Oct. 6, 2012: Wall Street & underwriting guidelines; are u/w guidelines evolving? investor updates; classic Halloween humor

Oct. 6, 2012: Wall Street & underwriting guidelines; are u/w guidelines evolving? investor updates; classic Halloween humor Rob Chrisman

How fast does a year go? Fast.  It was one year ago yesterday that Steve Jobs died. The world lost a great visionary, but Apple investors, although losing a great leader, and not crying too much. Apple shares are now up roughly 76% since Jobs’ death. Investors know that Apple certainly can endure without him – it certainly helps to have the talent still with the company that he put in place. No one likes being probed. Put that thought aside for a moment, and think of the used car market (relevant since I just sold my 2001 Prius with 179,000 miles on it – I have the receipt for every service performed on the car, which I gave to the buyer.) Buyers of mortgage-backed securities are usually pretty smart folks – can’t they analyze the attributes of the pools they are buying? Or, if they did, were they misled by the seller? That is the question at the crux of a probe of Credit Suisse: federal and state authorities are investigating Credit Suisse AG over mortgage-backed securities packaged and sold by the bank. The Justice Department and the New York Attorney General are among those probing Credit Suisse’s actions. It is the second bank known to be targeted by U.S. authorities probing how banks bundled mortgage loans into securities during the U.S. housing boom. New York Attorney General Eric Schneiderman filed a civil fraud case against JPMorgan Chase & Co on Monday over mortgage-backed securities originated and sold by Bear Stearns. The lawsuit accuses Bear Stearns of a “systematic abandonment of underwriting guidelines” and says that defects among loans sold to investors were largely ignored. Creating and packaging defective loans for sale to investors helped cause the housing bubble and subsequent collapse. Here is the story: http://www.foxbusiness.com/news/2012/10/04/credit-suisse-probed-by-us-over-mortgages-sources/.

Over the past four years, it seems that everyone has been demanding that something be done to “fix Wall Street,” and Dodd-Frank and Occupy Wall Street, it would appear, have not been sufficient.  The Justice Department hasn’t actually convicted any of the high-profile bankers who played a large part in the financial crisis, and data from the IMF suggests that the capital markets are no less vulnerable to crash and fraud than they were in 2008.  Despite aggressive rhetoric from the White House, the Obama Administration has opted to go after institutions rather than individuals.  This method has prompted criticism due to the fact that such settlements don’t involve any actual admission of wrongdoing and the dollar amounts they cost banks are really not all that significant (take, for instance the $25 billion foreclosure abuses settlement with Wells, Ally Financial, Citibank, BofA, and Chase).  There’s also the issue of time, money, and expertise: it’s much more expensive and logistically difficult to go after a plethora of individuals, and in the post-9/11 era, the FBI and Justice Department have been focused mainly on counterterrorism (a whole other can of worms).  In addition, insiders cite pure and simple fear of financial institutions failing if they were indicted and the resulting effects on the already-precarious global markets.

Wall Street often points to lenders offering lax guidelines, or not underwriting loans to published criteria. There is some argument there. But in the halcyon days of pre-2007, it was possible to be given a mortgage loan with little more than a credit score, no verification of income or assets required.  To make a gross understatement, things have changed since then, and many borrowers are having difficulty qualifying for loans due to “hyper-strict” nature of lenders’ underwriting standards. With 30-year mortgage rates at historic lows, some are hopeful that banks might be relaxing those standards, but industry data actually points in the other direction.  The average credit score on new loans closed in August 2012 was 750, nine points higher than August 2011.  When analyzing a sample from Fannie Mae and Freddie Mac, which dominate the conventional loan market, the average score is 763, a point higher than it was a year ago.  For reference, less than 22% of consumers have credit scores over 749.  A sizeable chunk of the population are therefore unlikely to qualify for a mortgage should they want to purchase a home, long touted as part of the American Dream.

Data on down payments reflects a trend towards tighter requirements as well.  Back in 2005, the median down payment percentage for American borrowers was a mere 2%, and 43% of borrowers put down nothing at all.  Compare this to the most recent numbers from Fannie Mae and Freddie Mac borrowers, who on average put down 21% and had clean debt-to-income ratios. The actual time it takes to process a mortgage loan has also increased—the more checks in place, after all, the more time it takes to review them. Underwriters doing 6-8 loans per day have into auditors doing 2-3 files per day.  From August 2011 to August 2012, the average time it took a loan to close from its application date increased from 40 to 49 days.  The time it took to process a refinance increased from 37 to 51 days. Indeed, frustrated would-be buyers are saying, but when will lenders start to loosen their standards?  Eventually, lenders will probably relax a bit about potential regulatory requirements, have fewer fears about expensive “buyback” demands from Fannie Mae and Freddie Mac, and remove some of the fees associated with extra credit risk.  For the time being, however, don’t count on anything.

With that in mind, let’s discuss some recent agency, investor, and lender bulletins. These will give you a flavor for what is going on out there, but it best to read the full bulletin for all the sordid details.

In the wake of the implementation of the new Uniform Appraisal Dataset standards, Fannie Mae has published a UAD resource document to provide users with additional guidance on PDF extraction, updates on financing concessions for comparables, and upcoming edits on the UAD page of its website (https://www.efanniemae.com/sf/lqi/umdp/uad/index.jsp).  The Loan Delivery and upcoming UCDP release notes for October have also been published on www.efanniemae.com, as have the release notes for EarlyCheck 2.1, which will be implemented on November 17th. Wells Fargo Correspondent has announced that an Expanded Approval recommendation of EA-I, EA-II, or EA-III from Desktop Underwriter is now eligible for purchases on DU Refi Plus refinances of a Wells-serviced loan.  This applies to Mandatory Commitments and Best Effort registration, locks, and relocks dated August 20, 2012 and after. Guidance on private transfer fee covenant for non-conforming loans has been expanded such that Wells will no longer accept loans that secure properties encumbered by a covenant requiring payment to an organization that does not directly benefit the property on which it is assessed.  Properties encumbered by fees for mandatory HOAs, master and sub-associations, and nonprofit organizations as defined in the Internal Revenue Code (certain educational, recreational, environmental, and conservation activities or situations where proceeds go towards the property’s maintenance, improvement, and administration), however, are eligible.  This applies to all non-conforming loans regardless of when the covenant was created. Wells has provided additional guidance on bankruptcy and insolvency in situations where the mortgagor was a debtor in a state or federal proceeding where the loan debt was refinanced and then reaffirmed during the proceedings. In order to align with FHA policy, Citibank is discontinued DU and LP as eligible process types for FHA Credit Qualifying Streamline Refinances.  All FHA Streamline refinances are required to be “decisioned” manually as per HUD guidance. Citi has updated guidance on verbal employment verification to state that, in cases where a borrower’s employer will not verbally verify employment, a written verification or verification from a reputable third party will suffice so long as it is obtained within the same time frame. Fifth Third reminded clients that First Payment Letters must contain the seller’s information and that at the time of closing, it doesn’t own the loan, which means that the first payment information cannot be Fifth Third Mortgage Company.  Once the loan has been sold to Fifth Third, the seller is required to complete a RESPA-compliant Good Bye Letter indicating the new servicer of record and forward it to the borrower.  A copy of the First Payment letter should be included in the loan file. All Fifth Third borrowers must be provided with a Good Bye Letter, which is required to include the effective date of transfer; name, date, and phone number of transferor and transferee; dates when the payment is due and when the current servicer will no longer accept payments; any pertinent information regarding the transfer’s impact on the insurance coverage; a statement that assignment, sale, or transfer will not affect the terms of the loan; and HUD model form including information on late fees, rights upon making a “qualified written request,” and the consumer’s right to damages for violations. Fifth Third also reminded clients that the GFE and HUD-1 for VA loans must disclose the VA tax service fee, which ensures compliance with RESPA and reduces potential tolerance cures. Effective for all loan applications received on or after September 17th, Fifth Third is allocating loans to its approved MI partners based on the application’s final two digits.  This ensures that loans are evenly distributed amongst MGIC, Essent, Radian, and Genworth and reduces counterparty risk. As a result of the g-fee increase, all Fannie and Freddie fixed-rate and ARM loans locked by US Bank before September 12th will be subject to additional extension fees if they don’t fund by October 22nd.  Loans with 20-, 25-, and 30-year terms will incur the current lock extension fee plus 50bps, while those with terms of 15 years or less will incur the current fee plus 20 bps. US Bank has clarified guidance to state that FHA-to-FHA refinance transactions will be allowed provided that the loan file meets the FHA’s definition of a Regular Credit Qualifying Refinance with an appraisal.  Registration or locks for FHA Streamline refinances that are not refinances of existing US Bank FHA loans will not be accepted.

Okay, that’s enough for today! A couple was invited to a swanky costume party. Unfortunately, the wife came down with a terrible headache and told her husband to go to the party alone. He being a devoted husband protested, but she argued and said she was going to take some aspirin and go to bed and there was no need for his good time being spoiled by not going. So he took his costume and away he went. The wife, after sleeping soundly for about an hour, awakened without pain and, as it was still early enough, decided to go the party. Since her husband did not know what her costume was, she thought she would have some fun by watching her husband to see how he acted when she was not with him. She joined the party and soon spotted her husband cavorting around on the dance floor, dancing with every nice woman he could, and copping a little touch here and a little kiss there. His wife sidled up to him and being a rather seductive babe herself, he left his current partner high and dry and devoted his time to the new babe that had just arrived. She let him go as far as he wished. (Naturally, since he was her husband!) Finally, he whispered a little proposition in her ear and she agreed. So off they went to one of the cars and had a quickie. Just before unmasking at midnight, she slipped away, went home, put the costume away and got into bed, wondering what kind of explanation he would make for his behavior. She was sitting up reading when he came in, and she asked what kind of a time he had. He said: “Oh, the same old thing. You know I never have a good time when you’re not there.” “Did you dance much?” “You know, I never even danced one dance. When I got there, I met Pete, Bill Browning and some other guys, so we went into the den and played poker all evening. But you’re not going to believe what happened to the guy I lent my costume to….”

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 looming fiscal cliff brought on by Washington DC. 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.)