July 29: Notes on the MID, servicing values, InterFirst’s closing, HUD Handbook verbiage, lack of comments on Ability to Pay Rule

Welcome to National Lipstick Day. (Yes, I know that every day is national something day.) If one looks around free lipstick can be found. And in other news, iRobot, the maker of Roomba, made big news this week when an interview with its CEO mentioned plans to sell the map data of customers’ homes to third parties. Now the company has launched damage control measures and the CEO is spreading assurances that this is all just a big misunderstanding.

In Thursday’s commentary, I mentioned chips being placed in employees ostensibly so they could purchase treats. (“Have you been chipped yet? A Wisconsin company is holding a “chip party” to implant chips into its employees so they can buy snacks with a  wave of the hand. Is having your complete credit information on it far behind?”) The story prompted one correspondent rep to send, “The rouse is to buy snacks, but the real reason is for scanners at the entrance to see when they come and go, and when they’re at their desk or not…”

InterFirst Mortgage’s closing

Dennis D. reminded us that, “This is not the InterFirst Wholesale Lending that was in Ann Arbor, MI and was sold to Citi Mortgage in 2007. The original InterFirst Wholesale Lending was led by Stan Rhodes, Willie Newman and Tom Goldstein – outstanding leaders and visionaries in the mortgage field. InterFirst Wholesale Lending was also known by the name they closed their loans in – ABN AMRO Mortgage. MOAI technology set the standard during this period. InterFirst was a National leader and the #1 wholesaler in the early 2000’s: A highly profitable cutting-edge technology and process driven company that was considered the best by the broker community.”

T. writes, “The real issue with InterFirst? Management made a couple of very bad trades before the election, which hurt them. January 9th InterFirst pulled its pricing out of the market and then stayed there until June 29th when secondary stopped sending out rate sheets.”

H.A. took a harsher view. “Great to hear InterFirst hit the dust. When the company entered the market, management hired many outside AEs and once they built up a customer base, BOOM, they were fired. Good luck in your future endeavors!!”

Servicing: CPR primer

This week the commentary contained some information on servicing packages, and I received this question from Oregon. “I have heard the term ‘CPR.’ I understand that this is a measure of a pool of loans paying off early, e.g. prepaying. I also understand that investors in servicing want those assets for a long time. But I am trying to figure out the average percent of loans that are prepaying monthly and annually. I realize that different loans have different prepayment speeds, and are based on prevailing interest rates. But do you have any sense the highs and lows for this year?”

CPR can either denote “Conditional Prepayment Rate” or “Constant Prepayment Rate.” I turned to Steve Fleming, SVP of Phoenix Capital for an update on current conditions. “CPRs are the most important MSR valuation assumption as they hold the primary effect on the servicing cash flows. We’ve seen CPRs, whose technical definition includes SMM (single monthly mortality), encompass or exclude amortization, but the metric generally denotes runoff only (i.e. PIFs and curtailments). If amortization inclusion is desired, pay special attention to the loan’s age/WALA as the principal percentage of a P&I payment of course grows over time and can skew the apples-to-apples comparison one might be seeking when comparing populations/cohorts. The bottom line CPR numbers can fluctuate widely for a variety of reasons including rate incentive, loan to value, loan size, credit profile, and numerous other factors, and to complicate this discussion further, components influencing CPRs can vary significantly from originator to originator.

“To quote a specific CPR without given the proper context of the underlying collateral is impossible and it can range from the mid-to-high single digits to 25%+ CPRs (higher on Govies but must delineate FHA vs VA vs Streamline/IRRRL, etc.). Equally important to the CPR or voluntary prepayments can be the CDR (involuntary prepayment or defaults) on certain collateral types and vintages. Phoenix advises clients to closely track their actual CPRs (and CDRs for that matter) at a granular level and incorporate their results into future MSR strategies (e.g. retention vs sales, portfolio economic modeling, etc.).” Thanks Steve!

If you’d really like to dig into the servicing calculations more, I suggest “Standard Formulas for the Analysis of Mortgage-Backed Securities and Other Related Securities.”

Interest, taxes, and housing

“Rob, I have FHLMC interest rates by month from 1971 to present, but I cannot find residential volume by year. Do you have a source?” Sure. The Agencies and the MBA are pretty good with this stuff. For example, Freddie Mac publishes monthly volume summaries on its web site. These reports provide year-to-date activity and other statistical data.

If you want to start a fight, ask someone at the National Association of Realtors about the importance of the mortgage interest rate deduction. The group has rallied around keeping this deduction in its current form as if it is in the U.S. Constitution. Yet the Wall Street Journal highlights a recent study that suggests that the mortgage interest deduction does little to promote homeownership. This is one of the core justifications of the tax break. The paper was produced by the National Bureau of Economic Research, and is based on studies done on Denmark, but it is worth a skim for anyone who cares.

Brent Nyitray, Director of Capital Markets with iServe Residential Lending, sent out a note on mortgage payments as a function of income over time. “I showed that the post bubble days hit a 40-year low (at least) and that we are still well below historical levels. The issue with that analysis is that it ignores the tax effects of the mortgage interest deduction, which really mattered in the late 70s / early 80s when tax rates and interest rates were much higher. Up until the mid-1980s, the marginal tax rate for the median income was between 22% and 24%. It has been 15% ever since.

“Also, when interest rates were much higher, the vast majority of your payments for the first few years went to interest, not principal – in fact when mortgage rates were 17%, 99% of your first year’s payment went to interest. Today, that number is much lower, and even ticked below 70% in 2012.

“One can build quickly build equity simply by paying their mortgage on time. Back in the 70s / 80s, you were probably lucky to have enough home price appreciation and principal paid to cover your closing costs if you moved after a few years. Today, you have both strong home price appreciation and a higher principal payment percentage. This helps emphasize how real estate is a great way to build wealth.”

And Jeremy Potter points out, “Regardless of your perspective on the mortgage interest deduction, I think we should all agree there’s two issues here – the reality of whether the math supports true savings and the perception of whether homebuyers believe it does. For now, perception matters most. We should start thinking about how long that’s likely to last.”

HUD language problems

Dottie Sheppick, Managing Partner at Specialty Mortgage Product Solutions, LLC, writes, “One issue that is bothering lenders now is the updated HUD Handbook uses combined language for how to handle the Section 8 Housing Choice Voucher (HCV) mortgage payment subsidy and the Mortgage Credit Certificate (MCC) federal tax reductions. The problem is there is no payment subsidy on an MCC, the additional income comes in the form of reduced federal tax liability deduction in the borrower’s paycheck whereas the HCV is an actual partial payment of the borrower’s monthly mortgage payment. Both can be added to income for purposes of calculating qualifying ratios, which does work. The Handbook goes on to say, however, that the lender may deduct the amount of the MCC or HCV if it is paid directly to the Servicer. That may work for HCV, but again, there is no amount paid to anyone in the MCC. I am told that HUD is working on a clarification.”

Originator pay caps & lack of industry input

Rick Fabricio with Stearns Lending noticed something about public comments on the Ability to Pay Rule: there are only 36 comments! “This is a very common complaint I hear, and was amazed at the poor response. It is stunning that only 36 people have commented on the Ability to Pay Rule so far. The CFPB is assessing the Ability to Repay rule, also known as the Qualified Mortgage (QM) rule. Under the rule, we have a 43% ratio that essentially only applies to private industry loans and a 3% cap that really only applies to mortgage brokers because of all the exemptions. It is super-easy to comment, simply click on this and say something like, “I believe the CFPB should remove the 3% cap on mortgage originators,” or, “The 43% cap on income should be changed to 50%,” etc. NAMB has provided some talking points, or one can look at NAMB’s official comment for ideas. Anyone can even comment anonymously if they are afraid of the CFPB. The deadline for comment is Monday, July 31st.

(Thanks to Penn P. for this one.)

Two best buddies in south Louisiana, Boudreaux and Roubideaux spent a lot of time together playing booray.

One day after finishing up a robust game Boudreaux noticed that Roubideaux had a white mule standing out in near his corn field. 

Boudreaux looked at Roubideaux with a quizzical look on his face.

Roubideaux, how’d you got dat white mule, you is a lucky Cajun.”

Oh hell yes I am.” Having a white mule is considerable lucky.”

Boudreaux continued. “Roubideaux, how bout you sell me dat white mule to me?”

Roubideaux immediately replied, “Hell no dat mule ain’t for sale.”

Boudreaux scratched the top of his head for a moment.

How’s bout 200 dollars US for dat mule?”

Roubideaux immediately without flinching said “Sold!”

Boudreaux then looked the mule over and said, “I grab my pick ‘em up truck and see you in 3 or 2 days.”

Roubideaux shook hands with Boudreaux and the cash was handed over. 

Boudreaux said, “I’m glad you got to see me.”

Roubideaux responded, “I’m glad you got to see me too!”

3 or 2 days went by and Boudreaux arrived in his pick ‘em up truck.

Roubideaux was sitting on his front porch with 5 or 4 dogs sleeping underneath in the shade.

Boudreaux approached Roubideaux and said, “I’m here to got dat mule.”

Roubideaux looked down and shook his head.  “Dat mule up and died yesterday he’s layin over der under that tree.”

Aw man dat’s bad, so just got me my money back.”

Roubideaux looked down again. “Can’t do dat, lost it playin booray.”

Boudreaux scratched his head for a while then said.  “Hell, help me load dat mule in my pick ‘em up truck.”

The two friends loaded the dead mule in Boudreaux’s pick ‘em up truck and he headed off.”

6 or 5 days later Roubideaux saw his best buddy down town. 

Hey…Boudreaux…how you are?” 

Boudreaux responded, “Great, just great.”

What ja do with dat mule?” asked Roubideaux.

Boudreaux had a smile on his face. “Oh…I had a raffle for dat mule and sold 300 tickets at 1 dollar a piece.”

Roubideaux looking quizzically at Boudreaux said. “Didn’t you tick off a lot of folks?”

To which Boudreaux sheepishly replied. “Only 1, and I give his money back to him.”

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Rob Chrisman