Sep. 14, 2012: Readers’ insightful reactions to Fed move; House passes FHA measure; new warehouse lender or…

Sep. 14, 2012: Readers’ insightful reactions to Fed move; House passes FHA measure; new warehouse lender or… Rob Chrisman

This is kind of exciting… or is it? Fortis, a large Belgian bank, offering a new warehouse line? Or is it another ewarehouseOne type company? CFO’s, searching for fresh warehouse talent in April, remember the mysterious ewarehouseOne, with its lack of address, contacts, follow through, but with a hefty application fee. We now have the Fortis Warehouse company. Sources say that there is no street address, and although the phone number is from North Miami Beach the firm does not seem to be registered with the Florida Division of Corporations. And the process of e-mailing in your application package (rather than regular mail) and requesting the application fee upfront sounds eerily similar. Here is the site: http://fortiswarehouseline.com/index.html.

“Can you explain the thinking behind HARP 3 when HARP 2 and HARP 1 didn’t have the desired effect? If our industrialists and entrepreneurs and banks have been awash in cash and cheap money for years yet still won’t invest, what does Bernanke think is so different now?” I don’t know.

“Rob, one part of the government is jacking up gfees, making agency loans .5 more expensive with more in the future, one part of the government, through the CFPB, making things very difficult for lenders of any product, and now we have another part of the government making agency loans 1 point less expensive. I don’t see any coordinated effort with regard to agency loans versus non-agency loans.” “Rob, I don’t care if rates go down to 1%, or near 0 like in Japan. Why? Because until residential lending loosens up somewhat, especially on some of these bizarre and unreasonable underwriting requests, and lenders aren’t terrified of future liabilities and lawsuits, borrowers who didn’t refinance in this last wave aren’t going to be able to do so now. How is the Fed going to deal with that?” I don’t know.

“Are the same borrowers who paid $2-4k in closing costs and underwriting hassles this year going to spend it again to refinance? It can take a year or more to make up the up-front loan costs – are they going to do that? Are there that many borrowers who don’t know rates are low, but can’t refinance because of equity issues, or job & qualification issues?” “Rob, yesterday the FOMC’s announcement caused agency mortgage-backed securities to shoot through the roof – better by one point. Fannie 3’s, which have 3.25-3.625% 30-yr loans, are now above 104. A four point premium! But the 10-yr barely budged, closing at 1.76%. And the investors’ rate sheets certainly didn’t improve by that much. Why not?” That one’s easy. First off, the FOMC did nothing with regard to Treasury securities, and thus no change. We’re seeing “pricing overlays” in the form of profit margins. You know how we have underwriting overlays, when the government will offer some program and accept certain LTV or credit score guidelines, but the major aggregators don’t go along? Well, the MBS market improved dramatically, but the investors did not go along all the way. There are too many capacity issues. Few companies can handle the volume, and would instead rather increase margins than follow the agency mortgage-backed security market higher.

But reaching for the crux of the story, the Federal Reserve announced the initiation of an open-ended round of Quantitative Easing (QE3) and extended the period for which it will keep rates between 0 and 1/4% to mid-2015. “….The Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions…should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” Unlike Quantitative Easing 1 and QE2, no dollar amount or time-limit was placed on the program. The Fed essentially announced it will be purchasing $40 billion in MBS per month until further notice.

It is estimated that QE1 “cost” $1.7 trillion. QE2 was roughly half a trillion, give or take. The new plan isn’t really QE3, because it’s never scheduled to end. “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.”

So overnight rates will be near 0% for three more years. Where’s the unpredictability? The Fed is going to buy about $65-$70 billion agency MBS per month (including pay-down reinvestments, thus the extra amount) going forward. The recent monthly gross issuance of agency MBS is around $140 billion and the net issuance is close to $0 billion. Thus, the Fed will be buying close to 50% of the gross issuance of agency MBS over the next several months. If it takes until late 2013 for the unemployment rate to reach 7.5% consistently, the Fed is likely to continue to grow its agency MBS holdings until the end of 2013. Will the Fed soak up all the agency MBS? The Fed’s holdings should increase by about $650 billion between now and the yearend 2013, which would indicate that domestic money managers (excluding REITs) who own about $1.2 trillion of agency MBS, may reduce their MBS holdings by selling them to the Fed. My head’s spinning…

Over in FHA-land, the House of Representatives, offering a relatively rare display of bipartisanship as the bill was initially introduced in February, passed the Federal Housing Administration (FHA) Fiscal Solvency Act of 2012. “The Fiscal Solvency Act seeks to strengthen and broaden the ability of the U.S. Department of Housing and Urban Development (HUD) to avoid or recoup losses for loans originated or underwritten by a mortgage lender that did not comply with FHA guidelines, as well as expand HUD’s ability to terminate the authority of poorly performing lenders to participate in FHA programs. Among the bill’s provisions are the establishment of a minimum annual premium for mortgage insurance of 0.55% and a required repayment of losses to the FHA by lenders who committed fraud. “We cannot afford another Fannie- and Freddie-style bailout, and mortgage holders don’t need any more market uncertainty driving down their home values.”

But a story from American Banker noted, “For years, critics have claimed that the Federal Housing Administration’s $1 trillion Mutual Mortgage Insurance fund would require a bailout. The fund’s required buffer has fallen well below the mandated level of 2% of the insured portfolio.  While the actual ratio, when last measured in November, stood at 0.24%, what seems remarkable at all is that five years into the collapse of the housing market, the fund did not implode and go the way of Fannie Mae, Freddie Mac and a slew of other well-known but now defunct mortgage portfolio lenders. It turns out that the longevity of the fund’s solvency is due to three events: the sharp decline in FHA’s market presence during the housing boom; FHA’s countercyclical role during the housing crisis and flight of private capital; and higher mortgage insurance premiums in recent years.”

Lenders know that prior to the peak of subprime lending, FHA products made up 10-15% of total originations. During 2005-2007 the agency accounted for less than 4%. In hindsight, that was great news for the FHA since those years have had abnormally high loss rates. (Stats show that 59% of seriously delinquent loans were from the 2005 to 2007 vintages and another 16% were from 2008-2009. Over at the FHA, 47% of the seriously delinquent loans are from 2008-2009, and 9% from 2010 or later. But that was then, and this is now. During the 2008-2010 period FHA’s market share went up to 20%, and more than 40% of the purchase mortgage market.  Today, FHA, the Department of Veterans Affairs, and other government housing programs account for more than 35% of the purchase market, largely due to their insuring of loans with low down payments.

LO’s know that the FHA has taken actions over the last few years to shore up its reserves. American Banker reminds us that it raised premiums as well as tightened underwriting standards in the years following the crisis. “For example, average credit scores of FHA borrowers in recent years have been around 700 or about 50 points higher than in 2007 and 2008.  And the performance of successive books of business has continued to improve, with 2010 better than 2009, 2011 better than 2010, and 2012 already appearing stronger than 2011.” Let’s hope, for many reasons but certainly the MMI’s sake, that home prices are stable or increase!

On quick conference note: Seattle, WA hosts the 35th annual Pacific Northwest Mortgage Lenders Conference next week from September 17th-19th.  The program, sponsored by the Washington Mortgage Lenders Association, will feature panels of lobbyists from the MBA, Chief Credit Officers, home lending executives, Fannie Mae economists, and senior bankers of Northwestern financial institutions in addition to updates on leadership in the CFPB and DFI.  Attendees can also participate in events that showcase two of Seattle’s most famous features, its Space Needle and its seafood, and the forecast calls for sun.  To register or find out more, visit http://pnmlc.com/. I was speaking at a conference yesterday, consisting mostly of secondary marketing managers and CEO’s, when the news broke of the FOMC’s announcement. Needless to say, it was the talk of the town. MBS prices surged higher and tighter to Treasuries – MBS prices rallied a point while the 10-yr sat, closing around 1.75%. The New York Federal Reserve Bank, which runs the MBS purchase program, starts today buying about $2 billion per day. To rehash the numbers mentioned above, if the Fed is buying $2 billion per day, plus about $1.9 billion per day from mortgages paying off early, this is about $4 billion per day for many months. If mortgage bankers can originate about $2 billion per day, overseas owners of MBS, money managers, and the GSE’s will have to kick in. Of course, the Fed could start buying 15-yr securities or non-agency (jumbo?!) loans.

Besides Kraft Foods being replaced by United Health Care this morning on the Dow, and not that anything will move rates like yesterday’s news, but this morning we’ve had the Consumer Price Index news for August. It was expected higher by 0.6% from unchanged previously, and it came in at exactly that. Retail Sales for August, called lower to +0.7% actually came out at +.9%. Later we’ll have husband wife team of Industrial Production and Capacity Utilization, and a preliminary September Consumer Sentiment reading is reported at 9:55 am and expected slightly lower to 74.0 from 74.3 at the end of August, and five minutes later Business Inventories (Jul) are projected at +0.3% from +0.1%. In the early going the 10-yr is up to 1.83% and MBS prices are slightly worse. But we may see some rate sheets catching up somewhat this morning and improving a little. (We’ll see if this has you humming the Queen tune this morning.) The AE walks warily down the street, with iPhone carried way down low Ain’t no sound but the sound of his feet, his iPad ready to go Are you ready, Are you ready for DU Are you hanging on the edge of your seat Out of the Credit team the Underwriter rips To the sound of the defeat Another loan bites the dust Another loan bites the dust And a Purchase is gone, and a Streamline is gone Another loan bites the dust Hey, they’re gonna get you too Another loan bites the dust

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 new CFPB Rule combining TILA & RESPA disclosures. 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.)