunities, all of which are available via http://freddiemac.sparklist.com/t/425792/4682832/5252/26/.
Ginnie Mae’s numbers are in for the month of October,
over which it guaranteed $36.8 billion in MBS. Single-family
pools comprised the majority and totaled $34.79 billion, with
multi-family pools totaling $707 million. Of the
single-family issuances, GNMAII pools exceeded $30.56 billion,
while GNMAI single-family pools totaled about $4.23 billion.
Citibank has updated its property flipping policy to
prohibit private sales and For Sale by Owner transactions on
new FHA properties. A second appraisal completed by an
FHA-approved appraiser is also be required if the transaction
exceeds between 10 and 50% to substantiate the increase in
value. For improvement transactions, the increase in sales
price from the seller’s acquisition cost is now capped at 50%
instead of 20%, and in cases where the sales price is more
than $500,000; the maximum increase in price has been
increased from $100,000 to $250,000.
In compliance with the recent policy changes announced by
Freddie, Citi has aligned the pricing differences between LTVs
over 80% and those of 80% or less for all LP Open Access
loans. Effective for all LTVs, proceeds from the new
refinance are permitted to go towards paying off the unpaid
principal balance of the first mortgage, any interest accrued
through the date when the mortgage is paid off, related
closing costs, financing costs, and escrows. The previous
requirements for establishing stability of income and
investigating the source of large deposits have been removed.
What’s going on with the markets? Not much, which is fortunate
since there seems to be enough other things going on, and no
one seems to mind the lack of volatility. Thursday the 10-yr.
closed at 1.58% - we’ve pretty much been near these levels all
week. And it is too early here in Pennsylvania to know where
things will open, but today we will have the unemployment
data which can easily move rates.
Scrabble...
Rearrange the letters below to spell out an important part of
the human body which is even more useful when erect.
P N E S I
People who wrote SPINE became doctors...
The rest are all my friends.
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 some of the considerations facing
the FHFA regarding Fannie and Freddie. 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.
