Origination

The use of knowledge qualifiers in representations and warranties by originators, sponsors and issuers of mortgage-backed securities may be one of the reasons residential MBS investors remain wary of the market, according to Digital Risk, Maitland, Fla. The analytics and advisory company has asked the American Securitization Forum, which is in the midst of a project aimed at restoring investor confidence in the market, to issue a guideline recommending against their use. The knowledge qualifiers, which limit what the parties involved represent to have information about, discourage thorough risk mitigation policies and procedures, Digital Risk said.

The Mortgage Bankers Association's Market Composite Index increased 17% on a seasonally adjusted basis for the week ended Sept. 4, driven by a notable increase in refinance applications as rates fell. In fact, the Refinance Index increased by 22.5% over the previous week, a jump that was its biggest since mid-March, MBA said. On an unadjusted basis, the MCI increased 15.8% compared with the previous week and 64.5% compared with the same week one year earlier. The MCI is calculated from the MBA's Weekly Mortgage Applications Survey. There is also strong home purchase mortgage application activity, as the Purchase Index increased by 9.5% over the previous week. This is the largest gain in this component since early April and it puts the Purchase Index at its highest level since the first week of January. The share of refinancing applications increased to 59.8% of total applications, up from 56.5% the previous week. The share of adjustable-rate mortgage applications for the week was 5.8%, up from 5.6% one week before. The average contract interest rate for 30-year fixed-rate mortgages fell to 5.02% from 5.15%, with points increasing to 1.23 from 1.09 (including the origination fee) for loans with an 80% percent loan-to-value ratio, according to the association. The average contract interest rate for 15-year FRMs decreased by 12 basis points to 4.45%, while for one-year adjustable rate loans, it decreased by 2 basis points to 6.69%. The MBA can be found online at http://www.mortgagebankers.org.

Starting Oct. 1, Federal Housing Administration direct endorsement lenders can determine whether a condominium project meets HUD eligibility requirements and begin financing unit sales. Currently, HUD field staff must approve condominium projects, which can be a slow process. The National Association of Realtors likes the new streamlined approach. However, the Department of Housing and Urban Development still requires a 50% occupancy rate to be eligible and no more than 30% of the units can be financed through FHA-insured loans, according to mortgagee letter 2009-19. NAR is urging HUD to relax the occupancy and concentration ratios to encourage more condo sales. "Increasing the concentration limit, or temporarily suspending it, will result in a greater number of owner-occupied units because more borrowers will be able to use FHA in more condominium projects," NAR says in a July 31 letter to HUD. FHA's new condominium policy ends "spot-loan" approvals (starting Oct. 1), which allow lenders to make a loan on one unit in a condo that is not FHA approved. The new streamlined and "uncomplicated" approval process eliminates the need for spot loans, HUD said.

U.S. payment option adjustable-rate mortgages set to see their rates recast over the next two years represent $134 billion in loan volume, according to Fitch, New York. Fitch said of the $189 billion in securitized option ARMs outstanding, 88% have not been through a recast event. The rating agency, which has rated about 5% of option ARM deals, said that of the loans yet to experience a recast event, 94% have used the minimum monthly payment to allow the loans to negatively amortize, allowing the loan balance to grow over time to caps that generally range between 110% to 125% of the original mortgage. A recast event generally occurs when the loan reaches that cap or has been outstanding for five years, at which point the borrower is obliged to stop making minimum payments and to instead make regular, fully amortizing principal and interest payments. This potentially creates payment shock for borrowers as the size of the fully amortizing P&I payment is on average 63% higher than the minimum monthly payment many borrowers have been making. Fitch expects this to put stress on recent vintage option ARM borrowers, creating expected losses that range from 35% to 45%, depending on collateral quality. Many option ARMs are secured by properties in states where values have declined by an average 48% since the second quarter of 2006. Even if these declines cease, Fitch believes the fact that many of these borrowers will be unable to refinance into alternative mortgages will cause a spike in option ARM defaults. Even though the origination of payment option ARMs has ground to a halt, the loans must still be serviced. As recently as the fourth quarter of last year Wachovia Mortgage - which is now part of Wells Fargo - was still originating the loans but did not offer the negative amortization option. In 3Q it funded $1 billion in POAs but by the fourth quarter originations had plummeted to just $40 million, according to the Quarterly Data Report.

I've received a great many calls and e-mails lately from coaching clients regarding seniors who "just won't make a decision right now about the reverse mortgage." Those readers who know me are fully aware of my typical advice in this situation: "Look in the mirror."

Eastern Mortgage Capital, Boston, is providing $3.27 million in permanent financing for a 75-unit apartment building for seniors in Chicago. Eastern Mortgage, a division of Eastern Bank, funded the commercial loan under the Federal Housing Administration's 223(f) insurance program. The apartment building, known as the MooGoong Terrace project, was originally built in 1983 and has 51,960 square feet of space.

U.S. subprime asset values may be showing some early signs of stabilizing along with U.S. home prices, according to a report by Fitch Solutions, New York. Fitch said its total market U.S. subprime index as of the beginning of this month was 8.34, which was higher than its all-time low of 7.27 seen in May, but was still significantly lower than its opening value of 42.56 on in November 2007. Fitch managing director and author of the report, Thomas Aubrey, said his company — which is introducing five new asset-backed securities credit default swap indices — has found that the synthetic subprime market is still seeing more activity than its cash equivalent and is still being looked to as a proxy for asset values.

CMG Mortgage, San Ramon, Calif., has hired 18 wholesale account executives that were left jobless when Taylor, Bean & Whitaker, Ocala, Fla., closed that division and then went bankrupt a few weeks later. CMG president Chris George said most of the AE hires have been in the western U.S., including California, Oklahoma and Texas. CMG, a non-bank, funds mortgages through retail and wholesale means. Roughly 65% of its production is wholesale. TBW was a top ten ranked lender, according to the Quarterly Data Report.

The House Financial Services Committee has set September 23 as a tentative date to mark up legislation to create a new consumer protection agency that would set uniform mortgage lending standards for depositories, non-banks and other players in residential finance. The American Bankers Association strongly opposes the bill (H.R. 3126) because it would limit federal preemption and create the Consumer Financial Protection Agency (CFPA), which would have regulatory and enforcement powers over depositories (on top of what they already face). The Mortgage Bankers Association claims the legislation — proposed by the White House and introduced by committee chairman Barney Frank, D-Mass. — fails to create a federal safety and soundness regulator for non-depository lenders. The CFPA would be responsible for compliance with uniform national lending standards. "The CFPA bill doesn't hit all the marks," said MBA chairman John Courson. Meanwhile, the Independent Community Bankers of America has proposed changes to the CFPA bill that would minimize the burden on community banks. "We are participating in the process," said ICBA's top lobbyist Steve Verdier. ICBA accepts the concept behind a CFPA but wants the agency to focus mainly on enforcement and examinations of non-depository lenders.

Default rates on commercial MBS could hit 6% by yearend as the recession finally takes its toll on the performance of commercial and multifamily properties, the president of the Commercial Mortgage Securities Association said Tuesday. CMSA chief president Patrick Sargent noted that the default rate (loans 60 days or more past due) generally averages 50 basis points. "Now we are starting to see these default rates go up to 3% and 4% and by yearend they could perhaps go up to 5% or 6%," he said on CNBC. The CMBS default rate rose nearly 100 bp to 2.39% in the second quarter from the first quarter, according to Trepp LLC data. CMSA's main focus is to bring liquidity back into the CMBS market, Mr. Sargent said. He noted the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF) has been helpful so far but noted that it will take more time to be effective. The Fed has already extended the TALF program for newly issued CMBS by six months to June 30. "We would like to see TALF extended [again] if it makes sense after next June," Mr. Sargent said.