And the beat goes on. Fannie Mae has reported issuing $42.7 billion in MBS in July, showing an increase of 6.4% from June production. In comparison, Fannie’s kissing cousin, Freddie Mac, is showing a month-to-month decline.
While Fannie does not break out purchases of refinanced loans in its monthly reports, its monthly report shows MBS issuance slowly rising from May, clearly based on the recent surge in refinancing applications. As reported by the Mortgage Bankers Association, by the end of July, refinancing applications hit a 13-month high. Since these applications would then show up in MBS issuances in August and September GSE reports, we can assume that more good news is around the corner as this trend continues for the short term.
And where is this product going? Well, the ice cold grip of the MBS investor may be starting to thaw. MBS, especially those paying higher rates of interest than comparable Treasurys (currently at about 150 basis points over), are being looked at by the MBS investor needing to invest cash and take advantage of the higher yields. Given the cleaner underwriting standards for the underlying product, together with prepayment speeds reportedly being somewhat flat, investors may be willing to put more than a toe in the market pool. And though roughly 25% of all outstanding mortgages are reported to be under water with a national delinquency rate of just under 10%, it appears from industry figures that mortgagors are continuing to pay their loans even though they are under water. This is in spite of the fact that these borrowers may not be able to refinance because they have no equity, or cannot qualify for a modification.
So, it appears that the two porch dogs that people have been liking to kick these days appear to be doing what they are suppose to do. Which is to watch out for the old homestead.
Tuesday, August 31, 2010
Wednesday, August 25, 2010
JUST WHAT WE NEED – AN FDIC FOR THE ASSET-BACK WORLD
From an article published Monday by Donna Borak for the American Banker, there appears to be a soon to-be-published paper written by two Federal Reserve Board economists — Wayne Passmore and Diana Hancock - proposing the establishment of an FDIC-like entity to explicitly price an insurance fund created to cover catastrophic risks on a wide range of asset classes, including mortgages, credit cards and auto loans. As reported by Ms. Borak, these economists believe that this explicit form of “backstop” could ensure the stability of the system in future financial crises and help eliminate the concept of "too big to fail" institutions. This seems to follow the discussions reported from the Treasury Department conference last week, where there appears to be some discussion of the creation of an insurance fund for MBS.
The paper envisions a GSE agency (a re-jiggered Fannie, Freddie, or a combination of the two) taking on the responsibility for running the insurance fund. This newly designed GSE, however, could not sell its own unsecured debt or build a mortgage portfolio. Rather, it would just collect the guarantee fee. But rather than using those fees for profit, as they have in the past, this GSE would simply build up a fund, like the Deposit Insurance Fund, to absorb losses in a crisis.
It appears that the proposal would get rid of the implicit guarantee of the Federal Government since the GSEs would no longer be able to sell debt or hold portfolios. Instead, the guarantee would be explicit for specified asset types that the government could define. By doing so, the proposal believes that these GSEs could restrict the guarantee to relatively safe loans with certain underwriting standards.
Where to start? While it is a valiant effort to put the GSE into the role of the private asset backed insurers, wasn’t the whole point of Fannie and Freddie to have the implicit guarantee of the U.S. government to allow for better pricing on the more risky loans. And so this proposal just pulls this business out of the private sector – for cost efficiencies?? Because the government can do a better job of this than the private sector?
And how do you structure the “club” function of the FDIC for the ABS world – the infamous “bank take-over” function that the FDIC has been using in record application for the last two years. To take over the securitization structure? From the Trustee (who structurally is brain dead already and has no real functional responsibilities)? From the servicer? Because this new agency will be better positioned to service multi-billion dollar pools? That is what Fannie and Freddie are trying to manage in the current melt-down. The FDIC has the ability to take on a failed bank to manage the turn-around and protect its insurance fund - which it has been doing pretty successfully, given the size of the financial crisis it has been managing to date.
I guess we will have to wait and see the full read of this mystery paper to better understand what is being proposed and how it may help avoid the next asset-back melt-down.
To read the full article by Ms. Borak, see:
http://www.americanbanker.com/issues/175_161/backstop-for-abs-markets-1024428-1.html
The paper envisions a GSE agency (a re-jiggered Fannie, Freddie, or a combination of the two) taking on the responsibility for running the insurance fund. This newly designed GSE, however, could not sell its own unsecured debt or build a mortgage portfolio. Rather, it would just collect the guarantee fee. But rather than using those fees for profit, as they have in the past, this GSE would simply build up a fund, like the Deposit Insurance Fund, to absorb losses in a crisis.
It appears that the proposal would get rid of the implicit guarantee of the Federal Government since the GSEs would no longer be able to sell debt or hold portfolios. Instead, the guarantee would be explicit for specified asset types that the government could define. By doing so, the proposal believes that these GSEs could restrict the guarantee to relatively safe loans with certain underwriting standards.
Where to start? While it is a valiant effort to put the GSE into the role of the private asset backed insurers, wasn’t the whole point of Fannie and Freddie to have the implicit guarantee of the U.S. government to allow for better pricing on the more risky loans. And so this proposal just pulls this business out of the private sector – for cost efficiencies?? Because the government can do a better job of this than the private sector?
And how do you structure the “club” function of the FDIC for the ABS world – the infamous “bank take-over” function that the FDIC has been using in record application for the last two years. To take over the securitization structure? From the Trustee (who structurally is brain dead already and has no real functional responsibilities)? From the servicer? Because this new agency will be better positioned to service multi-billion dollar pools? That is what Fannie and Freddie are trying to manage in the current melt-down. The FDIC has the ability to take on a failed bank to manage the turn-around and protect its insurance fund - which it has been doing pretty successfully, given the size of the financial crisis it has been managing to date.
I guess we will have to wait and see the full read of this mystery paper to better understand what is being proposed and how it may help avoid the next asset-back melt-down.
To read the full article by Ms. Borak, see:
http://www.americanbanker.com/issues/175_161/backstop-for-abs-markets-1024428-1.html
Wednesday, August 18, 2010
YIELD SPREAD PREMIUM – GONE BUT NOT FORGOTTEN
YIELD SPREAD PREMIUM: YSP, that little understood compensation provision that provided the ultimate incentive to mortgage brokers to put consumers into higher priced mortgage loans. Brokers argued that it was frequently done for the borrower, especially a low-income buyer, to pay a higher interest rate in exchange for lower closing costs (needing less cash to closing). Did we really need more gas on the fire??
NOT A PREDATORY LENDING PRACTICE: The California Court of Appeals found that the payment of YSP was not a predatory lending practice in Wolski vs. Fremont Investment & Loan (where I was Deputy General Counsel). In its determination, the court found that a covered loan under the California Covered Loan Law had to have total points and fees payable by the consumer at or before closing in exceed 6 percent of the total loan amount. The court explained that Yield Spread Premium (i) was a bonus paid by a lender to a broker for delivering a loan with an interest higher than minimum otherwise approved by the lender, and (ii) that the payment was not made at or before the closing. The appellate court reasoned that the meaning of the phrase "at or before closing" was unambiguous and "does not include payments made after closing and over the life of the loan, such as interest." So, the court reasoned that the added interest over the life of the loan to be paid by the borrower to the lender was to be used by the lender to pay the mortgage broker a bonus at the time of the closing of the loan.
THE NEW RULE: Now, the Federal Reserve has stepped in to end this practice as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) by adopting new rules banning yield spread premiums. Provisions of the Reform Act amend the Truth in Lending Act (“TILA”) by imposing restrictions on loan originator compensation and on steering by loan originators. The final rules issued by the Fed on Monday prohibit payments to loan originators, which includes mortgage brokers and loan officers, based on the terms or conditions of the transaction other than the amount of credit extended. The final rules further prohibit any person other than the consumer from paying compensation to a loan originator in a transaction where the consumer pays the loan originator directly. The finalized rules also prohibit loan originators from steering consumers to consummate a loan not in their interest based on the fact that the loan originator will receive greater compensation for such loan.
START DATE: The final rules apply to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 1, 2011. This allows for a bit of continuation of the YSP practice as the economy works through this “refi” bubble now going on. There is also a record retention requirement of two years for all mortgage transactions consummated following the April 2011 start date.
WHO IS COVERED: The final rule applies to loan originators, which are defined to include mortgage brokers, including mortgage broker companies that close loans in their own names in table-funded transactions, and employees of creditors that originate loans (e.g., loan officers). Therefore, only parties who arrange, negotiate, or obtain an extension of mortgage credit for a consumer in return for compensation or other monetary gain are covered by the new rules. Creditors are excluded from the definition of a loan originator when they do not use table funding, whether they are a depository institution or a non-depository mortgage company. However, employees of such entities are loan originators.
As a little caveat, the final rule only applies to extensions of consumer credit and does not cover servicer modifications on an existing loans on behalf of the current owner of the loan. This final rule does not apply if a modification of an existing obligation’s terms does not constitute a refinancing. A question though outstanding is, while HAMP may not be covered, is HARP covered by these new rules?
THE KEY PROVISION OF THE ANTI-STEERING RULE:
(e) . . .
(3) . . .
(i) The loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business and, for each type of transaction in which the consumer expressed an interest, must present the consumer with loan options that include:
(A) The loan with the lowest interest rate;
(B) The loan with the lowest interest rate without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation; and
(C) The loan with the lowest total dollar amount for origination points or fees and discount points.
(ii) The loan originator must have a good faith belief that the options presented to the consumer pursuant to paragraph (e)(3)(i) of this section are loans for which the consumer likely qualifies.
THE FUTURE: There are still some holes in the Reg. Z that need to be patched, as acknowledged by the Fed. One of the more significant is the ability of brokers to be compensated based upon volume. Naturally, this could lead to the “flight to quantity over quality” that was seen in the past. Also, since the allowable compensation will be based upon the amount of credit extended, given the underwater equity positions, if and when underwriting requirements start to loosen, returning to a 125 LTV product (or its successor) may challenge the new rules once again. And while “tier compensation” has been addressed in the new rules, under the final rule, a consumer may finance upfront costs, such as third-party settlement costs, by increasing or “buying up” the interest rate regardless of whether the consumer pays the loan originator directly or the creditor pays the loan originator’s compensation. Thus, the final rule does not prohibit creditors or loan originators from using the interest rate to cover upfront closing costs, as long as any creditor-paid compensation retained by the originator does not vary based on the transaction’s terms or conditions. This could also lead to abuses.
So, in the end, the Fed has created another level of regulatory hoops in the mortgage business. And like with all of these new regulations, it is going to be the enforcement that will actually bring about change. So, will Congress let this dog to hunt by giving government enforcement teeth? Or will it just turn out to be posturing for another four years of administrative quagmire?
NOT A PREDATORY LENDING PRACTICE: The California Court of Appeals found that the payment of YSP was not a predatory lending practice in Wolski vs. Fremont Investment & Loan (where I was Deputy General Counsel). In its determination, the court found that a covered loan under the California Covered Loan Law had to have total points and fees payable by the consumer at or before closing in exceed 6 percent of the total loan amount. The court explained that Yield Spread Premium (i) was a bonus paid by a lender to a broker for delivering a loan with an interest higher than minimum otherwise approved by the lender, and (ii) that the payment was not made at or before the closing. The appellate court reasoned that the meaning of the phrase "at or before closing" was unambiguous and "does not include payments made after closing and over the life of the loan, such as interest." So, the court reasoned that the added interest over the life of the loan to be paid by the borrower to the lender was to be used by the lender to pay the mortgage broker a bonus at the time of the closing of the loan.
THE NEW RULE: Now, the Federal Reserve has stepped in to end this practice as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) by adopting new rules banning yield spread premiums. Provisions of the Reform Act amend the Truth in Lending Act (“TILA”) by imposing restrictions on loan originator compensation and on steering by loan originators. The final rules issued by the Fed on Monday prohibit payments to loan originators, which includes mortgage brokers and loan officers, based on the terms or conditions of the transaction other than the amount of credit extended. The final rules further prohibit any person other than the consumer from paying compensation to a loan originator in a transaction where the consumer pays the loan originator directly. The finalized rules also prohibit loan originators from steering consumers to consummate a loan not in their interest based on the fact that the loan originator will receive greater compensation for such loan.
START DATE: The final rules apply to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 1, 2011. This allows for a bit of continuation of the YSP practice as the economy works through this “refi” bubble now going on. There is also a record retention requirement of two years for all mortgage transactions consummated following the April 2011 start date.
WHO IS COVERED: The final rule applies to loan originators, which are defined to include mortgage brokers, including mortgage broker companies that close loans in their own names in table-funded transactions, and employees of creditors that originate loans (e.g., loan officers). Therefore, only parties who arrange, negotiate, or obtain an extension of mortgage credit for a consumer in return for compensation or other monetary gain are covered by the new rules. Creditors are excluded from the definition of a loan originator when they do not use table funding, whether they are a depository institution or a non-depository mortgage company. However, employees of such entities are loan originators.
As a little caveat, the final rule only applies to extensions of consumer credit and does not cover servicer modifications on an existing loans on behalf of the current owner of the loan. This final rule does not apply if a modification of an existing obligation’s terms does not constitute a refinancing. A question though outstanding is, while HAMP may not be covered, is HARP covered by these new rules?
THE KEY PROVISION OF THE ANTI-STEERING RULE:
(e) . . .
(3) . . .
(i) The loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business and, for each type of transaction in which the consumer expressed an interest, must present the consumer with loan options that include:
(A) The loan with the lowest interest rate;
(B) The loan with the lowest interest rate without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation; and
(C) The loan with the lowest total dollar amount for origination points or fees and discount points.
(ii) The loan originator must have a good faith belief that the options presented to the consumer pursuant to paragraph (e)(3)(i) of this section are loans for which the consumer likely qualifies.
THE FUTURE: There are still some holes in the Reg. Z that need to be patched, as acknowledged by the Fed. One of the more significant is the ability of brokers to be compensated based upon volume. Naturally, this could lead to the “flight to quantity over quality” that was seen in the past. Also, since the allowable compensation will be based upon the amount of credit extended, given the underwater equity positions, if and when underwriting requirements start to loosen, returning to a 125 LTV product (or its successor) may challenge the new rules once again. And while “tier compensation” has been addressed in the new rules, under the final rule, a consumer may finance upfront costs, such as third-party settlement costs, by increasing or “buying up” the interest rate regardless of whether the consumer pays the loan originator directly or the creditor pays the loan originator’s compensation. Thus, the final rule does not prohibit creditors or loan originators from using the interest rate to cover upfront closing costs, as long as any creditor-paid compensation retained by the originator does not vary based on the transaction’s terms or conditions. This could also lead to abuses.
So, in the end, the Fed has created another level of regulatory hoops in the mortgage business. And like with all of these new regulations, it is going to be the enforcement that will actually bring about change. So, will Congress let this dog to hunt by giving government enforcement teeth? Or will it just turn out to be posturing for another four years of administrative quagmire?
Wednesday, August 11, 2010
FANNIE’S “DEED FOR LEASE™” PROGRAM - THE RIGHT STEP IN THE RIGHT DIRECTION
One of the lesser known programs in the Fannie Mae arsenal of borrower help programs is the Deed for Lease™ program initially announced in November 2009. The program allows borrowers facing foreclosure and eviction to stay in their homes while providing continuing cash flow on the asset after it is returned to the investor.
The program was designed for borrowers who do not qualify for or have not been able to sustain other loan-workout solutions, such as a modification. Under the Deed for Lease™, borrowers transfer their property to the lender by completing a deed in lieu of foreclosure, and then lease back the house at current market rate. To participate in the program, borrowers must live in the home as their primary residence and must be released from any subordinate liens on the property. As part of the program, borrowers must be able to document that the new market rental rate is no more than 31% of their gross income. Leases under the program may be up to 12 months, with the possibility of term renewal or month-to-month extensions after that period. As with Fannie’s program for tenant occupied properties that are foreclosed, the Deed for Lease™ property that is subsequently sold includes an assignment of the lease to the buyer.
This appears to be a true “win-win” situation for all involved, including the servicer and the investor. First and foremost, it keeps the borrower/tenant in the home. The displacement factor has never been properly addressed in those situations where a permanent modification or refinancing (HAMP or HARP) are not involved. HALA, and the new Fannie Mae’s version that goes into effect August 1, at best provides a “cash for keys” provision in certain circumstances. That sometimes leads to the “missing toilets and countertop” syndrome as borrowers leave the property.
Next, unlike the HAMP or HARP, the servicer no longer has to worry about advancing on the mortgage loan. Since the start of HAMP, there has always been an issue of borrowers who initially qualify for the modification and then fall back into default. Since the servicer is required in most cases to advance on the mortgage, a modification and then subsequent default would put the servicer back (technically) in the position of having to advance again. Since the loan has been discharged as part of the deed in lieu, servicers are not required to continue to advance. Therefore, the cash flow of the servicer improves. Now, it is just a matter of the servicer selling the property, which came at the reduced cost as compared to foreclosure. And since it can be marketed as an investment property with a tenant already in place, sales should be easier.
And finally, the investor under this program should be getting some form of current cash flow from the rental income off the property, though probably not as much as the mortgage payment. But then again, the borrower was already in default and the servicer was probably not making any payments on the loan, so the investor was probably getting bubkis anyhow.
On the social side of the issue, it is clear that the significant problem that brought about the entire meltdown of the mortgage (and financial) markets was the concept that not every person that qualified for a mortgage should have been a home-owner. No matter which side of the aisle you sit on, the general consensus has always been that the market drive to put people into homes, especially the sub-prime borrower, was not the best founded concept. By readjusting those people caught, by their own errors or by a frenzied market, into a better situation with a minimal of personal trauma, is a good thing for the market.
So, Fannie Mae’s Deed For Lease™ is a program that, if properly executed by servicers, could bring about a dramatic turn in the continuing problems faced in the market today. Let’s hope they catch on.
The program was designed for borrowers who do not qualify for or have not been able to sustain other loan-workout solutions, such as a modification. Under the Deed for Lease™, borrowers transfer their property to the lender by completing a deed in lieu of foreclosure, and then lease back the house at current market rate. To participate in the program, borrowers must live in the home as their primary residence and must be released from any subordinate liens on the property. As part of the program, borrowers must be able to document that the new market rental rate is no more than 31% of their gross income. Leases under the program may be up to 12 months, with the possibility of term renewal or month-to-month extensions after that period. As with Fannie’s program for tenant occupied properties that are foreclosed, the Deed for Lease™ property that is subsequently sold includes an assignment of the lease to the buyer.
This appears to be a true “win-win” situation for all involved, including the servicer and the investor. First and foremost, it keeps the borrower/tenant in the home. The displacement factor has never been properly addressed in those situations where a permanent modification or refinancing (HAMP or HARP) are not involved. HALA, and the new Fannie Mae’s version that goes into effect August 1, at best provides a “cash for keys” provision in certain circumstances. That sometimes leads to the “missing toilets and countertop” syndrome as borrowers leave the property.
Next, unlike the HAMP or HARP, the servicer no longer has to worry about advancing on the mortgage loan. Since the start of HAMP, there has always been an issue of borrowers who initially qualify for the modification and then fall back into default. Since the servicer is required in most cases to advance on the mortgage, a modification and then subsequent default would put the servicer back (technically) in the position of having to advance again. Since the loan has been discharged as part of the deed in lieu, servicers are not required to continue to advance. Therefore, the cash flow of the servicer improves. Now, it is just a matter of the servicer selling the property, which came at the reduced cost as compared to foreclosure. And since it can be marketed as an investment property with a tenant already in place, sales should be easier.
And finally, the investor under this program should be getting some form of current cash flow from the rental income off the property, though probably not as much as the mortgage payment. But then again, the borrower was already in default and the servicer was probably not making any payments on the loan, so the investor was probably getting bubkis anyhow.
On the social side of the issue, it is clear that the significant problem that brought about the entire meltdown of the mortgage (and financial) markets was the concept that not every person that qualified for a mortgage should have been a home-owner. No matter which side of the aisle you sit on, the general consensus has always been that the market drive to put people into homes, especially the sub-prime borrower, was not the best founded concept. By readjusting those people caught, by their own errors or by a frenzied market, into a better situation with a minimal of personal trauma, is a good thing for the market.
So, Fannie Mae’s Deed For Lease™ is a program that, if properly executed by servicers, could bring about a dramatic turn in the continuing problems faced in the market today. Let’s hope they catch on.
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