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Source:
-MBA Study: The Great Recession & Attitudes Toward Homebuying
-MBA’s Research Institute website

But seriously, the H.8 report released by the Federal Reserve recently showed that domestic bank holdings of agency MBS have increased by $27b over the two week period ending on November 30, which brings the YTD growth in bank holdings of MBS to $148b, a significant pickup since the August announcement from the Fed that it is likely to keep overnight Fed Funds near 0% through mid-2013. Add to this volume the recent monthly purchases of around $25b agency MBS by the Fed and it is easy to see why mortgage rates are doing well: supply and demand.

And as for different facet of the relationship between banks and mortgage backed securities, where does the discussion over QRM (Qualified Residential Mortgage) stand?

First, a reminder of what QRM even means…

Under Finreg, banks must retain some risk when selling mortgage loans. These risk retention rules require banks to keep 5% or more of mortgages they sell so they have skin in the game. Earlier this year, regulators started defining which loans constitute “Qualified Residential Mortgages” (QRMs) that are exempt from these risk retention rules.

Since then, the debate is mired in a sea of government agencies. But recently the MBA created a stir by saying the proposed QRM rule may be “fatally flawed.” (The last time I heard that term was from a long-time-ago girlfriend describing our relationship, but that’s another story.)

In written testimony prepared for delivery before a House Financial Services subcommittee, MBA President and CEO David Stevens said that although it is still premature to call for repealing the QRM, “that day may not be far away. Regrettably, the proposed rule, with its QRM definition and creation of a premium capture cash reserve account, is so deeply flawed that we seriously question whether it reflects congressional intent or can ever be successfully implemented,” Stevens wrote ahead of the hearing. The committee is holding the hearing to assess the Private Mortgage Market Investment Act authored by Rep. Scott Garrett, R-N.J. The bill calls for abolishing Dodd-Frank’s risk-retention provisions, among other reforms for the secondary mortgage market.
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Further Reference:
-FT: Banks face €350bn Basel III shortfall
-Banks Must Have Skin In The Game When Selling Mortgages

Challenger Job-Cut Report
-Announced layoffs for October were 42,759.
-Down sharply from the previous month’s 115,730 which saw a large number of jobs lost in the U.S. Army.
-Together ADP and Challenger paint a picture of modest jobs growth insufficient to match population growth.

Mortgage Applications
-MBA Purchase Index, Week/Week +1.8%
-Refinance Index, Week/Week -0.2 %
-Composite Index, Week/Week +0.2 %

FOMC
The two day meeting ends today with an announcement. I would guess that it will say 3Q2011 GDP was nice but we should be vigilant going forward and will hold off on any expansion of money supply (QE) if GDP growth remains where it was in 3rd Q. Be assured that the Fed is ready to take all steps necessary to blah, blah, blah

“I was at the MBA conference, and I loved it b/c it was fascinating to see the different perspectives you get from Mortgage Bankers versus those you get from the Realtors or Mortgage Brokers (the people who frequent the conferences I usually attend).

I very much enjoyed the panel discussions because the information was not stale to me.

Here is my biggest take-away: The current crop of seasoned managers and owners has been out of the trenches too long to see what is really going on in today’s lending environment.

And this results in two big flaws in judgment/assessment.

(1) They are too “accepting” of new regulatory constraints. Too many seem to embrace or grudgingly accept the new rules either already here or coming our way, no matter how destructive or irrational. HVCC guidelines, comp rules, and disclosure requirements are often ridiculous, costly and harmful for the consumer because they cause us to lose locks and/or preclude us from crediting fees. But, unless one is “in the trenches,” this is often not fully absorbed. Everyone should be “fighting mad”.

And (2) loan officers and most industry professionals “of yore” are simply too “dumb” (for lack of a better word) to close loans in today’s environment. We let all of our less than brilliant people go years ago, and we now only hire college grads with 3.5 GPAs or better. We test them before we hire them too. And we are rolling. A company can market and originate all it wants, but more business is worthless if nobody is capable of closing the many the tough deals that surface today. The ONLY firm I saw at the conference that was aware of the above facts was Academy Mortgage. Others are so far behind the curve it was shocking.”

There is a big difference between hallway chatter and Bloomberg headlines like “MetLife May Sell Mortgage Business.” Here’s the gist:

Chief Executive Officer Steven Kandarian, who took the job in May, is planning to exit a business that expanded in June when it replaced Bank of America Corp. as the preferred lender of builder KB Home…Keeping the mortgage unit could divert “resources away from MetLife’s primary focus on its global insurance and employee benefits businesses,” the New York-based company said in a statement. The company, the largest U.S. life insurer, plans to keep a so-called reverse-mortgage business that issues home equity-backed loans to people age 62 or older and jumped to No. 2 in the U.S. this year…MetLife will continue to originate mortgages as it seeks a buyer for the business, it said. MetLife Bank made about $4.4 billion of residential home loans in the first quarter of 2011, accounting for 1.5 percent of total mortgage originations…Today’s uncertain marketplace and regulatory environment require a tremendous amount of resources.

Given the investor scuttlebutt from the conference and general rumors, possible half-truths, and outright misstatements, here are some key points:

-MetLife is/was a solid competitor for wholesale broker business in many parts of the nation – maybe someone like Fortress will buy the mortgage group.

-Bank of America will soon be strictly retail, and only in some states.

-Chase does not buy third-party originated production, i.e., broker business, from clients.

-GMAC, PHH, and SunTrust have varying degrees of operational hurdles, and only buy loans on a mandatory basis one at a time or not at all, and have varying degrees of tolerance for buying loans from smaller companies offering correspondent relationships. Are they ready for all this volume?

Looking at the top correspondents, volume-wise, so we have Wells Fargo, which is grappling with purchase turn time days into the teens, CitiMortgage, U.S. Bank, Flagstar, Franklin American, and BB&T. Rumors of higher capital requirements for correspondent sellers are rampant. Too much competition is one thing, but does the industry really need fewer players? Besides making things easier for pricing engines, will the borrower be better off?

Let’s ask the protesters about unintended consequences.

Any here’s a conference recap from one top industry executive:

“Recap of 4 days in Chicago: ‘All investors suck because of repurchases and all AMCs suck because they overpromise and under deliver. But isn’t Chicago a great place to have this conference?’” So wrote an attendee to me yesterday. But a fair amount of news came out of it, one piece being that, “Fannie Mae and Freddie Mac are increasingly demanding sellers repurchase mortgages that default years after they were made and buy back recent loans that aren’t even delinquent, according to PHH.” “They’re casting the net wider,” Luke Hayden, head of PHH’s mortgage unit.

Meanwhile the MBA is among the industry groups calling on Congress to do no harm to the fragile housing market. It is closely watching the deficit-reduction super committee, which has targeted homeownership tax breaks such as the mortgage interest deduction and the capital gains exemption, Bloomberg reports. Moreover, the MBA continues to oppose efforts by regulators to impose minimum standards for mortgage borrowers, such as a 20% down payment, out of concern that such a move would not lower default rates but would prevent many home buyers from obtaining loans.

Mortgage Prepayment Stats
Mortgage prepayment speeds came out last week, and they showed a big increase. Every loan officer across the nation can tell you why: the reduction of conforming loan limits starting October 1. September was the last month where some of these high loan size borrowers, whose loans would no longer be considered conforming, could have refinanced back into an agency loan. I am sure that low rates figure in somewhere, but rates have been pretty good for quite some time. And new borrowers seem to be the only ones who can have their loans approved under recent guideline changes, so the newer loans are the ones reaping the benefits.

Rates are staying low, and many believe will go lower still, given the state of the economy. But as mortgage rates have improved, investors have increasingly become concerned about these jumps in prepayments on lower coupon, recently originated mortgages. However, due to the increase in annual FHA insurance premiums, these concerns have predominantly been restricted to Fannie and Freddie mortgage bonds. But what about prepayments on FHA & VA loans impacting Ginnie Mae securities?

A look at rate sheets show that the FHA rate being offered by originators is now 25-50 basis points lower than the conventional rate. The increase in annual insurance premiums only impacts FHA prepays. Prepayments on non-FHA loans are likely to be faster than speeds at the end of last year. Analysts point out that the impact of the net tangible benefit test fades as the loan seasons, and that in fact the most recent HUD outlook report showed that FHA-to-FHA refinancing applications jumped by 70% and that delinquencies on 2009-2010 vintage Ginnies have been increasing over the last couple of months. All of this adds up to many investors believing that FHA & VA loans will start to prepay at a faster rate. Uh oh.

Here are the FHA floor and ceiling limits. Please note that Conventional (non-FHA) ceiling limits will be the same as these FHA ceilings as of October 1:

FHA floors for October 1, 2011 through December 31, 2011 are:
-$271,050 (1 unit)
-$347,000 (2 units)
-$419,425 (3 units)
-$521,250 (4 units)

The FHA ceilings are:
-$625,500 (1 unit)
-$800,775 (2 units)
-$967,950 (3 units)
-$1,202,925 (4 units)

For all other areas, i.e., those where 115% of the median home price for the area is in between the floor and the ceiling, the limit shall be at 115% of the median home price.

For areas under Section 214 of the National Housing Act (Alaska, Guam, Hawaii and the Virgin Islands), higher ceilings of $938,250, $1,201,150, $1,451,925 and $1,804,375 for 1-, 2-, 3-, and 4-unit dwellings, respectively, apply.

The same FHA ceilings noted above would go for non-FHA conventional mortgages unless Congress pulls a rabbit out of its hat.

Mortgage Industry Volume
Even with the chatter about lower loan limits affecting overall loan production, industry projections have risen as rates have dropped.

The Mortgage Bankers Association raised its forecast for loan production this year to $1.1 trillion in residential mortgage origination, up $100 billion from its last forecast. Low mortgage rates have brought in higher than expected refinance volume, while purchase volume has been less than anticipated. But put those pennies aside: despite lower rates, weaker projected economic growth in 2012 led to a reduction in MBA’s origination forecast for that year to $931 billion, which would be the lowest volume originated since 1997.

MBA Mortgage Applications
-Purchase Index Week/Week: -9.1%
-Refinance Index – Week/Week: 8.0%
-Composite Index – Week/Week: 4.1%
-Refinancing is up because rates are down but the Purchase Index indicates the fact that the housing sector remains quite ill. Blame hard times and tougher qualification standards.

Yesterday’s FOMC statement that interest rates would remain low for the next two years was a reaction to the horrible GDP report of July 29. Lest than one month before this report, Bernanke had described the 1Q2011 “final” GDP increase of 1.92% as “relatively slow.” On 7/29, 81% of what was relatively slow growth simply disappeared. There are two questions to be asked 1) just how bad is GDP? and 2) why does anyone believe BEA (the government entity which produces the GDP report) when they are making such large changes to data already termed “final.” What would the media and politicians say about a CFO who, one month after his company’s quarterly P&L was issued, announced that earnings were really 81% less? The fact is that monetary and fiscal policy are being based on very inaccurate data produced by a government agency. This should be of concern.

Wholesale Inventories
-Growth in wholesale inventories slowed to +0.6% last month.
-This is from producers getting too far ahead of consumers.

Challenger Job-Cut Report
-This is a report of announced jobs cuts by large companies
-Announced Layoffs (July) were 66,414
-Previous month was 41,432.
-As graph shows, this is a leading indicator of Jobless Claims and a bad story for jobs recovery

MBA Mortgage Applications
-Purchase Index Week/Week: 5.1%
-Refinance Index Week/Week: 7.8%
-Composite Index Week/Week: 7.1%
-All of these are reversals from last weeks downward changes.
-Refis picked up because rates are down.

Factory Orders (June data)
-Factory Orders Month/Month: -0.8 %
-Previous was +0.8%
-This is continued effect of supply side getting ahead of consumer.
-There is also a story here about how bad data from BEA about GDP gives poor guidance to everyone.

ISM Non-Manufacturing Index
Composite Index for July was 52.7 down from 53.3. Same story as Factory Orders: slowing growth. This ISM report measures services sectors of the economy. The behind the scenes story of the economy is simple. Government and business have done much to stimulate the economy but the consumer is not on board.