THE BASIS POINT

BofA Sued, Dubai Troubles, Tighter Loan Guidelines Coming, Schwab Makes Mortgage Play

An uncle once told me, “I’ve had bad luck with both my wives. The first one left me. And the second one didn’t.” In a story from Reuters, both Deutsche Bank and France’s BNP Paribas SA separately sued Bank of America last Wednesday, “claiming that the largest U.S. bank breached its obligations on a total of more than $1.7 billion of mortgage-related transactions.” Both lawsuits relate to Ocala Funding LLC, a funding vehicle used by Taylor, Bean & Whitaker. TBW used Colonial Bank for warehouse lending, which Bank of America sued in August. Deutsche Bank accused BofA of breach of contract for failing to safeguard more than $1.25 billion of cash and mortgage loans from deals in 2007 and 2008. In the other lawsuit, BNP Paribas Mortgage Corp said BofA refused to pay $480.7 million of principal and interest on secured notes when the sum came due in August. A Bank of America spokesman said the bank had fulfilled its contractual obligations and would defend itself against the allegations in court. “BNP and Deutsche Bank’s effort to hold Bank of America responsible, however, is misguided. We fulfilled our contractual obligations in our limited administrative role with respect to the Ocala facility.”

Dubai Troubles
Dubai, home of the palm tree-shaped island, sail-shaped high-rise hotel, and indoor skiing, is not immune to the credit crisis. Apparently they borrowed quite a bit to finance their world-famous expansion, but on Wednesday the city-state said it would restructure its largest corporate entity, Dubai World and announced a six-month standstill on the company’s debt. Of course this news immediately pushed up the price of insuring against a default and reminded everyone of the collapse in its once-booming real-estate sector late last year. Fortunately it appears that our banks, and the mortgage business, have limited exposure to Dubai’s problems. But the question is whether Dubai World is isolated, or a sign of widespread sovereign debt defaults in emerging markets? One investor said, “I always thought that Dubai was way too flashy anyway, and they’re getting what they deserve – it’s fine unless its problems impact me.”

How Consumers Are Informed About Fannie Mae Guidelines
What does the public see about the mortgage business these days? “Fannie Mae, the giant mortgage finance company that helps shape lending guidelines, plans more crackdowns next month to further tighten lending practices.” Those in the business know that this is the rollout of DU 8.0, “raising of minimum credit score requirements and limiting the amount of overall debt that can be carried related to income.” And get this: in spite of the credit nightmare that we find ourselves in, “There is concern, however, that the mortgage industry may become too restrictive and impede an economic recovery in its attempts to roll back loose lending standards that led to the current crisis,” Washington Post says.

Credit Scores For FHA Borrowers Rising
The week before last it was reported by HUD that credit scores on FHA single-family loans have risen steadily over the past three years with the average score reaching 689 at the end of September, a 10% improvement from a year ago. So far this year 44% of the loans have FICO scores above 680 and only 13% have FICO scores below 620. This compares to 2007, when only 19% of the loans had FICO scores above 680 and 47% of the loans had FICO scores below 620. Steve from Franklin First wrote, “I think this is funny because HUD had nothing to do with this. As you know it was the mortgage industry self-regulating itself using overlays which, by the way, would be much needed positive press for our industry that seems to be ignored. It makes you wonder if HUD “geared” the major banks in this direction due to fact that they could not because it would have been politically incorrect…”

Schwab As Mortgage Lender?
I have a little money with Charles Schwab. I have never thought of them as a player in the mortgage origination business, but maybe they’re trying to change that. I received an e-mail saying

“Schwab Bank’s rates are some of the lowest in the country. Schwab Bank carefully compares its mortgage rates with those of other national lenders on a regular basis, so you can be sure that you’re getting a highly competitive rate. You can view the latest rate comparison at schwab.com/mortgage. Then, if you’d like to see Schwab Bank’s current low rates, please visit schwab.com/mortgagerates. We’ll alert you when mortgage rates drop. If you’d like to receive an email when Schwab Bank mortgage rates fall below a level you preselect, you can sign up for Rate Alerts at schwab.com/mortgagealerts.”

Loan Guideline Roundup
Caliber Funding told clients that they will adjust their FHA and Conventional Conforming Underwriting guidelines. They tweaked terms on properties listed for sale within the previous 6 months (eligible for refi if the subject property is not be currently listed for sale and was taken off the market for at least one day prior to the application date, etc., etc.) For seasoning on cash out deals, “in order to be eligible for a cash out refinance, all borrowers on the new loan must have been on the subject’s title for at least 6 months. The 6 months is measured from the existing loan note date to the date of application for the new loan.” Caliber goes on to address court ordered buy outs, and short sales (if the borrower has previously sold a property on a short sale, and the prior loan was not delinquent, the borrower may be eligible for a new FHA loan if the new loan receives an approve/eligible recommendation through TOTAL Scorecard, CAIVRS reflects no claim, and the subject property is not located in the same geographic area as the sold property…”). For conventional conforming loans, “if the borrower’s current principal residence will be retained as an investment property the rental income may not be used to offset the payment.”

Market/Economy Update
How about interest rates and the market in general? The day prior to Thanksgiving, the results of the 7-year note were very strong coming in at 2.86% with a bid/cover ratio of 2.76. (The YTD bid/cover has averaged 2.53, but had averaged 2.73 since the June 1 change in auction bidding rules.) The indirect bids were 62.5% of the auction. We also had New Home Sales up over 6% in October, much better than the drop that experts had forecast, and inventories shrank to about a 6.7 month supply at the current sales rate. We also had Consumer Spending pick up a little bit, which may give retailers a little hope for the upcoming buying season.

Things were relatively quiet over the weekend, although the Treasury is meeting with the large mortgage servicers today in an effort to push along loan modifications. Many are quick to point out that a few years back, the government was pushing lenders to widen their guidelines to promote home ownership, and now they pushing servicers to be actively keep many of these same borrowers in their houses. Today we have the Chicago Purchasing Manager’s Survey at 9:45 EST. Tomorrow will be Construction Spending and ISM, Wednesday is the Fed’s Beige Book, Thursday Jobless Claims, and then on Friday is all of the unemployment data. The Dubai turmoil has pushed our rates down relative to Wednesday (“flight to quality”), and we find the 10-yr at 3.24% and mortgage securities better than Wednesday but a little worse than Friday. Whole loan pricing will be dependent on the investor, of course.

Daily Humor
John was in the fertilized egg business. He had several hundred young layers (hens), called “pullets”, and ten roosters to fertilize the eggs. He kept records, and any rooster not performing went into the soup pot and was replaced. This took a lot of time, so he bought some tiny bells and attached them to his roosters. Each bell had a different tone, so he could tell from a distance, which rooster was “performing”.
Now, he could sit on the porch and fill out an efficiency report by just listening to the bells.

John’s favorite rooster, old Butch, was a very fine specimen, but this morning he noticed old Butch’s bell hadn’t rung at all! When he went to investigate, he saw the other roosters were busy chasing pullets, bells-a-ringing, but the pullets, hearing the roosters coming, could run for cover.

To John’s amazement, old Butch had his bell in his beak, so it couldn’t ring. He’d sneak up on a pullet, do his job and walk on to the next one. John was so proud of old Butch, he entered him in the Renfrew County Fair and he became an overnight sensation among the judges. The result was the judges not only awarded old Butch the No Bell Piece Prize but they also awarded him the Pulletsurprise as well.
Clearly old Butch was a politician in the making. Who else but a politician could figure out how to win two of the most highly coveted awards on our planet by being the best at sneaking up on the populace and “messing with” them when they weren’t paying attention?