If this plan requires Congressional approval, it will probably have a very low likelihood of succeeding in 2012.

And investors wonder if this plan impacts mortgages securitized in the agency MBS market (FN/FH/GN MBS), mortgages securitized in the non-agency MBS market, or mortgages on bank balance sheets in unsecuritized form.

Changes to help underwater borrowers refinance that could be made without Congressional approval, however, such as further easing of recently revamped HARP refis, further streamlining, eliminating LLPA’s, or further reducing buyback risk were seen as having a better chance.

Not that what anyone says in the mortgage industry matters anymore in Washington, but the FHFA director is likely to argue against a mass refi program of agency mortgages considering that such a program could actually hurts the retained portfolios of the GSE’s by up to $30-$35 billion.

But what if the government cuts the GSE’s preferred dividend payment to make up for some of it? Still, existing investors won’t be in favor of it.

And what if, in some miracle, the government used some of the $25 billion-or-so in the proposed settlement between the bank and the state AG’s to fund a plan? Stay tuned – maybe the government will just use that money to help fund the temporary payroll tax cut extension a few more months.
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Related:
-Analysts Think Obama’s Refi Plan Is Dead On Arrival: WSJ
-Obama’s State Of Union Housing Proposals
-DO I QUALIFY FOR A HARP UNDERWATER REFI?
-FHFA Head Says Banks Reducing Loan Balances Won’t Work (WSJ) (MortgageNewsDaily)

Could this relative price movement change direction?

Sure. Some broker-dealers believe that a sustained selloff in the rates market that will take the 10-year Treasury to 2.5% or above would be the most likely scenario in which MBS spreads would widen significantly. This is due to a number of factors, including a prediction that, assuming a selloff is caused by improving fundamentals of the US economy, the probability of Fed’s QE 3 involving agency MBS should diminish significantly in a rates backup scenario.

On top of that, IF rates were to see that big of a move, it would mean that volatility has increased – rarely a good thing for MBS’s. And when that happens, “convexity hedging” related selling from servicers and originators would probably lead to a sudden increase in the supply of agency MBS in this scenario, resulting in even more selling.

Lastly, domestic banks have been providing a very strong bid for agency MBS over the past 5-6 months, and in a rates backup scenario, their deposit growth is likely to be lower, meaning that banks would be unlikely to grow their holdings until rates stabilize again. Simple!

A memo written by BofA home loans sales executive Matt Vernon notes that:

While we regret the inconvenience this will cause to some of our customers in the short term, we are making the responsible choice that is in the best interest of our long-term capabilities to provide a predictable customer experience.

The memo was provided to National Mortgage News by a confidential source.

In spite of arguments that this is some of the cleanest product ever to be originated, and profit margins being solid for many in the business, BofA seems to be backing off a bit. They produced just over $22 billion in mortgages during 4Q2011, a 75% decline from 4Q2010.
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Source:
Another Mortgage Shoe Drops At BofA – National Mortgage News
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Related:
Mortgage Banker View: BofA Cuts Off Mortgage Bankers

The National Association of Home Builders (NAHB) concurs with a finding by the Federal Reserve Board (FRB) that excessively tight mortgage lending standards are hampering a housing and economic recovery. ‘The Federal Reserve’s report to Congress confirms what we have been saying for some time: That extraordinarily tight credit conditions are preventing creditworthy borrowers from obtaining home loans and this is harming the housing market and the broader economy,’ said NAHB Chairman Bob Nielsen, a home builder from Reno, Nevada.

Nielsen feels that the lack of credit extends to housing construction loans as well, which is crippling the housing industry and preventing construction of new homes in markets that need and want them.

We all know Nevada, and I was in Reno last week, much of which looks like a ghost town. Of course every foreclosure article one reads lists that state near or at the top of the problem states, and of course there is the little nagging problem of the “shadow inventory” that plagues us.

CoreLogic’s last shadow inventory report noted that the current residential shadow inventory as of October 2011 remained at 1.6 million units, representing a supply of 5 months. This was down from October 2010, when shadow inventory stood at 1.9 million units, or 7-months’ supply, but approximately the same level as reported in July 2011.

But the NAHB was basically responding to comments made by Federal Reserve Board Governor Elizabeth Duke, who noted that tighter underwriting in the lending space is stalling a meaningful housing recovery and impeding overall economic growth.

Duke says creditworthy borrowers are unable to secure mortgages at a time when interest rates are low and falling home prices are doing little to stimulate demand. Duke said:

Some of this tightening is appropriate, as mortgage lending standards were lax, at best, in the years before the peak in house prices. However, the extraordinarily tight standards that currently prevail reflect, in part, new obstacles that inhibit lending even to creditworthy borrowers. These tight standards can take many forms, including stricter underwriting, higher fees and interest rates, more stringent documentation requirements, larger required down payments, stricter appraisal standards, and fewer available mortgage products.

Duke says low or negative equity in homes is another barrier to refinancing, making it impossible for creditworthy borrowers to obtain traditional refinancing.

I think that the world would certainly be an interesting place if builders, politicians, Realtors, and Federal Reserve Board presidents underwrote home loans, serviced their loans, and had their own capital at stake after the loans were approved. Just sayin’…

AOT stands for “assignment of trade.”

An assignment of trade is a tri-party agreement between an Assignor (like a mortgage lender’s lock desk), an Assignee (an investor who the mortgage lender sells to like Wells or GMAC) and a broker/dealer (like Goldman Sachs or Cantor Fitzgerald).

Often a lender will sell a mortgage-backed security (MBS) to a dealer to hedge (protect) its interest rate risk. At some point in the future the dealer is expecting this security to be delivered to it, and the seller is obligated to deliver it unless it buys back the security (“pair it off”).

But a third option exists whereby the lender sends the loans to an assignee like Wells, and assigns the trade to them as well. At that point Wells is obligated to deliver a security to the dealer.

Put another way, after the MBS is sold to the dealer, when the loans are closed and ready to be delivered, the mortgage lender (assignor) sends the files to the investor (assignee) who then delivers the MBS to the broker/dealer, at which time the mortgage lender lock desk has fulfilled its delivery agreement while avoiding pair-off fees.

Avoiding expenses is the name of the game, whether it is the lender not paying the bid/ask spread to the dealer, or not paying the assignee for failing to deliver any loans.

In theory saving these expenses leads to better rate pricing to loan agents and their consumer clients.

To take this a little further, the lender is essentially investing in the servicing strip (sometimes there’s excess servicing too) while the lock desk is executing at TBA prices instead of the lender’s marked-up rate sheet. AOTs are generally more profitable when servicing released premiums are rich, which is not the case at the moment. That is why so many originators are setting up relationships with sub-servicers.

While we’re on Wells, its economic team notes the following on housing:

Most of the economic reports dealing with housing have shown a little more strength recently. New home sales rose, sales of existing homes climbed, and new home construction has also improved lately. Low mortgage rates, an improving job market, and some reported easing in mortgage underwriting standards has raised hopes that the momentum will carry over into 2012. The news has not been universally positive. The latest S&P/Case-Shiller data shows price declines accelerating in October. The 20-city index fell 0.6 percent in October and has tumbled at a 6.4 percent pace over the past three months. Home prices are down 3.4 percent over the past year. Moreover, price declines have been fairly widespread, with 16 of the 20 markets surveyed reporting price declines in October. The sharp drop in home prices over the past three months should raise some caution flags for those expecting dramatic gains in 2012. That said, 2012 will be a better year. We have slightly increased our forecast for the next two years, which marks the first time we have raised our expectations for housing in any significant way in well over a year.

But what’s good for housing isn’t always good for those in the mortgage business. Despite record low mortgage rates, 2011 has seen a surprisingly high level of cash home purchases, according to the real estate research firm Hanley Wood Market Intelligence. Analysts say tight lending standards and a search for yield by investors (NOO purchases) has driven all cash purchases of homes higher. Per the report, 38% of homes purchased in 2011 were bought with all cash, up from 34% in 2010, and double the 19% rate in 2006.

A better housing market would certainly help the housing agencies, as WSJ veteran Holman Jenkins says in his editorial called The Fannie & Freddie Hate Storm:

So where ultimately do Fannie and Freddie rank amid the confluence of ridiculous subsidies, private-sector opportunism and ungovernable global capital flows that contributed to the crisis? Who knows exactly, but the exaggerated ferocity of the debate lately is a reliable Washington hallmark of an argument fading into irrelevancy. The financial crisis isn’t over, and around the world the problem is not housing but governments whose commitments far exceed their resources.

For 2012 fixed-income traders seem focused on the U.S. election and continued bickering, more regulation in the U.S., Europe and its eventual endgame, where U.S. data shows the economy is headed, will the Middle East ever be stable, and what will happen to China. They are pretty much the same things as a year ago.

So where is the economy, and rates, going?

Freddie Mac forecasts that U.S. economic growth would likely climb to 2.5% over 2012, and that mortgage rates would stay at record lows. Frank Nothaft, Freddie’s chief economist said:.

“While the headwinds remain strong going into 2012, there are indications the economy and the housing market are gaining ground, albeit slowly,”

The company said that mortgage rates would stay low, with 4 percent for the 30-year fixed-rate mortgage leading the way recently. Nothaft forecasted that recent modifications to the Home Affordable Refinance Program would increase refinance originations by more than $100 billion over the next year, giving a lift to purchase-money biz but letting single-family originations enter a shortfall over the next year.

Another forecast from from Keefe, Bruyette & Woods, Inc. said:

“We expect 2012 to be a fairly similar year to 2011 for the mortgage market. While we expect a decline in residential mortgage volume (forecast a moderate decline in mortgage origination volume in 2012 to $1.1 trillion from an estimated $1.2 trillion in 2011) as refinance activity tapers off, originations should get support from still low rates and implementation of HARP 2.0. The lower volumes will likely lead to weaker mortgage production margins. Mortgage credit is likely to remain stable although we expect increasing delinquency rates on FHA loans. We expect little mortgage market reform through Congress, but there could be some changes driven by the regulators such as the release of a definition of a Qualified Residential Mortgage (QRM) and the introduction of a GSE risk-sharing pilot program.”

Fannie Mae’s chief economist, however, is warning that the United States has a 40% chance of slipping into a double-dip recession in 2012.

Recently Doug Duncan predicted a 50% chance of a double-dip recession next year, due to persistently high unemployment and the ongoing housing slump. But an uptick in job growth and stronger automotive and retail sales forced Duncan to revise his dour forecast slightly upward. He does not anticipate the housing market to fully rebound before 2015. And he expects to see plenty of contagion from Europe. One of the major problems is the housing market, he says. In past downturns, home sales have led a recovery, but this time around low interest rates have not pulled mortgage lending or consumer sentiment out of the doldrums. Chronically high unemployment over the next decade and weak income growth will continue to expert pressure on housing prices, he says:

“Until employment picks up, you won’t see any improvement in housing.”

Rarely do forecasts come true 100% of the time, however, and there were some from last year that did not.

There was no double-dip recession in 2011, and the year is ending on a positive note with the U.S. economy is growing at an estimated 3.5-4% annualized pace in the fourth quarter.

The European currency union did not come apart in 2011, although it had a few near-death experiences requiring multiple summits. The 11 countries that hitched their wagon to the common currency in 1999 and the 6 that joined subsequently are still together.

About a year ago banking analyst Meredith Whitney’s forecast of a large number of municipal defaults failed to materialize, fortunately, with less than $2 billion going into default according to a report from Bank of America Merrill Lynch. In fact, the U.S. Census Bureau just reported that state and local government tax collections rose 4.1 percent in the third quarter from a year earlier, the eighth consecutive increase.

But disaster is always on the minds of many, and the Federal Reserve issued proposals intended to prevent the collapse of major financial firms. A Fed statement said:

“The proposal would create an integrated set of requirements that seeks to meaningfully reduce the probability of failure of systemically important companies and minimize damage to the financial system and the broader economy in the event such a company fails.”

The Federal Reserve released a draft proposal that outlines a change to the liquidity capital ratio (LCR) tests that are included in the Basel III reforms. It is important to note that the treatment of conventional and Ginnie Mae MBS was only one small part of the Fed’s proposal, titled “Enhanced Prudential Standards and Early Remediation Requirements for Covered Companies.”

Under the Fed’s proposal, Fannie and Freddie securities would be classified as “highly liquid assets,” the same liquidity treatment as Ginnie Maes.

This makes agency MBS more appealing for purposes of attaining liquidity benchmarks. Remember that liquidity capital is not risk-based capital – the 20% risk-based capital weighting for Fannie and Freddie MBS is not going away, which means that the more restrictive capital requirements will remain untouched. For the purposes of risk-weighting, Ginnies are still classified as “Level 1″ assets, while conventional MBS are labeled as “Level 2.”

The risk weighting assigned to any asset is determined by the Basel Committee for Banking Supervision – not the Federal Reserve. And overseas investors buy Ginnie MBS’s for reasons that have little to do with the Basel III capital requirements. For these investors, the liquidity test is far less relevant than the presence of a full US government guarantee – something that is not going to change any time soon. All this is open to comments for the next three months.

One CEO wrote:

“The Basel III regulations show that ultimately I don’t think that the United States banks can say to the world that they don’t have to follow the same rules as everyone else. They can’t say, ‘Hey world, don’t worry about us and residential lending- we know what we are doing.’ The main contention for the Clearing House around Basel III is that it caps tier 1 capital reserves for MSR at about 10% (if my research is correct). This means that a bank like Wells Fargo that has $125 billion in Tier 1 capital would be limited to $12.5 billion in MSR (mortgage servicing rights). Depending on where the MSR is marked (say 4x servicing values, for example, on a Fannie Mae MSR although I think the norm is about 86-100 bps right now), and assuming that the strip is .25%, then the total amount of servicing that Wells Fargo could hold would be somewhere in the neighborhood of $1.25 trillion. This has huge implications. Think about the fire sale of servicing or reduction in production by the larger banks that has to occur between now and 2018 (when Basel III is slated to go into effect). We are already seeing servicing values reflect this uncertainty.”

He continues,

“Does it matter that the large aggregators are going to be reducing their holdings of MSR due to Basel III? Why is this good or bad? It will allow free flow of capital from foreign markets because we are all on the same ‘regulatory path’- something we will need for our recovery. This is also the intention behind Dodd Frank of course. It will allow the aging western civilization to match cash flows that suit their lifestyle with something other than treasuries and still have some relative notion of safety – even as credit widens because the concentrated risk in one institution would be much smaller. More players, in the mortgage lending part of banking, mean more competition. This drives cost to the consumer down and it also reduces systemic risk. The servicing value attributed to MSRs is in direct correlation to what a small aggregator can reasonably put on its books. Basically, if someone is out “buying the market” with higher servicing multiples, due to business a differing business strategy or overhead, then this would keep smaller servicers from being able to acquire the best quality loans at a reasonable price.”

Matt Ostrander, CEO, Parkside Lending responds:

“But if banks need to make higher yields they are invariably going to chase higher risk assets to do so. The markets ‘are what they are’ and they will need to do this – they can’t just inflate margins on commodities- it will only work in the short run. Too much regulation could lengthen the recession. It could stifle growth of our largest banks and this is not good for a large economy like ours- we need supersized banks to handle massive sized projects that we have in the United States- it’s what makes our economy so incredible. Money center banks are important and we need them to stay relatively large.”

“Sales of newly built, single-family homes edged up 1.6% to a seasonally adjusted annual rate of 315,000 units in November – the third consecutive monthly gain in new-home sales and the fastest pace of such activity since April”

and

“The Office of the Comptroller of the Currency (OCC) reported that the number of new foreclosures increased by 21.1% during Q3, as servicers lifted voluntary moratoria implemented in late 2010 and exhausted alternatives to foreclosure for the large inventory of seriously delinquent mortgages working through the loss mitigation process. The increase in new foreclosures and the increase in average time required to complete foreclosures sales has resulted in the number of foreclosures in process increasing to 4.1% of the overall portfolio, or 1,327,077 loans, at the end of the third quarter of 2011″ [more]

It’s worth noting is that the fine print on New Home Sales isn’t as rosy as the headlines looked last week, which you’ll see by going here.

Under the “unintended consequences” banner analysts were quick to point out that, given the increase is scheduled for ten years, Fannie Mae and Freddie Mac are not going away any time soon unless the government comes up with the money elsewhere.

Fannie and Freddie won’t absorb this increase, nor will lenders. It’ll be passed on to borrowers.

The increased g-fee, which makes it difficult for Congress to work on efforts to shut down Fannie and Freddie, based on current rates and a $200,000 loan, will cost the agency borrower about $11 per month.

“These institutions, which have been so costly to Americans and are so necessary to the housing recovery, should not be the piggy bank for future arbitrary tax policy,” head of the Mortgage Bankers Association Dave Stevens said.

Due to their government ownership, investors still view their agency (and FHA/VA) MBS’s as safer investments than those offered by private firms.

The law allows FHFA to phase in the fee over two years.

And there’s more mortgage fees born out of this bill. The bill also will raise the annual insurance premium borrowers pay on FHA loans by one-tenth of a percent.

How about, “most people who buy homes or refinance beginning next year”?

Over the weekend the Senate added a guarantee fee increase for Ginnie Mae mortgage-backed securities to the payroll tax bill, after experiencing heavy lobbying from the MI industry which feared that a 10 basis point g-fee hike for Fannie Mae and Freddie Mac MBS would tilt the market toward FHA loans. The final bill now includes g-fee hikes for all three: Fannie, Freddie and Ginnie.

Things change by the day, but the extension of a payroll tax cut and long-term unemployment benefits, estimated to cost $33 billion, will in part be paid for by an increase in the guarantee/guarantor fee charged by the FHA, Fannie, and Freddie.

But things aren’t quite that simple in Congress, as we’ve all learned.

Rep. Scott Garrett, R-N.J., has legislation that is tied into things somehow that would require the FHFA to establish rules for a privately funded mortgage finance system, repeal the risk-retention rule under the Dodd-Frank Act, move mortgage servicing standards to the FHFA, and prohibits any regulator from requiring servicers to commit principal reductions.

Five proposals have been introduced in both the House and Senate that would assemble a future housing finance system and replace the GSEs at the same time. But as I’ve been telling folks for quite some time, don’t look for any substantive changes for another year, or more.

But can we really afford to have government always frozen until the next election? A while back one reader answered:

Continuing sitting on the sidelines is not spurring activity beyond REO’s, short sales and those that have to move. The economy cannot recover without housing, unemployment cannot recover without hiring, and consumers will not spend until the economy improves. It is a vicious circle. Someone has to make a bold step and that involves banks taking a haircut to their asset value. (How many would shed crocodile tears for institutions that have failed their customer base?) Our politicians and civil servants lack the business acumen to successfully steer us out of this and too many bad decisions were made according to political expediency. Constantly aiming recovery efforts at those under water or likely to foreclose will only be a band aid. We need to boldly go where no politician has gone before and do a blanket refinance of all borrowers who are current. Yes, all those people who WOULD spend the $200 or so dollars they would now have over each month. Yes, it will have consequences but what is the alternative … more wasted billions thrown at situation from the bottom up instead of the top down?