Loan Think

I believe that one of the drivers of the subprime crisis is that everyone in the mortgage industry got too complacent. As more and more loans were originator, as home prices kept rising, as automated underwriting systems said what was being produced was OK for sale on the secondary market, various points in the origination cycle that used to ask questions stopped asking those questions.

HUD/RESPA SAYS WE WILL EXERCISE RESTRAINT IN ENFORCING THE NEW RULE FOR THE FIRST 120 DAYS BUT -- AND I DO MEAN BUT--IT IS STILL THE LAW

The big picture: the Dow is at 10,400 which means we need to recover just another 3,600 points and the economic meltdown of 2008 will be just a distant memory, a blip on the financial radar screen, so to speak. Not exactly. Unemployment is still sky high and home prices aren't about to "snap back" any time soon. Think of it this way: the home price appreciation we saw from 2002 to 2007 is something that we might "normally" see over a 20-year period, not a five-year period. That's just my opinion, of course. Meanwhile, we hear that plenty of former mortgage traders and MBS analysts who work on Wall Street are still hunting for jobs. Also, the price of higher-rated subprime MBS tranches have risen to the point that they are no longer considered bargains. And one last note: former NAMB chief Marc Savitt is working on a website that (so, we are told) won't exactly be backing Andrew Cuomo for governor. A former HUD secretary, Mr. Cuomo is the New York state attorney general and the man behind HVCC...

Last week the government released its latest unemployment figures, showing not only a significant (and unexpected) rise in the national rate but a loss of about 2,000 mortgage jobs. You would figure that with refinancings humming along, home sales improving (thanks to the federal tax credit and ultra low rates), and a government emphasis on loan modifications that hiring in different facets of the mortgage industry would be strong. (The job losses were not all lopsided toward the broker segment, though that's a partial explanation.) But I do have a theory about why the mortgage employment figure wasn't better. Some mortgage banking professionals -- either by desire or they were forced to -- are now working for hedge funds, outside vendors, and in real estate, facilitating the sale of foreclosed homes and notes. This shift in jobs is a subtraction from mortgage employment but shows up in other categories like real estate and financial services. Richard Tachine, a mortgage banker in California, recently wrote to me, noting that the toxic mortgage asset market in that state "is one of the fastest growing, job creating businesses around, but it's not for the weak. Well capitalized firms are purchasing giant pools of performing and nonperforming loans." Meanwhile, I continue to hear anecdotal stories that some cash-rich hedge funds are grubstaking nonbank mortgage startups or acting (to some degree) as warehouse financiers...

This certainly was a transitional year for the mortgage industry. There was a lot of new regulation, for one, and there’s more to come. The lenders that have survived are ready to move forward. So, what should be their next step? E-mortgages, of course.

Days of preparation are never wasted. Planning and preparation are two keys to success that you absolutely cannot discount.

Democratic lawmakers want to hold lenders’ and securitizers’ feet to the fire so they won’t originate and sell mortgages that burn consumers and investors.But the mortgage industry fears legislation currently under consideration could stifle a recovery in the private-label securities market, which has been dormant since the credit crisis began.Senate Banking Committee chairman Christopher Dodd, D-Conn., has drafted a bill that would require sellers of mortgage-backed securities to retain 10% of the credit risk."To restore confidence in our markets and encourage investment, we will require companies that sell products such as mortgage-backed securities to keep ‘skin in the game’ so that they won't sell worthless securities to unsuspecting investors," Sen. Dodd said.The 1,100-page bill is designed to revamp regulation of the financial services industry and safely shut down firms that are currently considered "too big to fail."In the securitization section of the bill, the Connecticut senator provides a "total or partial" exemption for government-guaranteed mortgages as well as mortgages purchased and securitized by Fannie Mae and Freddie Mac.The bill carves out government-guaranteed loans and provides flexibility for other exemptions, according to Scott Talbott, the Financial Services Roundtable's top lobbyist.The Securities and Exchange Commission and the federal banking regulators can approve a total or partial risk retention exemption for other MBS and allocate risk retention between securitizers and the lenders.But to issue a private-label MBS, the securitizer would have to make a case for the regulators to reduce the 10% retention requirement."We think 10% is too high as a starting point," Mr. Talbott said. "We think 5% is the right place to start."Independent mortgage bankers also want risk retention reduced to 5%.But Glen Corso, managing director of the Community Mortgage Banking Project, is wary of the exemptions in the Dodd bill.He pointed out that the way securitizers are defined it could "rope in" Ginnie Mae issuers and make them subject to risk retention."We are not 100% convinced that the way it is worded the exemptions will be effective," Mr. Corso said.Back in May, the House of Representatives passed a subprime lending bill (H.R. 1728) that requires lenders selling and securitizing subprime mortgages to retain 5% of the credit risk.House Financial Services Committee chairman Barney Frank, D-Mass., drafted the bill and he wants to attach (H.R. 1728) it to a regulatory legislation his committee is working on.But in drafting a regulatory reform bill, Chairman Frank bumped up the risk retention requirement to 10%. He also excluded the exemptions for government-guaranteed loans and other "qualified mortgages" that industry groups liked in H.R. 1728.This week, the Financial Services Committee resumes markup of its regulatory reform bill. Industry groups are supporting an amendment that will reduce the risk retention requirement to 5%."We want 5% to be the ceiling not the floor," Mr. Talbott said.Industry groups also want exemptions added to the bill. "The amendment will try to reinstate the provisions of H.R. 1728 with regard to qualifying mortgages," Mr. Corso said.American Bankers Association executive vice president Bob Davis is concerned 5% or 10% risk retention will restrict the availability of credit.Banks and other leveraged lenders already hold capital and requiring them to hold more has the "potential to choke the system," Mr. Davis said. "My great fear is that the markets won’t operate with a 10% risk retention requirement because it has to be capitalized by leveraged lenders."The ABA executive said there are a lot of other ways to "instill better discipline and more prudence in the underwriting process."He noted there is recourse as well as representations and warranties that lenders have to provide to investors.In addition, the Federal Reserve Board has strengthened Home Ownership and Equity Protection Act rules to limit prepayment penalties and prevent another subprime lending debacle. Lenders must assess the borrower's ability to repay the loans and fully document the loan under the new HOEPA rules that went into effect Oct. 1.These changes will put the brakes on lenders mass-marketing higher-cost alt-A loans as well as 2/28 and 3/28 subprime adjustable-rate mortgages.Lenders will not be making those "wild high risk" loans again, Mr. Davis said.

THIS JUST IN: Penny Mac has hired Jeremy Collett, who ran secondary for Taylor Bean & Whitaker, to help the publicly traded vulture fund get its mortgage conduit off the ground. As one Wall Street veteran quipped to us about the hire: "The question is can you make any money doing correspondent business when you are not Wells, Citi or BoA?" We shall see. (TBW went bust this summer.) In the Monday edition of National Mortgage News we explore, in two different analytical pieces, the future of Penny Mac and whether the private-label business will ever return, the latter penned by our bureau chief, Brian Collins. To subscribe to NMN call: 800-221-1809...

HUD released its much anticipated audit of the FHA's "reserve fund" this morning and the central message seemed to be: "Everything's okay, folks. You can all go home now." To their credit, HUD secretary and assistant secretary -- Shaun Donovan and David Stevens, respectively -- spent almost two hours with the media (and the public at large) explaining that FHA's reserves are under extreme pressure but they believe the fund will stay in the black. As for lenders that are abusing the program, Mr. Stevens had a clear message: the agency has "suspended or eliminated" eight firms from the program over the past few months and is watching closely...

Last week we spoke about the importance of using targeted direct mail and I outlined the four important components you must think about. This week let's tackle issue No. 1: Getting it delivered.