Aug. 25, 2012: HMDA reports; chatter on Treasury, Freddie, Fannie, and Basel III; investor updates – an alternative to FICO?

Aug. 25, 2012: HMDA reports; chatter on Treasury, Freddie, Fannie, and Basel III; investor updates – an alternative to FICO? Rob Chrisman

The MBA rolled out its latest HMDA report book. “Identify Hot Prospects and Understand Your Local Markets with MBA’s Mortgage Originations Residential DataBook.” The MBA goes on to explain that, “Home Mortgage Disclosure Act (HMDA) data are the most comprehensive source of loan origination data and an indispensable market intelligence tool. Learn how MBA’s research team can provide you with timely and targeted HMDA data reports to help you formulate your business strategies through better understanding of your market, enabling you to discern business strengths, identify market share and target areas for improvement. MBA’s Data On Demand provides critical, historical and up-to-date data that make a difference to your business.” No, this isn’t a paid ad – if your company is operating in several states, the report gives one origination totals by state, by state and purchaser type, by state, loan purpose and loan type and the top 100 lenders for each state ranked by origination volume. Write to MBAResearch@mortgagebankers.org for more information. The industry continues to ruminate on the recent Treasury announcement on the new Freddie and Fannie arrangement, both from a global perspective and what it means to small lenders and borrowers. There are a lot of questions out there, and one CEO of a small lender wrote, “”Rob, the fact all profit/income will be swept into the Treasury probably will eliminate any hope for the existing Fannie/Freddie equity to ever accrue value. The accelerated portfolio wind-down could be considered a potential negative for the housing market (the GSEs will be providing less support).  Would the Fed potentially make up the difference with an MBS-focused QE3? If BASEL III pushes a sizable percentage of banks from the residential lending industry, who can handle this volume? Most of the hedge funds I know do not trust the potential for a lack of liquidity or a frozen market that could pop up at any time. Nor have I seen the Treasury Department offering many options – I find it odd they are suddenly in concert with the FHFA.” On the other hand, I received, “The 21-page proposal laid out steps to slowly transfer Fannie and Freddie off the taxpayer dime, shift risk to institutions able to shoulder $100 billion in new originations each month, and stand up a new securitization platform separate from federal guarantees.” Who is right? (As a quick aside, speaking of Basel III, it is still open for public comment. Many believe that Basel III is a larger threat to U.S. residential lending than many other proposals – it is just that the industry is not aware of it. LO’s, and rightly so, are more concerned with closing loans in their pipelines. But they need to keep in mind that without investor demand for their product rates could move dramatically higher. Basel III proposals significantly increase risk weighting for banks holding mortgage assets. Prior to the eventual Basel III implementation, most mortgage assets have been weighted at 50%. Basel III significantly increases risk weightings for mortgages with less than 20% down, regardless of whether or not they include private mortgage insurance (PMI). In addition, it appears that Basel III proposals increase risk weighting for any loans that are not fully amortizing. These features have been important for first-time homeowners historically, even before the over-heated housing market of 2003-2007.) Returning to Fannie and Freddie, and the Treasury, the market is waiting with bated breath for the g-fee hikes. Remember that, given buy-up schedules, a 10 basis point g-fee hike translates into a 40 or 50 basis point price hike for borrowers, industry-wide. How aggressively and on what timeline do the GSEs limit counterparty risk? The talk of limiting newly approved Fannie & Freddie sellers to volumes based on net worth is increasing since it was first discussed in April. Neither g-fee hikes nor sales volume caps are good for small mortgage banks in the short-run. Hopefully this plan eventually leads to more competition in the industry, because right now it looks like we’re due for more contraction.

Many believe that the Treasury move was a clear sign the GSEs (government sponsored enterprises) will not be back as they were before, but now the government has a piggy bank for the next 5 years.  It can tax via the guarantee fee (remember how we’re paying for a short term extension in the payroll tax credit with 10 years of higher g-fees?), prompting on person to ask, “Where is the Taxpayer Financial Protection Bureau (TFPB)?”

At this point the agencies are providing two basic functions: guaranteeing mortgages for investors, and holding loans in their portfolios. The Treasury is requesting that the portfolio be wound down, which is okay for Freddie since it is already doing that at the desired pace. But Fannie must accelerate. The reduction in the portfolio works fine in a low origination market, which many believe we will have soon enough.

Up until this change both F&F were required to hand over 10% of their profits to the Treasury (as a dividend). Following this announcement, both are now required to hand over 100% of their profits. In addition, both will have to reduce their investment holdings ($1.2T combined) at a 15% annual rate vs. the 10% required since conservatorship. Those are the big pieces of this announcement, but what does it really mean for community banks? First, it means you don’t have to worry about their capital position getting any weaker, since this move effectively (although not explicitly) absorbs them into the Treasury. Taking this capital concern off the table instantaneously improved the credit risk profile of both agencies, as their “rich uncle” has now become their “rich dad.” It would appear we are done implying that F&F have Treasury support and have now made it clear. Given this full, explicit backing should translate into a change in capital risk weight on their debt from 20% to 0% for banks. This might counteract some of the Basel III changes – a good thing.

In future years, as these two wind down their portfolios, they will issue fewer bonds. Since community banks buy lots of callable and bullet agency securities and so many already sit in their investment portfolios, this piece is important to understand. As supply issued and outstanding declines, spreads should get even tighter to Treasuries. In fact, given the current maturity profile, 90% of all Freddie and Fannie outstanding debt (not MBS’s, but debt issued to finance their activities) will mature in the next 6 years. As this happens, returns will decrease, giving community banks a less attractive investment alternative. Perhaps money will move from this debt into debt issued by Federal Home Loan Banks (remember them?) or Farm Credit.

As for the mortgage-backed securities (MBS) world, things are mostly status quo. This announcement does not mean F&F will no longer guarantee new issuance (they will), it just means that guarantee is 100% rock-solid (as it is effectively backed by Treasury now) and they cannot buy their own paper (to hold as an investment). This could increase MBS supply in the market slightly. It is not viewed, however, as having an impact since neither has purchased any of their own securities since being placed into conservatorship in 2008.

Speaking of MBS, recently UBS AG has stopped trading in subprime and other riskier residential mortgage-backed securities in its latest effort to ease capital needs under new international banking regulations. It doesn’t affect the Swiss bank’s plan to participate in new RMBS issuance, even as that market has yet to see any significant volume since the financial crisis. But this returns us to Basel III as banks are preparing for new bank standards that require costly increases in capital for holdings of risky securities. Non-agency RMBS are among those that would take more capital because most are rated below investment grade, and their idiosyncratic nature means broker-dealers most often have to hold the assets in inventory as they seek out buyers. The non-agency RMBS market is about $1.1 trillion but shrinking as new issuance has been virtually nil – banks are holding on to jumbo loans, and non-prime paper is sitting in private hands. On to some somewhat recent vendor, conference, agency, and investor news! Congrats to vendor Digital Risk who made the Washington Post in a write-up about its alternative to credit scores. “It argues that credit scores such as FICO failed to predict large numbers of defaults during the mortgage bust years — most notably thousands of “strategic” walkaways by borrowers with high scores — because they could not anticipate homeowners’ reactions to economic stress.” Here is the story: http://www.washingtonpost.com/realestate/an-alternative-to-credit-scores/2012/08/15/0b7274f4-e6ea-11e1-936a-b801f1abab19_story.html.

Boy there sure are a lot of conferences coming up. I can’t list them all, but here is a smattering just in September: The MBA is hosting, in Dallas, the MBA’s Risk Management & Quality Assurance Forum 2012 from September 9–11 (visit www.MortgageBankers.org). The Mortgage Bankers Association of the Carolinas is having theirs in Hilton Head, SC. From the 19th through the 21st the New England Mortgage Bankers are having theirs in Newport, RI (www.MassMBA.com). And from 9/30-10/2the MBA is having its Regulatory Compliance Conference (that sure sounds like a barrel full of monkeys – but I guess it has to be done) in Washington D.C. – go to the address above. Clients are reminded that Freddie requires verification of insurance policies for PUDs in the form of an Insurance Certificate or a completed US Bank Request for Insurance information form, both of which can be completed and issued by the insurance agent.  The policy must be in the name of the HOA, provide for loss or damage settlement at replacement cost, and cover the entire project, which includes common areas, public ways, commercial space, and the like. Flagstar has updated its list of eligible settlement agents in Bronx, Kings, and Queens Counties in New York, all of which are considered restricted in that an agent from the list must be used or the loan will not be funded.  The restrictions are in effect for all broker transactions and any loans funded by a Flagstar Warehouse Line of Credit; correspondent loans that aren’t funded by a Flagstar Wholesale Line are exempt. United Guaranty will be updating its Performance Premium pricing, the changes of which will affect all MI applications and rate quote requests received on or after August 20th.  The updated pricing will primarily affect rates for self-employed borrowers, loans with DTI ratios of 37% and over, third-party originations, rate/term refinances, and borrowers with FICO scores of 640-700.   The Geographic Quality Index will be updated for August 20th as well. GMAC has announced that LPMI Conforming 5/1, 7/1, and 10/1 LIBOR ARM products now permit assumptions and may be assumed by a qualified borrower after the initial fixed-rate period. 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 CFPB’s servicing proposals, for better or worse. 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.)