July 13: Letters on VA loans, marijuana, and tech spending; Agencies moving away from LIBOR

Although VA loans are a relatively small part of the origination pie, they are very much a source of pride for those companies that offer them, and MLOs that specialize in them. And there are plenty of sources of news for veterans. Want a chart of VA funding fees? Here you go. VA loans by county? Sure thing. And due to recent coverage in this commentary about the VA program, some folks wrote in with reminders and possible improvements.

From New Mexico Bill Elliott writes, “You forgot a major reason that many veterans do not take advantage of the VA loan and that is the VA Funding Fee. When I obtained my first VA loan, there was no funding fee. If I wanted to buy another home and use my VA eligibility, the VA Funding Fee would be 3.3% or an additional $6,600.00 on a $200,000 VA loan with no money down. I could reduce that amount to 1.5% or 1.25% by putting 5% or 10% down, respectively, but that is still a pretty good chunk of change. Of course, if the veteran is ‘lucky’ and has a service-connected disability, the Funding Fee is waived. I served active duty from 1965 until 1969 and have no such ‘luck.’”

And John Easterbrook observed, “About the lack of VA participation, most real estate agents have a stigma about VA because of legacy issues (Panel D, etc.) and the fact that VA requires a clear termite report (Sec. 1 & Sec. 2 that relates to moisture). I have had to do a lot of education with agents and still there is resistance because many buyer’s agents feel that if they are in a competitive situation, they will have a hard road trying to get their VA offer accepted.

“What I stress with my buyer’s agents is that it is essential to get me involved with the education of the listing agent when a VA offer is being presented. What I emphasize is that the buyer can pay for the termite report and repairs (if they have the ability to pay), the appraisal process now is almost identical to the appraisal management processes in place for every other loan, and the appraisal standards are nearly identical to every other loan with regard to value. It’s our duty as LO’s to look out for our borrower’s best interest. If the agent isn’t on board with a VA loan and we lose a loan as a result, so be it.”

Too Much Tech?

Nate Johnson, head of the U.S. mortgage business at SLK Global Solutions, a business process transformation enterprise that serves four of the top 25 banks, wrote, “Home lenders need to balance technology with human interaction. As more and more lenders adopt new technology to digitize all points of customer contact, they shouldn’t neglect the human side of customer engagement. While technology certainly does improve the customer experience, human interaction remains irreplaceable. Lenders should never lose sight of the fact that, for most customers, financing a home purchase is the single biggest financial decision of their lifetime, and a certain amount of hand-holding will be required.”

JT Gaietto, CISSP, Executive Director, Cybersecurity Services, Richey May Technology Solutions sent on a note on his thoughts on why lender spending on cybersecurity and compliance isn’t letting up. “Lenders working in states like California are now being required to develop comprehensive data privacy and governance programs. This means adding new controls, such as data loss prevention and encryption, which will push IT budgets higher. These extra costs are being compounded by the fact that cybersecurity and data privacy experts are in high demand and not easy to find or afford.

“Ransomware and endpoint security, that is, protecting networks that are connected to client systems, are growing challenges as well. Many lenders do not have a disaster recovery or incident response plan in place. When something does go wrong, it typically leads to prolonged system availability outages, which ultimately will impact production. There are plenty of things lenders can do to manage costs as long as they get the right help.” (JT says his company is helping lenders make the right security investments, in tandem with other technology investments on the rise such as dashboarding and data analytics.)


Anyone interested in lending to borrowers in that industry should read, “Fannie’s HomeReady Program Allows for Cannabis Industry Financing.” Lenders are well aware, however, that marijuana is still illegal in the eyes of the Federal Government, and therefore institutions regulated by the Government (like Wells Fargo or Chase) still will not lend to borrowers whose income is based on that business.

That said, the Senate in California has passed legislation that will create state chartered cannabis banks, as it seeks to help this industry get around the legal issues faced by the banking industry. The legislation allows private banks or credit unions to apply for a limited-purpose state charter to provide depository services to licensed cannabis businesses.

The Agriculture Improvement Act of 2018 (2018 Farm Bill) that became law at the end of last year officially allows banks to provide services to industrial hemp customers. Under the law, banks can legally service hemp businesses that include farmers, transportation, warehousing, processing, manufacturing, distribution, financing, and sales activities. The Bill directs the US Dept. of Agriculture (USDA) to issue regulations and guidance and to implement a program for the commercial production of industrial hemp in the US. Banks should note that the USDA has begun gathering information for rulemaking, but that remains in motion so rules are in flux. The USDA says it plans to issue regulations in the fall of 2019 to accommodate the 2020 planting season. Interested banks should do plenty of pre-work to ensure not to run afoul of any laws or banking regulations.

Yesterday’s commentary noted how the number of dispensaries in Denver stacked up to the number of well-known chains such as Starbucks or McDonalds. Besides eliciting Claus to send, “One may ask whether people in Colorado now all stoned will continue to live in wood houses?” the note prompted this email from Aaron Ninness. “I have to comment on the Denver Weed Scene portion at the beginning. Before every one on your mail list gets the idea that us Denverites are waking up every day to get Stoney Baloney on our way to our job of basket weaving and drum circles, this article is based on the City and County of Denver. The Denver Metro area is really more like 35 – 40 cities & towns that are collectively called Denver. Denver county has the least restrictions on getting a marijuana dispensary license which is why most are congregated there. If you go to other towns like Parker, Co (still part of the Denver Metro Area) you won’t find one but WILL find plenty of Starbucks and a couple Micky D’s. That is because Parker is located in Douglas County which does not allow dispensaries and is also usually in the top 5 of wealthiest counties in the USA. It accounts for 335,000 of our Denver Metro Area.

“Bottomline is the number is severely skewed when you look at the City & County of Denver (population 619,968) vs. the Denver Metro Area (11 counties and population of 2.93M). Yes, we have a lot of dispensaries but it isn’t as bad as it sounds. Also, as a fun note Colorado had $1.6 billion in tax revenue on our budget last year. Looking at this State Fiscal Rating website, it is clear more states might want to consider getting into the marijuana game.”

Capital markets

The U.S. Agencies are addressing the move away from LIBOR. Recently Freddie Mac, Fannie Mae, and Ginnie Mae have all published information on the topic that lenders should be aware of. For example, “Freddie Mac supports the Alternative Reference Rate Committee’s (ARRC) recommendation to replace the LIBOR index with a new index based on the Secured Overnight Financing Rate (SOFR). The transition will impact new purchases of hybrid ARMs once a SOFR-based product is implemented.”

Fannie issued a similar statement. The FHFA, which oversees Freddie and Fannie, sent out a note of support. And not wanting to be left out of current events, CFPB Director Kathleen Kraninger said, “CFPB is committed to working with the other ex-officio members of the ARRC to help the market successfully transition away from LIBOR. The release of the white paper relating to adjustable rate mortgages by the ARRC is an important step in helping all market participants, including consumers, to move away from LIBOR in a transparent, orderly, and fair manner.”

Ginnie Mae, which doesn’t purchase loans, had information on its first REMIC transaction with a tranche indexed to the Secured Overnight Funding Rate (SOFR). Apparently, it was well received by investors when it went to market in April. Since then, many questions about the transaction have been posed to which Ginnie Mae provided an explanation of the SOFR transaction.

All is not unicorns and rainbows. The transition away from Libor could disrupt lenders’ hedge accounting arrangements, some market participants say. They fear the switch to an alternative rate could nullify contracts and create balance-sheet volatility.

Freddie & Fannie continue to move forward with initiatives that aren’t directly reliant on political decisions, like billions of dollars of transferring credit risk. Dan Fichtler, Director of Housing Finance Policy, for the Mortgage Bankers Association observes, “We continue to be encouraged by the progress the GSEs are making with respect to their CRT programs. For the STACR and CAS offerings in particular, it’s clear that they’ve turned the corner to become better-understood, more-liquid securities, which is increasing investor demand and contributing to tighter spreads. Another very positive development is the decision by both GSEs to issue their STACR and CAS securities as REMICs, which should allow greater investment by REITs.”

Loan originators should know that transferring credit risk away from taxpayers to willing buyers help rates for their borrowersLet’s see what Freddie’s been up to in the capital markets.

Freddie Mac announced its second Seasoned Loans Structured Transaction (SLST) offering of 2019—a securitization backed by a pool of approximately $1.3 billion seasoned re-performing loans. The SLST program is a part of Freddie Mac’s seasoned loan offerings which reduce less-liquid assets in its mortgage-related investments portfolio and helps to shed credit and market risk. The loan pool is comprised of loans that were modified to assist borrowers who were at risk of foreclosure to help them keep their homes, and will be serviced in accordance with requirements that prioritize borrower retention options in the event of default and promote neighborhood stability. The two-step process involves an auction of the right to purchase the subordinate, non-guaranteed certificates backed by the RPLs, and the SLST Trust issuing both senior and subordinate certificates. Freddie Mac will guarantee certain senior certificates, and may initially retain some of such certificates. The winner of the auction will purchase the subordinate certificates at issuance. To date, Freddie Mac has sold $8 billion of non-performing loans and securitized more than $53 billion of RPLs. Additional information about the company’s seasoned loan offerings can be found at: http://www.freddiemac.com/seasonedloanofferings/.

Freddie Mac priced a new $240 million offering of Structured Pass-Through K-Certificates (K-J24 Certificates) that are backed by underlying collateral consisting of supplemental multifamily mortgages and settled on June 28, 2019. The K-J24 Certificates are backed by corresponding classes issued by the FREMF 2019-KJ24 Mortgage Trust and guaranteed by Freddie Mac. The KJ24 Trust will also issue certificates consisting of class B and class R certificates, which will not be guaranteed by Freddie Mac and will not back any class of K-J24 Certificates. Class A-1 has principal of $91.141 million, a weighted average life of 4.74 years, a coupon of 2.283 percent, a yield of 2.25996 percent, and a dollar price of $99.9981. Class A-2 has principal of $149.575 million, a weighted average life of 7.55 years, a coupon of 2.821 percent, a yield of 2.51573 percent, and a dollar price of $101.9997. Class X, which is not offered, has principal of $300.896 million and a weighted average life of 6.50 years.

On May 24, Freddie Mac announced it sold via auction 118 non-performing residential first lien loans as part of Freddie Mac’s Extended Timeline Pool Offering, expected to settle in July 2019. Freddie Mac’s seasoned loan offerings are focused on reducing less-liquid assets in the company’s mortgage-related investments portfolio in an economically sensible way, including through sales of NPLs, securitizations of re-performing loans (RPLs) and structured RPL transactions. To date, Freddie Mac has sold $8 billion of NPLs and securitized more than $52 billion of RPLs consisting of $29 billion via fully guaranteed PCs, $20 billion via Seasoned Credit Risk Transfer senior/sub securitizations, and $3 billion via Seasoned Loan Structured Transaction offerings. Given the delinquency status of the loans in this particular transaction, the borrowers have likely been evaluated previously for or are already in various stages of loss mitigation, including modification or other alternatives to foreclosure, or are in foreclosure.  Mortgages that were previously modified and subsequently became delinquent comprise approximately 54 percent of the pool balance. Additionally, purchasers are required to solicit distressed borrowers for additional assistance except in limited cases and ensure all pending loss mitigation actions are completed. The $22 million UPB principal pool of New York loans (excluding NYC) was won by Matawin Ventures XXVII, with the cover price in the mid-$80s area. Additional information about the company’s seasoned loan offerings can be found at:


A gorilla walks into a bar in San Francisco at the Western Secondary and, to the amazement of the bartender, orders a martini. When the bartender gives the gorilla the martini, he is further surprised to see that the ape is holding a $20 bill.

The bartender takes the $20 bill, then he decides to see just how smart the gorilla is, so he hands the gorilla $1 change. The gorilla quietly sips the martini until the bartender breaks the silence.

“We don’t get too many apes in here at the Westin,” he says.

The gorilla replies, “At $19 a drink, I’m not surprised.”

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Rob Chrisman