Originations

A California tax credit that grants buyers of new homes in the state a $10,000 tax credit has proved to be so popular it may soon max out — nine months before its expiration date. According to California's Franchise Tax Board, "we will soon reach $100 million in new home credit applications" which is the maximum set by law. The state notes in a release that once the threshold is met "the tax credit will no longer be available." A spokeswoman for the governor's office told National Mortgage News that the state is aware of the problem. "It's been very successful," she said. "There may be a bill to extend it or increase the amount of money allocated." The tax credit expires March 2010. It applies to all homebuyers in the state but only if they purchase a newly built home that has not been occupied.

There was a very slight decrease in the amount of commercial/multifamily mortgage debt outstanding between the end of the fourth quarter 2008 and the end of the first quarter of 2009, according to the Mortgage Bankers Association. There is $3.48 trillion outstanding as of March 31, 2009, down by $33 million, according to MBA's analysis of the Federal Reserve Board Flow of Funds data. Multifamily debt outstanding increased by 0.6% to $908 billion. "Banks, thrifts, Fannie Mae and Freddie Mac all increased their holdings of commercial and multifamily mortgages during the first quarter, while run-off among CMBS and life company loans decreased those investors' holdings," said Jamie Woodwell, MBA's vice president of commercial real estate research. "The relatively long-term nature of commercial real estate finance has meant greater stability in the levels of commercial and multifamily mortgage debt outstanding than is seen among many other types of credit." Commercial banks hold 45% of the total, followed by private label securitization issuers at 21%, life insurers 9% and thrifts 6%. The government sponsored enterprises hold $191 million of multifamily loans to support securities they issued, plus an additional $154 billion of whole loans.

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.

Net worth requirements for Federal Housing Administration lenders and brokers need to be raised, Mortgage Bankers Association David Kittle said at a House Financial Services subcommittee hearing. Higher requirements, he said, allow for lenders and brokers to be held accountable for their actions. "Specifically, we recommend that mortgage bankers should have a minimum corporate net worth of the greater of $500,000 or 1% of FHA loan volume up to a maximum of $1.5 million. Mortgage brokers should have a minimum corporate net worth of the greater of $150,000 or half of one percent of FHA loan volume up to the minimum for mortgage bankers. MBA supports mortgage bankers and brokers maintaining a bond sufficient to provide reasonable protection to consumers and taxpayers," Mr. Kittle's prepared testimony said. He added MBA supports a permanent increase in the FHA limit to $625,500, and in high-cost area, it should be raised to $729,750.

Flagging refinance volumes are expected to get a slight boost from the first drop seen in the average weekly 30-year mortgage rate tracked by the Freddie Mac Primary Mortgage Market Survey since May 20. The drop to 5.38% from 5.59% the previous week reversed part of the weekly primary market rate's recent increase from 4.82% since the second half of May. This is something Credit Suisse researchers said should result in "a modest pickup in refi activity." However, they said they believe that the 30-year rate would have to drop below 5.00% "to trigger a renewed surge in refi activity." Shorter-term rates tracked by Freddie Mac all fell below 5.00% during the week ended June 18, with the average 15-year fixed-rate mortgage rate dropping to 4.89% from 5.06% the previous week; the average five-year Treasury-indexed hybrid adjustable-rate mortgage rate sliding to 4.97% from 5.17% and the average one-year Treasury ARM rate declining to 4.95% from 5.04%. Points for FRMs averaged 0.7 and points for ARMs averaged 0.6. Average 15- and 30-year fixed rates remain below the levels of last year when they were 6.02% and 6.42%, respectively. The five-year Treasury ARM at the same time last year was 5.89% and the one-year Treasury ARM was 5.19%. Pressuring all rates lower in the past week have been "reports of benign inflation figures," according to Frank Nothaft, Freddie Mac's vice president and chief economist. "It's still too early to tell whether the decline in housing has hit bottom yet," he added, noting that recent market indicators have been mixed.

Mortgage market players and other securitization market participants say they largely agree with the Obama Administration plan's aims but have some concerns about the way in which it plans to realign incentives and its global context. "While we support policy initiatives to align economic incentives among securitization market participants and to achieve greater risk transparency, we believe that mandated retention of risk by asset originators and securitization sponsors may not be the most effective way to achieve this goal," said American Securitization Forum executive director George Miller in response to the regulatory reform proposal. "To the extent risk retention is required, we believe provisions must be designed carefully to avoid undue restrictions on the ability to fund consumer and business lending via securitization, which could impair broader economic recovery." He also noted that "international consistency on this topic is critically important" given the global nature of the capital markets and the fact that European policymakers also have been working on risk retention policies. "We acknowledge that there were misuses of securitization that need to be corrected," Mr. Miller said. "However securitization is a central means of delivering affordable credit to consumers and businesses that has produced ... benefits over the past 40 years [that] include increased availability and reduced cost of financing for mortgage loans."

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.

Performance deterioration seen in commercial mortgage-backed securities and multifamily transactions in Europe, the Middle East and Africa during the first quarter is expected to continue, Moody's Investors Service said in a report Wednesday, citing upcoming refinancing risks. "While the refinancing exposure of EMEA CMBS in 2009 and 2010 is still remote, one has to look further ahead," said Deniz Yegenaga, a Moody's associate analyst and co-author of the report. "Given the most recent commercial property market performance and the anticipation of further property value declines, also loans that mature after 2010 will be highly levered on their refinancing date and will most likely experience difficulties to repay. In addition, the significantly declining property values increase the loss upon default of commercial real estate loans." During the first quarter, the number of loans "subject to an event of default" came close to doubling, Moody's said. The rating agency downgraded 13 classes of notes in nine transactions and placed 23 classes of notes in six transactions on review for possible downgrade during the period. It also upgraded three classes of notes in two transactions during the quarter.

Spring is in the air in the Houston metro area, where the number of single-family house sales in May was the most of any month so far this year, according to the local Realtors group. While single-family sales for May were still 21.2% below that of the same month last year, the average price climbed to $213,474, the highest it's been since August. Another promising sign, says the Houston Association of Realtors: foreclosure sales continued to shrink in May. Repossessions accounted for just 20% of all sales in the month, compared to 34% in January, 28% in February, 24.5% in March and 23.6% in April. Overall, 5,539 properties of all types, totaling $1.1 billion, changed hands in the metro area in May. "The more I speak with real estate associations around the country, the more I appreciate the strength with which the Houston market has weathered the economic downturn," said HAR Chair Vicki Fullerton, a RE/MAX broker in The Woodlands. "Our current housing climate has been performing at about 2004 levels while other regions of the U.S. are suffering what Houston endured back in the 1980s." However, month-end pending sales — those listings expected to close within the next 30 days — totaled just 3,637, which was 24.7% lower than last year, suggesting a decline in sales when the June numbers are tallied.

Standard & Poor's is dropping Colonial BancGroup Inc., Montgomery, Ala. — a major mortgage warehouse lender — from the S&P MidCap 400 index after the close of trading on June 23. In its statement, S&P said Colonial had a market capitalization of approximately $206 million at the close of trading on June 16, where the minimum market cap needed to be a part of that index is currently $750 million. It will be replaced in the MidCap 400 by S&P SmallCap 600 constituent WMS Industries Inc., a provider of gaming products to the legalized gaming industry. As of late morning on June 17, Colonial's common stock was trading at $0.92 per share, a decline of $0.10 from the previous day's close.

A slight decrease in the average 30-year mortgage rate for the week ended June 12 had no impact on applications as the Mortgage Bankers Association Weekly Applications Survey Market Composite Index fell nearly 16% on a seasonally adjusted basis. The MCI, an overall measure of mortgage applications, was 514.4, compared with 611.0 one week earlier, continuing the downward trend of recent weeks. The refinance index decreased 23.3% to 1998.1 from 2605.7 the previous week while the seasonally adjusted purchase index decreased 3.5% to 261.2 from 270.7 one week earlier. Moreover, the share of refi applications continued to fall, to 54.1%, down from 59.4% the previous week. On an unadjusted basis, the index decreased 15.8% compared with the previous week and increased 0.3% compared with the same week one year earlier. The rising mortgage rates of recent weeks have contributed to an increase in adjustable-rate mortgage applications, up to 4.3%, from 3.4% for the previous week, the MBA said. There was a decrease in the average contract interest rate for 30-year fixed-rate mortgages to 5.50% from 5.57%, with points (including the origination fee) dropping 20 basis points to 0.89 from 1.09 for loans with 80% loan-to-value ratios, according to the association. The MBA can be found online at http://www.mortgagebankers.org.

The Federal Reserve's purchases of mortgage-backed securities are affecting the supply-demand balance of MBS collateral in the repurchase markets, according to a Barclays Capital report. This has narrowed the one-month term repo MBS spread to Treasury collateral to 2 basis points from 14 bps in March when the Fed began its purchases, according to a June 15 report by Joseph Abate, a U.S. fixed income strategist at Barclays Capital. "At the same time, usage of the Federal Reserve's [Term Securities Lending Facility] for schedule one collateral (essentially MBS) has evaporated, with no bids at any of the collateral swap auctions for several weeks," said Mr. Abate, in his Weekly Collateral Update report.

The White House late Tuesday unveiled its plan to overhaul the nation's financial regulatory system, a blueprint that would create a new government body — the Consumer Financial Protection Agency — with sweeping oversight and enforcement powers over all aspects of the origination process, including several bedrock laws that govern how lenders interface with consumers. "This a sweeping change to how things are done now," said Howard Glaser of the Glaser Group. He noted that the CFPA would be empowered to enforce the Real Estate Settlement Procedures Act, the Home Ownership and Equity Protection Act, the Home Mortgage Disclosure Act, and even certain aspects of the Community Reinvestment Act. The plan states that, "Consumers should have clear disclosure regarding the consequences of their financial decisions." The plan notes that the White House wants to require lenders to offer 30-year fixed-rate "vanilla" loans to consumers with streamlined pricing. Mr. Glaser said the creation of the CFPA might level the playing field for independent non-bank lenders who are getting "short shrift" from the Federal Reserve. He encouraged the mortgage industry to embrace the plan "to bring certainty and clarity back" to the home lending market.

Non-bank mortgage lenders and depositories would be assessed millions of dollars in fees to fund the creation and maintenance of the Consumer Financial Protection Agency, a new government body that would have massive enforcement powers over all players in residential finance, according to a White House draft proposal. Funding of the new agency also would come from transaction fees, the White House says. The Obama Administration notes that mortgage lenders not owned by banks fall into a regulatory "no man's land" where no government body "exercises leadership and state [attorneys general] are left to fill in the gap." The administration feels the Federal Trade Commission lacks the jurisdiction over the banking sector and has limited tools to "promote compliance of nonbank institutions." The White House believes the core of the CFPA can be "assembled reasonably quickly from discrete operations of other agencies." (For the full plan see Editor's Choice below or visit: http://www.nationalmortgagenews.com/documents/reg_reform_paper.pdf.

After hearing a guilty plea to participating in a mortgage-flipping scheme, Judge Martin L.C. Feldman sentenced Calvin Davis of New Orleans to 40 months in prison and ordered him to pay more than $1 million in restitution. According to Jim Letten, U. S. attorney for the Eastern District of Louisiana, Davis purchased various properties, obtained fraudulent appraisals and arranged for straw buyers to purchase them. Davis then sent the straw buyers to obtain loans by using fraudulent employment and credit documents as well as false tax returns. The loans were approved for the straw buyers and forwarded to the HUD offices in Denver. Based on the fraudulent applications, HUD insured the loans, which were then sold to another mortgage company. Various properties eventually went into default and HUD became responsible for paying off those loans. Davis is the fifth person to be sentenced in this case.

Windsor Capital Mortgage Corp., the San Diego-based company that was once the nation's second largest mortgage broker according to Broker magazine, is not filing for bankruptcy or closing down, said its chief executive Ron Temko. Instead, the company is becoming a "boutique-type" mortgage originator and shedding "a lot" of its branches, he explained. Reports that the company is filing for bankruptcy are "not accurate." Approximately two-and-one-half weeks ago, Windsor sent a letter to its branches saying it is establishing minimum production requirements and terminating any branch that did not meet those. Mr. Temko said the company, which once operated in 40 states, would now basically operate in California. Everything, he said, is being handled in an orderly fashion. "There is no fire drill here," Mr. Temko said, adding everyone will be paid the commissions they are owed.

The newest client for PHH Mortgage's private label outsourced origination platform is Amalgamated Bank, New York. Amalgamated customers can apply for loans at a bank branch, online, or via telephone with PHH staying in the background as the private label processor. Product types include fixed and adjustable rate mortgages, jumbo loans, second/vacation homes, condos and co-ops. Amalgamated will continue to offer its Money Sense financial literacy workshops for first-time homebuyers. It has 14 branches in New York City, three in Los Vegas and one each in Lyndhurst, N.J., Washington and Pasadena, Calif. Hector Fernandez, Amalgamated's first vice president, said the private label deal was struck "as the housing market begins to show signs of emerging from a long period of adversity. Refinancing activity continues to be strong."

The Treasury Department is circulating a proposal that would require originators to retain 5% of a loan's credit risk when selling it into the secondary market. An early snippet from the Obama administration's regulatory restructuring plan, which is expected to be unveiled Wednesday, indicates the proposal also would ban loan originators from hedging or even indirectly transferring the risk they are required to retain. Loan broker and loan officer compensation would be disbursed over time and reduced if a loan is not repaid because of poor underwriting. Some of these concepts — or similar ones — have already been introduced in the House by House Financial Services Committee chairman Barney Frank, D-Mass.

All homebuyers — not just new ones — would be entitled to a $15,000 federal tax credit and no qualification caps would be placed on their income, under recently introduced legislation. The language was introduced by Sen. Johnny Isakson, R-Ga., who says that a $8,000 first-time homebuyer (FTHB) tax credit that become law last year "has made a difference" but wants to expand it. Sen. Isakson says he has bipartisan support from at least nine senators, including Banking Committee chairman Chris Dodd, D-Conn. The $8,000 FTHB tax credit is set to expire Dec. 1 and has income caps of $75,000 for an individual and $150,000 for a couple. The Mortgage Bankers Association and National Association of Realtors have already voiced their support for the bill (S. 1230, "The Homebuyer Tax Credit of 2009.") Before he was elected, Sen. Isakson was a Realtor and worked in real estate for three decades, according to his office.

Construction of new single-family homes rose to a seasonally adjusted rate of 401,000 units in May, the best reading in six months and a sign that the homebuilding sector may have hit bottom this spring and is now showing tentative signs of a recovery. May starts rose 7.5% from April but compared to the same month last year fell 41%. All housing starts (including multifamily) rose to a seasonally adjusted rate of 532,000 units, a 17% jump from April but a 45% decline from May 2008. New construction for single-family units was strongest in the South (rising 10.6%) but weakest in the Northeast, which suffered a 12.5% sequential decline. Even though May's construction numbers are a hopeful sign, housing and mortgage executives are concerned that rising interest rates could snuff out the momentum. In trading Tuesday, most homebuilder stocks were flat or down slightly after some initial appreciation.