Sep. 11, 2012: Redwood’s new deal; revamped repurchase plan; thoughts on importance of QC; agency updates

Sep. 11, 2012: Redwood’s new deal; revamped repurchase plan; thoughts on importance of QC; agency updates Rob Chrisman

Is it easier to finance 500 non-owner loans than it is 5? It is kind of looking that way: http://www.reuters.com/article/2012/09/04/us-real-estate-banks-idUSL2E8K46VK20120904.

But speaking of lots of loans, and lost in the chatter about the Treasury saying it will sell about $18 billion of its AIG stock holdings, reducing its ownership stake from 53% currently to about 20% after the sale and making a nice profit, some of the buzz in the rating agency session at yesterday’s conference in Dallas focused on Redwood Trust’s new non-agency deal. Here are is the summary: http://www.bloomberg.com/news/2012-09-10/redwood-to-sell-securities-backed-by-313-2-million-of-mortgages.html. And Redwood share price, like many other mortgage related stocks (banks, REIT’s, servicers, etc.) is doing pretty well: http://community.nasdaq.com/News/2012-09/redwood-trust-momentum.aspx?storyid1358.   

And regarding loans in general, I received this note, “Rob, my borrowers ask me about bank lending. In this environment, can’t banks make money even falling off a log?” My opinion is that no, they can’t – it still takes work. Sure, the spread right now between their cost of funds (easily less than 1%) and where their loans are (an easy guess is where residential or commercial loans are right now) is good. But much of the cash they’re earning now is being socked away for a rainy day. There are significant changes to bank capital structure under Basel III which may or will come into play – what if it is too expensive for banks to hold many residential mortgages being originated now? Regulatory changes have muddied the water so much, investors can’t tell what sort of return they will get on their investment so capital flows have slowed to a trickle. Add to that a Presidential election year and an uncertain outlook and you have all the pieces of a very jumbled and confusing situation that has too much risk in motion to properly calculate bank income into the future. It seems, however, that even though Fannie and Freddie are going after old repurchases with lots of vim and vigor, the FHFA is going to revamp repurchases. “Under the new rules, the two taxpayer-owned companies won’t force lenders to repurchase defaulted loans if the borrowers have made 36 months of consecutive, on-time payments. Banks will be protected from buyback requests after only 12 months of payments for certain types of loans, such as those originated under the federal government’s Home Affordable Refinance Program.” Here more: http://www.businessweek.com/news/2012-09-10/fannie-mae-and-freddie-mac-to-begin-new-loan-review-system.

Whoever controls the information, and can mine the data, is going to come out ahead, right? Just think of all the data that entities like MERS, title companies, the FHFA through Freddie & Fannie, and so on hold. There exists, outside of those entities just mentioned, “a computerized compendium of millions of housing transactions.” It is a decade’s worth of residential information from across the country, and some think it might shed some light on historical mortgage information that could be used to correct issues in the future. “The system is an outgrowth of work done by a New York investment manager, Thomas Priore. In the boom years, his investment firm, ICP Capital, navigated the dangerous waters of collateralized debt obligations via an investment vehicle called Triaxx…. Triaxx’s technology came to light only last month, in court documents filed in connection with the bankruptcy of Residential Capital. ResCap was the mortgage lending unit of GMAC, now known as Ally Financial. As an investor in mortgage securities, Triaxx gained access to a lot of information about loans that were pooled, including when those loans were made, where the properties are and how big the mortgage was, relative to the property’s value.” Here is the scoop: http://www.nytimes.com/2012/09/09/business/how-to-find-weeds-in-a-mortgage-pool-fair-game.html?_r1.

It is definitely a different environment now then it was then for lenders. David Green, the president of quality control’s The StoneHill Group, writes, “Rob, among lenders out there we are seeing confusion regarding Fannie and now Freddie’s pre-funding QC requirements and recommendations.  The extent of the review, documenting and establishing action plans based on the results of the reviews and incorporation of the review into a company’s Quality Control plan; all of these areas appear to be open to interpretation, based on who you speak with. We are also seeing many lenders still struggling with Fannie and now Freddie’s Loan Quality Initiative (LQI); establishing a compliant QC plan based on the quality initiative, as well as  the scope of review based on the level of LQI.  Whereas LQI 1 encompasses all loan types, including FHA and VA, LQI 2 is generally based on conventional loan product. Many Lenders are still unclear of the levels of LQI as well as the initiative.” David continues, “Senior management’s involvement and action around findings is required once the QC reviews are complete.  A formalized plan, involving Sr. Management, to review and remediate findings discovered during a Pre-Funding and/or Post Close Quality Control review is necessary for a successful Quality Control Program. Documentation around findings and resolutions as well as updating of the Lenders QC plan are an integral part of the process. Clients often ask about selecting a defect rate. While this is left up to the lender, selecting a defect rate that is relative to the lender’s business model is imperative. Defect rates should be realistic in nature and should be established for both significant and insignificant ratings. Defect rates should not be set to a standard that is not reasonably obtainable. Lastly, a lenders commitment starts at the top and filters through to all employees of the company.  A “Commitment to Quality” statement outlining a lenders quality initiative, requirements and agreeance to adhere to this commitment should be executed by all employees.  This brings awareness and a level of understanding to all involved that the company is committed to Quality.” (If you’d like to reach David, write to him at dgreen@stonehillgroup.com.) Well, the agency, investor, and lender updates just keep coming. It is hard to keep up, and I squeeze them in, space permitting. As always, it is best to read the actual bulletin, but these will show you the trends.

The National Association of Mortgage Brokers is presenting a webinar on the recent regulatory developments surrounding disparate impact claims and mortgage loan originator compensation on Thursday, September 13th.  Led by a team from BuckleySandler LLP, the training will also discuss the implications of the business model for wholesale lenders and brokers.  The event is free for NAMB members thanks to the sponsorship of SunTrust Mortgage, Franklin American Mortgage Company, and Premier Nationwide Lending.  See