Originations

The recent rise in interest rates has apparently brought a crashing halt to the rapid decline in the Eleventh Federal Home Loan District Cost of Funds Index. In fact, COFI, a weighted average of the cost of mortgage funds for thrifts that belong to the Federal Home Loan Bank of San Francisco, had its second largest increase ever between April and May. The index for May is 1.832%, a rise of some 45 basis points over April's 1.380%, which was the all-time low point. In a five-month period prior to May, COFI fell 177.5 basis points. The only larger increase in COFI, based on data from the FHLB-SF website, occurred between May and June in 1982, when the index rose 51 basis points. Between September and October in 2008, what is now the fourth largest all-time increase in COFI took place, as the index increased by 36 basis points.

May was the worst month of the year so far in terms of primary new insurance written by the members of the Mortgage Insurance Cos. of America. In addition, the cure/default ratio plummeted to the second lowest level of the year. There was $6.9 billion of primary new insurance written (just $19 million in the bulk channel), compared with $7.8 billion ($5.7 million bulk) in April and $15.5 billion in May 2008 ($3.7 million bulk). The May 2008 data does not include information from Radian Guaranty, but does from Triad Guaranty, the smallest of the MIs, which is now in run-off. The amount of primary insurance in force declined from $932 billion at the end of April to $922 billion one month later. New pool risk written was $22.8 million. The cure/default ratio for May was 59.8%, compared with April's 72.2%. There were 52,590 cures and 87,904 defaults in May.

A report from analysts at Keefe, Bruyette and Woods said the decline in this week's refinance component of the Mortgage Bankers Association Market Composite Index suggests that any benefit from the Federal Reserve's agency mortgage-backed securities purchase program has largely dissipated. The MCI, an overall measure of mortgage applications, was 444.8, a decrease of 18.9% on a seasonally adjusted basis for the week ending June 26, 2009, when compared with 548.2 one week earlier. The refinance index decreased 30.0% to 1482.2 from 2116.3 the previous week. KBW analysts Bose George and Jade Rahmani pointed out the refi index is now near the level it was at the time the Fed announced the program at the end of November. They also pointed out the overall index is at its 2009 low and down 80% from its highest point for the year. The seasonally adjusted Purchase Index decreased 4.5% to 267.7 from 280.3 one week earlier. On an unadjusted basis, the index decreased 18.5% compared with the previous week and decreased 7.4% compared with the same week one year earlier. There was a decline in the share of refi applications to 46.4%, down from 54.0% the previous week, while the share of adjustable-rate mortgages applications increased to 4.3% from 4.1% for the previous week, the MBA said. There was a decrease in the average contract interest rate for 30-year fixed-rate mortgages to 5.34% from 5.44%, with points (including the origination fee) increasing to 1.12 from 0.99 for loans with 80% loan-to-value ratios, the association said. The MBA can be found online at http://www.mortgagebankers.org.

Existing home sales bottomed out in the first quarter and sales should be up 3% when the final numbers come in for the second quarter, according to National Association of Realtors. NAR economists are forecasting that sales will total 4.72 million in the second quarter and rise another 5% in the third quarter. Housing affordability is at historic highs and the first-time home buyer tax credit is fueling demand. "Strong activity by entry level buyers is helping absorb inventory and [allowing] some existing owners to make a trade," said NAR chief economist Lawrence Yun. NAR pending sales rose ever so slightly in May to 90.7, up from 90.6 in April. The index tracks signings of sales contracts and it is a forward-looking indicator of existing home sales. But the Realtors are concerned that appraisal issues are hindering some sales. "Closed existing home sales have improved but are coming in lower than expected because some contracts are delayed or falling through," Mr. Yun said. NAR wants regulators to suspend the implementation of a new GSE appraisal code that went into effect May 1 that it blames for appraisal issues. Other market participants and observers say the problem may be driven less by the code's implementation and more by lower recent market prices and foreclosure sales.

In an effort to pre-empt plans to bring credit unions under a new Consumer Financial Protection Agency, National Credit Union Administration chairman Michael Fryzel has proposed the creation of the agency's own consumer protection office. NCUA currently has authority over products and services offered by credit unions but rarely, if ever, determines whether they comply with consumer laws and regulations, leaving that to other agencies such as the Federal Reserve, Federal Trade Commission of the Securities and Exchange Commission. The new NCUA office would monitor compliance with mortgage laws and disclosures, credit card rules and regulations, and investment products sold by credit unions.

A strong Consumer Financial Protection Agency would even the playing field so community banks would not have to compete against unregulated mortgage bankers in offering products and services, according to the Treasury Department. "If you are a community bank or credit union, the last thing you want to do is compete against a set of unregulated players outside the system," Treasury assistant secretary Michael Barr told reporters. The American Bankers Association and Financial Services Roundtable oppose the proposed CFPA, claiming it will limit consumer choice and stifle competition. Financial institutions will have to offer plain-vanilla products, Mr. Barr said, so consumers can compare and make decisions about more complex mortgages based on products they actually understand. "The market can continue to offer whatever products it wants," he said. Mr. Barr made his comments after Treasury sent the text of a 150-page CFPA bill to Congress. House Financial Services Committee chairman Barney Frank, D-Mass, said the legislative text will make it easier for his committee to pass a CFPA bill before the August recess. "While the committee will, of course, exercise its own judgment on the specifics and we have already had a thorough hearing on the matter, it is helpful to have the administration's proposals as well because I believe there is a great deal of common ground between us," Rep. Frank said.

Freddie Mac's board of directors has selected Charles E. Haldeman Jr., a top executive at Putnam Investments, to be its next chief executive, according to a source familiar with the matter. "He's the leading candidate," said the source. The nomination has been sent to its regulator, the Federal Housing Finance Agency, which has yet to act on the pick. Mr. Haldeman would replace John Koskinen, a former Clinton Administration official. Mr. Koskinen replaced David Moffett who took control of the GSE when the government placed it into conservatorship this past fall. In other company news, the GSE said in a new regulatory filing that it received $6.1 billion in new funds from the Treasury Department to help offset its mounting liabilities. Counting the new infusion, the Treasury Department, to date, has given the GSE $51.7 billion to keep its net worth above zero.

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.

Genworth Financial Inc., Richmond, Va., has priced the initial public offering of its Canadian mortgage insurance subsidiary, revealing that it hopes to raise up to $730 million (U.S.) The IPO has been priced at $19 per share, Canadian, which translates into $16.45. U.S. Genworth hopes to complete the IPO by July 7. The stock will trade on the Toronto Stock Exchange under the symbol MIC. "This IPO reinforces our already sound financial foundation and provides additional capital flexibility to Genworth," said Michael D. Fraizer, chairman and chief executive of Genworth Financial. "At the same time, we will continue to benefit from the earnings associated with our majority position in Genworth MI Canada as it plays an important role in providing solutions to the housing finance market in Canada." The Canadian business had first quarter 2009 net operating income of $66 million, compared with $75 million for the same period one year prior. The unit had $2.4 billion of flow insurance sales and $0.4 billion of bulk sales for the first quarter 2009.

The deterioration of the mortgage market and rising foreclosures and delinquencies is expected to cause increasing losses on billions of dollars of mortgage-backed securities being held by corporate credit unions, according to the National Credit Union Administration. The prediction comes as NCUA revealed it has pumped almost $20 billion into U.S. Central FCU and WesCorp FCU over the last six months to keep these two corporate CUs afloat. Scott Hunt, director of NCUA's Office of Corporate CUs, said current estimates are that U.S. Central will have a loss of $1.7 billion and WesCorp a loss of $5.7 billion on their mortgage securities, but agency officials expect those numbers to be even higher because of the ongoing deterioration in the market.

House prices fell by only 0.6% from March to April, according to the Standard & Poor's/Case-Shiller 20-city house price index, signaling that home values may be stabilizing. From February to March, prices fell 2.2%. "We are entering the seasonally strong period in the housing period, so it will take some time to determine if a recovery is really here," said David Blitzer, chairman of S&P's index committee. Overall, home prices are down 18.1% from April of last year. In 13 of the 20 metro areas, the annual rate of decline slowed from March to April. Eight metro areas experienced price increases in April, including Cleveland which saw values rise 1.2%. Dallas saw a 1.7% gain, and Denver 1.5%.

The General Accountability Office is urging the Department of Housing and Urban Development to increase its monitoring of housing counselors who provide information about FHA reverse mortgages to senior citizens. GAO auditors secretly participated in 15 counseling sessions and discovered that counselors did not cover all the topics required by HUD. Seven of the 15 counselors did not discuss required information about alternatives to Federal Housing Administration reverse mortgages, which are known as 'home equity conversion mortgages.' GAO also noted some claims made by counselors are potentially misleading. One potentially misleading claim is that seniors are told they will "never owe more than the value of your house." HUD had approved this claim at one time, but later said it is not true in all situations, GAO said. "A borrower or heirs of a borrower would owe the full loan balance — even if it were greater than the value of the house — if the borrower or heirs chose to keep the house when the loan became due," said Mathew J. Scire, director of financial markets and community investment, in prepared testimony released Monday. The report also recommends that other federal regulators need to be "vigilant about emerging consumer protection risks" in the reverse mortgage market.

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%.

Standard & Poor's has placed more than 1,000 U.S. conduit and fusion commercial mortgage-backed securities deals on "watch negative." S&P says the move does not represent a change in the expected performance of pools but rather a change in its CMBS criteria. The main change is a revision of credit enhancement levels in line with an effort to establish ones that enable securities carrying top investment-grade ratings of AAA to "withstand market conditions commensurate with an extreme economic downturn without defaulting." S&P said its analysis has resulted in a AAA credit enhancement figure of 19% for the "archetypical" pool. "We determined the higher enhancement level based on a number of factors, but primarily on our assessment of potential commercial property value declines in the range of 40% to 50% under conditions of extreme stress, such as during the Great Depression," the rating agency said. "This represents a major recalibration of our CMBS criteria and is intended to make U.S. CMBS ratings more comparable with ratings in other sectors." S&P also said, "While the new criteria represents a major change in our opinion of what might happen under highly stressful conditions, it does not represent a change in our view of the expected performance of commercial pools under current conditions."

There is a disconnect between how the market prices residential mortgage-backed securities and their intrinsic value, according to a recent study by Fitch Solutions to gauge the factors driving the valuations of RMBS tranches. The case study, entitled, "What Moves RMBS Tranche Values? A Case Study," compared observed valuations of RMBS bonds in the market with internally derived discounted cash flow valuations based on a range of default and loss assumptions. One goal of the study was to find the loss assumptions that would cause the modeled price to converge with the market price. According to the report, the market expectation regarding future losses is on average 32%, which can be decomposed into a pool default rate of 40%, with 80% loss severity. Vintage and performance are key determinants. "With structural features clearly having an impact on price sensitivity, it is now more important than ever to understand slight nuances from deal-to deal through in-depth cash flow modeling," said Richard Hrvatin, Fitch managing director and author of the report.

Lennar Corp. of Miami, the third-largest home builder in the U.S., reported a wider second-quarter loss as sales fell and the company wrote down land it no longer plans to build on. Company CEO Stuart Miller said the housing market is not recovering. Lennar said its net loss for the quarter ending May 31 rose to $125.2 million, from $120.9 million a year earlier. Revenue dropped 21%, to $891.9 million.

Growing uncertainty about Federal Reserve Board Chairman Ben Bernanke's role in pushing Bank of America Corp. to go through with its deal to buy Merrill Lynch & Co. is likely to delay regulatory restructuring plans and give ammunition to those seeking to prevent the central bank from receiving more power. According to a report in American Banker, the White House said it hopes to finalize by yearend a regulatory revamp that would give the Fed sweeping new powers over the country's largest firms. Also on the drawing board is the creation of a new consumer protection agency that would have oversight over most mortgage origination laws and regulations. Meanwhile, lawmakers from both parties said they were unwilling to give the Fed more authority until questions over Bernanke's role in the Bank of America-Merrill deal were answered. BoA is now the nation's second largest mortgage banker, thanks to its purchase last year of Countrywide Financial Corp.

The Senate Banking Committee has approved the nomination of David Stevens to be the new Federal Housing Administration commissioner, clearing the way for his confirmation by the full Senate. Mr. Stevens' nomination had been held up for several months due to alleged Real Estate Settlement Procedures Act violations by his former employer, Long & Foster — a mid-Atlantic real estate brokerage firm. The RESPA complaints did not name Mr. Stevens and HUD secretary Shaun Donovan continued to support him, claiming his experience as an executive at Freddie Mac and Wells Fargo Home Loans is needed at FHA. The committee approved Mr. Steven's nomination by a voice vote late Thursday afternoon. The Senate adjourned a few hours later so his confirmation will be pending when the senators return from their 4th of July recess on July 6.

The Lending Partners, a Texas-based non-bank lender, is expanding into the southeast market and has hired a regional sales manager to accomplish the goal. Currently the mortgage banker, which has focused mostly on the North Texas market, is operating at a run-rate of $60 million a month. Once its southeastern expansion is complete it hopes to be funding $100 million a month. Luke Strawn, vice president of business development for the lender, said TLP depends on warehouse lines of credit for funding. He said it's a "daily struggle" managing its warehouse needs but the firm is using several small Texas banks as participants. To expand into southeastern states such as Arkansas, Georgia, Kentucky, Mississippi, and Tennessee TLP hired Jared M. Ward as regional sales manager. The company relies on joint ventures with Realtors and builders.

Freddie Mac said loan delinquencies on its portfolio and guarantee book of business rose to 2.01% in May, an 8% uptick from the previous month, but a 229% increase from the same period last year. The increase in delinquencies is not surprising given the deteriorating condition of home values and the rising unemployment rate. Meanwhile, Freddie Mac said it bought $50.2 billion in mortgages during May, a 13% decline from the previous month, and a 23% drop from May 2008. However, purchases are much improved from January and February of this year. In May it issued $43.7 billion in MBS (participation certificates) compared to $51 billion in April. A year ago in May it issued $47.3 billion in PCs.