Origination

A steep yield curve could selectively keep earnings/dividends for agency mortgage real estate investment trusts above normal levels even though a rally in the sector is running out of steam, according to a report Wednesday by Sandler O'Neill & Partners LP, which is initiating coverage on the sector. "We view the agency mortgage REIT sector as attractive, particularly for conservative investors seeking to earn low- to mid-teen returns while avoiding the credit challenges encompassing financial stocks more broadly," the company said in its equity research report. "We believe the favorable environment will likely continue into next year but are concerned that the hint of a Fed tightening cycle and/or the phase out of the Fed's MBS purchase program could deflate the stocks' upward momentum in 2010," said the report by associate director Michael Taiano and associate Michael Sarcone. "Consequently, we recommend being selective within the group and buying those REITs that have more balanced models and cheaper valuations." The company covers six agency mortgage REITs and has "buy" recommendations on two of them: Annaly and Anworth, primarily based on the former's "more diversified and balanced model, along with its track record of managing through various interest rate cycles" and the latter's "more defensive strategy toward higher rates" as well as the fact that "its valuation is the cheapest among the group." Sandler O'Neill has "hold" recommendations on the other agency mortgage REITs it covers.

The Federal Housing Administration wants to stay away from traditional risk-based pricing for mortgage insurance premiums, saying it doesn't want the government to compete against private sector MI firms. Lowering prices for the least risky borrowers could have the effect of "potentially crowding out the return of a private market" or delaying its return, HUD secretary Shaun Donovan told a congressional panel. FHA officials are planning to raise the upfront premium or the annual premium — or both. The agency will unveil details of their proposal in January. In determining the premiums, they want to employ some combination of credit scores, loan-to-value ratios and other underwriting criteria that would limit the entry of the riskiest borrowers into the FHA fund. For example, FHA might raise the down payment for borrowers with low FICO scores. "We also have to be careful about overpricing risk," secretary Donovan testified. He noted new FHA originations are "quite profitable."

MGIC Investment Corp., Milwaukee, has cleared another hurdle in its plan to write new business through a reactivated unit, MGIC Indemnity Corp. The Office of the Commissioner of Insurance for Wisconsin has waived a requirement that MGIC maintain a specific level of minimum regulatory capital; the waiver lasts until Dec. 31, 2011. MIC is a subsidiary of the company's primary operating unit, Mortgage Guaranty Insurance Corp. The regulator also approved a change in the business plan for MIC where the reactivated subsidiary would only write new policies in states which MGIC's primary mortgage underwriting unit no longer met minimum capital requirements. There are 17 states that impose some sort of requirement, including Wisconsin, where MGIC is domiciled. Previously, Fannie Mae had approved MIC as an eligible mortgage insurer through Dec. 31, 2011. However, Freddie Mac has yet to approve MIC. MIC has been capitalized by MGIC with $200 million.

For the first time in over three years, title insurance underwriters wrote more in new premiums when compared to the same quarter in the previous year. According to the American Land Title Association, underwriters generated $2.51 billion in premiums during the third quarter of 2009, compared with $2.48 billion for the same period in 2008. This ends a run of 13 consecutive quarters where title premiums declined from the prior year's equivalent quarter. Kurt Pfotenhauer, chief executive of ALTA, said "Congress' temporary tax incentives and the Federal Reserve's efforts to keep mortgage interest rates low have brought more homebuyers to the table. We are hopeful that the extension and expansion of the homebuyer tax credit will keep this momentum going through 2010 and begin to drive activity beyond the first-time buyer market." The momentum of increased premiums is not a nationwide phenomenon. There were 32 states that had increased premium volume, including California, which had $396.3 million vs. $349.6 million for third quarter 2008. Alaska had a 77% increase, $11.6 million this year, compared with $6.6 million one year ago. New Jersey had a 36% increase, Rhode Island, 57%, Colorado, 40%, and North Dakota, 31%. But three of the largest states saw declines in premium volume: Texas, down 9.9%, Florida, down 16%; and New York, down 26.1%. Mr. Pfotenhauer warned that this local cyclicality needs to be remembered by legislators and regulators looking to change the structure of the industry.

The weekly average for the 30-year fixed-rate mortgage that dominates the market had fallen again to yet another record low at 4.71%, according to the most recent Freddie Mac Primary Mortgage Market Survey. That average rate for a 30-year fixed-rate mortgage during the week ending Dec. 3 was the lowest seen since Freddie started tracking the rate in 1971. It was 4.78% the previous week and 5.53% a year ago. The average 15-year FRM rate, which Freddie has been tracking since 1991, also dropped to a new record low. It was 4.27% during the most recent week, 4.29% the previous week and 5.77% a year ago. In contrast, the average rate for a five-year hybrid Treasury-indexed adjustable-rate mortgage inched up during the most recent week to 4.19% from 4.18% the week previous. This rate was 5.77% a year ago. The average one-year Treasury ARM rate during the most recent week, at 4.25%, was higher than the average five-year rate during that time but down compared to the rate for the same type of loan the week previous. During the previous week, the average one-year Treasury ARM rate was 4.35%. A year ago this rate was 5.02%. Points in the most recent week were 0.7 for 30-year FRMs and 0.6 for the three other types of mortgages. "Interest rates for 30-year and 15-year fixed-rate mortgages fell for the fifth consecutive week to an all-time record low while the average rate on five-year ARMs hovered near its record set in the previous week," said Frank Nothaft, Freddie Mac vice president and chief economist. "In addition, interest rates on 30-year and 15-year fixed mortgages thus far in 2009 averaged one percentage point below their respective average in 2008."

Former New York mayor Rudolph Giuliani and some of his advisors attended talks between Lend America officials and the Department of Housing and Urban Development last week, hoping to find a solution to the lender's problems, according to sources familiar with the matter. A source close to Lend America told National Mortgage News that Mr. Giuliani "was there" at the meetings but at press time it was unclear whether he attended as a representative of his law firm, Bracewell & Giuliani, or in an outside capacity. A spokeswoman for Bracewell said to the best of her knowledge, Lend America and its 'dba,' Ideal Mortgage Bankers, are not clients of the law firm. Also in attendance was Lend America president Michael Primeau. Before going into politics, Mr. Giuliani was U.S. Attorney for the Southern District of New York and made his name by busting junk bond king Michael Milken. On Monday HUD ordered the New York-based Lend America to halt the origination of FHA-backed loans. The next day the company laid off most of its work force - roughly 550 workers. HUD fined the company $512,000, accusing it of underwriting fraud and other misrepresentations.

Wells Fargo & Co., the nation's largest residential wholesale lender, is once again tightening its menu of products available to loan brokers, including new restrictions on high-balance mortgages that it sells to Fannie Mae and Freddie Mac. In a "Newsflash" memo its wholesale department sent to brokers on Wednesday, Wells said it is lowering the allowable LTV on high balance loans to 80% from 95%. The change goes into affect Dec. 14, 2009. It also is telling brokers that non-occupant "co-borrowers" will no longer be allowed on these loans. Wells is also tightening its condominium loan requirements. Wells said it is making these changes because mortgage insurance companies are being more selective about what they will cover in regard to broker-sourced loans.

The House of Representatives is slated to debate and vote on a massive regulatory reform package next week that includes several bills addressing abusive mortgage lending practices and risk retention on sales and securitizations of mortgages. The House Financial Services Committee completed action on the reform package on Wednesday when it approved a bill to set up a resolution process for "too big to fail" institutions. The "systemic risk" bill also gives regulators the discretion to set risk retention requirements as high as 5% on Federal Housing Administration, Fannie Mae and Freddie Mac loans. The regulatory reform package also includes bills that create a Consumer Finance Protection Agency, regulates the trading of derivatives, and a bill (H.R. 1728) the House passed in May that curbs subprime lending practices. The mortgage industry prefers the risk retention provisions in H.R. 1728, which totally exempts lenders and securitizers from retaining a portion of the credit risk on FHA and GSE loans. Some industry lobbyists have been wondering how committee chairman Barney Frank, D-Mass., would deal with the different risk retention provisions. Rep. Frank told reporters he would drop the original provision in H.R. 1728. "The risk retention section of the subprime bill will conform to what we did in the systemic risk bill," the chairman said.

Automated underwriting and pricing engine provider PriceMyLoan and advisory firm Mortgage Capital Trading are introducing an interface that links their technologies and allows for pipeline hedging. The Automated Loan Pipeline Hedges and Analysis interface feeds loan pricing data from the former's AU and pricing engine into the latter's proprietary hedging model. The interface is designed to automatically update the hedging model when a lender locks in a rate.

The Eleventh Federal Home Loan District Cost of Funds Index for October 2009 is plumbing new lows at 1.259%. This is a decline of a little over 11 basis points from September's 1.272%. There were 26 eligible member institutions of the Federal Home Loan Bank of San Francisco that reported the data used to calculate the Index. Average total funds used in the calculation were $90.2 billion while total interest expense was $94.7 million. Since the start of the year, COFI, which is used by some thrifts to index adjustable-rate mortgages, is down 120 basis points. In comparison, the Freddie Mac monthly Primary Mortgage Market Survey data for the one-year ARM shows the average commitment rate declining just 38 basis points between June, when the 4.93% average was 1 BP higher than in January, and October's 4.55%. According to Freddie Mac's data, the lowest monthly average rate recorded for the one-year ARM was in March 2004 at 3.41%.