Lenders offering FHA products know that Mortgagee Letter 2010-24 eliminated the unlimited CLTV ratio, and reinstated the requirement that the total of any FHA-insured first mortgage and any subordinate lien may not exceed the applicable FHA loan-to-value and geographical maximum mortgage amount. (Only the FHA-insured first mortgage must be within the FHA maximum mortgage limits.) But lenders may also want to listen in to an FHA "Condo Recertification Industry Call" Q&A session today at 2PM EST. The dial-in number is: 1-877-941-1706 and the confirmation number is: 170410.

 

Yesterday I discussed SRP's, and how it may behoove lenders to contemplate either servicing or subservicing these loans themselves since the market is not "adequately" compensating originators for the value. Obviously pipeline management firms use this in their daily pricing & execution strategy. As only one example, someone from MIAC wrote and said, "We have seen many clients where up to 40% of their originations should be sold servicing retained, looking at the daily best-execution numbers. In many cases, large originators should do MBS's rather than cash desk execution, since selling loans to the cash desk can be up to 30 basis points worse in price - but it's a moving target."

 

It is rumored that one of the Big 4 investors is considering providing a "shelf" for jumbo securities. This is not an offer to purchase the loans, but instead provide mid-size lenders an opportunity to securitize its production - so definitely a step in the right direction. Should a lender wish to originate them, and therefore use this platform, it is rumored that the requirements are somewhat stringent: each lender may need to secure a Rating Agency Originator Review which costs $65,000 a year, each lender will secure a Rating Agency Servicer Review and its cost is independent of the Originator review, and lenders will be required to go through the large investor's internal counter-party risk review - not a slam dunk. But for some, the rewards may be there. Stay tuned...

 

Repurchases and buybacks will be with us for quite some time. Barclays released a study estimating that "repurchase requests related to reps and warranties will cost the bank industry $22bn, with the four largest banks absorbing $12bn, split as follows: $4.9bn at Bank of America, $2.9bn at JPMorgan, $2.6bn at Wells Fargo, and $1.1bn at Citigroup." However, Barclays said, "We believe these amounts are manageable in relation to the $8.3bn of reserves already established by these banks and their $460bn of combined tangible common equity." And companies such as The Prieston Group, Pyramid Quality Assurance, and Fortace are making a market in helping smaller companies (who don't have dedicated buy back-handling staffs) deal with the issues.

 

Fortace, for example, released a set of questions that companies should ask themselves when focusing on the issue. What is the inventory of my company's identified losses? What products, channels and relationships are the primary causes? What future losses can we expect, and what sets of assumptions should we use? What is my "market position" versus each potential adversary? Am I stuck with the loss or do I have recourse to another party? What effective leverage does my counterparty have in terms of rights to pull servicing, pull financing, realize on collateral, or suspend our company's approved status? What are the governing terms of the specific contracts and communications between my company and counterparties? What rights and obligations does each party have on the key issues that will determine loss liability and allocation, including definitions and exceptions on fraud, misrepresentation, indemnity and coverage periods? Do we have access to the information we need on loan performance, servicing, documentation, and past communications? Do we have a process to analyze our company's exposures at the loan and product level? Are we using a comprehensive audit workflow process to make sure we understand either the alleged defect or potential rebuttal on each key issue in the loan file?

 

In the last few years, there has been plenty of blame to go around for the credit crisis - not the least of which is directed at the rating agencies. But they seem to continue on.... http://www.nytimes.com/2010/09/05/business/economy/05gret.html?_r=1&src=busln

 

Last week Flagstar told its clients that, after October 1, it will no longer warehouse loans being sold to Franklin American. In addition, customers with tangible net worth < $500,000 will be able to warehouse Flagstar loans only. The bank also notified clients that it will follow Freddie's guidelines for calculating the maximum mortgage amount. "For all pipeline loans, proceeds for the refinance may be used to pay off the 1st mortgage amount (including only the unpaid principal balance and interest accrued through the date the mortgage being refinanced is paid off), pay actual closing costs, financing costs and prepaids/escrows not to exceed the lesser of 4% of the current unpaid principal balance (UPB) of the Mortgage being refinanced, $5,000 or the actual closing costs and prepaids, any lender credit for closing costs will affect the loan amount calculation. The maximum mortgage amount calculation may not be increased to receive cash back, and borrowers may not receive cash back exceeding $250."

 

Flag also updates its credit report requirements: it must list all inquiries that were made in the previous 120 days. All applicants with credit inquiries are required to complete an Undisclosed Debts Acknowledgement and disclose the nature of all credit inquiries. In addition, "Purchase transactions with subject properties located in Florida with four or more mortgage inquiries on the credit report in the last 90 days are not eligible. Inquiries showing any FNMA or FHLMC credit reseller as the credit inquiry will be deemed to be a mortgage inquiry. Other inquiries that cannot be identified as being for purposes other than mortgage (auto, department store, etc) will also count toward the limit" and "Arizona has been removed as an ineligible state for applicants with four or more mortgage credit inquiries. This change is effective immediately and is effective for both conventional and government loan transactions."

 

Chase Correspondent has posted an update to its FHA Streamline product line guidelines. Last week, effective this upcoming Monday, Chase raised many of its LTV and CLTV levels - mostly by 5-10% - for several agency amortizing fixed and ARM products. (Minimum FICO's for agency products remained at 660.) GMAC updated its FHA product guidelines.

 

CitiMortgage sent out a correction for its "Departing Property" policy due to a further evaluation of Freddie's policy. Starting Monday "On loans where rental income/signed leases from a departure property (one that's being converted into an investment property) are used for loan qualification, the borrower must show a 2-year history of managing other investment property. This applies to all processing types (DU, LP and manual as we sell to both Fannie Mae and Freddie Mac)."

 

U.S. Bank Home Mortgage Wholesale Division, following the recent HUD Mortgagee Letter ML 2010-24, implemented the new CLTV/HCLTV for refi's: "Rate and Term Refinances maximum CLTV / HCLTV 97.75%, Cash out Refinances maximum CLTV / HCLTV 85%, FHA to FHA Streamline Refinance With or Without Appraisal maximum CLTV / HCLTV 125%."

 

Caliber Funding has made changes to its conventional and FHA underwriting guidelines, addressing 2nd home properties with rental income (if rent is included in their taxes, it is an investment property not a 2nd home), HELOC's ("The qualifying monthly payment must be calculated using 1% of the total line amount regardless of the outstanding line amount; including when the HELOC is secured by a property other than the subject property"), and adopting the FHA LTV/CLTV guidelines for R&T refi's at 97.75%.

 

One thing that investors don't want is for a pool of mortgages that they paid a premium for to pay off early. Well, with rates dropping, this is to be expected. Yesterday we learned that 15-yr FNMA prepayment speeds came in faster than expectations. Much of this was from relatively recent production - it would appear that those that could refinance 6 months ago can do it again with lower rates. And going back farther, as one analyst said, "Clearly, the ability to do streamlined refinancing for loans originated before March 2009 is making a significant difference as the lags are shorter for such refinancings."

The Mortgage Bankers Association's application index fell 1.5% last week, with refi's down about 3% and purchases rose over 6%. Mortgage purchase applications for purchase are now down roughly 40% after peaking in late April (given that tax credit deadline rush).

 

Let's sum up the market for Tuesday: stocks sold off and interest rates improved (not always the case!) when we found out that the euro bank stress tests were actually not reliable - they excluded large amounts of sovereign debt holdings. (Stunned silence.) Anyway, Europe is still fragile, default risk is still present, and that led to a flight to Treasury security quality over here. We sold $33 billion of 3-yr Treasury notes at less than .80% - and the demand was decent. The 10-year note rose almost a point dropping the yield to 2.61%, and current coupon mortgages improved by about .5. Investors and Wall Street traders who were around on Friday were happy to have accepted rate locks and bought MBS's on Friday when they were cheap - not so for anyone who locked on a Friday ahead of the holiday weekend.

 

Today we have the Fed's Beige Book at 11AM PST providing economic anecdotes from the various districts in preparation for the next FOMC meeting on September 21. We also have the $21 billion 10-yr note auction. Ahead of that the 10-yr is at 2.63% and mortgages are roughly unchanged after yesterday's multiple-investor price improvements.