Subprime Mortgages

Fannie Mae and Freddie Mac have received the green light from their regulator to refinance underwater homeowners with loan-to value ratios as high as 125%. The special refinancing plan that Obama administration officials unveiled in February limited the refinancing option to loans with LTV ratios of 80% to 105%. But the 105% LTV limit would not offer any relief for borrowers who have seen the values of their home erode by 15% to 30%. "The higher LTV refinancings will allow more homeowners to strengthen their finances by taking advantage of lower mortgage rates," Federal Housing Finance Agency director James Lockhart said. Fannie Mae said it would accept delivery of the higher LTV loans starting Sept. 1. A Freddie Mac spokesman said it would start accepting the loans "now." The GSE financing program is only available to borrowers with loans that are owned or guaranteed by Fannie and Freddie. They also have to be current on their mortgage payments. "On the 105%-125% LTV loans, lenders can either sell us the loans for cash or deliver them into an MBS execution to be sold to other investors," a Fannie spokesman said.

The National Association of Mortgage Brokers has elected Jim Pair to be its president for 2009-2010. The announcement came at the trade group's midyear meeting in San Antonio. Mr. Pair, who is from Corpus Christi, Texas, succeeds Marc Savitt, who remains as an officer of the group as immediate past president. The new president-elect is William Howe, Scottsdale, Ariz., who moves up from vice president. The brokerage industry is facing an uphill battle for survival thanks to the credit crisis and the blame placed on third-party originators for poor credit quality. Wholesale production now accounts for about 15% of all fundings compared to 28% three years ago, according to National Mortgage News and the Quarterly Data Report.

The default rate on prime loans backing private-label securities jumped 214 basis points from April to 8.8% in May, according to a report by Five Bridges Advisors Inc. "In dramatic fashion, the performance of prime loans has deteriorated more severely [in May] than either Alt-A or subprime borrowers," the default report says. [Defaults include loans 90 days or more past due, in foreclosure or real estate owned.] The jump in prime defaults partially reflects the lifting of foreclosure moratoriums, as well as the "very tight credit markets for jumbo loans in the United States and the increase in mortgage rates over the last six weeks," according to analysts at Five Bridges, which is based in Bethesda, Md. Prime loans make up 23.5% of all non-agency mortgage loans with Alt-A making up 41% and subprime 35.5%.

House Financial Services Committee chairman Barney Frank, D-Mass., wants his committee to move quickly and pass a bill that creates a new agency to regulate mortgage lending and protect consumers from financial abuse. The chairman said he plans to mark up a consumer finance protection agency bill in July and act on other regulatory reforms proposed by the Obama administration when Congress returns from its August recess. Chairman Frank also indicated that he wants to curb the Comptroller of the Currency's broad powers to pre-empt state banking laws. And he wants to craft a pre-emption provision that would become part of the consumer protection agency bill. "I have spoken to the secretary of the Treasury and initiated conversations with the Comptroller of the Currency, the state attorneys general and state bank supervisors," Rep. Frank said at a committee hearing. The chairman said the pre-emption provision may render a pending Supreme Court case moot. The high court is expected to issue a decision soon in a case where the New York AG was blocked from investigating national banks for possible discriminatory subprime lending practices.

The National Reverse Mortgage Lenders Association has created two ethics advisories, one that deals with expected standards and practices in selling other financial products and the other creates standards for lead generation activities. "Ethical Offers of Other Financial and Insurance Products and Services" discusses ethical practices in which reverse mortgage originators may refer, recommend, originate or sell other financial or insurance products. This guidance includes a framework for implementing the relevant provisions of the Housing and Economic Recovery Act of 2008 requirements for firewalls and safeguards in offering other financial and insurance products. Important points here include the need to act in the client's best interest and the need to provide a bona fide advantage to the client, NRMLA said. The advisory titled "Lead Generation State Licensing Requirements and Ethical Advertising" also outlines the NRMLA Ethics Committee's intention to take action, including reporting to appropriate government authorities and the public naming of entities that are dismissed in accordance with the "NRMLA Code of Ethics and Professional Responsibility." Liz Scholz, the chief operating officer of NRMLA, declared the group "will continue to move in the direction of self-regulating, enforcing and taking action against any unethical activity as the integrity and reputation of our industry depend on this. We urge members and non-members to report any ethical infractions or concerns to NRMLA for further investigation."

A Fitch Solutions/Portsmouth Financial Systems desktop application that offers loan-level analytics for the U.S. structured finance market will start with a focus on subprime, alternative-A and prime credit residential mortgage-backed securities. Michael Megliola, chief executive officer of Portsmouth Financial Systems, Portsmouth, N.H., said the application differs from others offered in the market because it offers "more granular structured finance analytics at the loan, bond and deal level." Users can define the parameters for the analytics in the application, which is called Deal View. These can include, for example, a comparison of prepayment and default rates for arbitrary loan pools, or interactive yield tables on a collection of loans, the companies said. They plan to add more asset classes to the application going forward.

A bank's underwriting on a subprime mortgage was not as strong if it planned to sell the loan to be securitized as opposed to keeping it in portfolio, a study from a professor at the University of Michigan Ross School of Business found. According to Amiyatosh Purnanandam, the more a bank participated in what he termed the "originate-to-distribute" market, the larger its charge-offs and defaults were after 2007. These loans were more likely to default than the ones banks kept and this discrepancy cannot be explained by differences in the geographic location of the property. Therefore, it wasn't just the economic slowdown that caused the subprime mortgage crisis, it was an "incentive problem" because the banks weren't as discerning about the borrower if they planned to sell the loan. "The basic premise is that there was this perverse incentive," said Mr. Purnanandam. "The screening came down, and the banks were willing to lend to folks they otherwise would not have. We find a systematic pattern in that the banks that were originating and selling their mortgages are suffering disproportionately more." Furthermore, banks that relied more on demand deposits for funding were more likely to write better quality loans than those that relied on the financial markets. From a risk management perspective, Mr. Purnanandam said, regulators need to look at how a bank is funded and not just its actions.

The National Association of Mortgage Brokers said the financial reform plan proposed by President Obama is flawed because it attempts to tie mortgage broker compensation to the long-term performance of securitized loans. The proposal shifts the risk of poor underwriting from the mortgage lender to the mortgage broker "without an increase in compensation for that shift," said NAMB president Marc Savitt in a statement. The group said it welcomes transparency and the proposed Consumer Financial Protection Agency would provide that and level the playing field. However, "proposals to standardize mortgage products could have serious consequences for consumers shopping to find the most suitable and cost effective loan," Mr. Savitt said. The Center for Responsible Lending said it supports the creation of CFMA. "The same rules must apply to similar products across all financial institutions. Such consistency is only fair. And we strongly support the position that states must be free to make and enforce laws that are even stronger than those set by the federal agency when they determine that's necessary to protect their own residents," said CRL president Michael Calhoun.

Even though residential loan production fell just 12% in the first quarter (compared to the same period a year ago), the origination of alt-A loans and interest-only loans plummeted, according to survey figures compiled by National Mortgage News. Alt-A fundings, not surprisingly, totaled just over $806 million, a fraction of their former volume. Non-GSE subprime production was non-existent in the quarter, according to the newspaper and its affiliate, the Quarterly Data Report. In 2008 alt-A production totaled $60 billion with IO fundings at $100 billion. Alt-A fundings peaked in 2006 at $612 billion. NMN also found that mortgage bankers originated just $8.8 billion in IO loans during the period, a 72% decline from a year ago. In the current credit environment, before a residential loan can be originated it must meet underwriting guidelines established by Fannie Mae, Freddie Mac, or the Federal Housing Administration.

The National Association of Mortgage Brokers is urging brokers, appraisals and consumers that have concerns about the new GSE appraisal code to register them with their congressmen, Fannie Mae, Freddie Mac and New York Attorney General Andrew Cuomo. The appraisal code that went into effect May 1 is forcing lenders to extend 30-day rate locks to 45 or 60 days because it takes so long to get an appraisal, according to NAMB executive vice president Roy DeLoach. "It is increasing costs for consumers and it is making transactions fall through," Mr. DeLoach said. In addition, appraisers working for appraisal management firms are unfamiliar with local market conditions and they are coming in with "depressed appraisals," he said. So NAMB is giving brokers, appraisers and consumers a channel to contact their congressmen and senators and air their complaints. NAMB has opposed the new code that Fannie, Freddie and their regulator devised under pressure from AG Cuomo. The code is designed to reduce conflicts of interest by prohibiting mortgage brokers and loan officers from selecting or influencing the choice of appraisers.